Oct 30

New Podcast – The Trump Tax Plan and 401(k) Plan Retirement Accounts

In his latest podcast, IRA Financial Group’s Adam Bergman discusses the proposed tax plan from President Trump and the potential impact on 401(k) Plan retirement accounts and why the government thinks it needs to lower 401(k) Plan contribution limits.

Podcast 80

Click Here to Listen

 

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Oct 13

Some Disadvantages 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 solution (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. Hence, in order to use retirement funds to invest in a business in which a disqualified person will be personally involve one needs a “C” Corporation to operate a business and adopt a 401(k) Plan

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.

Four Disadvantages of Establishing a ROBS

1. The “C” Corporation Requirement: Although there are advantages to establishing a “C” corporation, such as owner’s liability protection from the actions of the company, there are several disadvantages as well.

2. Double Taxation: Corporations, unlike other companies that are considered sole proprietorships and partnerships, file their own taxes separately from their owners at their own tax rates. After the company’s profits are taxed at the corporate level, they are then distributed to the shareholders who have to report the amount received on their individual tax returns. The corporate tax rate is generally 15% for corporate profits under $50,000 and 35% for profits above $50,000. This isn’t the case for Sub-chapter S corporations or LLC, where the profits bypass being taxed at the corporate level and are distributed and taxed at the shareholder’s level. That is called pass-through taxation. For example, if we assume a 20% income tax rate for both corporation and individuals and a “C” Corporation earned $100 of profits, the “C” Corporation would be required to pay tax of $20 (20% of $100) and then the shareholder would be required to pay tax of $16 (20% of $80) on any dividend issued by the “C” Corporation to the shareholder. Whereas, in the case of an LLC or “S” Corporation, there is no entity level tax so the $100 would flow directly to the shareholder or LLC member and a tax of only $20% would be imposed at the shareholder level. Comparing this with the “C” Corporation example, by using a passthrough entity such as an “S” Corporation or LLC, the individual would save $16 in our example (total tax of $36 with a “C” Corporation versus $20 in the case of an LLC or “S” Corporation.

Some Disadvantages of Using ROBS to Start Your BusinessIt is important to note that it can be argued that the disadvantage of double taxation bite does not impact retirement accounts (i.e. 401(k) plans) as much as individuals, since the dividend from the “C” Corporation to the 401(k) plan shareholder would be exempt from tax since a 401(k) plan is a tax-exempt retirement account. However, the double taxation is not eliminated but simply deferred until the 401(k) plan participant elects to take a 401(k) plan distribution, which would generally be subject to a second tax (the first tax would be applied at the “C” Corporation level). In contrast, if a 401(k) plan invested in an LLC, a passthrough entity for taxation, the income or gains from the LLC would generally flow back to the 401(k) plan without tax and the 401(k) plan participant would only be required to pay one tax when a distribution is taken.

Unfortunately, the IRS rules require a “C” Corporation be used when a retirement account holder wishes to use retirement funds to invest in a business they or another disqualified person will be involved in. The issue of double taxation is certainly one disadvantage of the ROBS solution, but it is generally perceived as better than paying tax and potentially a 10% early distribution penalty on a distribution from your retirement account.

Regulations and Formalities

Sub-chapter C corporations generally involve more corporate formalities than LLCs, for example. In general, “C” Corporations have to report annually to the states in which they’re incorporated, and the states in which they do a lot of business, on an annual basis. Also, “C” Corporations must observe certain formalities to be considered corporations. This includes holding regular board and shareholder meetings and issuing stock. Also, the names of corporate officers are made public, which is not required by businesses formed under different organizational structures.

401(k) Plan Administration

Even though 401(k) plan administration costs have come down significantly over the years, there is still a cost of offering a 401(k) plan to employees. In addition to having to make a 3% safe harbor contribution, which will be discussed below, 401(k) plans cost money to administer because there are many compliance issues that have to be monitored, there are many ongoing service and administration functions that have to be provided, and there are a host of education and communication services that are required to be offered to plan participants. It is not uncommon for a small business 401(k) Plan to cost anywhere from $750-$1500 annually for a third-party administration company to administer as well as file the annual IRS Form 5500 .

3. Matching Contributions: 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 or $1200 to the 401(k) plan, the employer would contribute an additional $1200 (3% of the salary) to the individual 401(k) plan account. Taking this a step further, if the business has 5 employees and each employee makes $40,000 a year, the employer now has to make $6000 in employer matching contributions. Although the contributions are tax deductible to the employer, it is still additional funds that are being removed from the company and could impact the cash flow of a new small business.

4. Potential IRS Audit: Dating back to the 2005 or so, the IRS started focusing some attention on the ROBS solutions and some of the abuses they perceived were occurring.

To this end, on October 31, 2008, Michael Julianelle, Director, Employee Plans, signed a “Memorandum” approving IRS ROBS Examination Guidelines. The IRS stated that while this type of structure is legal and not considered an abusive tax avoidance transaction, the execution of these types of transactions, in many cases, have not been found to be in full compliance with IRS and ERISA rules and procedures. In the “Memorandum”, the IRS highlighted two compliance areas that they felt were not being adequately followed by the promoters implementing the structure during this time period. The first non-compliance area of concern the IRS highlighted in the “Memorandum” was the lack of disclosure of the adopted 401(k) Plan to the company’s employees and the second non-compliance area was establishing an independent appraisal to determine the fair market value of the business being purchased. In sum, the IRS was concerned that people were using their retirement funds to buy a business and either the business was not being purchased and the individual then used the funds for personal purposes, thus avoiding tax and potential penalties, or the business that was purchased closed, and the retirement account liquidated, thus, leaving the IRS without the potential to tax the retirement account in the future.

The IRS did not publicly comment on the ROBS solution again until August 27, 2010, almost two years after publishing the “Memorandum”, the IRS held a public phone forum open to the public which covered transactions involving using retirement funds to purchase a business. Monika Templeman, Director of Employee Plans Examinations and Colleen Patton, Area Manager of Employee Plans Examinations for the Pacific Coast spent considerable time discussing the IRS’s position on this subject. Monika Templeman began the presentation reaffirming the IRS’s position that a transaction involving the use of retirement funds to purchase a new business is legal and not an abusive tax-avoidance transaction as long as the transaction complies with IRS and ERISA rules and procedures. The concern the IRS has had with these types of transactions is that the promoters who have been offering these transactions have not had the expertise to develop structures that are fully compliant with IRS and ERISA rules and regulations. The IRS added that a large percentage of the transactions they reviewed were in non-compliance largely due to the following non-compliance issues: (i) failure by the promoters to develop a structure that requires the new company to disclose the new 401(k) Plan to the company’s employees and, (ii) the failure to require the client to secure an independent appraisal to determine the fair market value of the company stock being purchased by the 401(k) Plan. The IRS concluded by stating that a transaction using retirement funds to acquire a business is legal and not prohibited so long as the transaction is structured correctly to comply with IRS and ERISA rules and procedures.

So does the ROBS solution trigger an audit? No one knows what factors trigger an IRS audit, but although legal, the ROBS solution is something the IRS and Department of Labor is looking at. Again, if your structure is set-up properly and the funds are used to buy a business, the 401k plan is being offered to all eligible employees, a valuation of the stock purchased is performed, and the plan is compliant with all annual testing and IRS filing requirement, there is nothing to be concerned with if your plan was audited by the IRS or DOL.

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Sep 09

401(k) Loans Are Viable Last Resort For Hurricane Victims

This article originally appeared on Forbes.com

Hurricane Harvey has set a record for rainfall in the continental United States. It is estimated that some 100,000 homes have been affected by Harvey all with differing degrees of insurance coverage.  In addition, at least 37 people have died from the storm.

Over the coming weeks we will be hearing news about payout projections by insurers, but chances are those dollars will flow to the commercial sector, not homeowners. If the 2012 Hurricane Sandy is a predictor, households are facing a severely diminished quality of life, financial frustration, a long process for applying for grants and aid, and way too little insurance funding in relation to the premiums they’ve been paying. Many insurance experts estimate that only a relatively small percentage of the Harvey-impacted homes and businesses will have adequate flood insurance. For those without it, there is a short list of possible bases for coverage under a home policy.  However, for Harvey storm victims who are participating in an employer 401(k) plan or who are self-employed, an unorthodox financing option exists that can help storm victims borrow up to $50,000 tax-free and penalty free from their 401(k) plan.

Internal Revenue Code Section 72(p) allows a Solo 401(k) plan participant to take a loan from his or her 401(k) plan so as long as it is permitted pursuant to the business’s 401(k) plan documents. The loan proceeds can be used for any purpose.  In order to be eligible to take a loan from a 401(k) plan, the solo 401(k) plan documents must specifically provide for a loan program

In general, to avoid having a 401(k) plan loan treated as a taxable distribution to the recipient, the following conditions must be satisfied (IRC Sec. 72(p)(2)).

  • The loan must have level amortization, with payments made at least quarterly.
  • The recipient generally must repay the loan within five years, although a fifteen year period can be used for the purchase of a primary residence.
  • The loan must not exceed statutory limits.

401(k) Loans Are Viable Last Resort For Hurricane VictimsGenerally, the maximum amount that an employee may borrow at any time is one-half the present value of his vested account balance, not to exceed $50,000. The maximum amount, however, is calculated differently if an individual has more than one outstanding loan from the plan.  A 401k loan is permitted at any time using the accumulated balance of the solo 401k as collateral for the loan. In other words, a Solo 401(k) participant can borrow up to either $50,000 or 50% of their account value, whichever is less. This loan has to be repaid over an amortization schedule of five years or less with payment frequency no less than quarterly.  The lowest interest rate that can be used is prime as per the Wall Street Journal, which as of September 1, 2017 is currently 4.25%. However, if a loan fails to satisfy the statutory requirements regarding the loan amount, the loan term, and the repayment schedule, the loan is in default and is considered a deemed distribution. In addition, another potential disadvantage of taking a 401(k) plan loan is that the borrowed funds are removed from investment in the market, forfeiting potential tax-exempt gains.

For Harvey storm victims participating in an employer 401(k) plan, taking a 401(k) loan can be done generally by contacting the 401(k) plan administrator.  Whereas, for individuals who are self-employed or have a business with no full-time employees, other than a spouse or partner(s), a Solo 401(k) plan with a loan option can be adopted quite easily, which will allow such individuals to borrow up to $50,000 and use the proceeds for any purpose, including paying for home repairs, purchasing a car, paying living expenses, paying credit card debt, or other expenses.

In the case of Harvey storm victims, the primary advantage of using a 401(k) loan feature is that the individual will gain the ability to use up to $50,000 of retirement funds without tax or penalty.  In addition, the loan payments of principal and interest are paid back by the individual to his/her plan account, thus, increasing the overall value of the 401(k) plan assets over the loan period. Drawbacks of taking a retirement plan loan include the loss of compounding for assets in the plan, as well as the fact that loans are repaid with after-tax dollars, resulting in a loss of tax-free or tax-deferred advantages of such an account.

For more information about using a loan from your 401(k) plan, please contact us @ 800.472.0646.

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Aug 10

How to Use ROBS to Start a Business with 401k Funds

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 use retirement funds, such as an IRA or 401(k), to purchase a new or existing business or franchise tax-free and penalty-free.

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 funds in the stock of the new C Corporation.

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

At first glance, using a Self-Directed IRA LLC to purchase stock in a corporation would seem to share many similarities with the ROBS structure.

How to Use ROBS to Start a Business with 401k FundsWith IRA Financial Group’s ROBS transactions, the structure typically involves the following sequential steps: (i) an entrepreneur or existing business owner establishes a new C Corporation; (ii) 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.”; (iii) 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; (iv) 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 (v) the C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.

With IRA Financial group’s ROBS strategy, the newly formed business will also be able to borrow from third parties, pay salaries to employees (including shareholders/plan participants), and engage in other routine business transactions with disqualified persons. Commonly, a corporate officer or shareholder will make or guarantee loans to the business.

With a Self-Directed IRA LLC, an entrepreneur could use retirement funds to purchase business assets like with the ROBS strategy. However, that individual would not be able to be actively involved in the business, earn a salary, or even personally guarantee a business loan.

The recent U.S. Tax Court case Ellis v. Comm’r of Internal Revenue, No. 14-1310 (8th Cir. 2015) highlights the risk and limitations involved when using a Self-Directed IRA to purchase business assets. In the Ellis case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. Because Mr. Ellis used an IRA and not a 401(k) Plan to purchase the C Corporation stock, Mr. Ellis 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.

If Mr. Ellis had used IRA Financial Group’s ROBS strategy, he would have been able to purchase business assets with retirement funds, earn a salary from the business, as well as personally guarantee the business loan without triggering the IRS prohibited transaction rules.

Legal Foundation for the ROBS Solution

An individual retirement account investor is able to use retirement funds to invest in an active trade or business with tax or penalty because the ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules. The exemption to the prohibited transaction rules under IRC 4975(d) is centered around ERISA Section 408(e). It is IRC Section 4975(d) and ERISA Section 408(e) which shields employers from scrutiny of routine (non-abusive) corporate transactions by the plan sponsor and other “disqualified persons,” which might otherwise constitute technical violations of the prohibited transaction rules (due to the employer-sponsored retirement plan’s ownership of employer securities). If the plan sponsor and other fiduciaries’ routine corporate transactions did not fall within the purview of ERISA Section 408(e), the prohibited transaction rules would needlessly prohibit a myriad of legitimate business transactions and would ultimately nullify the exemption that Congress intended to provide. To accomplish its intended effect, ERISA Section 408(e) must be read to exempt the natural and necessary commercial consequences of owning corporate stock, rather than just the stock purchase or divestiture.

Important tax and economic policy considerations also compel a different result for 401(k) plans than IRAs. Congress specifically intended to encourage 401(k) plans to invest in employer securities, within certain limits. The opportunity to invest in employer securities through retirement plans benefits employers and employees alike by aligning their economic interests.

Outside the context of ROBS arrangements, many 401(k) plans permit participants to invest in employer stock. A number of large 401(k) plans, including plans sponsored by Apple and Pepsi, include substantial allocations of employer stock.

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

May 01

President Trump’s Recent Proposed Corporate Tax Rate Reduction Expected To Increase Popularity of Rollover Business Start-Up Solution

Trump plan to reduce corporate tax rate to 15% could make it more tax efficient for thousands of Americans use retirement funds tax-free to fund a business via ROBS

IRA Financial Group, a provider of Rollover Business Startup Solution (“ROBS”) solutions, expects to see a boost in the popularity of the ROBS solution based on President Trump’s tax plan, which calls for a reduction in the corporate tax rate from 35% to 15%.

President Trump’s Recent Proposed Corporate Tax Rate Reduction Expected To Increase Popularity of Rollover Business Start-Up SolutionThe rollover business start-up (“ROBS”) arrangements 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 ROBS 401k solution is a tax efficient way for any entrepreneur looking to use IRA funds to buy a business or franchise without incurring any tax or penalty from an IRA distribution. “With a reduction in the corporate income tax rate from 35% to 15%, operating a business via a C Corporation will become more tax efficient and should increase the popularity of the ROBS IRA solution with entrepreneurs looking to use retirement funds to buy a business,” stated Adam Bergman, a partner with the IRA Financial Group.

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

IRA Financial Group is the market’s leading provider of self-directed IRA LLC and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Apr 19

Using Your 401k to Start Your Own Business

Leaving your job or thinking of leaving your job and a have 401(k) qualified retirement plan or other type of retirement plan? Why not use your retirement funds to invest in yourself instead of a volatile stock market? While the Stock Market is doing well, who knows how long before the bubble bursts; why not use your 401(k) funds on a business you can run, manage, and even earn a salary from? Isn’t it time you placed your retirement future in your hands rather than trust Wall Street bankers?

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

Using Your 401k to Start Your Own BusinessWith the IRS compliant Business Acquisition Structure (similar to that of the Rollover Business Start-up (ROBS) solution, you can earn a reasonable salary from your new business or franchise. You can also use your new 401(k) Plan to make high tax-deductible contributions – $54,000 ($60,000 if you are over the age of 50) and even borrow up to $50,000 for any purpose.

What does the IRS Say about this?

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

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

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

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

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

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Mar 13

Small Business and Franchise Funding with Your 401k

IRA Financial Group’s Solo 401(k)

“The Entrepreneurial Solution”

If you’ve ever said, “If I could do it over again, I’d be my own boss” then this may be the ideal time to consider your options and opportunities. At IRA Financial Group, we specialize in helping entrepreneurs obtain small business capital to get them started. With the IRA Financial Group’s Solo 401(k), we can assist you in funding your existing or new business through your qualified retirement assets.

Small Business and Franchise Funding with Your 401kFinancing Your Franchise with IRA Financial Group’s Solo 401(k) Plans

Hundreds of new franchise owners and entrepreneurs have used our IRA Financial Group’s Solo 401(k)’s to purchase or recapitalize their business. By simply rolling your existing IRA or 401(k) funds into one of IRA Financial Group’s Solo 401(k) Plans, you can invest in a new business or fund an existing business… without tax penalties.

The IRA Financial Group’s Solo 401(k) plans allow you to:

  • Use funds from retirement accounts like IRAs, 401(k)s, SEPs, etc., without incurring early distribution taxes or penalties
  • Take advantage of tax compliant structures that have already been approved by the Internal Revenue Service
  • Utilize pre-tax dollars to fund or invest in a business
  • Obtain funding fast using your retirement funds to help finance your business
  • Utilize the retirement funds of a sibling, cousin, or friend to help finance your business
  • Solo 401(k) Participants can borrow up to $50,000 or 50% of account value (whichever is less) to help finance their business

Entrepreneurs don’t sit around waiting for the economy to recover; they take action to boost their situation. They become part of the economic solution by creating opportunities for themselves and their families. If this fits your profile, becoming an entrepreneur could very likely be the greatest business opportunity of your life.

Have an IRA Financial Group representative walk you through your small business financing options for becoming an entrepreneur, including the IRS-approved ROBS solution. The IRA Financial Group Solo 401(k) for small business investing is ideal options for aspiring entrepreneurs.

Establish a Solo 401(k) with IRA Financial Group and have immediate checkbook control to access alternative investment opportunities using tax-deferred retirement funds.

For a better understanding on how to fund a new or existing business utilizing your qualified retirement assets, please contact one of our tax specialists for a free consultation at 800-472-0646.

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

Mar 05

Can You Purchase Stock in a Personal Business with Your 401k?

Yes. 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.  One way to use 401(k) funds to invest in a business is by utilizing the Rollover as Business Startup, or ROBS.

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.

ERISA Section 408(e) provides that ERISA Section 406 shall not apply to the purchase by the Plan of qualifying employer securities (as defined in ERISA 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 ERISA 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 Section 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 Section 408(e) are met.

The exemptions in Internal Revenue Code 4975(d) shall not apply to items described in Internal Revenue Code Section 4975(f)(6). Internal Revenue Code Section 4975(f)(6)(A)) states that the exemption of Internal Revenue Code Section 4975(d) shall not apply i n 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 Can You Purchase Stock in a Personal Business with Your 401k?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.

The IRA Financial Group’s retirement tax professionals will work with you directly to develop an IRS and ERISA fully compliant business acquisition or funding solution customized to your individual business, financial, and retirement needs.

For more information about using your 401(k) to invest in a business, please contact us @ 800.472.0646.

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

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.

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page

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.

IRA Financial Group Facebook pageIRA Financial Group Twitter pageamazon-logoIRA Financial Group Tumblr pageIRA Financial Group Pinterest page