Nov 07

Are You Eligible for a Self-Employed 401(k) Plan?

A Self-Employed 401(k) Plan, also called a  Solo 401(k) Plan, is well suited for businesses that either do not employ any employees or employee certain employees that may be excluded from coverage. A Solo 401(k) plan is perfect for any sole proprietor, consultant, or independent contractor.

To be eligible to benefit from the Solo 401(k) plan, investor must meet just two eligibility requirements:

1. The presence of self employment activity.

2. The absence of full-time employees.

The Presence of Self Employment Activity

Self employment activity generally includes ownership and operation of a sole proprietorship, Limited Liability Company (LLC), C Corporation, S Corporation, and Limited Partnership where the business intends to generate revenue for profit and make significant contributions to the plan.

Are You Eligible for a Self-Employed 401(k) Plan?Generate Revenue for Profit

There are no established thresholds for how much profit the business must be generated, how much money must be contributed to the plan, or how soon profits and contributions must happen. It is generally believed that the IRS will consider you eligible if the business being conducted is a legitimate business that is run with the intention of generating profits. The self employment activity can be part time, and it can be ancillary to full time employment elsewhere. A person can even participate in an employer’s 401(k) plan in tandem with their own Solo 401(k). In such a case, the employee elective deferrals from both plans are subject to the single contribution limit.

The Absence of Full-Time Employees

Unlike a regular 401(k) plan, a Solo 401K plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees and are not employed by any business owned by them or their spouse (an exception applies if your full-time employee is your spouse). The business owner and their spouse are technically considered “owner-employees” rather than “employees”.

The following types of employees may be generally excluded from coverage:

  • Employees under 21 years of age
  • Employees that work less than a 1000 hours annually
  • Union employees
  • Nonresident alien employees

If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up. However, a Solo 401k eligible business can have part time employees and independent contractors.

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

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Jul 18

The Self-Employed 401k Solution

The Solo 401(k) Plan, also known as the Self-Employed 401(k) Plan, is an IRS approved type of qualified retirement plan which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. The Solo 401(k) plan is not a new type of plan. It is a traditional 401(k) plan covering only one employee.

Solo 401k PlanAs a self-employed business owner you know how important it is to maintain financial security for yourself and your family. The Solo 401(k) is designed for the self-employed and offers powerful features not found in traditional 401k or IRA retirement plans. Tired of being forced to invest in stocks or mutual funds? Have an investment opportunity, such as real estate or a business investment that you would love to make with your 401(k) funds? Then the Solo 401(k) is your solution!

In addition to the tremendous 401(k) benefits (tax-free profits, high tax contribution deductions – up to $59,000, asset protection and estate planning), the Solo 401(k) allows you to invest tax-free in investments that you know and understand and even allows you to borrow up to $50,000 or 50% of the account value for any purpose. Aside from certain “prohibited transaction” investments outlined in Internal Revenue Code Section 4975, a Solo 401(k) Plan can invest in most commonly made investments, including real estate, private business entities, public stocks, private stocks, and commercial paper.

A Solo 401k plan is perfect for any sole proprietor, consultant, or independent contractor. In addition, to being able to make high contributions (up to $59,000 for 2016) and borrow up to $50,000 tax-free, the Solo 401(k) Plan offers the same investment opportunities as a Self Directed IRA LLC, but without having to hire a custodian or create an LLC.

See Why the Solo 401(k) Plan Has Become the Most Popular Retirement Plan for the Self-Employed?

Solo 401k Solution

The Solo 401(k) Plan Advantage

Traditional IRA
SEP IRA
Solo 401K Plan
Maximum Annual Contributions $5,500 or $6,500 if individual is over the age of 50 25% of individual’s compensation up to $53,000 (20% in the case of a self-employed individual) $53,000, or $59,000 if individual is over the age of 50
IRA Custodian Required Yes Yes No – account can be opened at any local bank
Checkbook Control Yes – but only with a Self-Directed IRA LLC which requires the formation of an LLC Yes – but only with a Self-Directed IRA LLC which requires the formation of an LLC Yes – no LLC is required to be formed since the 401(k) Plan Trust is used as the investment vehicle
Loan Feature No No Yes – you can borrow $50,000 or 50% of your account value
Nonrecourse Financing Yes – but the nonrecourse financing would be subject to tax Yes – but the nonrecourse financing would be subject to tax Yes – generally no tax on the nonrecourse financing
Roth Feature No – must establish a Roth IRA which has income restrictions No – must establish a Roth IRA which has income restrictions Yes – no income restrictions

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

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Jul 08

The Self-Employed 401k Plan

A Solo 401K Plan also called a Self-Employed 401K Plan 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. As long as a business exists with no full-time employees other than the owner and his/her spouse, a Self-Employed 401K Plan can be established.

A Self-Employed 401K Plan is perfect for any sole proprietor, consultant, or independent contractor, such as a realtor, doctor, accountant, attorney, dentist, or sales agent. The Self-Employed 401K Plan can be adopted by a sole proprietorship, LLC, Partnership, or Corporation.

There are many reasons why the Self-Employed 401K Plan is considered the most attractive retirement solution for the self-employed.

High Contributions: Under the 2014 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $17,500. 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 $52,000, an increase of $1,000 from 2013.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $23,000. 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 $57,500, an increase of $1,000 from 2013.

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

Tax-Free Loan for any Purpose:   With a Self-Employed 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.

True “Checkbook Control”: One of the most popular aspects of the Self-Employed 401K Plan is that it does not require the participant to hire a bank or trust company to serve as trustee of the Plan. Unlike an IRA, which requires a financial institution to serve as trustee and custodian of the IRA, in the case of a Self-Employed 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 Plan. This flexibility allows the plan participant (you) to gain “checkbook control” over your retirement funds. In essence, all assets of the Individual 401K Plan will be under the sole authority of the 401k participant.  A Self-Employed 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-Employed 401K Plan, making a 401K Plan investment is as simple as writing a check.

Unlocking A World of Investment Opportunity: With a Self-Employed 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 BusinessesPrecious Metals, Hard Money & Peer to Peer Lending as well as stock and mutual funds; your only limit is your imagination. The income and gains from these investments will flow back into your Individual 401K Plan tax-free!

Use Non-recourse 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. An Self-Employed 401K plan is generally exempt from UDFI. In other words, unlike an IRA, Internal Revenue Code Section 514(c)(9), allows an Individual 401K plan to use nonrecourse leverage to make a real estate acquisition without tax or penalty.

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

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

Roth 401K Conversion: The Self-Employed 401K Plans allows for the conversion of pre-tax 401K funds to an after-tax Roth sub-account contained in the Self-Employed 401K Plan. However, the Self-Employed 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 Self-Employed 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 Self-Employed 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 Self-Employed 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-Employed 401K Plan assets are protected from creditors. Most states will provide protection for Self-Employed 401K Plan assets from creditors outside of the bankruptcy context.

IRA Financial Group will take care of setting up your entire Self-Employed 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-Employed 401K Plan account. Our tax and ERISA professionals are on-site greatly reducing the setup 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-Employed 401K Plan.

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

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