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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Aug 08

Solo 401(k) CPA Services for Real Estate Investors

IRA Financial Group is the only full service Solo 401(k) Plan facilitator that offers its clients the ability to consult with our in-house tax accountants and CPAs, in addition, to our tax professions. Our in-house CPAs are specially trained in the taxation of retirement accounts, which allows us to provide our clients with specialized tax advice and offer tax filing and reporting services relating to the use and taxation of 401(k) Plan funds to make investments. Because the Solo 401(k) Plan is governed by a complicated set of IRS and ERISA tax rules, it is crucial to work directly with specially trained tax professionals and CPAs.

Solo 401(k) CPA Services for Real Estate InvestorsThe Taxation of a Solo 401(k) Plan

The one-participant 401(k) plan is not a new type of 401(k) plan. It is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan. The Solo 401(k) Plan is a qualified retirement plan that is governed by Internal Revenue Code Section 401. A Solo 401(k) Plan is a tax-exempt qualified retirement plan. In other words, in general, a Solo 401(k) Plan is not subject to any tax earned on any passive income allocated to the Solo 401(k) Plan.

Annual Tax Reporting Requirement – IRS Form 5500-EZ

A Solo 401(k) plan is generally required to file an annual report on IRS Form 5500-EZ if it has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement.

In-House CPA Services

The IRA Financial Group has designed a specialized Solo 401(k) CPA service, which will offer clients the ability to consult with specialized Solo 401(k) Plan trained CPAs on a wide variety of tax & ERISA matters concerning the Solo 401(k) Plan. Below is a list of some of the services offered by our in-house CPAs:

  • Advising clients regarding Federal Income tax matters concerning the establishment, maintenance, and operation of a Solo 401(k) Plan
  • Advising clients regarding ERISA tax matters concerning the establishment, maintenance, and operation of a Solo 401(k) Plan
  • Advising clients regarding state income tax matters concerning the establishment, maintenance, and operation of a Solo 401(k) Plan
  • Assisting clients with the completion and filing of IRS Form 5500-EZ
  • Assisting clients with the completion and filing of any Federal Income tax Partnership returns in connection with the employer which adopted the Solo 401(k) Plan
  • Assisting clients the completion and filing of any state Income tax returns in connection with the employer which adopted the Solo 401(k) Plan
  • Advising clients on the IRS prohibited transaction rules as they pertain to federal and state tax matters concerning using a Solo 401(k) Plan to make investments
  • Advising clients regarding the Unrelated Business Taxable Income (UBTI or UBIT) rules concerning a Solo 401(k) Plan investment
  • Advising clients regarding the Unrelated Debt Finance Income (UDFI) tax rules concerning a Solo 401(k) Plan investment
  • Assisting clients the completion and filing of the IRS Form 990-T in connection with a Solo 401(k) Plan investment that generates UBTI and/or UDFI
  • Assisting clients with the day-to-day accounting and management of the Solo 401(k) plan investments (QuickBooks)
  • Solo 401(k) Plan annual asset valuation services
  • Advising on the federal and state asset & creditor protection rules relating to the use of a Solo 401(k) Plan

Specialized In-House CPA Service for Real Estate Investors

When it comes to engaging in a real estate transaction with a Solo 401(k) Plan there are a number of important IRS and tax rules that must be followed. For example, IRC Section 4975 prohibits an Plan owner to engage in a transaction that directly or indirectly benefits him/or her or any other “disqualified person”. A “disqualified person” is defined in IRC Section 4975 as the Plan owner and any of his or her lineal descendants, which include parents, children, spouse, daughter-in-laws, and son-in-laws. In addition, a “disqualified person” is not permitted to provide any services or receive any personal benefit from the Solo 401(k) Plan investment. Therefore, IRA Financial Group has specially designed a CPA tax service program for Solo 401(k) Plan investors. The specialized CPA service will offer special federal and state tax advice regarding real estate matters as well will cover federal and state tax reporting and filing obligations. Our specially designed Solo 401(k) Plan real estate CPA service will also offer clients that ability to work with our in-house CPAs to develop an internal accounting system that could keep track of all Solo 401(k) Plan related expenses and income in order to be in a position to properly value the Solo 401(k) Plan assets. The Solo 401(k) Plan real estate CPA service is designed to offer a Solo 401(k) Plan retirement investor with a more detailed accounting of the activities of the Solo 401(k) Plan and its investments.

The tax professionals and CPAs at the IRA Financial Group are committed to making sure your Solo 401(k) Plan solution remains in full IRS and ERISA compliance from establishment through investment.

For more information on IRA Financial Group’s in-house CPA services, please contact a Solo 401(k) Plan expert at 800-472-0646.

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Jul 24

Setting the Record Straight on Solo 401k Plans

The Solo 401(k) Plan is essentially a regular, plain-old, vanilla 401(k) plan that has one participant, who is a self-employed individual, or that person and his or her spouse. There is some misinformation being disseminated about these plans and we would like to set the record straight. We want to let you know what is fact and what is fiction according to the Internal Revenue Service.

A 401(k) plan for a self-employed individual is a new kind of plan.

Fiction

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. The Solo 401(k) Plan is best suited for business owners who do not have any employees, other than themselves and perhaps their spouse.

I can make up to $60,000 of contributions to my 401(k) Plan as employee and employer each year.

Fact

The annual Solo 401k contribution consists of 2 parts, an employee salary deferral contribution and an employer profit sharing contribution. In 2017 the total contribution limit for a Solo 401k is $54,000 or $60,000 if age 50 or older. The total allowable contribution limits are combined to get the maximum Solo 401k 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.

Employee Elective Deferrals

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.

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).

Employer Profit Sharing Contributions

Through the role of employer, an additional contribution can be made to the plan in an amount up to 25% of the participant’s K-1 or self-employment compensation (20% in the case of a Sole Proprietor or Schedule C Tax Payer).

Total Limit

In 2017, the maximum solo 401(k) plan contribution limitation is $54,000 and $60,000 for plan participants over the age of 50.

If the business owner’s spouse elects to participate in the Solo 401(k) and earns compensation from the business, the spouse is allowed to make separate and equal contributions increasing the couples’ annual total contribution to $108,000 for 2017 or $120,000 if both spouses over age 50.

Solo 401k contributions are flexible. Both the salary deferral and the profit sharing contributions are optional and can be changed at any time based on business profitability.

A Solo 401k participant can contribute to the plan as an employee and as employer.

As a Trustee of the Solo 401(k) Plan I can make investments in traditional and non-traditional investments, such a real estate.

Fact

A Solo 401(k) offers a self-employed business owner the ability to use their retirement funds to make almost any type of investment on their own, including real estate, tax liens, and precious metals without requiring the consent of any custodian or person.

Unlike an IRA, I can use a nonrecourse loan to purchase real estate with my 401(k) Plan?

Fact

When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (a type of Unrelated Business Taxable Income) on which taxes must be paid. A Solo 401(k) plan is exempt from UDFI pursuant to Section 514.

I can borrow the lesser of $50,000 or 50% of my 401(k) account value for any purpose?

Fact

A Solo 401k loan is permitted at any time using the accumulated balance of the solo 401k as collateral for the loan. A Solo 401(k) participant can borrow up to either $50,000 or 50% of their account value – whichever is less. This loan has to be repaid over an amortization schedule of 5 years or less with payment frequency no greater than quarterly. The interest rate must be set at a reasonable rate of interest – generally interpreted as prime rate as per The Wall Street Journal. As of 6/23/17 prime rate is 4.25%, which means participant loans are to be set at a very reasonable interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application.

As a self-employed individual I can defer $18,000 in pre-tax deferrals and $18,000 in after-tax deferrals (Roth).

Fiction

The answer is “No.” There is one limit per person for all types of elective deferrals. However, the $18,000 can be split in any ratio between the Roth and the pre-tax elective deferrals.

Employer contributions to a 401(k) Plan are due when the employer’s tax return is due.

Fact

Employer contributions are not required to be made until the due date of the employer’s tax return, plus extensions. So, in the case of a sole proprietor, this is when the 1040 is due – October 15, if an extension was filed.

If I have two jobs, I can contribute the maximum to both company’s plans.

Fiction

The 402(g) limits are by person, not by plan. For example, Steve, aged 40, is employed by Company X, and participates in Company X’s 401(k) plan. Steve defers the most allowed by Code section 402(g) for 2017, $18,000. He also has his own business with a 401(k). He will not be able to defer anything in the self-employed 401(k) for 2017. This is because the Code section 402(g) limit applies to the individual and he has already deferred the maximum allowed for the year.

If I am the only participant and have a 401(k) plan, I don’t have to file any annual Form 5500 returns.

It depends

A Form 5500-EZ (or Form 5500) does not have to be filed for a plan year (other than the final plan year) that begins on or after January 1, 2011, if you have one or more one-participant plans that separately or together had total assets of $250,000 or less at the end of that plan year. In other words, if the assets of the plan or plans exceed $250,000, a Form 5500-EZ is required for a one-participant plan. The IRA-based plans almost never have an annual Form 5500 filing requirement, regardless of the value of the IRA assets.

If additional employees are hired, they don’t have to be covered under a 401(k) plan for self-employed individuals.

Fiction

Just because the plan is called Solo 401(k), it doesn’t mean that if the business is expanded and employees are added, the plan is only for one employee. If the new employee meets the eligibility requirements under the plan, then he or she will be required to enter the plan and be eligible for salary deferrals. Assuming that the new employee is a non-highly compensated employee, the plan is now subject to nondiscrimination testing, known as the ADP and ACP tests.

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

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Mar 02

Do All Solo 401k Plans Offer the Same Benefits?

When it comes to determining what type of 401(k) qualified retirement plan is best for a self-employed individual or small business owner with no employees, it is important to look at all the options the plan provides to make sure it will satisfy your retirement planning, tax, and investment goals.

Most financial institutions offer Solo 401K Plans, often called individual 401K Plans. However, if you do not want to be forced to invest all your hard earn retirement savings in the stock market, then these type of financial institution Solo 401(k) Plans are not very attractive. In addition, most financial institution Solo 401(k) Plans will not offer a loan feature or allow you to make Roth Type contributions.

IRA Financial Group’s Solo 401K plan is unique and so popular because it is designed explicitly for small, owner-only business.  There are many features of the IRA Financial Group’s Solo 401K plan that make it so appealing for small business owners.

High Contributions: Like all Solo 401K Plans, for 2017, IRA Financial Group’s Solo 401(k) Plan will allow a plan participant to make annual contributions up to $54,000 annually with an additional $6,000 catch-up contribution for those over age 50. The high contribution feature is one of the reasons a Solo 401K Plan is the most popular retirement vehicle for the self-employed.

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

Tax and Penalty free loan: Unlike most Solo 401K Plans offered by the traditional financial institutions such as Fidelity, IRA Financial Group’s Solo 401K 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: The most attractive feature of the IRA Financial Group Solo 401k Plan is that it offers the plan participant checkbook control over his or her retirement funds. In the case of a conventional Solo 401K 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 401KPlan account is required to be opened at the financial institution. With IRA Financial Group’s Solo 401K 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 401K 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 401K Plan, the Plan participant has the freedom to make the investments he or she wants while at the same time opening the 401K account at any local bank. As trustee of the Solo 401K Plan, the Plan Participant (you) can serve as the trustee providing you checkbook control over your retirement funds. With IRA Financial Group’s Solo 401K Plan, making a Solo 401K Plan investment is as simple as writing a check.

Roth Contributions & Conversion: Unlike a conventional Solo 401K Plan offered by most financial institutions, IRA Financial Group’s Solo 401K 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 401K Plan allows for the conversion of a traditional 401(k) or 403(b) account to a Roth subaccount. However, the Solo 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.

Easy Administration: Like all Solo 401K Plans, IRA Financial Group’s Solo 401K Plan is easy to operate. There is generally no annual filing requirement unless your solo 401K 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 is required.

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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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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Sep 23

What Are the Requirements to Open a Solo 401k?

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.

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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Mar 30

Solo 401k Fact or Fiction

The Solo 401(k) Plan is essentially a regular, plain-old, vanilla 401(k) plan that has one participant, who is a self-employed individual, or that person and his or her spouse. There is some misinformation being disseminated about these plans and we would like to set the record straight. We want to let you know what is fact and what is fiction according to the Internal Revenue Service.

A 401(k) plan for a self-employed individual is a new kind of plan.

Fiction

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. The Solo 401(k) Plan is best suited for business owners who do not have any employees, other than themselves and perhaps their spouse.

I can make up to $59,000 of contributions to my 401(k) Plan as employee and employer each year.

Fact

The annual Solo 401k contribution consists of 2 parts, an employee salary deferral contribution and an employer profit sharing contribution. In 2015 the total contribution limit for a Solo 401k is $53,000 or $59,000 if age 50 or older. The total allowable contribution limits are combined to get the maximum Solo 401k contribution limit.

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.

Employee Elective Deferrals

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.

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).

Employer Profit Sharing Contributions

Through the role of employer, an additional contribution can be made to the plan in an amount up to 25% of the participant’s K-1 or self-employment compensation (20% in the case of a Sole Proprietor or Schedule C Tax Payer).

Total Limit

In 2015, the maximum solo 401(k) plan contribution limitation is $53,000 and $59,000 for plan participants over the age of 50.

If the business owner’s spouse elects to participate in the Solo 401(k) and earns compensation from the business, the spouse is allowed to make separate and equal contributions increasing the couples’ annual total contribution to $106,000 for 2015 or $118,000 if both spouses over age 50.

Solo 401k contributions are flexible. Both the salary deferral and the profit sharing contributions are optional and can be changed at any time based on business profitability.

A Solo 401k participant can contribute to the plan as an employee and as employer.

As a Trustee of the Solo 401(k) Plan I can make investments in traditional and non-traditional investments, such a real estate.

Fact

A Solo 401(k) offers a self-employed business owner the ability to use their retirement funds to make almost any type of investment on their own, including real estate, tax liens, and precious metals without requiring the consent of any custodian or person.

Unlike an IRA, I can use a nonrecourse loan to purchase real estate with my 401(k) Plan?

Fact

When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (a type of Unrelated Business Taxable Income) on which taxes must be paid. A Solo 401(k) plan is exempt from UDFI pursuant to Section 514.

I can borrow the lesser of $50,000 or 50% of my 401(k) account value for any purpose?

Fact

A solo 401k loan is permitted at any time using the accumulated balance of the solo 401k as collateral for the loan. A Solo 401(k) participant can borrow up to either $50,000 or 50% of their account value – whichever is less. This loan has to be repaid over an amortization schedule of 5 years or less with payment frequency no less than quarterly. The interest rate must be set at a reasonable rate of interest – generally interpreted as prime rate as per The Wall Street Journal. As of 1/1/15 prime rate is 3.25%, which means participant loans are to be set at a very reasonable interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application.

As a self-employed individual I can defer $18,000 in pre-tax deferrals and $18,000 in after-tax deferrals (Roth).

Fiction

The answer is “No.” There is one limit per person for all types of elective deferrals. However, the $18,000 can be split in any ratio between the Roth and the pre-tax elective deferrals.

Employer contributions to a 401(k) Plan are due when the employer’s tax return is due.

Fact

Employer contributions are not required to be made until the due date of the employer’s tax return, plus extensions. So, in the case of a sole proprietor, this is when the 1040 is due – October 15, if an extension was filed.

If I have two jobs, I can contribute the maximum to both company’s plans.

Fiction

The 402(g) limits are by person, not by plan. For example, Steve, aged 40, is employed by Company X, and participates in Company X’s 401(k) plan. Steve defers the most allowed by Code section 402(g) for 2015, $18,000. He also has his own business with a 401(k). He will not be able to defer anything in the self-employed 401(k) for 2015. This is because the Code section 402(g) limit applies to the individual and he has already deferred the maximum allowed for the year.

If I am the only participant and have a 401(k) plan, I don’t have to file any annual Form 5500 returns.

It depends

A Form 5500-EZ (or Form 5500) does not have to be filed for a plan year (other than the final plan year) that begins on or after January 1, 2011, if you have one or more one-participant plans that separately or together had total assets of $250,000 or less at the end of that plan year. In other words, if the assets of the plan or plans exceed $250,000, a Form 5500-EZ is required for a one-participant plan. The IRA-based plans almost never have an annual Form 5500 filing requirement, regardless of the value of the IRA assets.

If additional employees are hired, they don’t have to be covered under a 401(k) plan for self-employed individuals.

Fiction

Just because the plan is called Solo 401(k), it doesn’t mean that if the business is expanded and employees are added, the plan is only for one employee. If the new employee meets the eligibility requirements under the plan, then he or she will be required to enter the plan and be eligible for salary deferrals. Assuming that the new employee is a non-highly compensated employee, the plan is now subject to nondiscrimination testing, known as the ADP and ACP tests.

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

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Oct 24

History of the Solo 401k Plan

401(k) plans are named after the section of the Internal Revenue Code in which they appear, and apply to private sector employers. A solo 401(k) plan, also called an individual 401(k), a one-participant plan, self-employed 401(k) or self-directed 401(k) plan is a qualified retirement plan that was designed specifically for the self-employed or small business owner with no employees. To many peoples surprise, the solo 401(k) plan is not a new type of retirement plan. The solo 401(k) plan is not a term of art or even fond in the Internal Revenue Code. The Solo 401(k) Plan, in general, has the same rules and requirements as company 401(k) plan, but is not subject to the complex ERISA rules which make employee 401(k) plans so costly. In other words, the solo 401(k) Plan is simply a 401(k) plan that is not subject to the ERISA rules because the adopting employer does not have any full-time employees, other than their spouse(s). The growth in the popularity of the solo 401(k) plan began with the enactment of the Economic Growth and Tax Reconciliation Relief Act of 2001 (EGTRRA) which armed the solo 401(k) plan with all the attractive features of the better known employer 401(k) plan.

The Solo 401K Plan has become the most popular retirement plan for the self-employed. This is exactly what the IRS envisioned when it created the Solo 401K Plan, also known as the Individual 401K or Self-Directed 401K Plan.

Pre-1978 – Deferred compensation arrangements (“cash or deferred arrangements,” known as CODAs) which allowed some compensation (and resulting tax liability) to be deferred, predate 401(k) plans by several decades and are viewed as their precursors.

The History of the Solo 401(k) PlanIn the 1950s, a number of companies, particularly banks, added to their profit-sharing plans a new feature that came to be called a “cash or deferred arrangement,” or CODA. Each year, when employees were awarded profit-sharing bonuses, they were given the option to deposit some or all of the bonus into the plan instead of receiving the bonus in cash. Even though the employee had the right to receive the bonus in cash, which normally would trigger immediate income tax, a CODA sought to treat any amount the employee contributed to the plan as if it were an employer contribution, and therefore tax-deferred.

In 1956, the IRS issued the first in a series of rulings allowing profit-sharing plans to include a CODA and still be eligible for the favorable tax treatment accorded employer contributions.

The Employee Retirement Income Security Act of 1974 (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 Defined Benefit pension plans, the Act contained numerous provisions impacting Defined Contribution plans (like profit-sharing plans, and eventually 401(k) plans).

In 1962, after much deliberation, Congress enacted the Self-Employed Individuals Tax Retirement Act of 1962, extending some of the benefits of qualified plan participation to self-employed persons. Plans covering self-employed individuals were often called Keogh or H.R. 10 plans, after the principal sponsor and bill number in the House of Representatives.

The 1962 legislation required plans covering self-employed individuals to satisfy all of the qualification criteria for plans covering only common law employees and imposed numerous additional requirements and limitations.

Is the Solo 401(k) Plan Subject to ERISA?

The DOL regulations provide that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA. Pursuant to Department of Labor Regulations 2510.3-3(c) –

(1) An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, an

(2) A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.

The provisions of Title I of ERISA, which are administered by the U.S. Department of Labor, were enacted to address public concern that funds of private pension plans were being mismanaged and abused. ERISA was the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans. The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans.

The provisions of Title I of ERISA cover most private sector employee benefit plans. Employee benefit plans are voluntarily established and maintained by an employer, an employee organization, or jointly by one or more such employers and an employee organization. Pension plans–a type of employee benefit plan–are established and maintained to provide retirement income or to defer income until termination of covered employment or beyond. Other employee benefit plans are called welfare plans and are established and maintained to provide health benefits, disability benefits, death benefits, prepaid legal services, vacation benefits, day care centers, scholarship funds, apprenticeship and training benefits, or other similar benefits.

In general, ERISA does not cover plans established or maintained by governmental entities or churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of nonresident aliens or unfunded excess benefit plans. In addition, ERISA does not cover plans involving self-employed business owners or entity’s with no full-time employees other than the business owner(s) and spouses(s) since the goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans of owners, for plans that only cover owners, there is no need for ERISA since there are no non-owner employees to protect.

Even though a solo 401(k) plan is not subject to Title 1 of ERISA, the ERISA rules are still looked at as a reference because a solo 401(k) Plan is still a qualified retirement plan.

1978 – The Revenue Act of 1978 included a provision that became Internal Revenue Code (IRC) Sec. 401(k) (for which the plans are named), under which employees are not taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments. The Revenue Act of 1978 added permanent provisions to the IRC, sanctioning the use of salary reductions as a source of plan contributions. The law went into effect on Jan. 1, 1980. Regulations were issued in November of 1981.

1981 – The IRS issued proposed regulations on 401(k) plans that sanctioned the use of employee salary reductions as a source of retirement plan contributions. Many employers replaced older, after-tax thrift plans with 401(k)s and added 401(k) options to profit-sharing and stock bonus plans.

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. In the years immediately following the issuance of these rules, large employers typically offered 401(k) plans as supplements to their Defined Benefit plans, with few employers offering them to employees as stand-alone retirement plans. November 10, 1981 marks the birth of the modern 401(k) plan. After that date, companies began to add 401(k) contributions to their profit-sharing plans, convert after-tax thrift-savings plans to 401(k) plans, or create new 401(k)-type DC plans.

Within two years, surveys showed that nearly half of all large firms were either already offering a 401(k) plan or considering one.

Over the years, most notably in 1974 and 1981, the rules for plans covering self-employed individuals were liberalized and elaborated, and rules applicable to all plans, including those covering only common law employees, were tightened by subjecting them to some of the restrictions originally applicable only to plans covering self-employed persons.

In 1982, Congress adopted a unified system for all qualified plans, including those covering self-employed persons, finding the logic of a unified system so obvious that only a single sentence was sufficient to justify the change: “Congress believed that the level of tax incentives made available to encourage an employer to provide retirement benefits to employees should generally not depend upon whether the employer is an incorporated or unincorporated enterprise.

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) took another step to spur saving through 401(k) and other DC plans. EGTRRA increased the annual Defined Contribution plan contribution limit, albeit not higher than the $45,475 limit in place in 1982. In addition, the restrictions placed on employee deferrals were loosened as the limit on pre-tax contributions was increased and additional “catch-up” contributions were allowed for employees age 50 and older. With the goal of preserving retirement accounts even when job changes occur, EGTRRA increased the opportunities for rollovers among various savings vehicles (401(k) plans, 403(b) plans, 457 plans, and IRAs). In addition, EGTRRA permitted 401(k) plans to offer a “Roth” feature for after-tax contributions.

Prior to 2002, most self-employed individuals tended to use a SEP IRA or SIMPLE IRA as a retirement vehicle. However, in 2002 the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) became effective and generally provided the small business owner with no employees or the self-employed the same advantages/benefits of a conventional 401(k) Plan.

EGTRRA includes various reforms that contributed to the growing popularity of the Solo 401(k) Plan versus the SEP IRA and SIMPLE IRA. Below is a list of several key EGTRRA provisions that led to growth in popularity of the Solo 401(k) Plan:

1. EGTRRA increased the deductible profit sharing contribution limit from 15 percent to 25 percent of employees compensation and changed the application of deferrals so that they are not counted against the employer’s maximum deductible contribution amount.

2. EGTRRA increased the annual contribution limit per plan participant to the lesser of an annual maximum dollar amount of 100 percent of the partcipant’s compensation. Prior to EGTTRA, an eligible participant of a Solo 401(k) Plan was not eligible to make employee deferrals.

3. EGTRRA created the designated Roth contribution option for 401(k) and 403(b) plans. This provision allowed plan participants to designate all or a portion of their employee deferrals as Roth (after-tax) contributions.

EGTRRA modified Internal Revenue Code Section 4975(f)(6) to allow for the expansion of the loan feature to apply to unincorporated business (a sole proprietorship). Legislation passed in August 2006, the Pension Protection Act (PPA), also aims to foster retirement savings and 401(k) plan participation. Among its many provisions, the Act makes the EGTRRA pension rule changes permanent and, additionally, makes some of the rules governing pension plans more flexible. For example, the PPA encourages employers to automatically enroll employees in their 401(k) plans and allows employers to offer appropriate default investments. These measures seek to increase participation in 401(k) plans and facilitate the best use of these plans’ options by workers.

The marketing for this type of plan is aimed at business owners who do not have any employees, other than themselves and perhaps their spouse. Many of the advantages of these Solo 401K plan generally vanish if the employer expands the business and hires more employees since the employer would now be required to adopt a conventional Solo 401K Plan and must include the new employee(s) in the plan. No matter what the plan is called, it must meet the rules of the Internal Revenue Code. If employees are hired and they meet the eligibility requirements of the plan and the Code, they must be included.

Thus, the Solo 401K Plan is an IRS approved plan that was initially established into law in 1962 but was greatly enhanced by the 2002 EGTRRA law. Now, the Solo 401K Plan is the most popular retirement plan for the self-employed or small business owner.

As of 2013, The 401(k) plan retirement system now holds $2.8 trillion in assets on behalf of more than 50 million active participants and millions of former employees and retirees. The number of workers covered by 401(k) plans continues to expand, which has been a result of rules attempted to encourage more employers, small and large, to open 401(k) plans by making them as simple and accessible as possible.

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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Oct 06

IRS Rules and Guidlines Concerning a Solo 401(k)

The “Solo 401K 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.

Solo 401(k) IRS Rules and GuidelinesSolo 401(k) Plans are generally permitted to engage in most types of investments, however, if a Solo 401(k) Plan engages in certain types of “prohibited transactions” it may trigger a prohibited transaction which could lead to disqualification of the Solo 401(k) Plan and severe tax consequences. Therefore, it is important that you familiarize yourself with the Solo 401(k) prohibited transaction rules.

 

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

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Sep 10

The Law Concerning Solo 401k Plans

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.

The law concerning the Solo 401k PlanIn 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 “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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