Oct 25

The Self-Directed 401(k) – How Does it Work?

With IRA Financial Group, you no longer have to spend $2000 to $5,000 or more to set up your Self-Directed 401(k) Plan (also known as a Solo 401(k)) or pay excessive administration fees. Work directly with our in-house tax and ERISA professionals to customize your Solo 401(k) Plan based on your investment and retirement goals.

We provide the following, all for one low price:

1. Establish your IRS Compliant Solo 401(k) Plan

  • Free tax consultation with our in-house tax and ERISA professionals
  • Adoption Agreement
  • Basic Plan Document
  • EGTRRA Amendment
  • Summary Plan Description
  • Trust Agreement
  • Appointment of Trustee
  • Beneficiary Designation
  • Loan Procedure
  • Loan Promissory Note
  • Free tax updates
  • Free tax and ERISA support
  • Satisfaction Guaranteed!

2. Tax-Free Transfer of Retirement Funds Transfer retirement funds (IRA, SEP-IRA, 401(k), 403(b), etc.) tax-free from your current custodian to any financial institution or credit union who can serve as your custodian for no fee. Direct the current custodian to transfer the retirement funds to your new Solo 401(k) Plan bank account. This transfer, also called a direct rollover is tax-free. The retirement tax professionals at the IRA Financial Group will assist you in completing this task in an expedited and tax-free manner. With a Solo 401(k) Plan with “checkbook control” you no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with a “checkbook control” Solo 401(k) Plan, you can use any local bank or credit union to serve as your custodian. By using a Solo 401(k) Plan with “checkbook control” you can take advantage of all the benefits of self-directing your retirement assets without incurring excessive custodian fees and custodian created delays.

IRA Financial Group will assist you in completing all the necessary custodian documents so your retirement funds are transferred to a local bank account established in the name of your Solo 401(k) Plan quickly and without any tax.

3. Open Local Trust Bank Account Open a local bank account for your Solo 401(k) Plan at any bank or credit union of your choice. Our in-house tax and ERISA professionals will guide you through the process.

4. “Checkbook Control” As the trustee of the Solo 401(k) Plan, you will have the freedom to make all investment decisions for your Solo 401(k) Plan (“Checkbook Control”). 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. As trustee of the Solo 401(k) Plan, you will be able to write a check or wire money from the 401(k) bank account to make an Investment.

5. Tax-Free Investment is Made The Investment is then made in the name of your Solo 401(k) account. As trustee and administrator of the Solo 401(k) Plan, you will have “checkbook control” to make investments on behalf of your Solo 401K Plan.

For more information about IRA Financial Group’s Solo 401(k) Plan or to set one up, please contact us @ 800.472.0646 today!

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Oct 21

Why Choose the IRA Financial Group for Your Solo 401k Plan?

Excellence: Our in-house retirement tax professionals have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP. Their tax and ERISA experience is unmatched in the industry and is the reason we are considered the leading facilitator of true “Checkbook Control” Solo 401(k) Plan structures.

Work directly with our in-house retirement tax professionals to set-up an IRS compliant Solo 401(k) Plan. Our clients have direct access to our in-house retirement tax professionals to ensure that the Solo 401(k) Plan is customized to satisfy the client’s retirement and investment objectives. In fact, we encourage our clients to contact our in-house retirement tax professionals with any tax and ERISA questions concerning the structure or a proposed investment to ensure full IRS compliance.

Our Solo 401(k) experts will take care of the entire set-up of your IRS compliant Solo 401(k) Plan. Our Solo 401(k) Plan experts and tax and ERISA professionals are on site greatly reducing the set-up time and cost. You will find that our fee for this service is significantly less than other companies that perform the same or similar services.

Why Choose the IRA Financial Group for Your Solo 401k Plan?Leader: IRA Financial Group is the markets leading provider of Solo 401(k) Plans. We have helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investments.

Value: We strive to offer our clients customized Solo 401(k) Plans at a fair and reasonable price. Whereas our competitors are forced to outsource much or all of their tax work and consultation, each client of the IRA Financial Group is assigned to one of our in-house retirement tax professionals allowing us to offer customized Solo 401(k) Plans for significantly less than our competitors.

We provide the following all for one low price:

  • Free tax consultation with our in-house tax and ERISA professionals
  • Adoption Agreement
  • Basic Plan Document
  • EGTRRA Amendment
  • Summary Plan Description
  • Trust Agreement
  • Appointment of Trustee
  • Beneficiary Designation
  • Loan Procedure
  • Loan Promissory Note
  • Free tax updates
  • Free tax and ERISA support
  • Satisfaction Guaranteed!

Integrity: We are guided by the rules of ethical conduct in all that we do. Our relationships with clients are built on trust, respect, and confidentiality.

Innovative: We anticipate the changing tax and financial needs of our clients and creatively adapt our Solo 401(k) Plan tax solutions to address them.

Results: We are committed to our clients’ satisfaction and strive to meet and exceed our clients’ expectations.

IRA Financial Group will take care of everything. The whole process can be handled by phone, email, fax, or mail. Our expert tax and ERISA professionals are on site greatly reducing the set-up time and cost. Most importantly, you will find that our fee for this service is significantly less than other companies that perform the same or similar services.

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

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Oct 18

The Roth Individual 401k Plan

The Roth Solo 401K Plan is the ultimate tax-free retirement solution for the self-employed. With federal and state income tax rates expected to increase in the future, gaining the ability to generate tax-free returns from your retirement investments when you retire is the last surviving legal tax shelter. With a Roth Solo 401K you can make almost any investment tax-free, including real estate, tax liens, precious metals, currencies, options, and private business investments and once you hit the age of 59 1/2 you will be able to live off your Roth 401K assets without ever paying tax. Imagine if someone told you that if you started making Roth 401K contributions in your forties and by just generating a modest rate of return, you could have over a million dollars tax-free when you retire. With a Roth 401K, live off the Roth 401K investment income tax-free or take a portion of your Roth 401K funds and use it for any purpose without ever paying tax.

The Roth Solo 401K Plan Advantages

Power of Tax-Free Investing: One of the main attractions to the self-directed Roth Solo 401(k) plan is based on the fact that qualified distributions of Roth earnings are tax-free. As long as certain conditions are met and the distribution is a qualified distribution, the Roth solo 401(k) plan participant will never pay tax on any Roth distributions received. The advantage of contributing to a Roth solo 401(k) plan is that income and gains generated by the Roth 401(k) investment can be tax-free and penalty-free so long as certain requirements are satisfied. Unlike with a pre-tax solo 401(k) plan contributions, contributions to a Roth solo 401(k) are not tax deductible.

The power of tax-free investing can be best illustrated by way of the following examples:

Example 1: Joe, a self-employed consultant began funding a Roth solo 401(k) plan with $3,000 per year at age 20 and would continue on through age 65. At age 65 Joe would wind up with $2.5 million at retirement (assuming they earn the long-run annual compound growth rate in stocks, which was 9.88 percent from 1926 to 2011). Not a bad result for investing only $3,000 a year.

Example 2: Ben, a self-employed real estate agent, who is 30 years began funding a Roth solo 401(k) plan with $8000 and wanted to know how much he would have at age 70 if he continued to make $8000 annual contributions and was able to earn at an 8% rate of return. Ben did some research and was astonished that at age 70 he would have a whopping $ 2,238,248 tax-free which he can then live off or pass to his wife or children tax-free.

Example 3: Mary, a self-employed real estate investor, who is 35 years began funding a Roth solo 401(k) plan with $13000 and wanted to know how much she would have at age 70 if she continued to make $13000 annual contributions and was able to earn at a 10% rate of return, which she felt was possible based off her past real estate investment returns. Mary did some research and was astonished that at age 70 she would have a whopping $ 3,875,649 tax-free which she could then live off or pass to her husband and children tax-free.

I am sure it may be hard for some of you to comprehend that putting away just a few thousand dollars a year in a Roth Solo 401(k) plan can leave you with millions of dollars tax-free. It’s as simple as making annual contributions to your Roth Solo 401(k) Plan and then generating tax-free returns from making real estate or other investments with your solo 401(k) plan.

High Contributions: A Roth Solo 401(k) combines features of the traditional 401(k) with those of the Roth IRA. Like a Solo 401K Plan, the Roth Solo 401K Plan is perfect for any self-employed individual or small business owner with no employees. The Roth Solo 401K Plan contains the same advantages of a Solo 401(k) Plan, but as with a Roth IRA, contributions are made with after-tax dollars. While you don’t get an upfront tax-deduction, the Roth 401K account grows tax-free, and withdrawals taken during retirement aren’t subject to income tax, provided you’re at least 59 1/2 and you’ve held the account for five years or more.

The Roth Solo 401(k) can offer advantages to self-employed individuals who wish to maximize their ability to generate tax-free retirement savings while receiving the ability to invest in real estate, precious metals, private businesses or funds tax-free and without custodian consent.

The Roth Individual 401k PlanUnlike a Roth IRA, which limits individual Roth IRA contributions to $5,500 annually ($6,500 if the individual is 50 years or older), in 2016, with a Roth Solo 401(k) account, an individual can make Roth (after-tax) contributions of up to $18,000, or $24,000 for those 50 or older by the end of the year — allowing individuals to stock away thousands of dollars more in tax-free retirement income than they would through a Roth IRA.

A Roth Solo 401(k) is perfect for sole proprietors, small businesses and independent contractors such as consultants. The Roth Solo 401(k) plan is unique and so popular because it is considered the last remaining legal tax shelter available. There are so many features of the Roth Solo 401(k) plan that make it so appealing and popular among self-employed business owners.

Unlimited Investment Opportunities: With a Roth 401(k) Plan or Roth 401(k) plan sub-account, you can invest your after-tax Roth 401(k) Plan funds in real estate, precious metals, tax liens, private business investments, and much more tax-free! Unlike with a pre-tax 401(k) Plan, with a Roth 401(k) account, all income and gains would flow back tax-free to your account. As long as you have reached the age of 59 1/2 and have had the Roth 401(k) account opened at least five years, you can take Roth 401(k) Plan distributions tax-free. In other words, you can live off your Roth 401(k) Plan assets or income tax-free. With federal income tax rates expected increase, the ability to have a tax-free source of income upon retirement may be the difference between retiring early or not.

Loan Feature: While an IRA offers no participant loan feature, the Roth Solo 401k allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose at a low interest rate (the lowest interest rate is Prime which is 3.50% as of 12/21/15). This offers a Roth Solo 401(k) Plan participant the ability to access up to $50,000 to use for any purpose, including paying personal debt or funding a business.

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

Exemption from UDFI: When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (“UDFI”) – a type of Unrelated Business Taxable Income (also known as “UBTI” or “UBIT”) on which taxes must be paid. The UBTI tax is approximately 40% for 2016. Whereas, with a Roth Solo 401(k) plan, you can use leverage without being subject to the UDFI rules and UBTI tax. This exemption provides significant tax advantages for using a Roth Solo 401(k) Plan versus an IRA to purchase real estate.

To learn more about the Roth Solo 401(k) Plan, please contact a 401(k) expert at 800-472-0646.

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Oct 17

When Can You Benefit from Taking 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:

When Can You Benefit from Taking a Loan from Your 401k?

  • 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

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

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Oct 14

Disqualified Persons and Prohibited Transaction with a Solo 401k

The Internal Revenue Code & ERISA does not describe what a Solo 401k Plan can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain type of transactions. The purpose of these rules is to encourage the use of qualified retirement plans for accumulation of retirement savings and to prohibit those in control of Solo 401K qualified retirement plans from taking advantage of the tax benefits for their personal account.

Who is a “Disqualified Person”?

Disqualified Persons and Prohibited Transaction with a Solo 401kThe IRS has restricted certain transactions between the Solo 401k Plan and a “disqualified person”. The rationale behind these rules was a congressional assumption that certain transactions between certain parties are inherently suspicious and should be disallowed.

The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the Solo 401k Plan Participant, any ancestors or lineal descendants of the Solo 401k Plan Participant, and entities in which the Solo 401k Plan Participant holds a controlling equity or management interest. In essence, under Code Section 4975, a “Disqualified Person” means:

  • A fiduciary (e.g., the Solo 401k Plan Participant, or person having authority over making Solo 401K Plan investments),
  • A person providing services to the Solo 401k Plan (e.g., the trustee or custodian),
  • An employer, any of whose employees are covered by the plan (this generally is not applicable to Solo 401k Plans but does include the owner of a business that establishes a qualified retirement plan),
  • An employee organization any of whose members are covered by the Solo 401k Plan,
  • A 50 percent owner of C or D above,
  • A family member of A, B, C, or D above (family members include the fiduciary’s spouse, parents, grandparents, children, grandchildren, spouses of the fiduciary’s children and grandchildren (but not parents-in-law),
  • An entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by A, B, C, D, or E. Whether an entity is a disqualified person is determined by considering the indirect stockholdings/interest which would be taken into account under Code Sec. 267(c), except that members of a fiduciary’s family are the family members under Code Sec. 4975(e)(6) (lineal descendants) for purposes of determining disqualified persons.
  • A 10 percent owner, officer, director, or highly compensated employee of C, D, E, or G,
  • A 10 percent or more partner or joint venturer of a person described in C, D, E, or G.

Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “Disqualified Persons”.

Prohibited Transactions

Pursuant to Internal Revenue Code Section 4975, an Solo 401k Plan Participant is prohibited from engaging in certain types of transactions. The types of prohibited transactions can be best understood by dividing them into three categories: Direct Prohibited Transactions, Self-Dealing Prohibited Transactions, and Conflict of Interest Prohibited Transactions.

Direct Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Direct Prohibited Transaction” generally involves one of the following:

4975(c)(1)(A): The direct or indirect Sale, exchange, or leasing of property between a Solo 401k Plan and a “disqualified person”

Example 1: Joe sells an interest in a piece of property owned by his Solo 401k Plan to his son.

Example 2: Beth leases real estate owned by her Solo 401k Plan to her daughter.

Example 3: Mark uses his Solo 401k Plan funds to purchase an LLC interest owned by his mother.

4975(c)(1)(B): The direct or indirect lending of money or other extension of credit between a Solo 401k Plan and a “disqualified person”

Example 1: Ted lends his wife $70,000 from his Solo 401k Plan.

Example 2: Mary personally guarantees a bank loan to her Solo 401k Plan to purchase real estate.

Example 3: Dan uses his Solo 401k Plan funds to lend an entity owned and controlled by his father $18,000.

4975(c)(1)(C): The direct or indirect furnishing of goods, services, or facilities between a Solo 401k Plan and a “disqualified person”

Example 1: Andrew buys a piece of property with his Solo 401k Plan funds and hires his father to work on the property.

Example 2: Rachel buys a condo with her Solo 401k Plan funds and personally fixes it up.

Example 3: Betty owns an apartment building with her Solo 401k Plan and hires her mother to manage the property.

4975(c)(1)(D): The direct or indirect transfer to a “disqualified person” of income or assets of a Solo 401(k) Plan

Example 1: Ken is in a financial jam and takes $32,000 from his Solo 401k Plan to pay a personal debt.

Example 2: John uses his Solo 401k Plan to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with John and transfers those funds back to John.

Example 3: Melissa invests her Solo 401k Plan funds in a real estate fund and then receives a salary for managing the fund.

Self-Dealing Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Self-Dealing Prohibited Transaction” generally involves one of the following:

4975(c)(1)(E): The direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the Solo 401k Plan in his/her own interest or for his/her own account

Example 1: Debra who is a real estate agent uses her Solo 401k Plan funds to buy a piece of property and earns a commission from the sale.

Example 2: Ben wants to buy a piece of property for $120,000 and would like to own the property personally but does not have sufficient funds. As a result, Ben uses $110,000 from in his Solo 401k Plan and $10,000 personally to make the investment.

Example 3: Nancy uses her Solo 401k Plan funds to invest in a real estate fund managed by her son. Heidi’s father receives a bonus for securing Nancy’s investment.

Conflict of Interest Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Conflict of Interest Prohibited Transaction” generally involves one of the following:

4975(c)(i)(F): Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account from any party dealing with the Plan in connection with a transaction involving income or assets of the Plan.

Example 1: Jason uses his Solo 401k Plan funds to loan money to a company in which he manages and controls but owns a small ownership interest in.

Example 2: Cathy uses her Solo 401k Plan to lend money to a business that she works for in order to secure a promotion.

Example 3: Eric uses his Solo 401k Plan funds to invest in a fund that he manages and where his management fee is based on the total value of the fund’s assets.

Statutory Exemptions

Under Internal Revenue Code Section 4975(d), Congress created certain statutory exemptions from the prohibited transaction rules outlined under Internal Revenue Code Section 4975(c). For these certain transaction, Congress believed there is a legitimate reason to permit them. For these transactions, Congress has issued a blanket statutory exemptions permitting these transactions assuming that certain requirements specified are satisfied.

Below is a list of some of the statutory exemptions found in Internal Revenue Code Section 4975(d) that apply to Solo 401ks:

  • Any contract with a disqualified person for office space, legal, accounting or other services necessary for the operation of the Solo 401k Plan as long as reasonable compensation is paid. Note – this exemption does not apply to a Solo 401k Plan fiduciary (the Solo 401k Plan trustee) as per Treasury Regulation Section 54.4975-6(a)(5).
  • The provision of ancillary services to a Solo 401k Plan by a bank trustee.
  • receipt by a disqualified person of any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries.

S Corporation Stock

Because of the shareholder restrictions imposed on “S” Corporations, an Solo 401k Plan cannot own stock in an S Corporation. Note – a Solo 401k Plan can own stock in a “C” Corporation.

Plan Asset Rules

The Department of Labor’s (DOL) Plan Asset Rules essentially define when the assets of an entity are considered ‘Plan” assets. Under the rules, 401(k) qualified plans, including Solo 401(k) Plans are frequently viewed as pension plans subjecting them to the Plan Asset Rules. Under the Plan Asset Rules, if the aggregate Solo 401(k) Plan ownership of an entity is 25% or more of all the assets of the entity, then the equity interests and assets of the “investment entity” are viewed as assets of the investing Solo 401k Plan for purposes of the prohibited transactions rules, unless an exception applies. Also, if a Solo 401k Plan or group of related qualified plans owns 100% of an “operating company”, the operating company exception will not apply and the company’s assets will still be treated as plan assets.

In summary, the Plan Asset Rules can be triggered if:

  • 100% of an “operating company” is owned by one or more IRAs/401k plans and disqualified persons, in which case all the assets of the “operating company” are deemed Plan assets (assets of the IRA/401(k)), or
  • If 25% or more of an “investment company” is owned by IRAs/401k plans and disqualified persons, in which case all the assets of the “investment company” are deemed Plan Assets (assets of the IRA/401k). In determining whether the 25% threshold is met, all IRAs/401k owners are considered, even if they are owned by unrelated individuals.

Exceptions to the DOL Plan Asset Regulations

The Plan Asset look-through rules do not apply if the entity is an operating company or the partnership interests or membership interests are publicly offered or registered under the Investment Company Act of 1940 (e.g., REITs). They also do not apply if the entity is an “operating company,” which refers to a partnership or LLC that is primarily engaged in the real estate development , venture capital or companies making or providing goods and services, such as a gas station, unless the “operating company” is owned 100% by a 401k qualified Plan or IRA and/or disqualified persons. In other words, if an IRA or Solo 401k Plan owns less than 100% of an LLC that is engaged in an active trade or business, such as a restaurant or manufacturing plant, the Plan Asset Rules would not apply. However, the IRA or 401k Plan investment may still be treated as a prohibited transaction under Internal Revenue Code Section 4975. In addition, the Unrelated Business Taxable Income may apply to subject to the IRA or 401k Plan to tax on the income or gains generated from the operating business.

Note: The fact that a transaction does not trigger the Plan Asset Rules does not mean that the transaction may not be deemed a prohibited transaction under Internal Revenue Code Section 4975. In other words, a transaction that does not fall under the Plan Asset Rules can still be treated as a prohibited transaction pursuant to Internal Revenue Code Section 4975.

Determining Whether a Specific Transaction is a Prohibited Transaction

Through an arrangement between the IRS and the Department of Labor (DOL), it is the DOL’s responsibility to determine whether a specific transaction is a prohibited transaction and to issue prohibited transaction exemptions. When the IRS discovers what appears to be a prohibited transaction in an individual’s IRA, it turns the matter over to the DOL to make the determination. The DOL reviews the situation and responds to the IRS, which in turn responds to the taxpayer. If the IRA granter wants to apply for a prohibited transaction exemption, he or she must apply to the DOL. The DOL has the authority to issue prohibited transaction exemptions. Some, known as “prohibited transaction class exemptions” (PTCEs), are available for anyone’s reliance, while others, called “individual prohibited transaction exemptions” (PTEs), are issued only to the applicant.

For additional information on the advantages of using a Solo 401k Plan with “Checkbook Control” to make investments, please contact one of our Solo 401k Plan Experts at 800-472-0646.

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Oct 11

Why Use ROBS Opposed to a Self Directed IRA to Fund a Business

The Business Acquisition & Compliance Solution Structure (BACSS) also known as the “Rollover Business Start-Up” (“ROBS”) Solution is an IRS and ERISA approved structure that allows an individual to purchase a new or existing business with retirement funds and be active in the business without triggering any of the IRS prohibited transaction rules. The ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules, which do not apply to a Self-Directed IRA structure.

How Does the ROBS structure work?

The ROBS arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsored, and then investing the rollover 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes.

The following is how a typical ROBS structure works:

  • 1. Jim, an entrepreneur or existing business owner, establishes a new C Corporation in the state where the business will be operating. The ROBS structure must involve a C Corporation and not an LLC or S Corporation because the exemption to the IRS prohibited transaction rules under IRC 4975(d) involves the purchase of “Qualifying Employer Securities”, which is defined as stock of a Corporation. Using an LLC would not satisfy this definition and only individuals can be shareholders of an S Corporation and a 401(k) Plan is a trust.
  • 2. The new C Corporation adopts a prototype 401(k) plan that specifically permits the plan participants, including Jim, to direct the investment of their plan accounts into a selection of investments options, including employer stock, also known as “qualifying employer securities.
  • 3. Jim elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover of a prior employer’s 401(k) Plan funds into the newly adopted 401(k) plan.
  • 4. Jim then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that Jim wishes to invest in the new business).
  • 5. Jim also invests personal funds equal to more than 1% of the purchase price so that the structure is not considered an Employee Stock Option Plan (ESOP).
  • 6. The C Corporation utilizes the proceeds from the sale of stock (the amount of rollover funds and personal funds used) to purchase the assets for the new business.
  • 7. Joe would be able to earn a salary from the revenues of the business as well as personally guarantee any business loan.

What is the Difference between using a Self-Directed Vs. ROBS structure to buy a business?

Why Use ROBS Opposed to a Self Directed IRA to Fund a BusinessIn a lot of respects, using a Self-Directed IRA LLC or a 401(k) Plan to purchase stock in a corporation would seem to be subject to the same rules. However, as described above, using 401(k) Plan funds and not IRA funds allows one to take advantage of the prohibited transaction exemption under IRC 4975(d) for “Qualifying Employer Securities.”

The recent U.S. Tax Court case Peek v. Commissioner, 140 T.C. No. 12 (May 9, 2013), highlights the risk and limitations involved when using a Self-Directed IRA to purchase business assets. In the Peek case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. Because Mr. Peek used an IRA and not a 401(k) Plan to purchase the C Corporation stock, Mr. Peek was not able to earn a salary or personally guarantee a business loan, which ultimately was the cause of the IRS prohibited transaction rule violation.

The limitation of using a Self-Directed IRA LLC to buy a business is that the individual retirement account business owner would not be able to be actively involved in the business, earn a salary, or even personally guarantee a business loan. Whereas, if the business owner used a ROBS strategy, that individual would be able to be actively involved in the business, earn a salary, as well as personally guarantee a business loan without triggering the IRS prohibited transaction rules.

To learn more about the benefits of the ROBS (Rollover Business Startup) strategy, please contact a retirement tax expert at 800-472-0646.

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Oct 10

How Do the Withholding Tax Rules Work for a Solo 401k?

In 1993, Congress passed a mandatory withholding law. The law requires your plan administrator to keep 20% of all qualified plan distributions, including a Solo 401(k), to pay federal income tax before distributing the remainder to you. There are, however, some exceptions to the mandatory withholding rule. For example, amounts that are transferred directly from the trustee of your retirement plan to a trustee of another plan or a custodian of an IRA are not subject to withholding (direct rollover).

How Do the Withholding Tax Rules Work for a Solo 401k?

Note: Plan administrators are required to notify you of the direct rollover option at least 30 days before the distribution is to take place.

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

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Oct 07

The IRA Financial Group True Solo 401k Plan

The IRS approved solo 401(k) Plan has been used by hundreds of thousands of small businesses for over 30 years. However, the scope of options available to Solo 401(k) Plan participants is determined based on the plan documents. To this end, most financial institutions that offer Solo 401(k) Plan restrict the Plan participant to invest plan assets solely in their financial products and do not permit plan loans. Even though the IRS allows for 401(k) plans to invest in nontraditional investments, such as real estate, and allows for Plan loans (IRC 72(p)), those options are typically not offered by financial institutions because it would cut into the commissions they can earn from your plan investments. For example, if you use your 401(k) plan assets to purchase real estate or do a loan, you will have less money to buy their financial products.

The “True” Solo 401(k) Plan offered by the IRA Financial Group offers the self-employed business owner the ability to use his or her retirement funds to make almost any type of investment, including real estate, tax liens, private businesses, precious metals, and foreign currency on their own without requiring custodian consent tax-free! In addition, a Solo 401K Plan will allow you to make high contribution limits (up to $59,000) as well as borrow up to $50,000 for any purpose. Also, you will be able to open up the Solo 401(k) Qualified Plan Trust account at any local bank or credit union.

The True Solo 401(k) Plan Advantages

The IRA Financial Group’s “True” Solo 401K plan is unique and so popular because it is designed explicitly for small, owner only business.  There are many features of our “True” Solo 401(k) plan that make it so appealing and popular among self-employed business owners.

High Contribution Limits: 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.

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.

Calculate Your Solo 401k Plan Maximum Contribution Limit Please click here to calculate your Solo 401(k) Plan Maximum Contribution Limit.

Loan Feature: With the “True” Solo 401k Plan, a plan participant is eligible to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying credit card bills, mortgage payments, personal or business investments, a car, vacation, or anything else. The loan has to be paid back over a five year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate)

“Checkbook Control”: The most noteworthy benefit of the “True” Solo 401k Plan is that it does not require the participant to hire a bank or trust company to serve as trustee. This flexibility allows the plan participant (you) 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 “True” 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. Making a Solo 401K Plan investment is as simple as writing a check.

Flexible Contribution Options: With the “True” Solo 401(k) Plan, contributions are completely discretionary. You always have the option to try to contribute as much as legally possible, but you always have the option of reducing or even suspending plan contributions if necessary.

Roth Type Contributions: The “True” Solo 401(k) plan contains a built in Roth sub-account which can be contributed to without any income restrictions.

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: The “Tue” Solo 401(k) Plan is easy to operate and effortless to administer. There is generally no annual filing requirement unless your solo 401(k) Plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

Roth Conversion: The “True” Solo 401(k) Plan allows for the conversion of pre-tax 401(k) funds to a Roth. However, the 401(k) Plan participant must pay income tax on the amount converted.

Financial Institution Solo 401(k) Plan

IRA Financial Group “True” Solo 401(k) Plan

High Contribution Limits (up to $53,000 if under the age of 50 and $59,000 if Participant is over 50 1/2)

Yes

Yes

Loan Feature (borrow up to $50,000 tax-free)

No

Yes

Traditional Investment Options (i.e. stocks and mutual funds)

Yes

Yes

Nontraditional Investment options (i.e. real estate, precious metals, tax liens, etc.)

No

Yes

Unlimited Investment Options

No

Yes

“Checkbook Control”

No

Yes

Roth sub-account

Yes

Yes

Roth conversion feature

No

Yes

Direct Access to your Retirement Funds

No

Yes

Serve as trustee of your Solo 401(k) Plan

Yes

Yes

Unlimited bankruptcy protection

Yes

Yes

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

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Oct 05

Buying Land with Your Solo 401k

Income or gains generated by a 401(k) Plan generate tax-deferred/tax-free profits. Using a Solo 401(k) Plan to purchase raw land allows the 401(k) to earn tax-free income/gains and pay taxes at a future date, rather than in the year the investment produces income.

With a Solo 401(k), you can invest tax-free and not have to pay taxes right away – or in most cases for many years allowing your retirement funds to grow tax-free! All the income or gains from your land deals flow though to your 401(k) account tax-free!

Investing in Raw Land with a Solo 401(k) is Quick & Easy!

Purchasing raw land with a Solo 401(k) Plan is essentially the same as purchasing real estate personally.

  • Set-up a Solo 401(k) Plan with the IRA Financial Group.
  • Identify the investment property.
  • Purchase the investment property with the Solo 401(k) Plan – no need to seek the consent of the custodian with a Solo 401(k) Plan since you serve as Trustee and Plan Administrator.
  • Title to the investment property and all transaction documents should be in the name of the Solo 401(k) Plan. Documents pertaining to the property investment must be signed by you as Trustee.
  • All expenses paid from the investment property go through the Solo 401(k) Plan. Likewise, all rental income checks must be deposited directly in to the Solo 401(k) Plan bank account. No 401(k) related investment checks should be deposited into your personal accounts.
  • All income or gains from the investment flow through to your 401(k) tax-free!

Solo 401K Solution

Structuring the Purchase of Raw Land with a Solo 401(k) Plan

When using a Solo 401(k) to make a land investment there are a number of ways you can structure the transaction:

1. Use your Solo 401(k) funds to make 100% of the investment

If you have enough funds in your Solo 401(k) to cover the entire  purchase, including closing costs, taxes, fees, insurance, you may make the purchase outright using your Solo 401(k). All ongoing expenses relating to the investment must be paid out of your Solo 401(k) bank account. In addition, all income or gains relating to your investment must be returned to your Solo 401(k) bank account.

2. Partner with Family, Friends, Colleagues

If you don’t have sufficient funds in your Solo 401(k) to make a land purchase outright, your Solo 401(k) can purchase an interest in the property along with a family member (non-disqualified person), friend, or colleague. The investment would not be made into an entity owned by the 401(k) owner, but instead would be invested directly into the property.

For example, your Solo 401(k) Plan could partner with a family member, friend, or colleague to purchase a piece of property for $150,000. Your Solo 401(k) Plan could purchase an interest in the property (i.e. 50% for $75,000) and your family member, friend, or colleague could purchase the remaining interest (i.e. 50% for $75,000).

All income or gain from the property would be allocated to the parties in relation to their percentage of ownership in the property. Likewise, all property expenses must be paid in relation to the parties’ percentage of ownership in the property. Based on the above example, for a $2,000 property tax bill, the Solo 401(k) would be responsible for 50% of the bill ($1000) and the family member, friend, or colleague would be responsible for the remaining $1000 (50%).

Isn’t Partnering with a family member in a Real Estate Transaction a Prohibited Transaction?

Likely not if the transaction is structured correctly. Investing in an investment entity with a family member and investing in an investment property directly are two different transaction structures that impact whether the transaction will be prohibited under Code Section 4975. The different tax treatment is based on who currently owns the investment. Using a Solo 401(k) Plan to invest in an entity that is owned by a family member who is a disqualified person will likely be treated as a prohibited transaction. However, partnering with a family member that is a non-disqualified person directly into an investment property would likely not be a prohibited transaction. Note: If you, a family member, or other disqualified person already owns a property, then investing in that property with your Solo 401(k) would be prohibited.

3. Borrow Money for your Solo 401(k)

You may obtain financing through a loan to finance a property purchase using a Solo 401(k). Solo 401(k) participants can also borrow up to either $50,000 or 50% of their account value – whichever is less to help finance an investment.

If using financing through a third-party loan to purchase a property (other than a loan from the 401(k) Plan), one important point must be considered when selecting this option:

  • Loan must be non-recourse – A “prohibited transaction” is a transaction that, directly or indirectly involves the loan of money or other extension of credit between a plan and a disqualified person. Normally, when an individual purchases real estate with a mortgage, the traditional loan provides for recourse against the borrower (i.e., personal liability for the mortgage). However, if the 401(k) Plan purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse; otherwise there will be a prohibited transaction. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the 401(k) Plan itself.

Note: Unlike a Self-Directed IRA LLC, pursuant to Internal Revenue Code Section 514(c)(9), in the case of a Solo 401(k) Plan, the Unrelated Business Income Tax (UBTI) does not apply when using nonrecourse leverage as part of a real estate transaction (unrelated debt-financed income – UDFI). Therefore, unlike a Self-Directed IRA LLC, using a Solo 401K to finance a real estate investment will not trigger UBTI – which imposes a tax in the range of 40% for 2016 on all income/gains relating to the debt financed portion of the investment.

To learn more about using a Solo 401(k) Plan to invest in raw land, please contact one of our Solo 401(k) Plan Experts at 800-472-0646 for more information.

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