Apr 29

The Law Concerning ROBS to Fund a Business

The Internal Revenue Code and ERISA have firmly codified the ability to use retirement funds to invest in the stock of a sponsoring company as long as certain IRS and ERISA rules are followed.

Internal Revenue Code Section 4975(c) includes a list of transactions that the IRS deems “prohibited”. However, Internal Revenue Code Section 4975(d) lists a number of exemptions to the prohibited transaction rules. Specifically Internal Revenue Code Section 4975(d)(13) lists an exemption for any transaction which is exempt from section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) by reason of section 408(e) of such Act.

Section 408(e) provides that section 406 shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 407(d)(5), provided that: (1) the acquisition or sale is for adequate consideration; (2) no commission is charged with respect to the acquisition or sale; and (3) the plan is an eligible individual account plan (as defined in section 407(d)(3)). A 401(k) plan fits in to this definition.

Pursuant to ERISA Section 406, the acquisition or sale must be for “adequate consideration.” Except in the case of a “marketable obligation”, adequate consideration for this purpose means a price not less favorable than the price determined under ERISA § 3(18),subject to a requirement that the acquisition or sale must be for “adequate consideration.” An exchange of company stock between the plan and its employer-sponsor would be a prohibited transaction, unless the requirements of ERISA § 408(e) are met.

The Law Concerning ROBS to Fund a BusinessThe exemptions in 4975(d) shall not apply to items described in Internal Revenue Code Section 4975(f)(6). Section 4975(f)(6)(A) states that the exemption of 4975(d) shall not apply in the case of a trust described in Internal Revenue Code Section 401(a), which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (other than paragraphs (9) and (12)) shall not apply to a transaction in which the plan directly or indirectly— (i) lends any part of the corpus or income of the plan to, (ii) pays any compensation for personal services rendered to the plan to, or (iii) acquires for the plan any property from or sells any property to, any such owner-employee, a member of the family of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. Therefore, since the Plan will be purchasing “qualified employer securities” directly from the newly formed corporation, the purchase of corporate stock will not be treated as a prohibited transaction pursuant to Internal Revenue Code Section 4975.

ERISA Section 407(b)(1) generally places limitations on the acquisition and holding of Qualifying Employer Securities (normally 10% of plan assets). However, the Section includes an exception for “eligible individual account plans” (ERISA 407(b)(1)). As set forth in ERISA Section 407(d)(3), a qualified profit sharing plan is included in the definition of “eligible individual account plans”. In addition, pursuant to ERISA Section 404(a)(2), these plans do not violate ERISA’s diversification and, to the extent it requires diversification, prudence requirements.

Call 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!

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Apr 26

Investing in Domestic and Foreign Real Estate with a 401k

It’s a little-known fact that Real Estate can be purchased with retirement account funds. When using a Solo 401(k) for investments in real estate, your profits are tax-deferred back into your retirement account. More important, if you have full checkbook control over your Solo 401(k), the purchases can be made on the spot as fast as you can write a check. In the case of a Roth Solo 401(k), your gains are tax-free and you can take personal ownership of the property tax-free at the age of 59 1/2.

The purchase of Real Estate in today’s marketplace is a surprisingly advantageous investment for a Solo 401(k), since the best deals are typically foreclosures, short sales and estate sales. These characteristics make a perfect investment climate for the individual with full checkbook control of an IRA Financial Group Solo 401(k).

The Solo 401(k) Plan offers a highly attractive loan feature allowing for the purchase of real estate. Under the Solo 401(k) Plan, a participant can borrow up to either $50,000 or 50% of their account value – whichever is less. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) for any real estate investment purposes.

Our unique, IRS approved structures, created by IRA Financial Group’s in-house retirement tax professionals are personally customized to suit your individual needs. Only a handful of institutions are skilled in these specialized account structures and IRA Financial Group is the “gold standard” for compliance, leadership, customer service, and technological innovation.

Steady Income Generator with no tax bite

Income from a rental property bought with a Solo 401(k) flows back into the retirement account tax-free.

On a percentage basis, the income from real estate and other alternative investments can be two to eight times higher than today’s fixed-income offerings even after paying expenses such as property taxes and insurance. Meanwhile, the account holder can eventually reap the potential appreciation of the underlying asset, tax-free.

Proceeds from selling an investment property roll back into the Solo 401(k) tax-free.

The Flexibility to Buy Time-Sensitive Investments

IRA Financial Group’s Solo 401(k) Plan offers the participant the ability to serve in the trustee role. This means that all assets of the 401(k) trust are under your sole authority. This gives you, the investor, an incredible freedom to fund the investment at a moment’s notice. In this arrangement, you can buy Real Estate with the stroke of the pen, without a fund manager or other bureaucrat saying no or otherwise trying to slow down the process.

Make any Domestic or Foreign Real Estate Investment

A Solo 401(k) Plan allows you to make either domestic or foreign real estate investments. Whether it is residential or commercial real estate property, using a Solo 401(k) plan to invest in domestic or foreign real estate offers tax advantages, such as tax deferral and/or tax free repatriation of income.

Investing in Domestic and Foreign Real Estate with a 401kKnow of a great real estate investment in or outside of the United States? Dream of retiring in your country of birth or spending part of the year overseas? A Solo 401(k) Plan allows you to buy a vacation or retirement home now at today’s prices anywhere in the world, rent it out, and then use it tax-free at the age of 59 1/2.

The IRA Financial Group has experience working with clients who have purchased real estate all over the world including, Canada, Brazil, Argentina, Costa Rica, Puerto Rico, Dominican Republic, Nicaragua, Mexico, India, Israel, Italy, France, Switzerland, Germany, Cayman Islands, Bahamas, and many more countries. Our retirement tax professionals have significant experience in structuring foreign real estate investments that are tax efficient from a U.S. and foreign tax perspective. Contact us at 800-IRA-0646 to learn more.

The IRA Financial Group Solo 401(k) enables you to:

  • Invest in real estate tax-free – all real estate related income or gains goes back into your Solo 401(k) tax-free.
  • Buy and sell domestic, foreign, commercial, residential, and rental properties as real estate 401(k) investments.
  • Invest in foreclosed properties and tax liens on the spot, or make personal loans by simply writing a check.
  • Buy and sell mortgages, notes, tax liens, tax deeds, etc.

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

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Apr 25

Options for a Beneficiary of a Solo 401(k) Plan

If you are a beneficiary (rather than the owner) of a qualified plan and receive a distribution as a result of the owner’s death, in general you have the following options:

  • Pay ordinary income tax: If plan assets are distributed to you, then you will have to report the distribution as income on your tax return. However, if you receive a distribution from a plan you inherited, you will not have to pay an early distribution tax, even if you are younger than 59 1/2. The penalty is waived for inherited plans.
  • Roll over the distribution: If you inherit a qualified plan and you were the spouse of the original owner, you can roll over the distribution into a traditional or Roth IRA. However, if you inherit a retirement plan, such as a 401(k) Plan, and you were not the spouse of the original owner, then you may roll over the plan assets into a traditional IRA only if you follow certain rules. For example, you may not roll over the assets into a plan or IRA that is in your own name (you must establish a new IRA that is titled in the name of the deceased with you as the designated beneficiary).
  • Convert to a Roth IRA: A spouse that inherits a retirement plan is provided virtually all of the distribution options offered to the deceased plan participant. Beginning in 2008, non-spouse beneficiaries also have the options to transfer the assets to a Roth IRA subject to certain rules.
  • Use ten-year averaging.

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

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Apr 22

The Ten Commandments of Retirement

Here’s an interesting article written by Tom Sightings over at usnews.com:

Most of us are familiar with the Ten Commandments, even if we don’t remember or follow them all. Some people consider them to be ancient universal truths. The Ten Commandments may be a good place to start in advising us about any aspect of our lives, even retirement, although they have to be adapted to make sense in 21st century America. So here are the Ten Commandments for retirement, as inspired by our philosopher ancestors.

  1. Save for retirement. Most of us have Social Security to help support us in old age, and some of us have a pension. But these days nothing is sacred. Benefits can be changed, and besides, nobody ever promised that Social Security would provide anything more than a safety net so we don’t starve to death. If you want a comfortable retirement, you should start saving early in your career, presumably with an employer program or an individual retirement account, save consistently through the years and then resist the temptation to rob your retirement fund to buy a house or a new car.
  2. Invest your money. Financial experts recommend that you save ten times your annual salary by the time you retire. That’s almost impossible to do by saving alone. But if you invest through your company plan, or with a low-cost mutual fund or exchange-traded fund in your IRA, you can reasonably expect to grow your savings over time, which is the most realistic way to achieve long-term financial security.
  3. Do not retire too early. Social Security offers a siren call when we first become eligible for benefits at age 62. In Greek mythology the Sirens were beautiful creatures who lured sailors with their enchanting music to wreck their ships on the rocky coast. Similarly, if you start taking Social Security early, you receive a smaller monthly income for the rest of your life. So if you don’t have substantial savings to keep you afloat, you will likely shipwreck on the rocks of unexpected expenses at some point in your retirement voyage.
  4. Downsize. You no longer need a big house to shelter your family. You may no longer need two or three cars to ferry the kids to school or soccer practice. So consider downsizing your home and your possessions, especially if you broke any of those first three commandments.
  5. Eat right. When you’re retired you have more time to take care of yourself. So make the effort to buy and prepare healthful foods, and make sure to get the nutrition you may have neglected when you were too busy working and raising a family.
  6. Get some exercise. A reasonable amount of light-to-moderate exercise will extend your longevity, so you’ll be around long enough to collect on the Social Security you’ve been paying into your entire working life. Exercise also makes you feel better by improving digestion, soothing aching joints and increasing energy levels.
  7. Hold your family close. Your kids are out of the house, but that doesn’t mean they should be out of your life. Loneliness is one hazard of retirement, so make an effort to stay close to family and old friends. Family members are the oldest friends you have, and your grandchildren are your link to the future.
  8. Make new friends. Inevitably, old friends will die or move away – or perhaps you will move away. Wherever you find yourself, try making new friends. A strong social network supports both physical and mental health as you get older.
  9. Do something you like to do. Loneliness is one threat in retirement; boredom is another. So after you retire, recommit to your long-time hobby, or find a new one. You could become active in your community, find a part-time job or volunteer to help those in need. Do something that makes you want to get out of bed in the morning and take part in the bright new day.
  10. Do not covet thy neighbor’s goods. We all see happy people who live ideal retirement lives, whether in women’s magazines, on TV, on Instagram or Facebook. But remember, the articles are carefully chosen, the photos are airbrushed and what you see on Facebook is people putting their best face forward. Retirement, like life, has its challenges and disappointments, as well as its opportunities and memorable moments. Other people are not enjoying a better retirement than you are, especially if you’re following the retirement lifestyle that’s right for you.

If you have any questions, please contact a 401(k) Expert at the IRA Financial Group @ 800.472.0646.

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Apr 20

Can You Contribute to Both a Solo 401(k) and a SEP IRA?

Yes. You can make contributions to both a SEP and a Solo 401K Plan. In other words, a business can have both a SEP IRA and a Solo 401(K) Plan, although, there is generally no advantage for a business to have both active at the same time.

A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan.

Under the 2016 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.

Can You Contribute to Both a Solo 401(k) and a SEP IRA?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.

Whereas, a SEP IRA would only allows for a profit sharing contribution. Hence, a participant in a SEP IRA would be limited to 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum of $53,000 for 2016. No employee deferral exists for a SEP IRA.

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 2016. If Joe had a Solo 401(k) Plan established for 2016, Joe would be able to defer approximately $49,000 for 2016 (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 SEP IRA, Joe would only be able to defer approximately $25,000 (25% if his compensation) for 2016.

In other words, having both a SEP IRA and a Solo 401(k) Plan will not allow a business owner to defer more than $53,000 ($59,000 if the individual is over the age of 50) for 2016. Most individuals will use a Solo 401(k) Plan vs. a SEP IRA since you can reach the maximum annual contribution limit quicker than a SEP IRA since the Solo 401(k) Plan includes both an employee deferral and profit sharing component, whereas, a SEP IRA just includes just a profit sharing component.

To learn more about the benefits of a Solo 401(k) Plan vs. a SEP IRA, please contact a tax professional at 800-472-0646.

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Apr 19

When is a Good Time to Take a Loan From Your 401k?

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. 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 gain 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

When is a Good Time to Take a Loan From Your 401k?

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

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Apr 15

Filling Out IRS Form 5500-EZ for Your Solo 401k

In general, the solo 401(k) plan is easy to operate. There is generally no annual filing requirement unless the fair market value of your solo 401(k) plan asset exceeds $250,000, as of December 31 of the previous year. If your solo 401(k) plan assets exceed $250,000 as of 12/31 of the previous year, you will need to file a short information return with the IRS (Form 5500-EZ). In such a case, the Solo 401(k) Plan participant will need to file a short information return with the IRS (Form 5500-EZ). The IRS Form 5500-EZ is due on July 31 and is filed in paper form

IRS FORM 5500-EZ

HOW TO REPORT THE FAIR MARKET VALUE OF ASSETS HELD BY YOUR SOLO 401K PLAN TO THE IRS

The Internal Revenue Service (“IRS”) Form 5500-EZ is an annual information return that is required to be filed by every “One-Participant Plan” (owners and their spouses), also known as a solo 401(k) Plan, with plan asset value in excess of $250,000 as of December 31 of the previous tax year. The purpose of filing and reporting the fair market value (“FMV”) of your solo 401(k) plan’s assets is to inform the IRS of assets over $250,000 annually held in a solo 401(k) Plan. You must file the Form 5500-EZ if a plan meets the requirements alone or combined with any other qualified retirement plan owned greater than 80% by the business owner or a related party (one controlled group) exceeding $250,000.

You do not have to file the form 5500-EZ for a prior plan year for a one-participant plan if the total of the plan’s assets and the assets of all other one-participant plans maintained by the employer at the end of the plan year does not exceed $250,000.00, unless the previous plan is the final plan year of the plan. In other words, if the value of your solo 401(k) plan assets as of 12/31 of the previous year is less than $250,000, you have NO filing requirements with the IRS with respect to your solo 401(k) plan.

FILING TIPS:

  • The Form 5500-EZ is due every July 31st of the next plan year. Ex: for a plan that was established in the prior year, the IRS Form 5500-EZ is due by July 31 st, of the following plan year. If the filling date falls on a Saturday, Sunday, or legal holiday it may be filed on the next day that is not.
  • The Form 5500-EZ is filed for the previous plan year. Hence, if you established your plan in 2014 and your plan assets exceeded $250,000, then you would file the Form 5500-EZ in 2015. Whereas, if you established the solo 401(k) plan in 2015, a filing would not be due until 2016 if your plan assets exceeded $250,000 in value as of 12/31 2015.
  • The Form 5500-EZ must be filed as a hard copy and sent directly to the IRS at the following address:

Department of the Treasury

Internal Revenue Service

Ogden, UT 84201-0020

  • To file the Form 5500-EZ using a private delivery service, you must use the approved IRS Designated providers (PDS) as follows:
  • DHL Express (DHL): Same Day Service.

Federal Express (FedEx): Priority Overnight, Standard Overnight, FedEx 2 Day, FedEx International Priority and FedEx International First.

United Parcel Service (UPS): UPS Next Day Air, UPS Net Day Air Saver, UPS 2 nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The Private delivery services should use the following address:

Internal Revenue Service

1973 Rulon White Blvd.

Ogden, UT 84404

  • The Form 5500-EZ cannot be e-filed electronically.
  • The Plan Administrator or employer (owner) must use the official printed paper Form 5500-EZ obtained from the IRS, and use blue or black ink for a wet signature. NO ELECTRONIC SIGNATURE ALLOWED. Print, sign and date before mailing.
  • Do not use a felt tip pen or other inks that bleed through, the other side should be blank.
  • Do not use arrows or make notes on the Form 5500-EZ and only enter information in the specific fields provided. Abbreviate if necessary.
  • Do not include schedules or attachments. However, you should retain them for your records.

PENALTIES:

The Internal Revenue Code imposes a penalty of $25 a day (up to $15,000).

COMPLETING THE IRS FORM 5500-EZ

It is important to work with a tax professional when completing the IRS Form 5500-EZ. When working with the IRA Financial Group, our tax professionals and CPAs will help you complete and file the IRS Form 5500-EZ if your plan has assets valued at $250,000 or above as of December 31 of the previous year.

PART I – Annual Return identification Information:

Enter the beginning date of the plan and then the ending date.

A) Check (1) the first return filed for the plan;

B) Typically, do not check this box unless filed Form 5558 for an extension of time.

C) Typically, do not check this box unless this plan is maintained outside the United States.

PART II – Basic Plan Information:

1a) Enter the name of the plan as it appears on the EIN letter from the IRS: ABC CONSULTING 401K TRUST.

1b) Enter the numbers 001 for this year and every year’s future fillings use the same number. Note – if this plan will be amending an existing solo 401(k) Plan, you will need to include the appropriate 3 digit code (i.e. 002), which can be found in the plan Adoption Agreement.

1c) Enter 01-01-2012 as of the date the plan became effective.

2a) Enter the name of the Adopting Employer:

ABC Consulting LLC

dba or c/o if applicable.

1234 Ginger Street
(P.O. Box ONLY if USPS does no does not deliver).
Family, FL55555.

2b) Enter the Adopting Employer EIN XX-XXXXXXX no SS#. If plan is under a Sole Proprietor, YOU MUST OBTAIN AN EIN FROM THE IRS by completing the online application:

Alternatively, you can acquire an EIN by preparing and faxing the Form SS-4 to the IRS at I-800-829-3676 then call 1-800-829-4933 to receive your EIN by phone. The EIN is issued immediately once the application information is validated.

2c) Enter the Adopting Employer telephone number: 888-888-8888.

2d) Enter the 6 digit applicable code XXXXXX that best describes the nature of the plan sponsors business from the list of principal business activity codes included at the end of these instructions.

3a) Enter the Plan Administrator information OPTIONAL. If preparer is the same as above, enter the same information.

3b) Enter and repeat the same EIN XX-XXXXXXX number as listed in 2b.

3c) Enter the Plan Administrator telephone number: 888-888-8888.

4a) Enter the name of the Trust (this is optional): ABC CONSULTING 401K TRUST.

4b) Enter the EIN number as it appears on the EIN letter from the IRS: XX-XXXXXXX.

5a), 5b) and 5c) is not required if no changes were made to the plan.

6a) Enter the total number of participants at the beginning of the year. If solo 401K plan: Ex: 1 participant. Note – if the plan will include the spouse of a participant or a second business owner, then the appropriate number would need to be included (i.e. 2).

6b) Enter the total number of participants at the end of the plan year. If solo 401K plan: Ex: 1 participant. Note – if the plan will include the spouse of a participant or a second business owner, then the appropriate number would need to be included (i.e. 2).

PART III – Financial Information:

7a(1) Enter the “Total Plan Assets” or the same amount in 7a(2)from last year; if filed Form 5500-EZ previously. Otherwise, this figure includes “Total Plan Assets” as: rollovers, unrealized gains and losses such as appreciation/depreciation in assets. It also includes specific assets held by the plan at any time during the plan year (for example, partnership/joint venture interests, employer real property, real estate (other than employer real property), employer securities, loans (participants and non-participant loans), and tangible personal property). Please do not include the annual contribution amount.

7a(2) Enter end of year “Total Plan Assets” as listed above. Please include annual contribution amounts, if applicable.

7b(1) Enter “Total plan liabilities” to include but are not limited to benefit claims payable, operating payables, acquisition indebtedness (i.e. nonrecourse loan) and other liabilities. Do not include the value of future distributions what will be made to participants.

7b(2) Enter end of year “Total plan liabilities” as listed above.

7c(1) Enter “Net plan assets” which equals the sum of subtracting 7b(1) from 7a(1).

7c(2) Enter end of the year “Net plan assets” sum of by subtracting 7b(2) from 7a (2).

8a) and 8b) Enter total cash contributions received and/or receivable from employer and participants during the plan year.

8c) Enter all contributions including rollovers received from other plans during the plan year valued on the date of contribution.

PART IV – Plan Characteristics:

9) Enter the applicable two-character feature Codes. In most cases, the following codes would be used: 2E, 2J, 3B, 3D. Note, if your plan assets are held in a brokerage account, then you would want to include2R.

PART V – Compliance and Funding Questions:

10) Check YES if any of the participants entered into a loan from the plan and the amount or NO if not applicable.

11) Check NO.

11a) Enter N/A for amount.

DO NOT complete any information for 12a) , 12b) , 12c) , 12d) and 12e). This pertains to a defined benefit plan.

IRA Financial Group offers all of its Solo 401(k) Plan clients the service of completing the IRS Form 5500-EZ for no additional fee. We want to make sure our solo 401(k) Plan clients that are required to file an IRS Form 5500-EZ are getting the necessary support they need to make sure the form is completed properly. All solo 401(k) plan clients required to file the IRS Form 5500-EZ will work our in-house CPAs to help prepare and file the IRS Form 5500-EZ.

For more information, please contact us @ 800.472.0646.

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Apr 13

How to Invest in Coins with a Solo 401(k)

The IRS does not list the type of assets or investments that may be purchased with retirement funds, but does indicate which categories of assets or investments are not permitted.

The categories of transactions that are not permitted to be purchased using a Solo 401(k) Plan can be found in Internal Revenue Code Sections 408 & 4975.

Does IRC 408 and 4975 Apply to Solo 401(k) Plans?

The Department of Labor (“DOL”) regulations provide that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA.

The provisions of Title I of ERISA, which are administered by the U.S. Department of Labor, were enacted to address public concern that funds of private pension plans were being mismanaged and abused. ERISA was the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans. The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans. Hence, for plans that only cover owners, there is no need for ERISA since there are no non-owner employees to protect. Accordingly, most plan documents state that the rules set forth under Internal Revenue Code Section 408 will apply to Solo 401(k) Plan investments.

Introduction

When it comes to coins or metals, Internal Revenue Code Section 408 is generally the provision that applies. In general, collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within a Solo 401(k) Plan pursuant to Internal Revenue Code Section 408.

Internal Revenue Code Section 408 is specific as to what defines a collectible. Some notable exceptions are allowed for certain gold (such as American Eagle) and silver coins and any coins issued by a state.

The Law

Internal Revenue Code Section 408(m):

(3) Exception for certain coins and bullion

For purposes of this subsection, the term “collectible” shall not include —

(A) any coin which is —

(i) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112 (a) of title 31, United States Code,

(ii) a silver coin described in section 5112 (e) of title 31, United States Code,

(iii) a platinum coin described in section 5112 (k) of title 31, United States Code, or

(iv) a coin issued under the laws of any State, or

(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) requires for metals which may be delivered in satisfaction of a regulated futures contract if such bullion is in the physical possession of a trustee described under subsection (a) of this section.

Subsection (a) states:

(a) Individual retirement account

For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:

(1) Except in the case of a rollover contribution described in subsection (d)(3) in section 402 (c), 403 (a)(4), 403 (b)(8), or 457 (e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219 (b)(1)(A).

(2) The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.

(3) No part of the trust funds will be invested in life insurance contracts.

(4) The interest of an individual in the balance in his account is non-forfeitable.

(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401 (a)(9) and the incidental death benefit requirements of section 401 (a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.

Hence, it is clear that in the case of physical metals, such as gold, the metals must be held in the physical possession of a U.S. trust (i.e. bank or depository), however, the “physical possession” requirement does not appear to relate to the possession of coins. A more detailed analysis will follow below.

31 U.S.C. 5112 refers to Denominations, specifications and design of coins.

(a) The Secretary of the Treasury may mint and issue only the following coins:

(1) a dollar coin that is 1.043 inches in diameter.

(2) a half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.

(3) a quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.

(4) a dime coin that is 0.705 inch in diameter and weighs 2.268 grams.

(5) a 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.

(6) except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.

(7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.

(8) A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold.

(9) A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold.

(10) and contains one-tenth troy ounce of fine gold.

(e) Notwithstanding any other provision of law, the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which —

(1) are 40.6 millimeters in diameter and weigh 31.103 grams;

(2) contain .999 fine silver;

(3) have a design —

(A) symbolic of Liberty on the obverse side; and

(B) of an eagle on the reverse side;

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

How do I hold IRS Approved Coins with a Solo 401(k) Plan?

Now that you have a clear idea of the types of coins that the IRS allows to be purchased using retirement funds, the next questions becomes how can the coins be held without violating IRS rules.

Most people don’t realize that a coin can be treated as bullion. As a result, based on the language in IRC 408(m)(3)(B), all coins defined in IRC 408(m), including American Eagle and State minted coins must be held in the ‘physical possession’ of a U.S. trustee, just like all precious metals (i.e. pure gold and silver bars). Since IRS approved coins, such as American Eagle and State minted coins are considered bullion for purposes of Internal Revenue Code Section 408(m), all IRS approved coins, just like precious metals, should be held in the “physical possession” of a U.S. bank or depository.

Although, bullion may be cast into bars or minted into coins. The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value as money. Hence, it appears that the “physical possession” requirement outlined for bullion in IRC 408(m)(3)(B) does pertain to coins, such as American Eagle coins, as defined in IRC 408(m)(3)(A), since they can be defined as bullion. That being said, it is best for retirement account holders to hold all IRS approved coins outlined in IRC 408(m) at a depository or bank safe deposit box and not in their personal possession. It is best practice to hold all IRS approved coins at a bank or depository, including the American Eagle and State minted coins.

Holding IRS Approved Coins in a Safe Deposit Box

IRC Section 408(m) clearly states that gold, silver, or palladium bullion, which includes IRS approved coins, must be held in the physical possession of a U.S. trustee, otherwise known as a U.S. bank or financial institution.

Here is the exact language from the tax code under IRC 408(m)(3)(B):

“Any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, U.S.C.) requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section.”

The tax code clearly states that any IRS approved metals (bullion) must be held in the physical possession of a trustee, which we now know means a U.S. bank. So the question then becomes is whether holding IRS approved coins (bullion) in a safe deposit box at a U.S. bank in the name of the Solo 401(k) plan that would be considered to be in the ‘physical possession’ of a U.S. trustee or bank and satisfy the definition under IRC 408(m)?

An argument can then be made that holding precious metals (bullion) at a U,S. bank safe deposit box would not be considered to be in the physical possession of the IRA holder since the bullion will physically be held in a safe deposit box of the bank in the name of the Solo 401(k) plan. However, the safe deposit box is in the constructive control of the Solo 401(k) plan trustee. That being said, the Internal Revenue Code under Section 408 clearly states ‘physical possession’ and not possession or ‘constructive control.’ From a legal standpoint, possession is not defined to represent control, meaning you can be in possession of an item but not in control or ownership of it. Therefore, many tax practitioners take the position that holding bullion in a safe deposit box in the name of the Solo 401(k) plan would satisfy the ‘physical possession’ requirement under Internal Revenue Code Section 408(m).”

Unfortunately there is no IRS guidance on this. What is clear is that, IRS approved precious metals should not be stored in the home or personal possession of the individual Solo 401(k) plan participant, or any person that does not satisfy the definition of a trustee according to the Internal Revenue Code. It is good practice to hold IRS approved precious metals or coins owned by a retirement account at an IRS approved depository where it is clearly in the ‘physical possession’ of a US Bank (trustee as defined under IRC 408(a).

To learn more about purchasing and holding coins with a Solo 401(k) Plan please contact one our tax professionals at 800-472-0646.

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Apr 11

Why Establish a Retirement Plan?

A 401(k) is known as an employer-sponsored employee benefit arrangement that is established for the purpose of providing retirement income for those that are eligible. But how does one contribute towards an account established on the participants’ behalf within a qualified retirement plan? The 401(k) participants have the option to elect to have a portion of their salary paid as a contribution towards the retirement account. Also, the amount deferred is NOT taxed until distributed to the employee at a later time.

What does the term “Qualified Plan” mean?

The term “qualified plan” generally means that the written arrangement and the operation of the plan meet specific qualification requirements, outlined in Internal Revenue Code Sec. 401(a).

What are some of the benefits as an Employer?

Some of the key benefits as an employer include lower cost and tax savings, employee appreciation, and employee attraction and retention. Also, there are Tax and non-tax benefits. As part of Tax benefits, 401(k) plans can be less costly to fund compared to other retirement plans. As part of non-tax benefits, employees view an employer-sponsored retirement plan as part of an overall benefits package, thus attracting high quality employees.

Why establish a retirement planWhat are some of the benefits for the Employees?

As with Employer benefits, employees receive tax and non-tax benefits. For Employee tax benefits, contributions and earnings are generally tax-deferred until distributed from the plan. Employee elective deferrals may be made on a pretax basis. In simpler terms, this gives an immediate tax savings to participants. Also, if the employer offers a qualified Roth contribution, employees who make designated Roth contributions may be eligible to distribute those assets tax-free and penalty-free. Some of the nontax benefits for employees include the opportunity to participate in a 401(k) plan which will help the employees prepare for financial security in retirement.

What is a common example of a plan qualified under IRC Sec. 401(a)?

A profit sharing plan is a common example of a plan qualified under IRC Sec. 401(a). When a plan meets these requirements, the business establishing the plan and the employee benefiting from the plan are entitled to special tax considerations.

What are some of the benefits associated with QRPs?

  • Generally, employer QRP contributions are tax-deductible.
  • Employer contributions made to a plan on behalf of plan participants are not included in the taxable income of participants for the contribution year. Rather, participants generally are taxed on employer contributions when they receive a distribution from the plan.
  • QRP assets accumulate earnings on a tax-deferred basis. As with the plan contributions, earnings on contributions are not taxed until a distribution from the plan actually occurs.
  • QRP distributions at retirement may be eligible for favorable tax treatment.
  • A smaller employer that establishes a new QRP may receive a tax credit of up to 50 percent of the QRP start-up costs for a period of up to three years.

What are Non-tax Benefits associated with QRPs?

  • Many employers offer a QRP as an employee benefit to attract quality employees.
  • Many employers also find that by offering a QRP for the benefit of employees, they can enhance employee security and morale.
  • Also, a QRP tends to increase employee incentive and productivity, which, in turn, increases company profitability.

What type of Employers are Eligible to Establish a QRP?

  • Sole Proprietor: an individual is considered a sole proprietor if he/she has earned income from personal services rendered and reports the income to the IRS on schedule C.
  • Partnerships: the plan must be established by the partnership as a business entity, not by each partner individually. Partnerships wishing to adopt a QRP must consult either the partnership agreement or, in the absence of as partnership agreement, state law to determine the identity of the person(s) with authority to adopt the plan on behalf of the partnership. In addition, a preliminary inquiry regarding the ownership interest of any partners in other business entities must be made.
  • Corporations: typically, a corporation must adopt a resolution to authorize the adoption of a QRP. The corporation also must appoint persons or entities to oversee administrative and fiduciary responsibilities with respect to the plan. Special rules come into play if the corporation is a member of a controlled group or an affiliated service group.
  • Limited Liability Companies: LLCs combine the benefits of partnerships and corporations to create a separate business type. Because LLC members generally can choose to be treated as as a partnership or a corporation for tax purposes, LLCs must presumably follow the respective entity’s tax rules when adopting a QRP.

Types of QRP Contributions:

Employer Contribution Types:

  1. Profit Sharing Contributions: typically are discretionary and may range from 0 – 25 percent of the aggregate covered compensation earned by eligible plan participants during the employer’s tax year.
  2. Matching Contributions: an employer may make matching contributions to a 401(k) for those employees making elective deferrals. For example, the plan can allow an employer to match an employee’s deferrals in the amount equal to 50 percent of each dollar deferred into the plan
  3. Qualified Non-elective and Qualified Matching Contributions: employers may make qualified non-elective contributions and qualified matching contributions to non-highly compensated employees to correct non-discrimination testing problems.
  4. Forfeitures: these are typically created when participants who are not fully vested separate from service and take distributions of their vested balances. The unvested portions of their accounts are given up.

Employee Contribution Types:

  1. Pretax Deferrals: an employee that is eligible to participate in a 401(k) plan may choose to defer a percentage or dollar amount of his wages into the plan each pay period. The employees may also receive the option to receive bonuses in cash or defer all or a portion towards the 401(k) plan.
  2. Designated Roth Contributions: As of January 1, 2006 employers may allow participants to make Roth (after-tax) elective deferrals to the plan. These after-tax Roth contributions are still treated as elective deferrals for most purposes.
  3. Catch-up Deferrals: participants who become 50 years of age or older during the year, may make catch-up deferral contributions.
  4. Nondeductible Employee Contributions: some 401(k) plans allow employees to make contributions to the plan on an after-tax basis. These contributions also are subject to non-discrimination testing.

Let’s us take care of your Retirement Plan so that you can take care of your business!

Contact one of our Retirement Experts today at 800.401.5762 to learn more.

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Apr 10

Can You Use ROBS to Start a Business with No Employees Other than Yourself?

When using the Rollover Business Startup Solutions (ROBS) to fund your business, you don’t need full time employees other than yourself.  In fact, the administration of the Plan will be much easier if your business will have no employees other than yourself since you will not require the services of a third-party Plan Administrator or recordkeeper. If you elect to purchase new company stock along with your new 401(k) Plan, as the sole employee of the Company, you could serve as the Plan’s trustee and administrator.

Can You Use ROBS to Start a Business with No Employees Other than Yourself?

Please contact one of our Retirement Experts at 800-472-0646 for more information.

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