Yes. IRA Financial Group’s Solo 401(k) Plan allows participants to elect to treat contributions under the plan that would otherwise be elective deferrals as designated Roth contributions. For this purpose, an “elective deferral” is an employer contribution to a 401(k) plan that is excluded from the participant’s gross income only because the 401(k) plan is qualified or an employer contribution to a tax sheltered annuity under a salary reduction agreement to the extent excluded from gross income by 403(b) . An elective deferral is instead a designated Roth contribution if the participant “designates” it as not being excludable. A participant’s designated Roth contributions for any year may not exceed the maximum amount of elective deferrals that could be excluded from gross income, less the elective deferrals for the year that the employee does not designate as Roth contributions. A participant must include a designated Roth contribution in his or her gross income at the time he or she would have received the amount in cash absent the 401(k) election.
A Solo 401(k) Plan is an IRS approved retirement plan, which is suited for business owners who do not have any employees other than themselves and perhaps their spouse. The “one-participant 401(k) Plan” or Individual 401(k) Plan is not a new type of plan. It is a traditional 401k Plan covering only one employee. Unlike a Traditional IRA, which only allows an individual to contribute $5500 annually or $6500 if the individual is over the age of 50, a Solo 401k Plan offers the Plan participant the ability to contribute up to $59,000 each year. Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no compelling reason for an owner-only business to establish a Solo 401(k) Plan because the business owner could generally receive the same benefits by adopting a profit sharing plan or a SEP IRA. After 2002, EGTRRA paved the way for an owner-only business to put more money aside for retirement and to operate a more cost-effective retirement plan than a Traditional IRA or 401(k) Plan.
There are a number of options that are specific to Solo 401k Plans that make the Solo 401k Plan a far more attractive retirement option for a self-employed individual than a Traditional IRA for a self-employed individual.
1. Reach your Maximum Contribution Amount Quicker: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a Traditional IRA has a very low annual contribution limit.
Under the 2015 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000, an increase of $1,000 from 2014.
For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000, an increase of $1,500 from 2014.
Whereas, a Traditional Self-Directed IRA would only allow an individual with earned income during the year to contribute up to $5500, $6500 if the individual is over the age of 50.
For example, Joe, who is 60 years old, owns 100% of an S Corporation with no full time employees. Joe earned $100,000 in self-employment W-2 wages for 2015. If Joe had a Solo 401(k) Plan established for 2015, Joe would be able to defer approximately $49,000 for 2015 (a $24,000 employee deferral, which could be pre-tax or Roth, and 25% of his compensation giving him $49,000 for the year). Whereas, if Joe established a Traditional Self-Directed IRA, Joe would only be able to defer approximately $6,500 for 2015.
2. No Roth Feature: A Solo 401k Plan can be made in pre-tax or Roth (after-tax) format. Whereas, in the case of a Traditional Self-Directed IRA, contributions can only be made in pre-tax format. In addition, a contribution of $18,000 ($24,00, if the plan participant is over the age of 50) can be made to a Solo 401(k) Roth account.
3. Tax-Free Loan Option: With a Solo 401K Plan, you can borrow up to $50,000 or 50% of your account value, what ever is less. The loan can be used for any purpose. With a Traditional Self-Directed IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA without triggering a prohibited transaction.
4. Use Nonrecourse Leverage and Pay No Tax: With a Solo 401(k) Plan, you can make a real estate investment using nonrecourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax (IRC 514). However, the nonrecourse leverage exception found in IRC 514 is only applicable to 401(k) qualified retirement plans and does not apply to IRAs. In other words, using a Self-Directed SEP IRA to make a real estate investment (Self Directed Real Estate IRA) involving nonrecourse financing would trigger the UBTI tax.
5. Open the Account at Any Local Bank: With a Solo 401k Plan, the 401k bank account can be opened at any local bank or trust company. However, in the case of a Traditional Self Directed IRA, a special IRA custodian is required to hold the IRA funds.
6. No Need for the Cost of an LLC: With a Solo 401(k) Plan, the plan itself can make real estate and other investments without the need for an LLC, which, depending on the state of formation, could prove costly. Since a 401(k) Plan is a trust, the trustee on behalf of the trust can take title to a real estate asset without the need for an LLC.
7. Better Creditor Protection: In general, a Solo 401(k) Plan offers greater creditor protection than a Traditional IRA. The 2005 Bankruptcy Act generally protects all 401(k) Plan assets from creditor attack in a bankruptcy proceeding. In addition, most states offer greater creditor protection to a Solo 401(k) qualified retirement plan than a Traditional Self-Directed IRA outside of bankruptcy.
The Solo 401k plan is unique and so popular because it is designed explicitly for small, owner-only business. The many features of the Solo 401k plan discussed above is why the Solo 401k Plan or Individual 401k Plan it so appealing and popular among self-employed business owners.
To learn more about the benefits of a Solo 401(k) Plan vs. a Self-Directed IRA, please contact a tax professional at 800-472-0646.
Real Estate Solo 401(k) Plan allows real estate investors to use nonrecourse financing to purchase real estate without tax or penalty
IRA Financial Group, the leading provider of self-directed Solo 401k plans has seen a surge in real estate investors using the self-directed solo 401(k) plan to buy real estate with leverage and use the unrelated business taxable income tax (“UBTI”). In general, one may obtain financing through a loan or mortgage to finance a real estate using a Solo 401(k) so long as the loan is nonrecourse. A nonrecourse loan is not a traditional mortgage as due to the IRS prohibited transaction rules, the 401(k) plan participant cannot personally guarantee the loan, “With IRA Financial Group’s self-directed Solo 401(k) Plan a plan participant can use nonrecourse financing to acquire real estate and not pay and tax or penalty, “ stated Adam Bergman, a tax partner with the IRA Financial Group. “The great thing about using a Solo 401(k) Plan to buy real estate is that you can use leverage to increase the potential gains from the real estate investment and not pay tax, which is not the case with an IRA,” stated Mr. Bergman.
Under Internal Revenue Code Section 4975, a “prohibited transaction” is a transaction that, directly or indirectly involves the loan of money or other extension of credit between a plan and a disqualified person. Normally, when an individual purchases real estate with a mortgage, the traditional loan provides for recourse against the borrower (i.e., personal liability for the mortgage). However, if the 401(k) Plan purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse; otherwise there will be a prohibited transaction. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the 401(k) Plan itself.
The advantages of using a Solo 401(k) Plan to purchase real estate is that a nonrecourse loan can be used which could help leverage the property without triggering any tax or penalty. In contrast if using a self directed IRA LLC to purchase real estate, a tax would be imposed on the debt-financed portion of the property being purchased. Pursuant to Internal Revenue Code Section 514(c)(9), the Unrelated Business Income Tax (UBTI) would not apply when using nonrecourse leverage as part of a real estate transaction (unrelated debt-financed income – UDFI). “Using nonrecourse financing with a solo 401(k) plan offers real estate investors the ability to super charge their real estate returns without having to pay tax,” stated Mr. Bergman.
The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.
IRA Financial Group is the market’s leading provider of self-directed IRA and solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.
To learn more about the IRA Financial Group please contact us @ 800-472-0646.
The legality of using retirement funds to purchase employer corporate stock is firmly established in the Internal Revenue Code and under ERISA law. The IRA Financial Group’s in-house retirement tax professionals have spent the last two years developing an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free! Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP to ensure the structure satisfies IRS and ERISA rules and procedures. The retirement tax professionals at the IRA Financial Group have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new or existing business within 14-21 days.
Step 1 – Establishment of New Corporation
IRA Financial Group’s in-house tax and ERISA professionals will establish a corporation and ensure that the incorporation process is completed accurately in accordance with state law. Our in-house retirement tax professionals have significant experience with the incorporation process in all 50 states and the District of Columbia. Your corporation will be incorporated in the State where you will conduct business or in multiple states if the business will be conducted in more than one state. The IRA Financial Group’s retirement tax professionals will assist you in satisfying all internal corporate formalities, such as establishing a board of directors, appointing officers, and completing the corporate resolution and minutes. Upon the incorporation of the entity, our in-house retirement tax professionals will acquire an Employer Tax ID Number with the IRS for your new corporation.
The IRA Financial Group’s in-house ERISA professionals will establish an IRS approved 401(k) Plan for your new corporation. Plan documents will be drafted so that the new corporation will be the sponsor of the new 401(k) Plan. The Plan documents will appoint the new business owner as the trustee of the plan and will be customized based on the financial goals of you and the business. The Plan will be specifically drafted to allow for investment in your new corporation.
Step 3 – Rollover/Transfer of Funds to your New Corporation
The IRA Financial group’s in-house ERISA professionals will guide you through the process of opening a bank account for your new 401(k) Plan (the account can be opened at any local bank, credit union, or financial institution) as well as helping you complete the necessary transfer/rollover documents to transfer your retirement funds from your previous employer or IRA to your company’s new 401(k) Plan tax-free. Our in-house ERISA professionals will guide you through the entire rollover/transfer process so your retirement funds will be transferred to your new 401(k) Plan in an expedited and tax-free manner.
Step 4 – 401(k) Plan Invests in the new Corporation
The IRA Financial Group’s in-house retirement tax professionals will draft a customized stock purchase agreement detailing the 401(k) Plan’s purchase of new company stock. The IRA Financial Group will coordinate with the selected independent business appraisal to assure that the stock purchase agreement is in compliance with IRS and ERISA rules. Once the 401(k) Plan has purchased stock in the new corporation, the corporation will have the funds to purchase new business assets or help grow the business.
Step 5 – Compliance with IRS and ERISA Rules
Once your retirement funds have been invested in your new business, the retirement tax professionals at the IRA Financial Group will continue to work with you to ensure that the structure remains compliant with IRS and ERISA rules and procedures. In the case of a corporation with employees, the IRA Financial Group will work with a third-party administrator to ensure that the Plan remains compliant so that the structure continues to meet IRS and ERISA rules and requirements.
Work Directly with our on-site tax and ERISA professionals!
Each client of the IRA Financial Group is assigned an individual retirement tax professional who will customize a structure that satisfies his or her financial and retirement needs while ensuring the structure is developed in full IRS & ERISA compliance!
We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new or existing business within 14-21 days.
Contact us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!
IRA Financial Group is the only full service Solo 401(k) Plan facilitator that offers its clients the ability to consult with our in-house tax accountants and CPAs, in addition, to our tax professions. Our in-house CPAs are specially trained in the taxation of retirement accounts, which allows us to provide our clients with specialized tax advice and offer tax filing and reporting services relating to the use and taxation of 401(k) Plan funds to make investments. Because the Solo 401(k) Plan is governed by a complicated set of IRS and ERISA tax rules, it is crucial to work directly with specially trained tax professionals and CPAs.
The Taxation of a Solo 401(k) Plan
The one-participant 401(k) plan is not a new type of 401(k) plan. It is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan. The Solo 401(k) Plan is a qualified retirement plan that is governed by Internal Revenue Code Section 401. A Solo 401(k) Plan is a tax-exempt qualified retirement plan. In other words, in general, a Solo 401(k) Plan is not subject to any tax earned on any passive income allocated to the Solo 401(k) Plan.
Annual Tax Reporting Requirement – IRS Form 5500-EZ
A Solo 401(k) plan is generally required to file an annual report on IRS Form 5500-EZ if it has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement.
In-House CPA Services
The IRA Financial Group has designed a specialized Solo 401(k) CPA service, which will offer clients the ability to consult with specialized Solo 401(k) Plan trained CPAs on a wide variety of tax & ERISA matters concerning the Solo 401(k) Plan. Below is a list of some of the services offered by our in-house CPAs:
- Advising clients regarding Federal Income tax matters concerning the establishment, maintenance, and operation of a Solo 401(k) Plan
- Advising clients regarding ERISA tax matters concerning the establishment, maintenance, and operation of a Solo 401(k) Plan
- Advising clients regarding state income tax matters concerning the establishment, maintenance, and operation of a Solo 401(k) Plan
- Assisting clients with the completion and filing of IRS Form 5500-EZ
- Assisting clients with the completion and filing of any Federal Income tax Partnership returns in connection with the employer which adopted the Solo 401(k) Plan
- Assisting clients the completion and filing of any state Income tax returns in connection with the employer which adopted the Solo 401(k) Plan
- Advising clients on the IRS prohibited transaction rules as they pertain to federal and state tax matters concerning using a Solo 401(k) Plan to make investments
- Advising clients regarding the Unrelated Business Taxable Income (UBTI or UBIT) rules concerning a Solo 401(k) Plan investment
- Advising clients regarding the Unrelated Debt Finance Income (UDFI) tax rules concerning a Solo 401(k) Plan investment
- Assisting clients the completion and filing of the IRS Form 990-T in connection with a Solo 401(k) Plan investment that generates UBTI and/or UDFI
- Assisting clients with the day-to-day accounting and management of the Solo 401(k) plan investments (QuickBooks)
- Solo 401(k) Plan annual asset valuation services
- Advising on the federal and state asset & creditor protection rules relating to the use of a Solo 401(k) Plan
Specialized In-House CPA Service for Real Estate Investors
When it comes to engaging in a real estate transaction with a Solo 401(k) Plan there are a number of important IRS and tax rules that must be followed. For example, IRC Section 4975 prohibits an Plan owner to engage in a transaction that directly or indirectly benefits him/or her or any other “disqualified person”. A “disqualified person” is defined in IRC Section 4975 as the Plan owner and any of his or her lineal descendants, which include parents, children, spouse, daughter-in-laws, and son-in-laws. In addition, a “disqualified person” is not permitted to provide any services or receive any personal benefit from the Solo 401(k) Plan investment. Therefore, IRA Financial Group has specially designed a CPA tax service program for Solo 401(k) Plan investors. The specialized CPA service will offer special federal and state tax advice regarding real estate matters as well will cover federal and state tax reporting and filing obligations. Our specially designed Solo 401(k) Plan real estate CPA service will also offer clients that ability to work with our in-house CPAs to develop an internal accounting system that could keep track of all Solo 401(k) Plan related expenses and income in order to be in a position to properly value the Solo 401(k) Plan assets. The Solo 401(k) Plan real estate CPA service is designed to offer a Solo 401(k) Plan retirement investor with a more detailed accounting of the activities of the Solo 401(k) Plan and its investments.
The tax professionals and CPAs at the IRA Financial Group are committed to making sure your Solo 401(k) Plan solution remains in full IRS and ERISA compliance from establishment through investment.
For more information on IRA Financial Group’s in-house CPA services, please contact a Solo 401(k) Plan expert at 800-472-0646.
The Solo 401k Plan is a perfect tool to help entrepreneurs and small business owners reduce their 2015 tax liability as well as save for their retirement.
With the end of the 2014 tax season finally upon us, IRA Financial Group expects to see a strong demand for its self-directed Solo 401(k) plan from the self-employed and small business owners in 2015. “Now that tax season is finally over, is a great time for entrepreneurs and small business owners to start planning for their retirement while simultaneously reducing their 2015 tax burden”.
The “one-participant 401(k) plan” or Solo 401(k) Plan is an IRS approved qualified retirement plan, which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. The Solo 401(k) plan” is not a new type of plan. It is a traditional 401k plan covering only one employee. The plans have the same rules and requirements as any other 401k plan. The surging interest in these plans is a result of the EGTRRA tax law change that became effective in 2002.
A Solo 401K Plan offers a self employed business owner the ability to use his or her retirement funds to make almost any type of investment, including real estate, tax liens, private businesses, precious metals, and foreign currency on their own while generating tax-deferred income. In addition, a Solo 401K Plan will allow you to make high contribution limits of up to $53,000 or $59,000 if over the age of 59 for 2015. The Solo 401(k) Plan will also allow one to borrow up to $50,000 for any purpose. In addition, the Solo 401k Plan is easy to operate. There is generally no annual filing requirement unless your solo 401(k) Plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).
A Solo 401(k) is perfect for sole proprietors, small businesses and independent contractors such as consultants. To be eligible to benefit from the Solo 401(k) plan, investor must meet just two eligibility requirements: (i) The presence of self-employment activity, and (ii) The absence of full-time employees.
“The Solo 401k Plan is a perfect retirement planning vehicle as well the most tax advantageous retirement plan for entrepreneurs and small business owners”, states Susan Glass, retirement tax specialist with the IRA Financial Group. While an IRA only allows a $5,500 contribution limit for 2015 (with a $1,000 additional “catch up” contribution for those over age 50), a plan participant of a Solo 401K Plan can make annual contributions up to $53,000 annually with an additional $6,000 catch up contribution for those over age 50 for 2015.
“Unlike a SEP which limits a small business owners contribution to 25% of his or her compensation earned, a Solo 401(k) Plan offers the plan participant the ability to make employee deferrals and profit sharing contributions up to $59,000 if the participant is over the age of 50, in addition, to providing the participant with the option of borrowing up to $50,000 for any purpose”, stated Ms. Glass.
In addition, the Solo 401k Plan offers individuals all the “checkbook control” benefits of a Self Directed IRA or Self Directed Roth IRA. With a Self Directed IRA LLC an individual can make Real Estate IRA investments tax-free.
“Now that tax season is over, it’s important for entrepreneurs and small business owners to focus on 2015 in order to maximize their tax benefits as well as begin saving for their retirement, “states Ms. Glass.
The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.
IRA Financial Group is the market’s leading “checkbook control” Self Directed IRA and Solo 401(k) Plan provider. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.
To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.
If you have a workplace retirement plan, such as a 401(k), available to you, the biggest mistake you can make is not contributing to it. These tax advantaged plans are designed to help you put away money for retirement. These qualified plans are huge perks offered by businesses, both large and small. If you are not taking full advantage of them, you may be endangering your financial future. Here are a few other mistakes you should avoid.
The biggest perk of an employer-sponsored plan is a contribution match. If you are not taking full advantage of this match, you’re missing out the biggest return on your money. There are two typical types of matches: one that matches 100% of your contributions and one that matches 50%. There will be a cap on the match (typically 3% and 6% of your salary respectively). If you earn $100,000 and receive a 100% match up to 3%, you must contribute $3,000 to receive a full match of another $3,000. Further, if your match is 50% up to 6%, you must contribute $12,000 to get the full match of $6,000.
Another mistake is not contributing enough. If you were auto-enrolled in the 401(k), the default contribution is around 2-3%. Most experts agree that you should be saving at least 10-15% of your paycheck. For many people, you may not be able to afford saving that much. One strategy to use is to up your percentage by a point every time you receive a raise or bonus. In no time, you’ll be saving enough to have a comfortable retirement.
Next, you might not be an educated investor and/or are afraid of losing money in the markets. Therefore, you stick to safe options that won’t lose money. However, these investments (bonds, certificates of deposits, money market funds) don’t earn enough to even keep up with inflation, let alone yield a big enough return to help boost your savings. You need to have some risk so that your contributions utilize their full earning potential. Take advantage of advice your company’s plan offers and do a little research on your own.
One thing many people fail to do is re-balance. This should be done at least annually. The ebbs and flows of your investments might cause your allocation to be skewed. You might be taking on too much risk than you intended. Each year you should check your investments to make sure this isn’t the case. Additionally, as you get closer to retirement, you may want to take on even less risk since you don’t have as much time to wait for the markets to correct themselves.
Lastly, you should never cash out or leave a plan behind when you switch jobs. Most plans will allow you to roll your previous funds into your new plan. If not, you have the option of rolling it over into an IRA. Cashing out leads to a 10% early withdrawal penalty if you are not yet 59 1/2 years old. If you leave your funds invested in an old job, you may forget about them and lose the well-earned money you saved.
401(k) plans were designed to help you save for your post-career life. If you take full advantage of them as soon as possible, you’ll be well on your way to an easy retirement. If you have any questions, please contact a retirement expert @ 800.472.0646 or visit our website today.
With a Solo 401(k) Plan, as trustee of the Plan, you no longer have to get each 401(k) Plan investment approved by the custodian of your account. This means that all assets of the 401(k) trust are under the sole authority of the Solo 401k Plan participant (you). A Solo 401(k) plan allows you to eliminate the expense and delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.
For example, Mary has established a Solo 401(k) Plan for her business. Mary is appointed the trustee of her business’s Solo 401(k) Plan. Mary has opened her Solo 401(k) Plan bank account at a local bank. Mary wishes to use her 401(k) Plan funds to purchase a home from Ben, an unrelated third-party (non-disqualified person). Ben is anxious to close the transaction as soon as possible. With a Solo 401(k) Plan, Mary, as trustee of the Plan, can simply write a check using the funds from the 401(k) Plan bank account or can wire the funds directly from the account to Ben. Mary, as trustee of the Plan, no longer needs to seek the consent of the custodian or a financial institution before making the real estate purchase. With a Solo 401(k) Plan without “checkbook control”, Mary would likely not be able to make the real estate purchase since seeking custodian approval would have likely taken too much time.
With a Solo 401(k) Plan, you will be able to invest in almost any type of investment opportunity that you discover, including: Real Estate (rentals, foreclosures, raw land, tax liens etc.), Private Businesses, Precious Metals, Hard Money & Peer to Peer Lending as well as stock and mutual funds; you’re only limit is your imagination. The income and gains from these investments will flow back into your 401(k) Plan tax-free.
The following are some examples of types of investments that can be made with your Solo 401(k) Plan:
- Residential or commercial real estate
- Domestic or Foreign real estate
- Raw land
- Foreclosure property
- Mortgage pools
- Private loans
- Tax liens
- Private businesses
- Limited Liability Companies
- Limited Liability Partnerships
- Private placements
- Precious metals and certain coins
- Stocks, bonds, mutual funds
- Foreign currencies
The IRS has always permitted a 401(k) Plan to purchase or hold real estate or raw land. Making a real estate investment is as simple as writing a check. Since you are the trustee of your Solo 401(k) Plan, you have the authority to make investment decisions on behalf of your 401(k) Plan. One major advantage of purchasing real estate with a Solo 401(k) Plan is that all gains are tax-deferred until a distribution is taken.
For example, if you purchased a piece of property with your Solo 401(k) Plan for $200,000 and later sold the property for $400,000, the $200,000 of gain would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and in most cases state income tax.
Using Leverage to Purchase Real Estate with a Solo 401(k) Plan
Unlike a Self Directed IRA LLC, when a Solo 401(k) Plan buys real estate that is leveraged with mortgage financing it is exempt from paying any Unrelated Business Taxable Income (UBTI or UBIT) tax on the income or gain generated. With the UBTI tax rates at approximately 35%, the Solo 401(k) Plan offers real estate investors looking to use nonrecourse financing in a transaction a tax efficient solution.
By using a Solo 401(k) Plan to purchase tax-liens or tax deeds, all income and profits are tax-deferred back into your Solo 401(k) Plan until a distribution is taken. More importantly, with a Solo 401(k) Plan, you, as the trustee, will have “checkbook control” over your 401(k) Plan funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!
Loans & Notes
The IRS and ERISA rules permit the use of Solo 401(k) Plan funds to make loans or purchase notes from third parties. By using a Solo 401(k) Plan to make loans or purchase notes from third parties, all interest payments received would be tax-deferred until a distribution is taken.
For example, if you used a Solo 401(k) Plan to loan money to a friend, all interest received would flow back into your Solo 401(k) Plan tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.
With a Solo 401(k) you are permitted to purchase an interest in a privately held business. The business can be established as any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using Solo 401(k) Plan funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512.
Investing in an Active Business – The Unrelated Business Taxable Income Rules
If a Solo 401(k) invests in any business regularly carried on or by a partnership or LLC of which it is a member, all income or gains allocated to the Solo 401(k) will likely be treated as an unrelated business and subject to the Unrelated Business Taxable Income (“UBTI” or “UBIT”) rules pursuant to Section 512 of the Internal Revenue Code. For example, a Solo 401(k) investment into an LLC or partnership that is engaged in an active trade or business such a shoe factory; gas station, retail store or restaurant would likely be treated as an unrelated business and subject to UBTI.
The UBTI rules were enacted by Congress in the 1950s t o prevent tax-exempt entities, such as charities, from competing unfairly with taxable entities. Since an 401(k) is treated as a tax-exempt entity pursuant to Internal Revenue Code Section 401, the UBTI rules apply to Solo 401(k) investments.
Most 401(k) investments are not subject to the UBTI rules because of the many exceptions available. For example, dividends, interest, annuities, royalties, capital gains, most rentals from real estate, and gains/losses from the sale of real estate are all excluded from the application of the UBTI tax. However, rental income generated from real estate that is “debt financed” loses the exclusion, and that portion of the income becomes subject to UBTI.
A Solo 401(k) subject to UBTI is taxed at the trust tax rate because a 401(k) is considered a trust pursuant to Internal Revenue Code Section 401. For 2011, a Solo 401(k) subject to UBTI is taxed at the following rates:
- $0 – $2,300 = 15%
- $2,300 – $5,350 = $345 + 25%
- $5,350 – $8,200 = $1,107.50 + 28%
- $8200 – $11,200 = $1,905.50 + 33%
- Over $11,200 = $2,895.50 + 35%
Precious Metals & Coins
A Solo 401(k) Plan is permitted to invest in certain platinum coins as well as certain gold, silver, platinum, or palladium bullion provided the coins are held in a financial organization.
The advantages of using a Solo 401(k) Plan with “checkbook control” to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the metals and/or coins can be held in the name of the 401(k) Plan at a financial organization (at any local bank) safe deposit box eliminating depository fees.
The IRS does not prevent the use of 401(k) funds to purchase foreign currencies, including Iraqi Dinars. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.
Purchasing foreign currency, such as the Iraqi Dinar, with a Solo 401(k) Plan is as easy as writing a check. As trustee of the Solo 401(k) Plan, you will have “checkbook control” over your 401(k) Plan funds, providing you with the ability to make investments without requiring custodian consent. In addition, the foreign currency notes, including Iraqi Dinars, can be held in the name of the 401(k) Plan at a financial organization (any local bank) safe deposit box eliminating depository fees.
By using a Solo 401(k) Plan to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken. In the case of a Solo 401(k) Plan, all foreign currency gains would be tax-free.
Stocks, Bonds, Mutual Funds, CDs
In addition to non-traditional investments such as real estate, a Solo 401(k) Plan may purchase stock, bonds, mutual funds, and CDs. The advantage of using a Solo 401(k) Plan with “checkbook control” is that you are not limited to just making these types of investments. With a Solo 401(k) Plan with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless!
What Types of Investments are Not Permitted Using a Solo 401(k) Plan?
The Internal Revenue Code does not describe what an IRA can invest in, only what it cannot invest in. Internal Revenue Code Section 4975 prohibits Disqualified Persons from engaging in certain type of transactions. The purpose of these rules is to encourage the use of 401(k) funds for accumulation of retirement savings and to prohibit those in control of retirement funds from taking advantage of the tax benefits for their personal account.
Who is a “Disqualified Person”?
The IRS has restricted certain transactions between the Solo 401(k) Plan and a “disqualified person”. The rationale behind these rules was a congressional assumption that certain transactions between certain parties are inherently suspicious and should be disallowed.
The definition of a Disqualified Person (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the 401(k) Plan participant, any ancestors or lineal descendants of the 401(k) Plan participant, and entities in which the 401(k) Plan participant holds a controlling equity or management interest. In essence, under Code Section 4975, a “Disqualified Person” means:
- A fiduciary (e.g., the 401(k) Plan participant, or person having authority over making 401(k) Plan investments),
- A person providing services to the plan (e.g., the trustee or custodian),
- An employer, any of whose employees are covered by the 401(k) Plan,
- An employee organization any of whose members are covered by the 401(k) Plan,
- A 50 percent owner of C or D above,
- A family member of A, B, C, or D above (family members include the fiduciary’s spouse, parents, grandparents, children, grandchildren, spouses of the fiduciary’s children and grandchildren (but not parents-in-law),
- An entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by A, B, C, D, or E. Whether an entity is a disqualified person is determined by considering the indirect stockholdings/interest which would be taken into account under Code Sec. 267(c), except that members of a fiduciary’s family are the family members under Code Sec. 4975(e)(6) (lineal descendants) for purposes of determining disqualified persons.
- A 10 percent owner, officer, director, or highly compensated employee of C, D, E, or G,
- A 10 percent or more partner or joint venturer of a person described in C, D, E, or G.
Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “Disqualified Persons”.
Solo 401(k) prohibited transactions are listed in Code Section 4975; prohibited transactions are any direct or indirect:
- Sale or exchange, or leasing, of any property between a plan and a disqualified person;
- Lending of money or other extension of credit between a plan and a disqualified person;
- Furnishing of goods, services, or facilities between a plan and a disqualified person;
- Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
- Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
- Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
Examples of Prohibited Transactions
The following are a number of common Solo 401(k) Plan related transactions that are prohibited pursuant to Internal Revenue Code Section 4975:
- Selling interest in real estate to a Disqualified Person
- Selling or transferring real estate you own personally to your Solo 401(k) Plan
- Purchasing real estate with Solo 401(k) funds and leasing to a disqualified person
- Investing 401(k) funds in a house that is used by the 401(k) owner (or other Disqualified Person)
- Using the Solo 401(k) Plan as security for a loan
- Personally guaranteeing a loan to your Solo 401(k) Plan
- Buying real estate with your Solo 401(k) Plan and making repairs personally or having a “Disqualified Person” make repairs
- Buying real estate with personal funds and then transferring title to the Solo 401(k)
- Using personal funds to pay taxes and expenses related to the Solo 401(k) Plan real estate investment
- Being compensated for any services performed for or on behalf of the Solo 401(k) Plan
- Contributing personal funds to your 401(k) Plan bank account
- Acquiring a credit card for your Solo 401(k) Plan bank account
- Using your retirement funds to make a real estate investment and earning a commission personally from the purchase
- Making an investment using your 401(k) Plan into a company or fund that will benefit the 401(k) Plan participant or a Disqualified Person personally
- Making an investment using Solo 401(k) funds to facilitate or protect the 401(k) owner’s investment
- The Solo 401(k) invests in a business owned by the Solo 401(k) Plan participant who serves as the 401(k) Plan trustee and the 401(k) Plan participant owner generates a salary from the business
- Solo 401(k) Plan participant, as trustee of the Solo 401(k) Plan, using 401(k) Plan funds to lend money to an entity which he/she has an interest in
- Engaging in a transaction whereby the Solo 401(k) Plan participant – serving as trustee of the 401(k) Plan – independent judgment is affected
- Purchasing company stock from the Solo 401(k) Plan participant whereby the purchase helps the Solo 401(k) Plan owner personally
- Investing in a company owned by the Solo 401(k) Plan participant who is the trustee of the Solo 401(k) Plan whereby the investments benefits the Solo 401(k) Plan participant personally
With a Solo 401(k) Plan “Checkbook Control” structure, all income and gains from investments will generally flow back to your 401(k) Plan tax-free. Because a 401(k) Plan is treated as a tax-exempt entity pursuant to Internal Revenue Code Section 401, all income and gains generated by the 401(k) Plan will flow-through to the 401(k) Plan account tax-free!
For additional information on the advantages of using a Solo 401(k) Plan with “checkbook control” to make investments, please contact one of our 401K Experts at 800-472-0646.