Feb 28

Solo 401k and UDFI Rules When Buying Real Estate

One of the advantages of using retirement funds, such as a Solo 401(k) plan, to make investments is that, in most cases, all income and gains from the investment will flow back to the 401(k) plan tax-deferred or tax-free in the case of a Roth. This is because a 401(k) plan is exempt from tax pursuant to Internal Revenue Code (“IRC”) Section 401.  In addition, IRC Section 512 exempts most forms of investment income generated by a 401(k) from taxation.  Some examples of exempt types of income include: interest from loans, dividends, annuities, royalties, most rentals from real estate and gains/losses from the sale of real estate.

However, the IRS enacted a set of rules in the 1950s in order to prevent tax-exempt organizations, such as charities and later 401(k) and IRAs from engaging in an active trade or business not related to its exempt purpose and thus, having an unfair advantage because of their tax-exempt status. These rules have become known as the Unrelated Business Taxable Income rules, also known as UBTI or UBIT. If the UBTI rules are triggered, the income generated from that activities would generally be subject to close to a 40% tax for 2017.  The type of income that generally could subject a retirement plan to UBIT is income generated from the following sources:

  • Income from the operations of an active trade or business through a pass-through entity (i.e. LLC or partnership), such as a restaurant. Of note, a retirement account investing in an active trade or business using a C Corporation will not trigger the UBTI tax.
  • Using margin on a stock purchase.
  • Nonrecourse leverage to purchase real estate (a nonrecourse loan is a loan not personally guaranteed by the plan participant). Only a nonrecourse loan can be used, as a recourse loan (a loan personally guaranteed by the plan participant) would trigger a prohibited transaction under IRC Section 4975.

Solo 401k and UDFI Rules When Buying Real EstateWhen a retirement account buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (“UDFI”), a type of UBTI on which taxes must be paid.  However, a 401(k) plan is exempt from UDFI pursuant to IRC Section 514(c)(9), which allows a few types of exempt organizations, such as schools, colleges, universities, and their “affiliated support organizations” as well as qualified pension, profit sharing, and stock bonus trusts, but not IRAs, to make debt-financed investments in real property without becoming taxable under IRC Section 514. Generally, debt financed investments by a qualified organization in acquiring or improving real property will be exempt from the UDFI tax rules if the transaction navigates through a long list of prohibitions set forth under IRC 514(c)(9).  The price paid by the organization for the property or improvement must be fixed when the property is acquired or the improvement is completed, neither the amount nor the due date of any payment under the indebtedness can be contingent on the revenue, income, or profits from the property, the property may not be leased to the person who sold the property to the organization (sales and leaseback), and the qualified organization must hold the real estate directly.  However, if the qualified organizations owns an interest in a partnership that holds an interest in real estate (i.e. real estate fund), the exemption to the UDFI rules can still be satisfied if the partnership satisfies the aforementioned restrictions and one additional rule, that can be satisfied in any of three ways:

  • All partners are qualified organizations,
  • All allocations of tax items from the partnership must be qualified allocations
  • Allocations must satisfy the “fractions rule”

Using a 401(k) plan to purchase real estate using nonrecourse leverage is generally more tax advantageous than using an IRA so long as one can satisfy the list of prohibitions under IRC 514(c)(9).  Because of the complexity of the rules, one should consult with a tax attorney for more specific information on this subject.

For more information about the UDFI rules when using a Solo 401(k) to invest in real estate, please contact us @ 800.472.0646.

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Feb 22

A Creative Way to Fund Your Entrepreneurial Passion: Your 401(k)

Here’s an article from Kiplinger from contributor Charles C. Scott talking about the ROBS solution –

Never heard of a “rollover as business startup” transaction? It carries risks, but also important advantages for those seeking second acts in their careers.

I want to get out of the corporate rat race and follow my passion! But how do I pay for this?

Boy, if I had a nickel for every time I have heard this, I’d be a wealthy man.

Recently, I was talking with Mathew, a friend of a client. Mathew is a senior executive in large national company and is looking for a change of scene. A change so he can pursue what he’s really good at and loves to do, but doesn’t have the opportunity to do in the company where he is now.

He’s been pretty successful but is frustrated with the corporate bureaucracy that gets in the way of his good ideas. So, he’s looking at creating his own enterprise but has some critical questions.

Ever heard this before? We certainly have.

It seems to be happening all the time and not just among younger entrepreneurs. The fastest-growing area in business start-ups is coming from the 50- and 60-year-old segment of the population. They are taking the risks not necessarily out of need, but because they are seeing opportunities.

These entrepreneurs have been and interesting group for financial advisers to work with, according to Greg Bresiger in an article he wrote for Financial Advisor magazine.

Bresiger gave some good examples of questions to ask: What’s the real goal? Are you ready to compete with the 28-year-old who is eager to work 80 hours a week? Are you tapping your experience base or going into something completely new? What if it fails?

So, having considered all of this, you’ve done your homework and you’re ready to start the new enterprise. Where will the money come from? Family? Friends? A small-business loan? A home equity loan? What about your 401(k) plan assets?

What!!? My 401(k)? Are you nuts?

You’re willing to sacrifice your retirement dollars and start a business on your own. What have you been smoking? After all, small businesses fail at a very high rate, with over 1 out of 3 going under in the first two years and half failing within five years.

In addition, how do you get at the 401(k) dollars without paying income tax on the money as it comes out, and even a penalty if you’re younger than 59½?

Ever heard of a “rollover-as-business-startup” transaction? Let’s just call it “ROBS” for short.

I hadn’t heard of it either until a few months ago.

So, how exactly does this work, and how does the IRS feel about it?

Let’s start with the IRS. They looked into this in 2010 and their Employee Plans Compliance Unit concluded this was not abusive in avoiding taxes, but certainly only would benefit one person – the 401(k) owner.

I’m going to say it now, and I’ll repeat this at the end, you need to make sure you’re working with a professional who really understands how this all works. If your CPA is helping you with this, you need to know that this person is well versed in the ROBS process and feels like it makes sense for you.

CPAs are, by nature, pretty conservative, so be sure yours is willing to be a little outside the box on this idea, and truly understands the process.

Let’s now look at how this all comes together.

Both tax law and ERISA (Employee Retirement Income Securities Act of 1974) law have some exemptions designed to allow investments in small business, sort of like what an Employee Stock Option Plan (ESOP) does.

You start by setting up the company as a C-type corporation that has a 401(k) plan of its own. The owner transfers funds from the previous employer’s 401(k) plan into the new 401(k) plan, and that plan buys shares in the new company, thereby becoming a shareholder of the new company.

So right here there are going to be some costs associated with starting a corporation and creating a 401(k) plan, so don’t be surprised.

Here are a couple of key points:

The funds rolled over from your previous retirement plan are not taxed, so there are no income taxes to pay nor any potential early withdrawal penalties if you are under age 59 ½.

Also, you need to understand that you, as an owner, are a different entity from the 401(k), which is also an owner. Even though it was your retirement money in the first place, you need to operate as if the 401(k) owner is a really picky partner, and make sure you follow the 401(k) rules to the letter.

If there are other employees of the company, they must be offered the chance to buy stock also, otherwise the IRS would not be satisfied the company plan meets the necessary requirements.

Other IRS issues revolve around the filing of various tax forms, most often the 5500 form, which, in the case of ROBS, needs to be filed annually.

And you should expect the IRS to pay extra attention to you, making sure you do everything by the book.

Do you see the need for working with someone familiar with all of these requirements? You better!

And you still have a live, working 401(k) plan that comes with the costs of administration and the requirements of making sure any current or future employees understand the workings of the plan. And the plan trustee, you the business owner, is a fiduciary of the plan, and as such, needs to always act in the best interest of the plan, not just themselves.

And here is the time to make sure that the new business owner understands the complexities of a 401(k) plan and should know enough to hire a professional plan administrator to make sure all of the details of the plan are taken care of.

If all of this seems like a lot of extra stuff to deal with, it is, but the overall benefits might just outweigh the hoops that need to be jumped through.

For example, there’s no need to take out a loan, have the debt to pay back, and you get to forgo the delight of dealing with a lending institution – a bank usually – which comes with all of the documentation and lending underwriting and all of the other requirements that banks demand.

Remember, banks like to lend to people who don’t really need to borrow the money in the first place. It’s not likely that it’s the person wanting to start their own business. At least not without a huge commitment to collateralizing the loan from the start.

But the upside is that you, the owner, are in control, at least from a financial point of view, without the bank as your unwanted “partner.”

And don’t forget another key issue – the new business owner doesn’t have to stop saving for retirement.

They have set up the 401(k) plan in the first place, and as an employee, they will have the ability to make contributions to the plan from their income, therefore continuing to grow their retirement assets.

As I said before, and it requires repeating, you need to make sure you’re working with a professional who really understands how this will all work.

I can’t caution you enough about this idea. You are taking a huge risk with your “retirement” money. You truly need to know if you can afford to mess up your retirement to follow your dream. Remember the failure rate of small businesses mentioned earlier.

And it’s very prudent to have some other substantial funds set aside just in case this doesn’t work out.

Don’t put all of your retirement “eggs” into this one “basket.”

Is this something that’s right for everyone? Of course not, but it just might be the right fit for that great idea you’ve been hatching for a long time, just wondering how the heck you were going to come up with the funds to make it happen.

ROBS (rollover-as-business-startup) could be the solution.

And for heaven’s sake do your homework first.

Here are some additional resources if you want to find out more about the ROBS process.

For more information about ROBS, please contact a retirement expert from the IRA Financial Group @ 800.472.0646 today.

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Feb 20

The Legality of the Individual 401k Plan

The Employee Retirement Income Security Act of 1974 ( ERISA) ( Pub.L. 93-406, 88  Stat. 829, enacted September 2, 1974) is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA contained sweeping changes in the regulation of pension plans, and created rules regarding reporting and disclosure, funding, vesting, and fiduciary duties. Although ERISA was aimed mostly at “assuring the equitable character” and “financial soundness” of pension plans, the Act contained numerous provisions impacting plans (like profit-sharing plans, and eventually 401(k) plans). For example, ERISA contained a provision that allowed plans to delegate investment responsibility to participants and thereby relieve the plan sponsor from investment responsibility, which today is the basis for participant-directed 401(k) plans.

In 1978, Congress amended the Internal Revenue Code by adding section 401(k), whereby employees are not taxed on income they choose to receive as deferred compensation rather than direct compensation. The law went into effect on January 1, 1980. Although a tax code provision permitting cash or deferred arrangements (CODAs) was added in 1978 as Section 401(k), it was not until November 10, 1981 that the IRS formally described the rules for these plans.

The Legality of the Individual 401k PlanThe “one-participant 401(k) plan”, also known as an “Individual 401(k) plan” is an IRS approved type of qualified plan, which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. The “one-participant 401(k) plan” is not a new type of plan. It is a traditional 401(k) plan covering only one employee. The plans have the same rules and requirements as any other 401(k) plan. The surging interest in these plans is a result of the EGTRRA tax law change that became effective in 2002. The law changed how salary deferral contributions are treated when calculating the maximum deduction limits for contributions to a 401(k) plan. This change created an opportunity for some people to put away additional amounts toward their retirement.

It was not until the late 1990s that the regulatory climate began to change for 401(k) plans. In 1996, as part of a package of reforms aimed at bolstering small businesses— the Small Business Job Protection Act of 1996 (SBJPA) , Congress acted to encourage employers to offer retirement plans, including 401(k) plans. The SBJPA simplified nondiscrimination tests and repealed rules imposing limits on the contributions that could be made to a retirement plan by an employee that also participated in a DB plan. In addition, starting in the late 1990s, the IRS issued a series of rulings allowing automatic enrollment.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) contained many provisions that affected qualified retirement plans in a positive way. Two of the most significant changes were the increase in the maximum salary deferral amount for 401(k) plans along with a “catch-up” contribution and the ability to receive an allocation under the plan.

According to the IRS, there are approximately one million private retirement plans covering over 99 million participants.

IRS Publication 560 sets forth the general rules pertaining to a small business retirement plan, such as a Solo 401(k) Plan.

For additional information on the legality of the Solo 401(k) Plan, please contact one of our 401(k) Experts at 800-472-0646.

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Feb 15

What Types of Transactions May Trigger the UBTI Tax with a Solo 401k?

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

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

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

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

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

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

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

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

Examples could include:

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

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

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Feb 12

The Advantages of Using ROBS to Start Your Business

When it comes to using retirement funds to buy or finance a business that you or another “disqualified person” will be involved in personally, there is only one legal way to do it and that is through the Business Acquisition Solution, also known as a Rollover Business Start-Up (ROBS). The ROBS solution takes advantage of an exception in the tax code under Internal Revenue Code (“IRC”) Section 4975(d) that allows one to use 401(k) plan funds to buy stock in a “C” Corporation, which is known as “qualifying employer securities”. The exception to the IRS prohibited transaction rules found in IRC 4975(d) requires that a 401(k) plan buy “qualifying employer securities”, which is defined as stock of a “C” Corporation. This is the reason why one cannot use a self-directed IRA LLC to invest in a business the IRA holder or a disqualified person will be personally involved in or why a 401(k) plan cannot invest in an LLC in which the plan participant or disqualified person will be involved in without triggering the prohibited transaction rules.

So How Does the ROBS Solution Work?

The structure typically involves the following sequential steps:

1. An entrepreneur or existing business owner establishes a new C Corporation;

2. The C Corporation adopts a prototype 401(k) plan that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options, including employer stock, also known as “qualifying employer securities.”

3. The entrepreneur elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan;

4. The entrepreneur 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 the entrepreneur wishes to invest in the new business); and finally

5.The C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.

What Are Some of the Advantages of the ROBS Solution?

  • Save Money: The primary advantage of establishing a ROBS solution is to be able to use your retirement funds to invest in a business you will be personally involved in without having to pay tax the retirement funds you wish to use as a distribution to tax and potentially penalty. By being able to invest the retirement funds into the business without having to take a taxable distribution and a 10% early distribution penalty if under the age of 591/2, using a ROBS solution could save someone close to 45% of the distribution amount. For example, if someone under the age of 591/2 was looking to use $100,000 of retirement funds to fund a business and ended up taking a taxable distribution of that amount, that individual would likely have to pay approximately 45% of the 100,000 or $45,000 in tax to the IRS when declaring the distribution on their tax return. The tax rate could be lower if the individual was in a lower income tax bracket or the retirement funds needed were insignificant, but using a ROBS solution would save having to pay tax and potentially a 10% penalty on that amount.
  • Invest in Yourself: The ROBS solution allows one to invest their retirement funds in a business that will be actively run by the retirement account holder. As a result, one is essentially investing their retirement funds in themselves rather than on Wall Street. Of course, not all businesses are successful. According to Bloomberg, close to 80% of new businesses fail in the first 18 months. Hence, investing your hard earned retirement funds in a new business is certainly a risk. However, it is a risk that you are legally entitled to take as per the Internal Revenue Code. Using retirement funds to invest in your business is not for everyone, but for those entrepreneurs that would rather invest in themselves than Wall Street, the ROBS solution is an option.
  • Diversification: There is a growing sentiment among financial advisors, especially after the 2008 financial crisis, that in order to protect your retirement funds from a market downturn, your retirement funds should be well diversified. One can generally not eliminate investment risk completely, but one can manage your level of risk. Every investment has some amount of risk, however, having your retirement funds invested in different types of investments, such as stocks, real estate, and even private businesses, can be a way of diversifying your retirement portfolio and better protecting your retirement funds. Also, it is believed that diversification can enable a retirement portfolio to grow both when markets boom and returns crumble in one sector One should certainly work with a financial planner and tax professional when looking at investment options, especially when it comes to using retirement funds to buy a business.
  • Earn a Salary: In order for one to be a participant of a 401(k) Plan, one needs to be an employee of the business, which adopted the plan. This is the reason why if you own Apple or IBM stock but don’t work at those companies, you cannot participate in their company 401(k) plans. Hence, in order to be eligible to participate in the corporation 401(k) plan you must become a W-2 employee of the C Corporation. For many entrepreneurs the ability to earn a salary and be actively involved in the business is the reason they are using a ROBS solution versus using a self-directed IRA.
  • Benefit from having a 401(k) Retirement Plan: One of the best ways for you to save toward your own retirement and ensure your future security is through an employer-sponsored 401(k) plan. Below are some of the advantages of offering and participating ion a 401(k) Plan.
  • Matching Contributions Many employers will match a portion of your savings: It’s like passing up free money if you don’t participate. A safe harbor 401(k) Plan, which is a popular type of 401(k) plan for small businesses, offer employees who participate in the plan a 3% matching contribution made by the employer. Thus, for example, if the employee earns $40,000 in salary during the year and contributes 3% of the salary of $1200 to the 401(k) plan, the employer would contribute an additional $1200 (3% of the salary) to the individual 401(k) plan account.
  • Retaining employees: with most businesses offering their employees retirement benefits, it is worthwhile for small businesses to compete for talented workers by implementing 401(k) benefits. Offering 401(k) plan benefits is a great way to retain key employees. In general, when potential hires are considering multiple job offers, they’ll compare those offers based on corporate culture, growth opportunities, and benefits packages. –
  • Easy Administration: 401(k) Plan administration is now easier and more cost-effective than ever with Internet options available to small employers. In addition, IRA Financial Group offers recordkeeping and third-party administration services for your plan allowing you to spend more time focusing on your business and less on your plan.
  • You Can Participate As Well: You are eligible to participate in the company 401(k) plan if you are an owner or an employee of the company that sponsor’s the 401(k) plan. Current regulations allow plan participants to contribute up to $18,000 ($24,000 if over the age of 50) of their income on a pre-tax basis each year. That means that in addition to your tax savings for offering the plan and providing matching contributions, you’ll receive yet another tax savings for participating in the plan. This savings can be substantial – an owner in the 35% tax bracket who made the maximum contribution would have saved approximately $6,500 in taxes in 2016.

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

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Feb 07

The Basics of Flipping Houses with a Solo 401k

Since the creation of the Solo 401(K) Plan back in the early 1980s, the IRS has always permitted a Solo 401(K) Plan to purchase, hold, or flip real estate.  By using a Solo 401(K) Plan, also known as a self-directed 401(K) Plan or Individual 401(K) Plan, to buy real estate, you will be able to purchase raw land, domestic or foreign real estate, residential or commercial property, flip homes, and much more tax-free and without requiring custodian consent!

Flipping a Home is as Simple as Writing a Check

With a Solo 401(K) Plan, flipping homes or engaging in a real estate transaction is as simple as writing a check. As trustee of your Solo 401(K) Plan, you will have the authority to make real estate investment decisions on behalf of your 401(K) Plan on your own without needing the consent of a custodian. One of the true advantages of a Solo 401(K) Plan is that when you want to purchase a home with your Solo 401(K) Plan, you can make the purchase, pay for the improvements, and even sell or flip the property on your own without involving the custodian or any third-party.  It's Time To Let 401(k) Holders Invest Like the ProsIn other words, with a Solo 401(K) Plan, you will have the power to flip homes or do multiple real estate transactions on your own without requiring the consent of a custodian. One additional important advantage of purchasing real estate with a Solo 401(K) Plan is that all income and gains are tax-deferred until a distribution is taken (distributions are not required until the 401(K) Plan participant turns 70 1/2). In the case of a Roth Solo 401(K) Plan, all gains are tax-free.

Flip a Home without Requiring the Consent of a Custodian

A Solo 401(K) Plan is the most efficient and cost effective vehicle for doing house flips with retirement funds.  With a Solo 401(K) Plan, you will be able to use your 401(K) funds to purchase real estate and engage in flipping homes tax-free and without custodian consent.  A traditional 401(K) Plan custodian (financial institution) will not allow you to purchase real estate using your retirement funds.  Therefore, in order to have the ability to engage in house flipping transactions using retirement funds, a Solo 401(K) Plan is the answer.

Control the Entire House Flipping Transaction

Unlike a conventional 401(K) Plan which requires custodian consent and requires high custodian fees, a Solo 401(K) Plan will allow you to buy real estate by simply writing a check.  With a traditional custodian controlled Solo 401(K) Plan, you will have total control to make a real estate purchase, pay for improvements, and then sell the property without ever talking to the custodian.  Since all your 401(K) funds will be held at a local bank in the name of the Solo 401(K) Plan, all you would need to do to engage in a house flipping transaction is write a check straight from the Solo 401(K) Plan account or simply wire the funds from the Solo 401(K) Plan bank account.  No longer would you need to ask a custodian for permission or have a custodian sign the real estate transaction documents.  Instead, with a self-directed Solo 401(K) Plan, as trustee of the Solo 401(K) Plan, you will be able to execute the real estate transaction by simply writing a check.

Use a Solo 401(K) Plan and Flip a Home Tax-Free

One major advantage of flipping homes with a Solo 401(K) Plan is that all gains are tax-deferred until a distribution is taken (distributions are not required until the IRA owner turns 70 1/2). In the case of a Roth Solo 401(K) Plan, all gains are tax-free. In other words, all gains attributable to the house flipping transaction will flow back to your Solo 401(K) Plan tax-free!

IRA Financial Group will take care of setting up your entire Solo 401(K) Plan structure. The whole process can be handled by phone, email, fax, or mail and typically takes between 2-10 days to complete, the timing largely depending on the existing custodian holding your retirement funds. Our 401(K) Plan experts and tax and ERISA professionals are onsite greatly reducing the setup time and cost.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

To learn more about the advantages of using a Solo 401(K) Plan to purchase real estate and flip homes tax-free, please call a Solo 401(K) Expert at 800-472-0646 or visit www.irafinancialgroup.com.

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Feb 02

How Do You Take a Solo 401(k) Loan?

As long as the plan documents allow for it & the proper loan documents are prepared and executed, a participant loan can be made for any reason. The Solo 401(k) loan is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) for any investment purposes, including real estate, funding your business or a new business, tax liens, private placements, etc.

What is a Solo 401(k) Plan Loan?

A Solo 401(k) loan is permitted at any time using the accumulated balance of the Solo 401(k) as collateral for the loan. A Solo 401(k) participant can borrow up to $50,000 or 50% of their account value – whichever is less. This loan has to be repaid over an amortization schedule of 5 years or less with payment frequency no greater than quarterly. The interest rate must be set at a reasonable rate of interest, generally interpreted as prime rate as per the Wall Street Journal. As of 1/1/17 prime rate is 3.75%, which means participant loans may be set at a very reasonable Interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application.

How Do You Take a Solo 401(k) Loan?How Can This be Done?

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

When can a Participant Loan be Useful?

As a result of the recent economic meltdown, banks and other financial institutions have severely limited their lending capacity to self-employed business owners, thus, causing grave financial pressure on self-employed business owners. The Solo 401(k) plan is a perfect structure for any self-employed business owner seeking immediate funds for their business or to help pay personal expenses. Solo 401(k) participants can borrow up to $50,000 or 50% of their account value, whichever is less, to help finance or operate their business. For example, an individual can take a Solo 401(k) Plan loan and use those funds to pay off a mortgage, credit card, any personal expense, go on vacation, or start and finance a business.

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

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