Jan 29

Solo 401(K) Plan Controlled Group Rules

Can a business or individual adopt a separate Solo 401(k) plan for another entity or business?

One must first determine whether adopting the additional Solo 401(k) would violate the Controlled Group Rules set up by the IRS and Department of Labor.

The Controlled Group Rules were created essentially to protect employees from a business owner or executive establishing a separate 401(k) plan for another business and thereby not offering those employees the benefits inherent in participating in a 401(k) qualified retirement plan.

The IRS and Department of Labor were concerned that business owners wanting to establish a qualified retirement plan, but not wanting the burden of having to provide benefits to all eligible employees, would create a new separate business which would have no employees other than the owner or executive and then adopt a solo 401(k) plan for that company. Since the new company would be wholly owned by the business owner and would not have any full-time employees, the business owner could establish his or her own solo 401(k) plan and, thus, enjoy all the benefits of having a qualified retirement plan without having to provide any benefit to the employees from the other company.

WHAT IS A CONTROLLED GROUP OF CORPORATIONS?

As per Internal Revenue Code Section 414, a controlled group is any two or more corporations connected through stock ownership in any of the following ways:

Parent-subsidiary group

  • 80% of stock of each (subsidiary) corporation is owned by another member of the group
  • Parent corporation must own 80% of the stock of at least one of the other members of the group
  • The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Brother-sister group

  • The same five or fewer individuals own at least 80% of the stock of the corporations
  • “Individual” includes ownership by an estate or trust
  • “Ownership” includes having a controlling interest and effective control of the corporations
  • The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Combined group

  • Combination of a Parent-subsidiary and a Brother-sister group

HOW DOES ONE DETERMINE WHO IS PART OF A CONTROLLED GROUP?

To determine whether one is part of a controlled group, one must take into account the stock attribution rules.

The purpose of the stock attribution rules is to attribute shares, or interest in a company held by certain family members, to the person in question and determine whether that person is part of a controlled group. Internal Revenue Code Section 318 governs the stock attribution rules. Pursuant to Internal Revenue Code Section 318, an individual shall be considered as owning the stock, owned directly or indirectly, by or for –

(i) his/her spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance)

(ii) his/her children, grandchildren, parents

CAN THE COMPANIES IN A CONTROLLED GROUP BE TREATED AS SEPARATE COMPANIES?

The IRS does have a procedure through which a company can request to be treated as a Separate Line of Business (see IRC §414(r)) . The following are limitations for these requests:

  • Must have a valid business purpose
  • Must have at least 50 employees within each line of business
  • Restrictions on HCE ratios in each separate line of business
  • Must notify IRS to request their approval

DO ALL MEMBERS OF A CONTROLLED GROUP HAVE TO PARTICIPATE IN ONE PLAN?

No. Members of a controlled group may each have a different plan. Similarly, two or more members of the controlled group may adopt a single plan. In either case, all employees of the controlled group must be taken into account for testing purposes.

For example, if one company is owned by a shareholder with greater than 80% and has no employees, but that same person also has ownership of over 80% in another company with full-time employees, a single plan may be adopted for both companies. However, the adopted plan must provide benefits to the eligible employees from the second company.

In other words, the rules are in place to restrict the owner(s) of a business with full-time employees from establishing a new company with no employees and adopting a Solo 401(k) plan that would exclude the full-time employees from the other company. The IRS and Department of Labor wanted to make sure that all eligible employees of a company that is part of a controlled group receive all available retirement benefits.

Solo 401(K) Plan Controlled Group RulesControlled Group Examples:

Example 1: Joe owns 90% of Company A that has 3 employees. Joe wants to adopt a qualified retirement plan, but does not want to offer any benefits to his employees. Joe decides he will establish a new company that has no employees and adopt a Solo 401(k) Plan through that new company. Before proceeding, Joe talks with a tax attorney about his idea. Joe’s tax attorney quickly points out that since Joe would own more than 80% of Company A and the newly established company, both companies would be part of a controlled group. This would prohibit Joe from establishing a plan for the new company without offering the employees from Company A the same plan benefits.

Example 2. Joe owns 45% of Company A and Joe’s son, Mike, owns the remaining 55% interest. Company A has 5 full-time employees. Joe and Mike want to establish a 401(k) plan so they make tax-deferred contributions, but don’t want to provide the employees with any plan benefits. Joe and Mike come up with the idea of forming a new company that will have no employees other than themselves and adopt a 401(k) plan through the new company. Joe talks this over with his tax attorney and learns that since Joe and Mike are father and son, under Internal Revenue Code Section 318 they will be treated as owning each others shares, giving them each over 80% interest in Company A and, thus, triggering the controlled group rules. Hence, Joe and Mike would be limited from opening a 401(k) plan for the new business and not offering plan benefits to the employees from Company A. Joe and Mike could establish a plan for the new company, but the controlled group rules would require that the plan benefits be provided to all eligible employees from both companies.

Example 3. Joe owns 78% of Company A and Tim, his friend, owns the remaining 22%. Company A has 12 full-time employees. Company A does not have a 401(k) Plan. Tim does some consulting on a part-time basis and wants to establish a new corporation for his consulting business as well as establish a Solo 401(k) plan. Tim speaks with his tax attorney to inquire whether he could adopt a Solo 401(k) plan for his new business without being required to offer benefits to the 12 full-time employees with Company A. Tim’s tax attorney told Tim that because he owns less than 80% of Company A, his new consulting company would not be part of a controlled group and, thus, he would not be required to offer 401(k) benefits from his new company to the Company A employees.

Example 4. Joe and Tim each own 50% of Company A, which has 4 full-time employees. Company A currently offers its employees 401(k) plan benefits. Joe and Tim are each over the age of 59 ½ and are interested in using some of their retirement funds to purchase real estate. Unfortunately, Company A’s retirement plan does not allow for non-traditional investments, such as real estate. Joe and Tim decide to establish a new corporation, which they will each own 50% of and then have that new company adopt a new 401(k) plan. Before proceeding, Joe and Tim decided to speak with their tax attorney to make sure this strategy would work. Joe and Tim’s tax attorney advised them that as the new company will be owned by the both of them, just like Company A, the controlled group rules would be triggered since the same five or fewer individuals own at least 80% of the stock of the two corporations. Thus, Jim and Tim would not be able to adopt a new 401(k) plan without offering the same benefits to the employees from Company A.

Affiliated Service Group

In light of Section 414(b) and (c) which requires that all employees of commonly controlled corporations or trades or businesses be treated as employees of a single corporation or trade or business, some business owners have attempted to circumvent these rules by arranging the ownership of related business entities in an artificial manner.

In order to prevent business owners from adopting a 401(k) plan through a newly established and wholly owned entity, Internal Revenue Code Section 414(m) was enacted. Section 414(m) was enacted to prevent such circumvention by expanding the idea of control to separate, but affiliated, entities. Proposed Treas. Reg. § 1.414(m) provides that all employees of the members of an affiliated service group shall be treated as if a single employer employed them.

What is an Affiliated Service Group?

An affiliated service group is one type of group of related employers and refers to two or more organizations that have a service relationship and, in some cases, an ownership relationship, described in IRC section 414(m). An affiliated service group can fall into one of three categories:

1. A-Organization groups (referred to as “A-Org”), consists of an organization designated as a First Service Organization (FSO) and at least one “A organization”,

2. B-Organization groups (referred to as “B-Org”), consists of a FSO and at least one “B organization”, or

3. Management groups.

First Service Organization

A First Service Organization (“FSO”) must be a “service organization”. Performance of services is the principal business of the organization as defined in section 414(m)(3), and Proposed Treas. Reg. § 1.414(m)-2(f) .

A “Organization”

An “A” Organization refers to a corporation, partnership, or other organization. To be an A-Org, an organization must satisfy a two-part test:

1. Ownership Test: The organization is a partner or shareholder in the FSO (regardless of the percentage interest it owns in the FSO) determined by applying the constructive ownership rules as specified in section 318(a), and

2. Working Relationship Test: The organization “regularly performs services for the FSO,” or is “regularly associated with the FSO in performing services for third parties. Facts and circumstances are used to determine if a working relationship exists.

“B” Organization

To be a B-Org, the organization must meet the following requirements:

1. A significant portion of its business must be the performance of services for a FSO, for one or more A-Org’s determined with respect to the FSO, or for both,

2. The services must be of a type historically performed by employees in the service field of the FSO or the A-Org’s, and

3. Ten percent or more of the interests in the organization must be held, in the aggregate, by persons who are highly-compensated employees (pursuant to IRC § 414(q)) of the FSO or A-Org.

Note – An A or B-Org need not be a service organization.

What is Considered Performance of Services?

The principal business of an organization will be considered the performance of services if capital is not a material income-producing factor for the organization, even though the organization is not engaged in a field listed in Proposed Treas. Reg. § 1.414-(m)-2(f)(2) .

Whether capital is a material income-producing factor must be determined by reference to all the facts and circumstances of each case. In general, capital is a material income-producing factor if a substantial portion of the gross income of the business is attributable to the employment of capital in the business as reflected, for example, by a substantial investment in inventories, plant, machinery or other equipment.

Capital is a material income-producing factor for banks and similar institutions. Capital is not a material income-producing factor if the gross income of the business consists principally of fees, commissions or other compensation for personal services performed by an individual.

Regardless of whether the above sub-paragraph applies, an organization engaged in any one or more of the following fields is a service organization:

  • Health
  • Law
  • Engineering
  • Architecture
  • Accounting
  • Actuarial science
  • Performing arts
  • Consulting
  • Insurance

An organization will not be considered as performing services merely because:

  • It is engaged in the manufacture or sale of equipment or supplies used in the above fields,
  • It is engaged in performing research or publishing in the above fields,

or

  • An employee provides one of the enumerated services to the organization or other employees of the organization, unless the organization is also engaged in the performance of the same services for third parties

Affiliated Service Group Examples

Example 1: Bob Brown, a doctor, is incorporated as Bob Brown, P.C. and this professional corporation is a partner in the Jones Surgical Group. Bob Brown and Bob Brown, P.C., are regularly associated with the Jones Surgical Group in performing services for third parties. The Jones Surgical Group is an FSO. Bob Brown, P.C. is an A-Org because it is a partner in the medical group and is regularly associated with the Jones Surgical Group to perform services for third parties. Thus, Bob Brown, P.C. and the Jones Surgical Group would constitute an affiliated service group. As a result, the employees of Bob Brown, P.C. and the Jones Surgical Group must be aggregated and treated as if they were employed by a single employer per section 414(m).

Example 2: The Ewing, Frank and Gold Partnership is a law partnership with offices in numerous cities. EFG, of New City P.C., is a corporation that is a partner in the law firm. EFG, of New City P.C. provides paralegal and administrative services for the attorneys in the law firm. All of the employees of the corporation work directly for the corporation, and none of them work directly for any of the other offices of the law firm.

The law firm is an FSO. The corporation is an A-Org because it is a partner in the FSO and is regularly associated with the law firm in performing services for third parties.

The corporation and the partnership would together constitute an affiliated service group. Therefore, the employees of EFG of New City, P.C. and the employees of The Ewing, Frank, and Gold Partnership must be aggregated and treated as if they were employed as a single employer per section 414(m).

Example 3: Richards & Associates is a financial services organization that has 11 partners. Each partner of Richards owns one percent of the stock in Ames Corporation. Ames provides services to the partnership of a type historically performed by employees in the financial services field. A significant portion of the business of Ames consists of providing services to Richards. Considering Richards as an FSO, the Ames Corporation is a B-Org because:

1. A significant portion of its business is in the performance of services for the partnership of a type historically performed by employees in the financial services field. and,

2. More than 10% of the interests in the Ames Corporation is held, in the aggregate, by the highly-compensated employees of the FSO (consisting of the 11 common owners of Richards and Associates). Accordingly, the Ames Corporation & Richards and Associates constitute an affiliated service group. Therefore, the employees of the Ames Corporations and Richards and Associates must be aggregated and treated as if they were employed by a single employer per section 414(m).

Example 4: Douglas Properties, Inc. sells land that it has purchased and developed. Curt is a 25% shareholder of Douglas and a 50% shareholder of Curt and Son Construction Company, Inc. Douglas Properties regularly engages the services of Curt and Son. Although it appears that Douglas Properties could be an FSO, the affiliated service group rules do not apply because Douglas Properties is not a service organization.

The Broad Scope of the Affiliated Service Group Rules & The Solo 401(k) Plan

The affiliated service group rules are extremely broad and can trigger the controlled group rules in many unexpected cases. For this reason it is extremely important to work with a trained tax and ERISA professionals to determine whether the affiliated service group rules would trigger the controlled group rules and, hence, prevent the adoption of a solo 401(k) Plan or activate the need to offer plan benefits to certain employees. In other words, if the affiliated service rules are violated, the controlled group rules would apply and can prevent a business owner from adopting a solo 401(k) Plan due to employees from an affiliated owned company.

To learn more about how the controlled group rules as they apply to the establishment of a Solo 401(k) plan, please contact a tax expert at 800-472-0646.

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Jan 26

Myths About Your 401(k) Plan

Some myths as discussed by Christine Giordano at usnews.com

With their fees and percentages, funds and corporate matches, 401(k)s have been known to baffle and confuse even the smartest people in the office. In fact, even businesses offering the plans can be confused.

When asked, 83 percent of small business owners say they have questions about their company’s 401(k) plans, and a third of them feel they need to hire a consultant to settle their confusion, according to a 2012 national survey of small business owners conducted by ShareBuilder 401k. Many are unprepared for questions from their employees, according to the survey.

As an employee, if your company is offering a 401(k) match, consider it free money, but there are some things you should definitely research. Your best plan of action should be to stay educated and learn as much as you can about your plan.

Here are some myths about 401(k) plans:

Myth: The amount you save under your corporate match program will be all you need to retire. Experts say you should put away more than your employer’s match to protect yourself from rising costs of living, inflation and unexpected medical bills. You’ll need to do a little extra math.

“While it’s always good to put in at least as much as your employer matches, 99 percent of the time, you need to put in more,” says Layton Cox, director of retirement plan consulting for Pathways Financial Partners in Tucson, Arizona.

If the cost of living increases by 3 percent each year, you’ll need more money to be comfortable in the future. “If you are, say, 25 years from retirement, and want to have a lifestyle that requires you to spend $100,000 a year in today’s dollars, you are going to need $209,000 a year at retirement because the cost of living has compounded 3 percent every year. People forget the inflation factor when looking at what they may need,” said Ben Doty, senior investment director at Koss Olinger & Co. in Gainesville, Florida.

Consider that you might live to 100. How much will you need for every year of retirement?

Start by considering how much you want to spend in retirement each year, and think about what age you’d like to retire. If you want to retire at 65 and live until 100, that would be 35 years of living times how much you want to spend. Then add on 3 percent per year, plus medical expenses. For example, a 65-year-old couple retiring will need at least $240,000 to cover future medical costs, according to a study by Fidelity Investments.

“Basic retirement calculators can help you determine how much you need to put aside to reach your target nest egg given your age,” Doty says.

Myth: A 401(k) is the best place for your retirement savings, even without a matching program. Other retirement plans, like IRAs, may provide more benefits than a 401(k), so it’s best to do your research. “Those extra contributions can potentially be put to better use in places that provide more benefits, safety and liquidity, and possibly at a lower cost,” says Richard Bavetz, investment advisor for Carington Financial in Westlake Village, California.

Find out if your 401(k) and 403(b) are providing a match to your contributions. “If an employee’s contributions are not matched, then the only advantage to making these contributions is going to come from the tax strategy if taxes are lower when the employee starts withdrawing their savings. If taxes are the same or higher, then there is no advantage and potentially an even higher tax liability if taxes rise,” Bavetz says.

Myth: You will be in a different tax bracket when you retire. Some think that because they won’t have a job when they retire (isn’t that the purpose of retiring?), their income will be zero. Not true. You are usually taxed on how much you withdraw from your retirement savings. If you withdraw $60,000 per year from your 401(k) as a single person, you’ll pay 25 percent taxes on it, as if it was your salary. Some people who are great at saving, and others who retire with pensions, get pushed into a higher tax bracket when they retire and withdraw from their funds.

“Earning the same or slightly more in retirement is very attainable if a person has good saving habits, can be consistent and is given the proper guidance. In fact, I might even go so far as to suggest that if a financial planner is telling their clients to plan for a lower bracket, they ought to be fired,” Bavetz says.

Myth: Your 401(k) is free. While your employer does pay the majority of costs to run the plan, it definitely isn’t free for employees. Many providers will charge a monthly per-participant flat fee, says Andrew Meadows, vice president of brand and culture at Ubiquity Retirement + Savings in San Francisco.

“There are also asset-based fees, which can be as high as 2 percent, to pay for the management of the funds in which the employee is invested,” Meadows says.

To review your 401(k) plan management expenses, ask for an example of a fee report that a typical client would get. “There will be two,” Meadows says. “One for the regular recurring cost of administration and the one that comes from the investments. The latter is likely hidden, but due to fee disclosure regulations, a provider must share this with their client.”

Myth: Your 401(k) doesn’t need any analysis. It’s on autopilot. You have different investment options in your 401(k), and some are better than others. And you’ve heard the expression, “don’t put all of your eggs in one basket.” It’s the same for your retirement.

Michael Sander, vice president for the Creative Planners Group in Tarrytown, New York, sees people make three major mistakes when they allocate their 401(k) investments: They put all their funds in money market or stable value funds, they pick only the fund that had the best return in the prior year or they use only a target-date fund.

“Many target-date funds do not have the most optimized asset allocations available compared to a well-structured portfolio utilizing many diversified funds. Often, target-date funds underweight small caps, international holdings and the mixture of stocks and bonds is more or less than what is intended,” Sander says.

Different funds offer different benefits, Cox says. “Participants need to understand that a single fund can be more diversified than 20 funds,” he says. Start by checking the number of underlying holdings in each fund to get a rough estimate of how diversified the fund is, he says.

If you’re overwhelmed, you can always hire a fiduciary service to manage these for you through a well-known company, Meadows says. A fiduciary must, by law, make decisions that are only in your best interest. “If you’re not investment-savvy, these companies have great reputations and will take responsibility for ensuring you and your employees are making the most out of your investment options,” Meadows says.

Also, it’s a good idea adjust your 401(k) contributions and investment strategy – when you get a sizable bonus or a great promotion, you may want to increase your contribution amount, Meadows says.

Most plans come with advice, but people don’t ask for it. A recent Charles Schwab survey found that only about 12 percent of participants are getting professional advice for their 401(k), even though nearly half say they’d expect better performance if they used advice.

“Don’t let daily market swings dictate your investing decisions,” says Catherine Golladay, vice president of 401(k) Participant Services at Charles Schwab. “Just because a specific fund is underperforming today doesn’t mean it will be doing poorly tomorrow, or vice versa. You should develop a strategy based on your personal situation and risk tolerance, then stick with it. Use this time to make sure you are taking advantage of important plan features like professional investment advice.”

If you have any questions, please contact a 401(k) Expert at 800.472.0646.

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Jan 25

Checkbook Control for Your Solo 401(k)

A Solo 401(k) is perfect for sole proprietors, small businesses and independent contractors.

A Solo 401(k) plan is generally also referred to as a “checkbook control” Qualified Retirement Plan. In each case, a 401(k) plan is established whereby the participant serves as trustee and administrator of the Plan providing the participant with “checkbook control” over his or her retirement funds.

With a “checkbook control” Solo 401(K) Plan you will never have to seek the consent of a custodian to make an investment or be subject to excessive custodian account fees based on account value and per transaction.

By having “checkbook control” over your retirement funds you will gain the following advantages:

Checkbook Control for Your Solo 401(k)“Checkbook Control”: You’ll no longer have to get each investment approved by the custodian of your account. Instead, all decisions are truly yours. To make an investment, simply write a check and use the funds straight from your Solo 401(k) Plan bank account.

When making a real estate investment or purchasing tax liens, a “checkbook control” Solo 401(k) Plan, will allow you as manager of the LLC the ability to simply write a check from your Solo 401(k) Plan bank account.

Example 1: Joe has a Solo 401(k) set-up by the IRA Financial Group. Joe has established his Solo 401(k) Plan bank account with Bank of America. Joe wishes to use his retirement funds to purchase a home from Steve, an unrelated third-party (non-disqualified person). Steve is anxious to close the transaction as soon as possible. With a “checkbook control” Solo 401(k) Plan, Joe can simply write a check using the funds from his 401(k) Plan bank account or can wire the funds directly from the account to Steve. Joe, as trustee of the plan, no longer needs to seek the consent of the custodian before making the real estate purchase. With a custodian controlled Solo 401(k) Plan without “checkbook control” Joe may not be able to make the real estate purchase since seeking custodian approval would likely take too much time.

Example 2: Joe has a Solo 401(k) set-up by the IRA Financial Group. Joe has established his Solo 401(k) Plan bank account with Bank of America. Joe wishes to use his retirement funds to invest in tax lien certificates via auction. Purchasing tax lien certificates requires Joe make the payment at the auction. With a “checkbook control” Solo 401(k) Plan, Joe can simply bring his 401(k) Plan bank account checkbook to the closing or secure a certified check from the bank in order to make payments at the auction. With a custodian controlled Solo 401(k) Plan without “checkbook control” Joe would not be able to make tax lien certificate investments because he would need custodian approval before each tax lien certificate purchase and would not have sufficient time to seek the consent of the custodian.

No Custodian Fees or Transaction Fees: The most significant cost benefit of the Solo 401(k) plan is that it does not require the participant to hire a bank or trust company to serve as trustee. In other words, there are no custodian fees or transaction fees when establishing a Solo 401(k) Plan with the IRA Financial Group. This flexibility allows the participant to serve in the trustee role. This means that all assets of the 401(k) trust are under the sole authority of the Solo 401k participant.  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.

Speed: You can act quickly on a great investment opportunity. When you find an investment that you want to make with your retirement funds, simply write a check or wire the funds straight from your Solo 401(k) Plan bank account to make the investment. The Solo 401(k) Plan allows you to eliminate the delays associated with using an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.

Offset the Cost of Your Plan with a Tax Deduction: By paying for your Solo 401(k) with business funds, you would be eligible to claim a deduction for the cost of the plan, including annual maintenance fees. The deduction for the cost associated with the Solo 401(k) Plan and ongoing maintenance will help reduce your business’s income tax liability, which will in-turn offset the cost of adopting a self-directed Solo 401(k) Plan. The retirement tax professionals at the IRA Financial Group will help you take advantage of the available business tax deduction for adopting a Solo 401(k) Plan.

Cost Effective Administration: In general, the solo 401(k) plan is easy to operate. There is generally no annual filing requirement unless your Solo 401K plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

For more information, please contact us @ 800.472.0646.

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Jan 20

How to Use the Rollover Business Startup (ROBS) to Buy a Business

Leaving your job or thinking of leaving your job and a have 401(k) qualified retirement plan or other type of retirement plan? Why not use your retirement funds to invest in yourself instead of a falling stock market? With the recent turmoil in the U.S. stock market and the downward trend expected to continue, why not use your 401(k) funds on a business you can run, manage, and even earn a salary from? Isn’t it time you placed your retirement future in your hands rather than trust Wall Street bankers?

With IRA Financial Group’s Business Acquisition structure, a new C Corporation is formed which will adopt a 401(k) Qualified Plan. Your existing retirement funds can then be rolled into the newly adopted 401(k) Plan tax-free. The 401(k) Plan will then purchase the stock of the new corporation. The new corporation will then use those funds to purchase a new business or franchise tax-free!

With the IRS compliant Business Acquisition Structure, you can earn a reasonable salary from your new business or franchise. You can also use your new 401(k) Plan to make high tax-deductible contributions – $53,000 ($59,000 if you are over the age of 50) and even borrow up to $50,000 for any purpose.

What does the IRS Say about this?

The Internal revenue Code explicitly permits the purchase of corporate stock by a 401(k) Qualified Plan. The IRS has repeatedly confirmed that the structure is legal but has expressed some concern about the potential for abuse by individuals not being properly advised by tax professionals. For example, the IRS has documented the following instances of abuse when it comes to using retirement funds to invest in a business: (i) the employees of the business are not properly informed that a 401(k) qualified plan has been adopted by the business and that they are eligible to participate, (ii) the individual that established the structure with no intention to use for business purpose and the sole purpose for establishment was to get access to the retirement funds without penalty, or (iii) the structure would be used to purchase assets for personal use with the retirement funds.

Therefore, the IRS has stressed that it is imperative that when using retirement funds to establish or finance a new or existing business or franchise, it is necessary to work with qualified tax professionals who have experience in this area and can make sure the structure is established in full compliance with IRS and ERISA rules and procedures.

IRA Financial Group’s Business Acquisition structure is an IRS compliant legal structure that one can use to invest retirement funds into a business they will operate and be employed by. Work with IRA Financial Group’s in-house tax professionals to help establish your IRS compliant Business Acquisition Solution.

How to Use the Rollover Business Startup (ROBS) to Buy a BusinessUsing IRA Financial Group’s Business Acquisition Solution is the only way you will be able to use your retirement fund to legally start or finance a new or existing business tax-free and penalty free! Whereas, with a self-directed IRA LLC, an individual can invest retirement funds in a private business, but not a business that he or she would be involved in – that would be considered a prohibited transaction pursuant to Internal Revenue Code 4975. While, with a Solo 401K, an individual could only borrow up to $50,000 or 50% of his or her account value whichever is less and use that loan for any purpose, including starting or financing a business. However, if an individual required more than $50,000 for a business, then the Business Acquisition structure is the only solution that will allow one to use their retirement funds to start or finance a business tax-free and without penalty!

To learn more about the advantages of using a Business Acquisition Structure to start or finance a business using retirement funds, please contact a retirement expert at 800-472-0646.

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Jan 15

Types of Investments You Can Make With Your Solo 401k Plan

A Solo 401(k) Plan offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The following are some examples of types of investments that can be made with your Solo 401(k) Plan:

For additional information on the advantages of using a Solo 401K Plan to make investments, please contact one of our 401(k) Experts at 800-472-0646.

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Jan 13

Rollover Business Start-Up Book Now Available on Amazon Kindle

New book on the ROBS written by Adam Bergman, Esq., now available in the Amazon Kindle store

The new book by Adam Bergman, Esq., Turning Retirement Funds into Start-Up Dreams – financing and retirement funding options for your start-up business is now available for purchase on Amazon Kindle.

The newly published book offers an in-depth overview of the various financing and retirement funding options available to entrepreneurs and business owners, including the viability of the Rollover Business Start-Up Solution (ROBS).

Turning Retirement Funds Into Start-Up Dreams is the next best thing to a private consultation with author Adam Bergman, Esq., a leading expert on IRAs and 401(k) plans. And what you’ll discover is that investing in yourself with your own retirement funds could be a viable option for you under the right circumstances.

Rollover Business Start-Up Book Now Available on Amazon KindleThis book provides a detailed analysis of various ways you can finance a business venture, including using personal savings, acquiring a traditional loan or SBA loan, using a credit card, approaching family or friends, and crowdfunding. It then discusses in detail the amazing benefits—and limitations—of the self-directed IRA, 401(k) plan loan option, and the Rollover Business Start-Up (ROBS) as business funding solutions. “My goal is to help educate more people, including many attorneys and CPAs, that there are legal ways to buy, finance, or invest in your own business with your retirement funds.” Stated Adam Bergman.

Adam Bergman is a senior tax partner with the IRA Financial Group, LLC, the markets leading provider of Self-Directed IRA LLC and Solo 401(k) plans. Mr. Bergman is also the managing partner of the law firm The Bergman Law Group, LLC. In addition, Mr. Bergman is a recognized expert on IRAs and 401(k) Plans and is the founder of the BergmanIRAReport.com and the Bergman401KReport.com. Mr. Bergman is the author of the book titled, “Going Solo: America’s Best Kept Retirement Secret For the Self-Employed”, available on Amazon, and is a frequent contributor to Forbes. Mr. Bergman has advised over 8,000 clients on the self-directed IRA LLC and Solo 401(k) Plan solutions.

Mr. Bergman has been quoted in a number of major publications on the area of self-directed retirement plans. Mr. Bergman has been interviewed on CBS News and has been quoted in Businessweek, CNN Money, Forbes, Dallas Morning News, Daily Business Review, Law.com, San Francisco Chronicle, U.S. Tax News, the Miami Herald, Bloomberg, Arizona Republic, San Antonio Express, Findlaw, Smart Money, USA Today, Houston Chronicle, Morningstar, and American Lawyer on the area of retirement tax planning.

Prior to joining the IRA Financial Group, LLC, Mr. Bergman worked as a tax and ERISA attorney at White & Case LLP, Dewey LeBoeuf LLP, and Thelen LLP, three of the most prominent corporate law firms in the world. Throughout his career, Mr. Bergman has advised thousands of clients on a wide range of tax and ERISA matters involving limited liability companies and retirement plans. Mr. Bergman received his B.A. (with distinction) from McGill University and his law degree (cum laude) from Syracuse University College of Law. Mr. Bergman also received his Masters of Taxation (LL.M.) from New York University School of Law.

Mr. Bergman is recognized as a leading retirement tax-planning expert and has lectured attorneys on the legal and tax aspects of Self-Directed IRA LLC and Solo 401(k) Plans. Mr. Bergman has also been retained by several leading IRA custodians, including Entrust, to offer expertise on the Self-Directed IRA structure. Mr. Bergman is a member of the Tax Division of the American Bar Association and New York State Bar Association.

IRA Financial Group is the market’s leading provider of self-directed retirement 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 visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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Jan 12

What Transactions Trigger UBTI Tax with a Solo 401(k)

In general, most passive investments that your Solo 401(k) Plan might invest in are exempt from Unrelated Business Taxable Income or UBTI. Some examples of exempt type of income include: interest from loans, dividends, annuities, royalties, most rentals from real estate, and gains/losses from the sale of real estate.

When an exempt organization, such as an 401(k) Plan, undertakes any development activities in connection with selling real estate, beyond passively placing the property for sale either directly or through a broker, the issue arises under Internal Revenue Code 512(b)(5)(A) whether the real estate is “property held primarily for sale to customers on the ordinary course of the trade or business.” An organization that engages in the sale of property to customers in the ordinary course of the trade or business is characterized as acting as a “dealer.

Fundamental to considering whether an exempt organization (i.e. a 401(k) Plan) is a “dealer” of real property is whether the property itself is held “primarily” for resale to customers in the ordinary course of a trade or business. In Malat v. Riddell, 393 U.S. 569 (1966), the U.S. Supreme Court interpreted the meaning of the phrase “held primarily for sale to customers in the ordinary course of trade or business” under Internal Revenue Code Section 1221(1). The IRS has often applied the principles derived under Internal Revenue Code Section 1221 to rulings interpreting the language of Internal Revenue Code Section 512(b)(5). The Court interpreted the word “primarily” to mean “of first importance” or “principally.” By this standard, ordinary income would not result unless a sales purpose is dominant. Both the courts and the IRS concluded that a taxpayer may make “reasonable expenditures and efforts” (such as subdividing land, construction of streets, the provision of drainage, and furnishing of access to such a necessity as water, as part of the “liquidation” of an investment asset without being treated as engaged in a trade or business.

The UBTI generally applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words—“trade or business,” “regularly carried on,” and “unrelated.”

What Transactions Trigger UBTI Tax with a Solo 401(k)Trade or Business: In defining “unrelated trade or business,” the regulations start with the concept of “trade or business” as used by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.” Although Internal Revenue Code Section 162 is a natural starting point, the case law under that provision does little to clarify the issues. Because expenses incurred by individuals in profit-oriented activities not amounting to a trade or business are deductible under Internal Revenue Code Section 212 , it is rarely necessary to decide whether an activity conducted for profit is a trade or business. The few cases on the issue under Internal Revenue Code Section 162 generally limit the term “trade or business” to profit-oriented endeavors involving regular activity by the taxpayer.

Regularly Carried On: The UBIT only applies to income of an unrelated trade or business that is “regularly carried on” by an organization (Solo 401(k) Plan investment). Whether a trade or business is regularly carried on is determined in light of the underlying objective to reach activities competitive with taxable businesses. The requirement thus is met by activities that “manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.” Short-term activities are exempted if comparable commercial activities of private enterprises are usually conducted on a year-round basis (e.g., a sandwich stand operated by an exempt organization at a state fair), but a seasonal activity is considered regularly carried on if its commercial counterparts also operate seasonally (e.g., a horse racing track). Intermittent activities are similarly compared with their commercial rivals and are ordinarily exempt if conducted without the promotional efforts typical of commercial endeavors. Moreover, if an enterprise is conducted primarily for beneficiaries of an organization’s exempt activities (e.g., a student bookstore), casual sales to outsiders are ordinarily not a “regular” trade or business.

Before it can be determined whether an activity is seasonal or intermittent, the relevant activity must be identified and quantified, a step that is often troublesome. The type of income that generally could subject a Solo 401(k) Plan to UBTI is income generated from the following sources:

  • Business income generated via a passthrough entity, such as an LLC or partnership
  • Income earned from a convenient store operated through a passthrough entity
  • Income earned through an active business owned by an LLC in which the IRA is an investor
  • Income from a real estate investment held through a passthrough entity that is treated as a business (inventory) instead of as an investment

Examples could include:

  • In Brown v. Comr, 143 F.2d 468 (5th Cir. 1944), the exempt taxpayer owned 500 acres of unimproved land used for grazing purposes within its tax-exempt mission. Taxpayer decided to sell the land and listed it with a real estate broker. The exempt organization instructed the broker to subdivide the land into lots and develop it for sale. The broker had the land plotted and laid into subdivisions with several lots. Streets were cleared, graded and shelled; storm sewers were put in at street intersections; gas and electric lines were constructed; and a water well was dug. Each year 20 to 30 properties were sold. The court held that the taxpayer was holding lots for sale to customers in the regular course of business. The court identified the sole question for its determination as whether the taxpayer was in the business of subdividing real estate. The fact that the taxpayer did not buy additional land did not prevent the court from finding that the sales activities resulted in an active trade or business.
  • In Farley v. Comr., 7 T.C. 198 (1946), the taxpayer sold 25 lots out of a tract of land previously used in his nursery business but now more desirable as residential property. Because the taxpayer made no active efforts to sell and did not develop the property, the court described the sale as “in the nature of the gradual and passive liquidation of an asset.” Therefore, the income derived from the sales represented capital gains income, rather than ordinary income from the regular course of business as in the Brown case.
  • Dispositions of several thousand acres of land by a school over a period of twenty-five years does not constitute sale of land held primarily for sale to customers in the ordinary course of business and thus gains are excludable under Internal Revenue Code Section 512(b)(5) (Priv. Ltr. Rul. 9619069 (Feb. 13, 1996)).
  • Developing or subdividing land and selling a large number of homes or tracts of land from that development in a given period.
  • Buying a property/home rehabbing it and then selling it immediately thereafter when this was your sole intent (note: The activity must manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations). It is unclear whether the purchase and sale of one or two homes in a given year that were held for investment purposes would trigger UBTI.

Please contact one of our Solo 401(k) Experts at 800-472-0646 for more information.

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Jan 11

When Are Roth 401k Distributions Taxable?

Generally, distributions from a designated Roth account are excluded from gross income if they are (1) made after the employee attains age 59 1/2 , (2) “attributable to” the employee being “disabled,” or (3) made to the employee’s beneficiary or estate after the employee’s death. However, the exclusion is denied if the distribution occurs within five years after the employee’s first designated Roth contribution to the account from which the distribution is received or, if the account contains a rollover from another designated Roth account, to the other account. Other distributions from a designated Roth account are excluded from gross income under Internal Revenue Code 72 only to the extent they consist of designated Roth contributions and are taxable to the extent they consist of trust earnings credited to the account.

When Are Roth 401k Distributions Taxable?

Please contact one of our 401(k) Experts at 800-472-0646 for more information.

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Jan 06

Can You Take a Loan From Your Solo 401k Plan?

A Solo 401k loan is permitted at any time using the accumulated balance of the solo 401k as collateral for the loan. A Solo 401(k) participant can borrow up to either $50,000 or 50% of their account value – whichever is less. This loan has to be repaid over an amortization schedule of 5 years or less with payment frequency no greater than quarterly. The interest rate must be set at a reasonable rate of interest – generally interpreted as prime rate as per the Wall Street Journal. As of 12/21/15 prime rate is 3.50%, which means participant loans may be set at a very reasonable interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application.

How Can This be Done?

Internal Revenue Code Section 72(p) and the 2001 EGGTRA rules allow a Solo 401(k) Plan participant to borrow money from the plan tax-free and without penalty. As long as the plan documents allow for it & the proper loan documents are prepared and executed, a participant loan can be made for any reason. The solo 401k loan is received tax-free and penalty free. There are no penalties or taxes due provided loan payments are paid on time. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) for any investment purposes, including real estate, funding your business or a new business, tax liens, private placements, etc. Our in-house retirement tax professionals will assist you in completing the Solo 401(k) Plan documents in a timely manner once your Solo 401(k) Plan has been adopted.

When can a Participant Loan be Useful?

As a result of the recent economic meltdown, banks and other financial institutions have severely limited their lending capacity to self-employed business owners, thus, causing grave financial pressure on self-employed business owners. The Solo 401(k) plan is a perfect structure for any self-employed business owner seeking immediate funds for their business or to help pay personal expenses. Solo 401(k) participants can borrow up to either $50,000 or 50% of their account value – whichever is less to help finance or operate their business.

Other useful ways of using the participant loan feature is to:

  • Lend the funds to a third-party who will pay a higher interest rate
  • Invest in a real estate project that offers a higher rate of return than the low interest rate you must pay
  • To consolidate debt
  • To pay for college expenses
  • To pay for unexpected emergencies
  • Avoid distribution penalties and use up to $50,000 immediately with no restrictions
  • Invest in a new franchise or business
  • Make any alternative Investment that will generate a higher rate of return than the low Interest rate imposed on you, such as tax liens, private placements, or mortgage pools
  • Invest in a transaction that would otherwise be a Prohibited Transaction under Internal Revenue Code Section 4975
  • Quick, easy, and cheap access to a $50,000 loan to be used for any purpose

Please contact one of our Solo 401k Experts at 800-472-0646 for more information.

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