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

 

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Oct 23

IRS Announces 2018 Solo 401(k) Contribution Limits

Under the 2018 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum annual employee deferral contribution in the amount of $18,500. That amount can be made in pre-tax, after-tax or Roth. On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) annual profit sharing contribution up to a combined maximum, including the employee deferral, of $55,000, an increase of $1,000 from 2017.

IRS Announces 2018 Solo 401(k) Contribution LimitsFor plan participants over the age of 50, an individual can make a maximum annual employee deferral contribution in the amount of $24,500. That amount can be made in pre-tax, after tax, or Roth. On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) annual profit sharing contribution up to a combined maximum, including the employee deferral, of $61,000, an increase of $1,000 from 2017.

One of the main benefits of a Solo 401(k) Plan is the opportunity to make higher annual contributions in pre-tax, after-tax or Roth.

IRA Financial Group’s Solo 401(k) plan is unique and so popular because it is designed explicitly for small, owner-only business. In addition, to the high annual contribution limitations. There are many features of the IRA Financial Group’s Solo 401(k) plan that make it so appealing for small business owners.

Tax and Penalty Free Loan

Unlike most Solo 401(k) Plans offered by the traditional financial institutions such as Fidelity, IRA Financial Group’s Solo 401(k) Plan allows plan participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying credit card bills, mortgage payments, or anything else. The loan has to be paid back over a five-year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate).

Checkbook Control & No Transaction Fees

The most attractive feature of the IRA Financial Group Solo 401(k) Plan is that it offers the plan participant checkbook control over his or her retirement funds. In the case of a conventional Solo 401(k) Plan offered by most financial institutions, the plan participant is relegated to making traditional investments, such as stocks and or mutual funds. In addition, the Solo 401(k) Plan account is required to be opened at the financial institution. With IRA Financial Group’s Solo 401(k) Plan, the plan account can be opened at any local bank, including Chase, Wells Fargo, and even Fidelity. In addition, with IRA Financial Group’s Solo 401(k) Plan, the plan participant can make almost any traditional as well as non-traditional investments, such as real estate, precious metals, tax liens, and much more. With IRA Financial Group’s Solo 401(k) Plan, the Plan participant has the freedom to make the investments he or she wants while at the same time opening the 401(k) account at any local bank. As trustee of the Solo 401(k) Plan, the Plan Participant (you) can serve as the trustee providing you checkbook control over your retirement funds. With IRA Financial Group’s Solo 401(k) Plan, making a Solo 401(k) Plan investment is as simple as writing a check.

Invest in Real Estate & Much More Tax-Free

With IRA Financial Group’s Self-Directed Solo 401(k) plan, you will be able to invest in almost any type of investment opportunity that you discover, including: real estate, tax liens, precious metals, private notes, hard money loans, private business, etc.; your only limit is your imagination. The income and gains from these investments will flow back into your Solo 401(k) tax-free.

Roth Contributions & Conversion

Unlike a conventional Solo 401(k) Plan offered by most financial institutions, IRA Financial Group’s Solo 401(k) Plan contains a built in Roth sub-account which can be contributed to without any income restrictions. In addition, the IRA Financial Group’s Solo 401(k) Plan allows for the conversion of a traditional 401(k) or 403(b) account to a Roth subaccount. However, the Solo 401(k) Plan participant must pay income tax on the amount converted.

Easy Administration

IRA Financial Group’s Solo 401(k) Plan is easy to operate. There is generally no annual filing requirement unless your solo 401(k) Plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ). However, unlike a financial institution, the tax professionals at the IRA Financial Group will assist you in completing this form, if it is required.

To learn more about the advantages of the Solo 401K Plan with Checkbook Control please contact a 401(k) Expert at 800-472-0646.

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Oct 18

Choosing a Solo 401(k) Over a SEP IRA

A Solo 401(k) Plan is an IRS approved retirement 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” or Individual 401(k) Plan is not a new type of plan. It is a traditional 401(k) Plan covering only one employee.  Like a SEP IRA, a Solo 401(k) Plan offers the plan participant the ability to contribute up to $60,000 each year.  Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no compelling reason for an owner-only business to establish a Solo 401(k) Plan because the business owner could generally receive the same benefits by adopting a profit sharing plan or a SEP IRA.  After 2002, EGTRRA paved the way for an owner-only business to put more money aside for retirement and to operate a more cost-effective retirement plan than a SEP IRA or 401(k) Plan.

There are a number of options that are specific to Solo 401(k) Plans that make the Solo 401(k) Plan a far more attractive retirement option for a self-employed individual than a SEP IRA.

1. Reach your Maximum Contribution Amount Quicker: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan.

Under the 2017 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $54,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $60,000.

Whereas, a SEP IRA would only allows for a profit sharing contribution.  Hence, a participant in a SEP IRA would be limited to 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum of $54,000 for 2017. No employee deferral exists for a SEP IRA.

For example, Joe, who is 60 years old, owns 100% of an S Corporation with no full time employees.  Joe earned $100,000 in self-employment W-2 wages for 2017.  If Joe had a Solo 401(k) Plan established for 2017, Joe would be able to defer approximately $49,000 for 2017 (a $24,000 employee deferral, which could be pre-tax or Roth, and 25% of his compensation giving him $49,000 for the year).   Whereas, if Joe established a SEP IRA, Joe would only be able to defer approximately $25,000 (25% if his compensation) for 2017.

2. No catch-up Contributions: With a Solo 401(k) Plan you can make a contribution of up to $54,000 to the plan each tax year ($60,000 if the participant is over the age of 50).  However, with a SEP IRA, the maximum amount that can be deferred is $54,000 since a SEP IRA does not offer any catch-up contributions.

3. No Roth Feature: A Solo 401(k) plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a SEP IRA, contributions can only be made in pre-tax format.  In addition, a contribution of $18,000 ($24,00, if the plan participant is over the age of 50) can be made to a Solo 401(k) Roth account.

4. Tax-Free Loan Option: With a Solo 401(k) Plan you can borrow up to $50,000 or 50% of your account value, whichever is less.  The loan can be used for any purpose.  With a SEP IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA without triggering a prohibited transaction.

5. Use Nonrecourse Leverage and Pay No Tax: With a Solo 401(k) Plan, you can make a real estate investment using nonrecourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax (IRC 514).  However, the nonrecourse leverage exception found in IRC 514 is only applicable to 401(k) qualified retirement plans and does not apply to IRAs. In other words, using a Self-Directed SEP IRA to make a real estate investment (Self-Directed Real Estate IRA) involving nonrecourse financing would trigger the UBTI tax.

6. Open the Account at Any Local Bank: With a Solo 401(k) Plan, the 401(k) bank account can be opened at any local bank or trust company.  However, in the case of a SEP or a Self-Directed IRA, a special IRA custodian is required to hold the IRA funds.

7. No Need for the Cost of an LLC: With a Solo 401(k) Plan, the plan itself can make real estate and other investments without the need for an LLC, which, depending on the state of formation, could prove costly. Since a 401(k) plan is a trust, the trustee on behalf of the trust can take title to a real estate asset without the need for an LLC.

8. Better Creditor Protection: In general, a Solo 401(k) Plan offers greater creditor protection than a SEP IRA.  The 2005 Bankruptcy Act generally protects all 401(k) Plan assets from creditor attack in a bankruptcy proceeding.  In addition, most states offer greater creditor protection to a Solo 401(k) qualified retirement plan than a SEP IRA outside of bankruptcy.

The Solo 401k plan is unique and so popular because it is designed explicitly for small, owner-only businesses.  The many features of the Solo 401(k) plan discussed above are why the Solo 401(k) Plan or Individual 401(k) Plan is so appealing and popular among self-employed business owners.

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

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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.

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Oct 10

Self-Directing Your Solo 401(k) is Easy!

A Solo 401K Plan, also called a Self-Directed 401K, offers a self employed business owner the ability to use their retirement funds to make almost any type of investment tax-free, including real estate, on their own without requiring custodian consent. Additionally, a Self-Directed 401K Plan will allow you to make high contributions to the Plan (up to $54,000 for plan participants under the age of 50 and $60,000 for plan participants over the age of 50) as well as borrow up to $50,000 for any purpose.

Advantages of Using a Self-Directed 401K

The Self-Directed Solo 401K Plan is such a popular retirement solution for small business owners because the IRS designed it specifically for them. Unlike other 401(k) Plans, which restrict plan investments to just stocks and mutual funds, IRA Financial Group’s Self-Directed 401K Plan is designed specifically to allow plan participants to diversify their retirement portfolio by making traditional as well as non-traditional investments such as real estate and precious metals. The Individual 401K Plan can be adopted by a sole proprietorship, LLC, Partnership, or Corporation.

There are a number of features that make the Self-Directed 401K Plan so appealing and popular among self -employed business owners.

High Contribution Limits: Under the 2017 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $54,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $60,000.

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

Tax-Free Loan:   With a Self-Directed 401K Plan, a plan participant is eligible to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying personal expenses such as credit card bills, mortgage payments, personal or business investments, a car, vacation, or anything else. The loan has to be paid back over a five-year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate). There is no pre-payment penalty.

Checkbook Control”: One of the most popular aspects of the Self-Directed 401K Plan is that it does not require the participant to hire a bank or trust company to serve as trustee. Unlike, an IRA which requires a financial institution to serve as trustee and custodian of the IRA, in the case of a Self-Directed 401K Plan, the plan account can be opened at any local bank or credit union and the plan participant can serve as trustee of the Self-Directed 401K. This flexibility allows the plan participant (you) to gain “checkbook control” over your retirement funds. In essence, all assets of the Self-Directed 401K Plan will be under the sole authority of the 401k participant.  A Self-Directed 401K plan allows you to eliminate the expense and delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself. With a Self-Directed 401K Plan, making a 401K Plan investment is as simple as writing a check.

A World of Investment Opportunity: With a Self-Directed 401K, you will be able to invest in almost any type of investment opportunity that you discover, including: Real Estate (rentals, foreclosures, raw land, tax liens etc.), Private Businesses, Precious Metals, Hard Money & Peer to Peer Lending as well as stock and mutual funds; you’re only limit is your imagination. The income and gains from these investments will flow back into your Self-Directed 401K Plan tax-free!

Self-Directed 401KUse Leverage Tax-Free:   When an IRA buys real estate that is leveraged with nonrecourse mortgage financing, it creates Unrelated Debt Financed Income (a type of Unrelated Business Taxable Income) on which taxes must be paid pursuant to Internal Revenue Code Section 514. A Self-Directed 401K plan is generally exempt from UDFI. What this means is that unlike an IRA, Internal Revenue Code Section 514(c)(9), allows a Self-Directed 401K plan to use nonrecourse leverage to make a real estate acquisition without tax or penalty.

Roth Contributions: The Self-Directed 401K Plan contains a built in Roth sub-account which can be contributed to without any income restrictions. A Self-Directed 401K Plan will allow you to make pre-tax and/or after-tax (Roth) employee deferral contributions to your Plan.

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

Roth Conversion: The Self-Directed 401K Plans allows for the conversion of pre-tax 401K funds to an after-tax Roth sub-account. However, the 401K Plan participant must pay income tax on the amount converted.

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

Asset & Creditor Protection: In the case of a bankruptcy, the general exemption found in section 522 of the Bankruptcy Code, 11 U.S.C. §522, provides an unlimited exemption for retirement assets exempt from taxation for Section 401(a) (tax qualified retirement plans—pensions, profit-sharing and section 401(k) plans). Thus, ERISA qualified plans as well as Self-Directed 401K plans are afforded full bankruptcy exemption. Outside of bankruptcy, state law will govern whether Self-Directed Solo 401K Plan assets are protected from creditors. Most states will provide protection for Self-Directed Solo 401K Plan assets from creditors outside of the bankruptcy context.

IRA Financial Group will take care of setting up your entire Self-Directed 401K Plan. 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 time it takes your current retirement asset custodian to move the funds to the new Self-Directed 401K Plan account. Our tax and ERISA professionals are on-site greatly reducing the set-up time and cost. Most importantly, each client of the IRA Financial Group is assigned a retirement tax professional to help with the establishment of the Self-Directed 401K Plan.

For additional information on the Self-Directed 401(k) Plan, please contact us at 800-472-0646.

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Oct 05

How Are Roth 401(k) Distributions Taxed?

How Are Roth 401(k) Distributions Taxed?All distributions from Roth 401(k) plans are either qualified distributions or nonqualified distributions. If the distribution is a qualified distribution, the early distribution tax does not apply. Qualified distributions must satisfy two key elements – 1) The account must have been open for at least five years and 2) you must be at least age 59 1/2. The early distribution tax applies only to those distributions that are subject to income tax. Because all qualified distributions from Roth 401(k) Plans are tax free, they are also exempt from the early distribution tax as well.

 

A “ qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

For more information about the benefits of the Roth 401(k) plan, please contact a 401(k) Expert from the IRA Financial Group @ 800.472.0646.

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Oct 02

Non-Deductible Solo 401(k) Contribution Strategy

The Secret Way to Boost Your Annual 401(k) Plan Contributions

In the case of an IRA, most people know that IRA contributions can be made in pre-tax, after-tax, or Roth. However, it is not widely known that a Solo 401(k) plan can allow you to make non-deductible plan contributions based off your income on a dollar for dollar basis.

Types of Plan Contributions

A contribution to a pre-tax 401(k) plan is a tax-deductible contribution; however, it is subject to tax when distributed. Unlike pre-tax elective contributions, a Roth 401(k) plan contribution is an after-tax contribution that is currently includible in gross income but generally tax-free when distributed. Whereas, when after-tax plan contributions are made from an employee’s compensation (other than Roth contributions), then an employee must include it as income on his or her tax return.

Non-Deductible 401(k) Plan Contribution Tax Strategy

Non-Deductible Solo 401(k) Contribution StrategyGenerally, when an individual is over the age of 50, he or she is able to make employee deferrals in a pre-tax fund or Roth of up to $18,000 or $24,000. A profit sharing contribution can be made in pre-tax funds in the amount equal to 25% of compensation (20% in case of self-employment or a single member LLC), and both contributions cannot exceed $54,000 or $60,000 in the aggregate for 2017. An after-tax deferral, (neither Roth or pre-tax), is also an option that can go up to $54,000 or $60,000 and include other plan contributions such as employee deferrals and profit sharing. For example, if a 40-year-old self-employed individual earns $100,000 in 2017, he or she would be able to make a maximum employee deferral contribution of $18,000 in pre-tax funds or Roth and make an after-tax contribution dollar-for dollar equal to $36,000. This is the difference between $54,000 (the maximum annual 401(k) contribution for 2017) and $18,000, the maximum employee deferral contributions limit. Those contributions can then be converted to a Roth. The advantage of making after-tax contributions versus a profit sharing contribution is that you can make a dollar for dollar contribution as opposed to a profit sharing contribution, which is based off a percentage of your compensation (20% or 25%). If a profit sharing contribution were made instead of an after-tax contribution, the individual would only be able to make a $20,000 contribution, giving him or her an annual contribution of just $38,000 versus $54,000 if employee deferrals were combined with after-tax contributions.

Is the Nondeductible 401(k) Contribution Option New?

No, Non-deductible 401(k) plan contributions are not new, but new IRS regulations (Notice 2014-54) make after-tax contributions more appealing and allows the retiree to effectively segregate the after-tax assets from the pre-tax funds. The pre-tax funds can be rolled into a Traditional IRA, whereas the after-tax dollars can be converted into a Roth IRA.

Do All Solo 401(k) Plans Allow for Non-Deductible contributions?

No. You must check the 401(k) plan documents to confirm that the plan allows for non-deductible contributions. IRA Financial Group’s Solo 401(k) Plan allows for non-deductible contributions, in addition to pre-tax and Roth contributions.

For additional information on making non-deductible contributions to a Solo 401(k) plan, please contact one of our Solo 401(k) plan experts at 800-472-0646.

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Sep 27

IRA Financial Group Introduces New Solo 401(k) Plan Bitcoin Solution For Retirement Account Investors

Solo 401(k) Plan option offers retirement account holders the ability to trade or hold Bitcoins and other cryptocurrency without tax

IRA Financial Group, the leading provider of Solo 401(k) Plan solutions, is proud to announce the introduction of the Bitcoin Solo 401(k) Plan option to all retirement account holders. IRA Financial Group’s Bitcoin Solo 401(k) Plan solution will allow retirement account holders to buy, sell, or hold Bitcoins and other cryptocurrency assets and generate tax-deferred or tax-free gains, in the case of a Roth Solo 401(k) Plan. “Bitcoins have become a popular investment diversification option for many of our Solo 401(k) Plan investors in 2017, who are interested in using a tax-efficient manner to buy and sell Bitcoins,” stated Adam Bergman, a partner with the IRA Financial Group.

IRA Financial Group Introduces New Solo 401(k) Plan Bitcoin Solution For Retirement Account InvestorsAccording to Mr. Bergman, IRA Financial Group’s Solo 401(k) Plan Bitcoin solution is so attractive to Bitcoin investors because it gives them the control to buy, hold, or sell Bitcoins themselves. The primary advantage of using a Solo 401(k) Plan to make Bitcoin investments is that all income and gains associated with the Solo 401(k) investment grow tax-deferred or tax-free, in the case of a Roth Solo 401(k).

IRA Financial Group’s Bitcoin Solo 401(k) Plan for cryptocurrency investors is an IRS approved structure that allows one to use their retirement funds to make Bitcoin and other investments tax-free and without custodian consent.

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

Adam Bergman, IRA Financial Group partner, has written six books on the topic of self-directed retirement plans, including, “The Checkbook IRA”, “Going Solo”, “Turning Retirement Funds into Start-Up Dreams”, “Solo 401(k) Plan in a Nutshell”, “Self-Directed IRA in a Nutshell”, and “In God We Trust in Roth We Prosper”. Mr. Bergman is also the founder of The IRA Financial Trust Company, a Self-Directed IRA custodian.

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

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Sep 18

Investing in Real Estate with a Self-Directed Solo 401k Plan

Most people mistakenly believe that their 401(k) must be invested in bank CDs, the stock market, or mutual funds. Few Investors realize that the IRS has always permitted real estate to be held inside 401(k) retirement accounts. Investments in real estate with a Solo 401(k) are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA). IRS rules permit you to engage in almost any type of real estate investment, aside generally from any investment involving a disqualified person.

Advantages of Using a Solo 401(k) to Purchase Real Estate

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

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

Types of Real Estate Investments

Below is a partial list of domestic or foreign real estate-related investments that you can make with a Solo 401(k):

  • Raw land
  • Residential homes
  • Commercial property
  • Apartments
  • Duplexes
  • Condos/townhomes
  • Mobile homes
  • Real estate notes
  • Real estate purchase options
  • Tax liens certificates
  • Tax deeds

Investing in Real Estate with a Solo 401(k) is Quick & Easy!

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

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

Solo 401K Solution

Structuring the Purchase of Real Estate with a Solo 401(k) Plan

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

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

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

2. Partner with Family, Friends, Colleagues

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

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

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

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

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

3. Borrow Money for your Solo 401(k)

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

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

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

Note: Unlike a Self-Directed IRA LLC, pursuant to Internal Revenue Code Section 514(c)(9), in the case of a Solo 401(k) Plan, the Unrelated Business Income Tax (UBTI) does not apply when using nonrecourse leverage as part of a real estate transaction (unrelated debt-financed income – UDFI). Therefore, unlike a Self-Directed IRA LLC, using a Solo 401K to finance a real estate investment will not trigger UBTI – which imposes a tax in the range of 40% for 2017 on all income/gains relating to the debt financed portion of the investment.

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

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Sep 12

What Advantages Does ROBS Have When Starting a 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;

What Advantages Does ROBS Have When Starting a Business?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 2014.

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

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