Nov 02

Learn Everything You Need to Know About a Solo 401(k) Plan

With a Solo 401(k) Plan – Make High Contributions, Borrow up to $50,000, and use your retirement funds to invest in real estate and much more tax free!

IRS Approved PlanIn 1981, the IRS formally described the rules for 401k Plans. The Solo 401(k) Plan is an IRS approved type of qualified plan. The Solo 401k plan” is not a new type of plan. It is a traditional 401k plan covering only one employee. The plans have the same rules and requirements as any other 401(k) plan. The surging interest in these Solo 401k plans is a result of the EGTRRA tax law change that became effective in 2002.

Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no incentive for an owner-only business to establish a 401(k) plan because the business owner could generally receive the same benefits by adopting a profit sharing plan or SEP IRA. However, EGTRRA changed everything and turned the Solo 401(k) Plan into the most popular retirement plan for the self-employed. EGTRRA cleared the way for an owner-only business to defer more money into a retirement plan and to operate a more cost-effective, less complex type of plan. One of the key features of EGTRRA was that it added the employee deferral feature founded in a traditional multiple employee 401(k) Plan to the Solo 401(k) Plan. This feature turned the Solo 401(k) Plan into the retirement vehicle that provided the highest contribution benefits to the self-employed.

A Solo 401k plan is perfect for any sole proprietor, consultant, or independent contractor. A Solo 401(k) Plan offers the same abilities as a Self-Directed IRA LLC, but without having to hire a custodian or create an LLC. With the IRS approved Solo 401(k) Plan, roll over your existing IRA or 401(k) plan funds tax-free into a new Solo 401(k) Plan and use those funds to make tax-deferred investments, such as real estate, while also gaining the ability to borrow up to $50,000 as well as make annual plan contributions up to $60,000 – almost 10 times the amount of an IRA.

The Solo 401(k) Plan – The Ultimate Retirement & Investment Solution

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.  Unlike a Traditional IRA, which only allows an individual to contribute $5500 annually or $6500 if the individual is over the age of 50, a Solo 401k 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 Traditional 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 Traditional IRA for a self-employed individual.

1. Maximize Your Retirement Nest Egg: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a Traditional IRA has a very low annual contribution limit.

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 Traditional IRA would only allow an individual with earned income during the year to contribute up to $5500, $6500 is the individual is over the age of 50.

2. Open Architecture Plan: IRA Financial Group’s Solo 401(k) Plan is an open architecture, self-directed plan that will allow you to make traditional as well as nontraditional investments, such as real estate by simply writing a check.  As trustee of the Solo 401(k) Plan, you will have “checkbook control” over your retirement assets and make the investments you want when you want.

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

3. Borrow-Up to $50,000 Tax-Free: With a Solo 401K 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 Traditional IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA without triggering a prohibited transaction.

It's Time To Let 401(k) Holders Invest Like the Pros 4. Buy Real Estate with Leverage Tax-Free: 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 an IRA to make a real estate investment (Self Directed Real Estate IRA) involving nonrecourse financing would trigger the UBTI tax.

5. No Need to Establish 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.

6. Strong Creditor Protection:  In general, a Solo 401(k) Plan offers greater creditor protection than a Traditional 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 Traditional IRA outside of bankruptcy.

7. Easy Administration: With a Solo 401(k) Plan there is no annual tax filing or information returns for any plan that has less than $250,000 in plan assets.  In the case of a Solo 401(k) Plan with greater than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed.  The tax professionals at the IRA Financial Group will help you complete the IRS Form.

8. IRS Audit Protection:  The Solo 401(k) Plan is an IRS approved qualified retirement plan.  IRA Financial Group’s Solo 401(k) Plan comes with an IRS opinion letter which confirms the validity of the plan and is a safeguard against any potential IRS audit.

9. Roth After-Tax Benefit: A Solo 401k plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a Traditional IRA, contributions can only be made in pre-tax format.  In addition, a contribution of $18,000 ($24,000, if the plan participant is over the age of 50) can be made to a Solo 401(k) Roth account.

The Solo 40IK Solution

A Solo 401k Plan offers a self-employed business owner the ability to use his or her retirement funds to make almost any type of Solo 401k Planinvestment, including real estate, tax liens, private businesses, precious metals, and foreign currency on their own without requiring custodian consent tax-free! In addition, a Solo 401k Plan will allow you to make high contributions (up to $60,000) as well as borrow up to $50,000 for any purpose. Have an investment opportunity, such as real estate or a business investment that you would love to make with your 401k funds? Want the ability to make high tax-deductible or Roth contributions? Need to access up to $50,000 of your retirement funds for personal use? Then the Solo 401k Plan is your solution!

With IRA Financial Group’s Solo 401k Plan– you now can:

  • Make maximum contributions nearly 10 times higher than the IRA.
  • For 2017, contribute up to $54,000 per year or $60,000 if you are over age 50. If your spouse is involved in the business, they can contribute an additional $54,000 (or $60,000 if they are over the age of 50) per year.
  • Invest in real estate, private companies, precious metals, and virtually anything else.
  • Borrow up to $50,000 from your Solo 401k Plan for any purpose.
  • No need to hire a custodian.
  • Gain control of your retirement funds – serve as trustee of the Solo 401k Plan.
  • Make Roth contributions to your Solo 401k Plan.
  • Use non-recourse leverage to purchase real estate without penalty or tax with your Solo 401k Plan.
  • Maintain a qualified retirement plan and help save for the future.
  • Diversify your retirement portfolio with a Solo 401k Plan!
  • Access your retirement funds to make the investments you want when you want tax-free!
  • Help grow your retirement funds tax-free with a Solo 401k Plan!
  • Make investment quickly without delay with a Solo 401k!
  • Make Solo 401k Plan investment decisions without requiring custodian consent!
  • Work directly with our retirement tax professionals to establish an IRS compliant Solo 401K Plan structure that works best for you and your investment goals.

Our Solo 401k Plan Establishment Service Includes:

  • Solo 401k Adoption Agreement
  • Solo 401k Basic Plan Document
  • EGTRRA Amendment
  • Solo 401k Summary Plan Description
  • Trust Agreement
  • Appointment of Trustee
  • Action by Board of Directors
  • Beneficiary Designation
  • Solo 401k Loan Procedure
  • Solo 401k Loan Documentation
  • Election Not To Participate
  • Transfer Request Forms for incoming funds transfers
  • Newly assigned Employer Identification Number from the IRS
  • IRS Determination letter stating that this is a Prototype Plan that meets the requirements of a qualified plan
  • Free tax and ERISA support on the Solo 401k Plan structure
  • Direct access to our on-site retirement tax professionals
  • Satisfaction Guaranteed!

We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new Solo 401k Plan within 24 hours.

Why Work 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. Over the years, we have helped thousands of clients establish self-directed Solo 401(k) Plans. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and ERISA knowledge in this area is unmatched.

To learn more about the advantages of using a Solo 401(k) Plan, please contact one of our Solo 401(k) Plan experts at 800-472-0646 for more information.

You can use Solo 401(k) Plan funds to invest in a friend's business.

The Solo 401k Plan offers a self-employed business owner the ability to use his or her retirement funds to make almost any type of investment, including real estate, tax liens, private businesses, precious metals, and foreign currency, on their own without requiring custodian consent and tax-free! For more information on the Solo 401k Plan, check out the books by IRA Financial Group’s Adam Bergman entitled “Going Solo – America’s Best-Kept Retirement Secret For The Self-Employed” and “Solo 401(k) In A Nutshell” available on Amazon.

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Feb 20

The Legality of the Individual 401k Plan

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

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

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

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

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

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

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

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

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Jan 17

If You Have Self-Employment Income, You Need a Solo 401k Plan

401k plans are defined in the Internal Revenue Code (Section 401) as retirement savings trusts. A 401(k) Plan is an IRS approved qualified retirement plan. As the name implies, the Solo 401(k) plan is an IRS approved qualified 401(k) plan designed for a self-employed individual or the sole owner-employee of a corporation. It works best when there are no other employees or a very small number of employees.

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was passed. This act clarified how a 401(k) could be used by a self employed person who has no full time employees. It also clarified that the self-employed 401(k) participant can make contributions as the role of employee and employer resulting in very high contribution limits.

To access these benefits an investor must meet two eligibility requirements:

1. The presence of self employment activity.

2. The absence of full-time employees.

A Solo 401(k) offers a self-employed business owner the ability to use his or her retirement funds to make virtually any type of investment on their own without requiring the consent of a custodian. The IRS only describes the type of investments that are prohibited, which are very few. In addition, a Solo 401(k) plan offers a high annual contribution limit (up to $60,000), allows you to borrow up to $50,000 for any purpose, and imposes no custodian fees.

The Advantages of Using a Solo 401(k)?

The Solo 401(k) plan offers most of the characteristics of the Self Directed IRA LLC, including having the ability to make almost any type of investments, including real estate, but without the need to establish an LLC or pay custodian fees.  The Solo 401(k) Plan is the most tax-advantageous retirement plan available because of its very high annual contribution limits. The Solo 401K plan also allows you to borrow money from your retirement funds (up to $50,000) and use the funds for any purpose, including help finance your business or pay personal bills.

Am I Eligible to use the Solo 401K Plan?

The Solo 401(k) plan may be used by any individual who is already a business owner or who will be establishing a business and does not have, or plan to have, full-time employees. The Solo 401(k) plan is perfect for independent contractors, such as consultants, home businesses and real estate agents. The owner’s spouse may also contribute to the plan as long as he or she is an employee of the business.

Use the Solo 401K Plan to Take out a Loan

One of the advantages of the Solo 401K plan is that it allows you to take out a loan from your retirement account. Under Internal Revenue Code Section 72(p), a Solo 401(k) Plan participant is permitted to borrow up to 50% of the total 401(k) value or $50,000 whichever is less tax-free for any reason. Repayment of the loan is based on a schedule provided when the loan is initiated and must be paid back into the account (including interest) over a term of up to five years. Loan payments must be made at least quarterly and at a minimum interest rate of Prime (as of 1/1/17, the Prime interest rate as per the Wall Street Journal is 3.75%). Failure to make the loan payments may cause a loan default causing taxes and IRS penalties.

For Real Estate Investors

Like the Self-Directed IRA LLC structure, the Solo 401K Plan offers participants the ability to invest in real estate tax-free! All income and gains generated by the investment will flow back to the 401(k) Plan tax-free!

In addition, in the case of an IRA using nonrecourse debt to finance a real estate purchase (only nonrecourse debt is permitted as recourse debt associated with an IRA investment would trigger a prohibited transaction), income or gains generally from the investment would trigger a penalty tax called the Unrelated Debt Financed Income (UDFI) tax. UDFI is a type of unrelated business taxable income which if triggered could subject the IRA to close to a 40% tax for 2017. However, a 401(k) Plan using nonrecourse financing for a real estate investment is exempt from the UDFI tax (Internal Revenue Code Section 514(c)(9).

How do I Initially fund the Solo 401K Plan?

Like the Self-Directed IRA LLC, to initially fund the Solo 401(k) you may rollover funds from Traditional IRAs, SEP Plans, previous employer 401(k) plans, Money Purchase plans, Profit Sharing plans, Keogh plans, Defined Benefit plans, 403(b) plans and Rollover IRAs tax-free! This is accomplished by setting up a Trust account for the Solo 401(k) and directly transferring the funds from the current Custodian to the trust bank account. The trust account can be opened at any local bank or credit union.

How much Money Can I Contribute to the Solo 401K 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.

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

The Trustee

For a Solo 401K plan, a Trustee must be designated to hold the assets of the retirement plan. In the case of the Solo 401(k), you are able to act as your own Trustee and are responsible for investing trust assets prudently and productively. In other words, as Trustee of the 401(k) Plan, you will have “Checkbook Control” over the Plan assets allowing you to make investments by simply writing a check from your 401(k) Trust account. As a result, the Solo 401(k) Plan is perfect for making real estate or tax lien investments. Note – The Trustee is prohibited from benefiting directly from the trust and cannot co-mingle personal funds with the trust or enter into a transaction with the trust.

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

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Nov 18

Should You Choose a Solo 401k or 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 $59,000 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 2016 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000.

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 $53,000 for 2016. 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 2016.  If Joe had a Solo 401(k) Plan established for 2016, Joe would be able to defer approximately $49,000 for 2016 (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 2016.

2. No catch-up Contributions: With a Solo 401(k) Plan you can make a contribution of up to $53,000 to the plan each tax year ($59,000 if the participant is over the age of 50).  However, with a SEP IRA, the maximum amount that can be deferred is $53,000 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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Aug 01

Why Choose a Self Directed 401(k) Over a Self Directed IRA

A Self Directed 401(k), also known as 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 401k Plan covering only one employee.  Unlike a Traditional IRA, which only allows an individual to contribute $5500 annually or $6500 if the individual is over the age of 50, a Solo 401k Plan offers the Plan participant the ability to contribute up to $59,000 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 Traditional IRA or 401(k) Plan.

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

1. Reach your Maximum Contribution Amount Quicker: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a Traditional IRA has a very low annual contribution limit.

Under the 2016 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000.

Why Choose a Self Directed 401(k) Over a Self Directed IRAFor plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000.

Whereas, a Traditional Self-Directed IRA would only allow an individual with earned income during the year to contribute up to $5500, $6500 if the individual is over the age of 50.

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 2016.  If Joe had a Solo 401(k) Plan established for 2016, Joe would be able to defer approximately $49,000 for 2016 (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 Traditional Self-Directed IRA, Joe would only be able to defer approximately $6,500 for 2016.

2. No Roth Feature: A Solo 401k Plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a Traditional Self-Directed 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.

3. Tax-Free Loan Option: With a Solo 401K Plan, you can borrow up to $50,000 or 50% of your account value, what ever is less.  The loan can be used for any purpose.  With a Traditional Self-Directed IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA without triggering a prohibited transaction.

4. 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.

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

6. 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.

7. Better Creditor Protection: In general, a Solo 401(k) Plan offers greater creditor protection than a Traditional 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 Traditional Self-Directed IRA outside of bankruptcy.

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

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

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May 31

The Solo 401k Rules

With a Solo 401k Plan – Make High Contributions, Borrow up to $50,000, and use your retirement funds to invest in real estate and much more tax free!

IRS Approved PlanIn 1981, the IRS formally described the rules for 401k Plans. The Solo 401k Plan is an IRS approved type of qualified plan. The Solo 401k plan” is not a new type of plan. It is a traditional 401k plan covering only one employee. The plans have the same rules and requirements as any other 401k plan. The surging interest in these Solo 401k plans is a result of the EGTRRA tax law change that became effective in 2002.

Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no incentive for an owner-only business to establish a 401(k) plan because the business owner could generally receive the same benefits by adopting a profit sharing plan or SEP IRA. However, EGTRRA changed everything and turned the Solo 401(k) Plan into the most popular retirement plan for the self-employed. EGTRRA cleared the way for an owner-only business to defer more money into a retirement plan and to operate a more cost-effective, less complex type of plan. One of the key features of EGTRRA was that it added the employee deferral feature founded in a traditional multiple employee 401(k) Plan to the Solo 401(k) Plan. This feature turned the Solo 401(k) Plan into the retirement vehicle that provided the highest contribution benefits to the self-employed.

A Solo 401k plan is perfect for any sole proprietor, consultant, or independent contractor. A Solo 401(k) Plan offers the same abilities as a Self-Directed IRA LLC, but without having to hire a custodian or create an LLC. With the IRS approved Solo 401(k) Plan, roll over your existing IRA or 401(k) plan funds tax-free into a new Solo 401(k) Plan and use those funds to make tax-deferred investments, such as real estate, while also gaining the ability to borrow up to $50,000 as well as make annual plan contributions up to $59,000 – almost 10 times the amount of an IRA.

The Solo 401(k) Plan – The Ultimate Retirement & Investment Solution

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.  Unlike a Traditional IRA, which only allows an individual to contribute $5500 annually or $6500 if the individual is over the age of 50, a Solo 401k Plan offers the Plan participant the ability to contribute up to $59,000 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 Traditional 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 Traditional IRA for a self-employed individual.

1. Maximize Your Retirement Nest Egg: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a Traditional IRA has a very low annual contribution limit.

Under the 2016 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000.

Whereas, a Traditional IRA would only allow an individual with earned income during the year to contribute up to $5500, $6500 is the individual is over the age of 50.

2. Open Architecture Plan.   IRA Financial Group’s Solo 401(k) Plan is an open architecture, self-directed plan that will allow you to make traditional as well as nontraditional investments, such as real estate by simply writing a check.  As trustee of the Solo 401(k) Plan, you will have “checkbook control” over your retirement assets and make the investments you want when you want.

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

3. Borrow-Up to $50,000 Tax-Free: With a Solo 401K 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 Traditional IRA, the IRA holder is not permitted to borrow even $1 dollar from the IRA without triggering a prohibited transaction.

It's Time To Let 401(k) Holders Invest Like the Pros 4. Buy Real Estate with Leverage Tax-Free: 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 an IRA to make a real estate investment (Self Directed Real Estate IRA) involving nonrecourse financing would trigger the UBTI tax.

5. No Need to Establish 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.

6. Strong Creditor Protection.  In general, a Solo 401(k) Plan offers greater creditor protection than a Traditional 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 Traditional IRA outside of bankruptcy.

7. Easy Administration.  With a Solo 401(k) Plan there is no annual tax filing or information returns for any plan that has less than $250,000 in plan assets.  In the case of a Solo 401(k) Plan with greater than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed.  The tax professionals at the IRA Financial Group will help you complete the IRS Form.

8. IRS Audit Protection.  The Solo 401(k) Plan is an IRS approved qualified retirement plan.  IRA Financial Group’s Solo 401(k) Plan comes with an IRS opinion letter which confirms the validity of the plan and is a safeguard against any potential IRS audit.

9. Roth After-Tax Benefit. A Solo 401k plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a Traditional IRA, contributions can only be made in pre-tax format.  In addition, a contribution of $18,000 ($24,000, if the plan participant is over the age of 50) can be made to a Solo 401(k) Roth account.

The Solo 401K Solution

A Solo 401k Plan offers a self-employed business owner the ability to use his or her retirement funds to make almost any type of Solo 401k Planinvestment, including real estate, tax liens, private businesses, precious metals, and foreign currency on their own without requiring custodian consent tax-free! In addition, a Solo 401k Plan will allow you to make high contributions (up to $59,000) as well as borrow up to $50,000 for any purpose. Have an investment opportunity, such as real estate or a business investment that you would love to make with your 401k funds? Want the ability to make high tax-deductible or Roth contributions? Need to access up to $50,000 of your retirement funds for personal use? Then the Solo 401k Plan is your solution!

With IRA Financial Group’s Solo 401k Plan– you now can:

  • Make maximum contributions nearly 10 times higher than the IRA.
  • For 2016, contribute up to $53,000 per year or $59,000 if you are over age 50. If your spouse is involved in the business, they can contribute an additional $53,000 (or $59,000 if they are over the age of 50) per year.
  • Invest in real estate, private companies, precious metals, and virtually anything else.
  • Borrow up to $50,000 from your Solo 401k Plan for any purpose.
  • No need to hire a custodian.
  • Gain control of your retirement funds – serve as trustee of the Solo 401k Plan.
  • Make Roth contributions to your Solo 401k Plan.
  • Use non-recourse leverage to purchase real estate without penalty or tax with your Solo 401k Plan.
  • Maintain a qualified retirement plan and help save for the future.
  • Diversify your retirement portfolio with a Solo 401k Plan!
  • Access your retirement funds to make the investments you want when you want tax-free!
  • Help grow your retirement funds tax-free with a Solo 401k Plan!
  • Make investment quickly without delay with a Solo 401k!
  • Make Solo 401k Plan investment decisions without requiring custodian consent!
  • Work directly with our retirement tax professionals to establish an IRS compliant Solo 401K Plan structure that works best for you and your investment goals.

Our Solo 401k Plan Establishment Service Includes:

  • Solo 401k Adoption Agreement
  • Solo 401k Basic Plan Document
  • EGTRRA Amendment
  • Solo 401k Summary Plan Description
  • Trust Agreement
  • Appointment of Trustee
  • Action by Board of Directors
  • Beneficiary Designation
  • Solo 401k Loan Procedure
  • Solo 401k Loan Documentation
  • Election Not To Participate
  • Transfer Request Forms for incoming funds transfers
  • Newly assigned Employer Identification Number from the IRS
  • IRS Determination letter stating that this is a Prototype Plan that meets the requirements of a qualified plan
  • Free tax and ERISA support on the Solo 401k Plan structure
  • Direct access to our on-site retirement tax professionals
  • Satisfaction Guaranteed!

We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new Solo 401k Plan within 24 hours.

Why Work 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. Over the years, we have helped thousands of clients establish self-directed Solo 401(k) Plans. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and ERISA knowledge in this area is unmatched.

To learn more about the advantages of using a Solo 401(k) Plan, please contact one of our Solo 401(k) Plan experts at 800-472-0646 for more information.

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Feb 16

Choosing Between a Solo 401k Plan and 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 Simplified Employee Pension or SEP IRA, a Solo 401(k) Plan offers the plan participant the ability to contribute up to $59,000 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 2016 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000.

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 $53,000 for 2016. 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 2016.  If Joe had a Solo 401(k) Plan established for 2016, Joe would be able to defer approximately $49,000 for 2016 (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 2016.

2. No catch-up Contributions: With a Solo 401(k) Plan you can make a contribution of up to $53,000 to the plan each tax year ($59,000 if the participant is over the age of 50).  However, with a SEP IRA, the maximum amount that can be deferred is $53,000 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 (UDFI) 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 401(k) 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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Nov 24

Solo 401(k) Plans and ERISA

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

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

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

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

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

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

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

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

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Jul 17

Solo 401k or SIMPLE IRA?

A SIMPLE IRA plan is similar to a Solo 401(k) Plan in that it is funded by employee deferrals and additional employer contributions. However, unlike a Solo 401(k) Plan, a SIMPLE IRA plan uses an IRA-type trust to hold contributions for each employee, rather than a single plan trust that is typical of a traditional employer 401(k) Plan. A SIMPLE IRA can be opened with a bank, insurance company or other qualified financial institution. However, unlike a Solo 401(k) Plan, the employee owns and controls the SIMPLE IRA.

Solo 401k or SIMPLE IRA?SIMPLE IRA

A SIMPLE IRA plan can be established by any employer who has less than 100 employees, who will receive at least $5,000 in compensation from the employer in the proceeding calendar year. The SIMPLE IRA plan has a lower deferral limit than a Solo 401(k) Plan. However, unlike a Solo 401(k) Plan, the SIMPLE IRA plan uses an IRA-style trust to hold SIMPLE IRA contributions for each employee, rather than the a single plan like a 401(k) Plan or other qualified retirement plan.

Solo 401(k) Plan

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.   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 the SEP IRA or SIMPLE 401(k) Plan.

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

1. Higher Contributions: A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SIMPLE IRA only offers minimal employee deferral opportunities.

Under the 2015 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000, an increase of $1,000 from 2014.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000, an increase of $1,500 from 2014.

Whereas, a SIMPLE IRA has a lower deferral limit of $11,500 for 2015, plus a $2,500 catch-up contribution. In addition, the employer must provide either a dollar-for-dollar contribution of up to three percent of compensation to all who defer or a two percent non-elective contribution to all employees who are eligible to participate in the plan and who have earned $5,000 or more in compensation from the employer during the year.

Hence, a participant in a SIMPLE IRA would be significantly limited in the amount of annual deferrals to be made to the retirement account in comparison to a Solo 401(k) Plan participant.

2. Reduced Catch-Up Contribution amount: With a Solo 401(k) Plan, for 2015, a plan participant who is over the age of 50 is able to make a catch-up contribution of up to $6,000. Whereas, with a SIMPLE IRA, the maximum annual contribution limit for 2015 is just $2,500.

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 SIMPLE 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 SIMPLE IRA, the IRA holder is not permitted to borrow even one dollar from the SIMPLE 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 SIMPLE IRA to make a real estate investment (Self Directed Real Estate IRA) involving nonrecourse financing would trigger the UBTI tax.

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

6. 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.

7. Better Creditor Protection: In general, a Solo 401(k) Plan offers greater creditor protection than a SIMPLE 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 SIMPLE IRA outside of bankruptcy.

The Solo 401(k) 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 SIMPLE IRA, please contact a tax professional at 800-472-0646.

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May 19

Is a Solo 401k Better Than 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 $59,000 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 2015 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000, an increase of $1,000 from 2014.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000, an increase of $1,500 from 2014.

Is a Solo 401k Better Than a SEP IRA?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 $53,000 for 2015. 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 2015.  If Joe had a Solo 401(k) Plan established for 2015, Joe would be able to defer approximately $49,000 for 2015 (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 2015.

2. No catch-up Contributions: With a Solo 401(k) Plan you can make a contribution of up to $53,000 to the plan each tax year ($59,000 if the participant is over the age of 50).  However, with a SEP IRA, the maximum amount that can be deferred is $53,000 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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