Jul 13

What You Need To Know About Using Retirement Money For Business Funding

For most would-be entrepreneurs, the hardest part is not coming up with a business idea or a potential business to buy, but finding the cash needed to start or buy a business. After taking an inventory of their personal finances, the next step on the financing train is usually family and friends. If the train needs to keep moving, the next stop for potential financing is typically a bank or hard money lender that can provide a small business loan. Often this is where the financing train runs out of track.

The good news for many entrepreneurs is that there are a number of legal ways to use retirement funds to buy a business or franchise, although these opportunities do come with substantial downside that must be well examined. Buying or starting a business is not without risk. The Small Business Administration (SBA) keeps the statistics on business failures and claims that more than half of new businesses will disappear in the first five years.

Here is a look at the most common ways to use retirement funds to buy or start a business:

Take a Taxable Distribution: If the funds are in a individual retirement account (IRA) the funds can always be taken as a taxable distribution. The downside is that a pre-tax IRA would trigger an ordinary income tax on the amount of the distribution and a 10% early distribution penalty if the individual taking the distribution is under the age of 59½. In the case of a Roth IRA (after-tax), the funds can be distributed tax-free if the Roth IRA holder is over the age of 59½ and the Roth IRA has been opened for at least five years. If the Roth IRA holder is under the age of 59½, the 10% early distribution penalty would apply on the Roth earnings. Taking an IRA distribution is certainly not the most tax efficient way to use retirement funds to buy a business, but, based on the amount of funds needed for the business and the age of the IRA holder, it could end up being the wisest decision.

401(k) Loan Option: Many 401(k) qualified retirement plans offer a loan feature, which allows a plan participant to borrow the lesser of 50% of their plan account value or $50,000. The loan does have to be paid back over a five year period, at least quarterly and at an interest rate of at least Prime as per the Wall Street Journal, which as of June 30, 2015 is 3.25%. The advantage of using the 401(k) loan feature is that the plan participant would be able to get tax-free and penalty-free use of up to $50,000 of retirement funds, which can be used for any purpose including for the purchase of a business. The downside is that the loan is capped at $50,000 or 50% of the plan account value and the loan need to be paid back over a five-year period. The 401(k) plan loan feature can work well if one is in need of a small amount of money for the purchase of a business, but for many entrepreneurs, the maximum loan amount available would not be sufficient which makes the loan option an unviable option.

ROBS: The Rollover Business Startup Solution (“ROBS”) is a controversial retirement structure that allows one to use rollover retirement funds to purchase a business tax-free. The controversy stems from the fact that although the structure is based off a provision in the Internal Revenue Code (IRC 4975(d)(13)) and has been confirmed to be legal by the Internal Revenue Service (IRS), it continues to be on the radar of the IRS and Department of Labor (DOL).

The ROBS arrangement typically involves rolling over a pre-tax IRA or 401(k) plan account into a newly established 401(k) plan, which is sponsored by a “C” Corporation and then investing the rollover funds in the stock of the “C” Corporation. The individual retirement account holder can then earn a reasonable salary as an employee of the business. The advantage of the ROBS solution is that it does allow one to use all their pre-tax IRA or 401(k) funds to buy a business that they will be involved in personally as an employee without tax or penalty.

The downsides are numerous. First, the ROBS solution requires the use of a “C” Corporation, which is treated as a completely separate taxpayer from its owners, whereas, a sole proprietorship, LLC, or “S” Corporation are treated as pass-through entities for tax purposes. In other words, a “C” Corporation would impose two taxes on corporate earnings: a corporate level tax and a shareholder tax on the dividends received. In comparison, for a pass-through entity, such as an LLC, the profits bypass taxation at the corporate level and are distributed and taxed at the owner’s level. It is important to note that it can be argued that the double taxation handicap does not impact retirement accounts (i.e. 401(k) plans) as much as individuals, since the dividend from the “C” Corporation to the 401(k) plan shareholder would be exempt from tax since a 401(k) plan is a tax-exempt retirement account. However, the double taxation is not eliminated but simply deferred until the 401(k) plan participant elects to take a 401(k) plan distribution, which would generally be subject to a second tax.

The ROBS solution also requires the use of a 401(k) plan, which brings with it some additional costs and compliance issues. Even though 401(k) plan administration costs have come down significantly over the years, there is still the cost of offering a 401(k) plan to employees, which needs to be balanced with the advantage of offering 401(k) plan benefits to employees. In addition to having to potentially make a minimum 3% safe harbor contribution, as many small business 401(k) plans opt to become safe harbor plans, 401(k) plans cost money to administer because there are many compliance issues that have to be monitored, as well as many ongoing service and administration functions that must be provided. It is not uncommon for a small business 401(k) plan to cost anywhere from $750-$1500 annually for plan testing and recordkeeping.

Third, establishing a ROBS solution could lead to an IRS audit. We know that the IRS and DOL have been looking at the promoters of ROBS plans as far back as 2005 because of some of the abuses they perceived were occurring. The IRS outlined their concerns in a October 31, 2008 memorandum titled, “Guidelines regarding rollovers as business start-ups.” The IRS stated that while this type of structure is legal and not considered an abusive tax avoidance transaction, the execution of these types of transactions, in many cases, have not been found to be in full compliance with IRS and The Employee Retirement Income Security Act of 1974 (ERISA) rules and procedures. In the “Memorandum,” the IRS highlighted two compliance areas that they felt were not being adequately followed. The first area of concern the IRS highlighted was the lack of disclosure of the adopted 401(k) Plan to the company’s employees, and the second area was establishing an independent appraisal to determine the fair market value of the business being purchased. In sum, the IRS was concerned that people were using their retirement funds to buy a business and that ultimately the business was not being purchased and the individual then used the funds for personal purposes, thus avoiding tax and potential penalties. Additionally, the business that was purchased closed, and the retirement account liquidated, thus leaving the IRS without the potential to tax the retirement account in the future.

The IRS did not publicly comment on the ROBS solution again until August 27, 2010, almost two years after publishing the “Memorandum,” when the IRS held a phone forum open to the public which covered transactions involving using retirement funds to purchase a business. Monika Templeman, Director of Employee Plans Examinations, and Colleen Patton, Area Manager of Employee Plans Examinations for the Pacific Coast, spent considerable time discussing the IRS position on this subject. The IRS again aired their concerns about the ROBS solution and the potential for abuse, but did confirm that the structure was not considered illegal or prohibited if done correctly. That being said, the IRS’ primary concern with the ROBS solution is directly tied into the SBA statistics on new business failures. Most people don’t think of the IRS as their partner in their retirement accounts, but that is the reality. For pre-tax retirement funds, the IRS permitted the IRA holder to receive a tax deduction for the amounts contributed, but will force the IRA holder to take a required minimum distribution (RMD) beginning at age 70½ and pay tax on the RMD amount. Imagine how the IRS feels when the IRA holder takes the majority of his/her pre-tax retirement funds and invests it in a business that untimely fails. The IRS has now lost any potential tax revenues resulting from RMDs because the funds were lost. In contrast, if the IRA holder purchased stocks, mutual funds, or even real estate, the account would fluctuate in value, but would likely not be lost.

This article originally appeared in Forbes by IRA Financial Group tax partner Adam Bergman.  For more information, please contact us @ 800.472.0646.

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May 29

Why You Should Use Retirement Funds to Start a Business (ROBS)

When it comes to using retirement funds to buy or finance a business that you or another “disqualified person” will be involved in personally, there is only one legal way to do it and that is through the Business Acquisition Solution, also known as a Rollover Business Start-Up (ROBS). The ROBS solution takes advantage of an exception in the tax code under Internal Revenue Code (“IRC”) Section 4975(d) that allows one to use 401(k) plan funds to buy stock in a “C” Corporation, which is known as “qualifying employer securities”. The exception to the IRS prohibited transaction rules found in IRC 4975(d) requires that a 401(k) plan buy “qualifying employer securities”, which is defined as stock of a “C” Corporation. This is the reason why one cannot use a self-directed IRA LLC to invest in a business the IRA holder or a disqualified person will be personally involved in or why a 401(k) plan cannot invest in an LLC in which the plan participant or disqualified person will be involved in without triggering the prohibited transaction rules.

Five Benefits of Using Retirement Funds to Buy a Business (ROBS)So How Does the ROBS Solution Work?

The structure typically involves the following sequential steps:

1. An entrepreneur or existing business owner establishes a new C Corporation;

2. The C Corporation adopts a prototype 401(k) plan that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options, including employer stock, also known as “qualifying employer securities.”

3. The entrepreneur elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan;

4. The entrepreneur then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value ( i.e., the amount that the entrepreneur wishes to invest in the new business); and finally

5.The C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.

What Are Some of the Advantages of the ROBS Solution?

  • Save Money: The primary advantage of establishing a ROBS solution is to be able to use your retirement funds to invest in a business you will be personally involved in without having to pay tax the retirement funds you wish to use as a distribution to tax and potentially penalty. By being able to invest the retirement funds into the business without having to take a taxable distribution and a 10% early distribution penalty if under the age of 591/2, using a ROBS solution could save someone close to 45% of the distribution amount. For example, if someone under the age of 591/2 was looking to use $100,000 of retirement funds to fund a business and ended up taking a taxable distribution of that amount, that individual would likely have to pay approximately 45% of the 100,000 or $45,000 in tax to the IRS when declaring the distribution on their tax return. The tax rate could be lower if the individual was in a lower income tax bracket or the retirement funds needed were insignificant, but using a ROBS solution would save having to pay tax and potentially a 10% penalty on that amount.
  • Invest in Yourself: The ROBS solution allows one to invest their retirement funds in a business that will be actively run by the retirement account holder. As a result, one is essentially investing their retirement funds in themselves rather than on Wall Street. Of course, not all businesses are successful. According to Bloomberg, close to 80% of new businesses fail in the first 18 months. Hence, investing your hard earned retirement funds in a new business is certainly a risk. However, it is a risk that you are legally entitled to take as per the Internal Revenue Code. Using retirement funds to invest in your business is not for everyone, but for those entrepreneurs that would rather invest in themselves than Wall Street, the ROBS solution is an option.
  • Diversification: There is a growing sentiment amongst financial advisors, especially after the 2008 financial crisis, that in order to protect your retirement funds from a market downturn, your retirement funds should be well diversified. One can generally not eliminate investment risk completely, but one can manage your level of risk. Every investment has some amount of risk, however, having your retirement funds invested in different types of investments, such as stocks, real estate, and even private businesses, can be a way of diversifying your retirement portfolio and better protecting your retirement funds. Also, it is believed that diversification can enable a retirement portfolio to grow both when markets boom and returns crumble in one sector One should certainly work with a financial planner and tax professional when looking at investment options, especially when it comes to using retirement funds to buy a business.
  • Earn a Salary: In order for one to be a participant of a 401(k) Plan, one needs to be an employee of the business, which adopted the plan. This is the reason why if you own Apple or IBM stock but don’t work at those companies, you cannot participate in their company 401(k) plans. Hence, in order to be eligible to participate in the corporation 401(k) plan you must become a W-2 employee of the C Corporation. For many entrepreneurs the ability to earn a salary and be actively involved in the business is the reason they are using a ROBS solution versus using a self-directed IRA.
  • Benefit from having a 401(k) Retirement Plan: One of the best ways for you to save toward your own retirement and ensure your future security is through an employer-sponsored 401(k) plan. Below are some of the advantages of offering and participating ion a 401(k) Plan.
  • Matching Contributions: Many employers will match a portion of your savings: It’s like passing up free money if you don’t participate. A safe harbor 401(k) Plan, which is a popular type of 401(k) plan for small businesses, offer employees who participate in the plan a 3% matching contribution made by the employer. Thus, for example, if the employee earns $40,000 in salary during the year and contributes 3% of the salary of $1200 to the 401(k) plan, the employer would contribute an additional $1200 (3% of the salary) to the individual 401(k) plan account.
  • Retaining employees: with most businesses offering their employees retirement benefits, it is worthwhile for small businesses to compete for talented workers by implementing 401(k) benefits. Offering 401(k) plan benefits is a great way to retain key employees. In general, when potential hires are considering multiple job offers, they’ll compare those offers based on corporate culture, growth opportunities, and benefits packages. –
  • Easy Administration: 401(k) Plan administration is now easier and more cost-effective than ever with Internet options available to small employers. In addition, IRA Financial Group offers recordkeeping and third-party administration services for your plan allowing you to spend more time focusing on your business and less on your plan.
  • You Can Participate As Well: You are eligible to participate in the company 401(k) plan if you are an owner or an employee of the company that sponsor’s the 401(k) plan. Current regulations allow plan participants to contribute up to $18,000 ($24,000 if over the age of 50) of their income on a pre-tax basis each year. That means that in addition to your tax savings for offering the plan and providing matching contributions, you’ll receive yet another tax savings for participating in the plan. This savings can be substantial – an owner in the 35% tax bracket who made the maximum contribution would have saved approximately $6,500 in taxes in 2014.

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

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May 06

What is the difference between the ROBS Structure and the IRA Financial Group’s Business Acquisition and Compliance Solution Structure?

The IRS has coined a structure that has been designed as a means for prospective business owners to access accumulated tax-deferred retirement funds in order to cover new business start-up costs as Rollovers as Business Start-ups, or ROBS. As stated in the IRS’s October 1, 2008 Memorandum and repeatedly affirmed by the IRS, the ROBS structure is legal but has been poorly implemented by a number of the promoters who have been actively marketing the structure. In other words, the IRS has concluded that the ROBS transaction is perfectly legal it has just not been implemented properly from an IRS and ERISA compliance standpoint. In contrast, the IRA Financial Group’s in-house retirement tax professionals have spent the last several years reviewing IRS materials and guidance in order to develop the Business Acquisition & Compliance Solution Structure (“BACSS”), an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax free!

What is the difference between the ROBS Structure and the IRA Financial Group's Business Acquisition and Compliance Solution Structure?While BACSS involves many of the same features of the ROBS transaction, the core distinction is that BACSS has been carefully developed by retirement tax professionals to include all the necessary elements so that the structure is fully compliant with IRS and ERISA rules and procedures. While our competitors were promoting the ROBS structure, which in many cases failed from a compliance standpoint, the IRA Financial Group’s in-house retirement tax professionals spent the last two years reviewing IRS materials in order to develop an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax free!

The IRA Financial Group’s in-house retirement tax professionals will work closely with you to assure that all IRS and ERISA compliance rules and procedures are carefully followed to ensure the legality of the structure.

Please contact one of our Retirement Experts at 800-472-0646 for more information.

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Mar 27

The Law Regarding the Use of a 401k to Fund a Business

The Internal Revenue Code and ERISA have firmly codified the ability to use retirement funds to invest in the stock of a sponsoring company as long as certain IRS and ERISA rules are followed.

Internal Revenue Code Section 4975(c) includes a list of transactions that the IRS deems “prohibited”. However, Internal Revenue Code Section 4975(d) lists a number of exemptions to the prohibited transaction rules. Specifically Internal Revenue Code Section 4975(d)(13) lists an exemption for any transaction which is exempt from section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) by reason of section 408(e) of such Act.

Section 408(e) provides that section 406 shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 407(d)(5), provided that: (1) the acquisition or sale is for adequate consideration; (2) no commission is charged with respect to the acquisition or sale; and (3) the plan is an eligible individual account plan (as defined in section 407(d)(3)). A 401(k) plan fits in to this definition.

The Law Regarding the Use of a 401k to Fund a BusinessPursuant to ERISA Section 406, the acquisition or sale must be for “adequate consideration.” Except in the case of a “marketable obligation”, adequate consideration for this purpose means a price not less favorable than the price determined under ERISA § 3(18),subject to a requirement that the acquisition or sale must be for “adequate consideration.” An exchange of company stock between the plan and its employer-sponsor would be a prohibited transaction, unless the requirements of ERISA § 408(e) are met.

The exemptions in 4975(d) shall not apply to items described in Internal Revenue Code Section 4975(f)(6). Section 4975(f)(6)(A) states that the exemption of 4975(d) shall not apply in the case of a trust described in Internal Revenue Code Section 401(a), which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (other than paragraphs (9) and (12)) shall not apply to a transaction in which the plan directly or indirectly— (i) lends any part of the corpus or income of the plan to, (ii) pays any compensation for personal services rendered to the plan to, or (iii) acquires for the plan any property from or sells any property to, any such owner-employee, a member of the family of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. Therefore, since the Plan will be purchasing “qualified employer securities” directly from the newly formed corporation, the purchase of corporate stock will not be treated as a prohibited transaction pursuant to Internal Revenue Code Section 4975.

ERISA Section 407(b)(1) generally places limitations on the acquisition and holding of Qualifying Employer Securities (normally 10% of plan assets). However, the Section includes an exception for “eligible individual account plans” (ERISA 407(b)(1)). As set forth in ERISA Section 407(d)(3), a qualified profit sharing plan is included in the definition of “eligible individual account plans”. In addition, pursuant to ERISA Section 404(a)(2), these plans do not violate ERISA’s diversification and, to the extent it requires diversification, prudence requirements.

Call us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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Mar 06

Learn How to Buy a Franchise with Your 401k

The legality of using retirement funds to purchase employer corporate stock is firmly established in the Internal Revenue Code and under ERISA law. The IRA Financial Group’s in-house retirement tax professionals have spent the last two years developing an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free! Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP to ensure the structure satisfies IRS and ERISA rules and procedures. The retirement tax professionals at the IRA Financial Group 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 or existing business within 14-21 days.

Learn How to Buy a Franchise with Your 401kStep 1 – Establishment of New Corporation

IRA Financial Group’s in-house tax and ERISA professionals will establish a corporation and ensure that the incorporation process is completed accurately in accordance with state law. Our in-house retirement tax professionals have significant experience with the incorporation process in all 50 states and the District of Columbia. Your corporation will be incorporated in the State where you will conduct business or in multiple states if the business will be conducted in more than one state. The IRA Financial Group’s retirement tax professionals will assist you in satisfying all internal corporate formalities, such as establishing a board of directors, appointing officers, and completing the corporate resolution and minutes. Upon the incorporation of the entity, our in-house retirement tax professionals will acquire an Employer Tax ID Number with the IRS for your new corporation.

Step 2 – New Corporation Adopts 401(k) Plan

The IRA Financial Group’s in-house ERISA professionals will establish an IRS approved 401(k) Plan for your new corporation. Plan documents will be drafted so that the new corporation will be the sponsor of the new 401(k) Plan. The Plan documents will appoint the new business owner as the trustee of the plan and will be customized based on the financial goals of you and the business. The Plan will be specifically drafted to allow for investment in your new corporation.

Step 3 – Rollover/Transfer of Funds to your New Corporation

The IRA Financial group’s in-house ERISA professionals will guide you through the process of opening a bank account for your new 401(k) Plan (the account can be opened at any local bank, credit union, or financial institution) as well as helping you complete the necessary transfer/rollover documents to transfer your retirement funds from your previous employer or IRA to your company’s new 401(k) Plan tax-free. Our in-house ERISA professionals will guide you through the entire rollover/transfer process so your retirement funds will be transferred to your new 401(k) Plan in an expedited and tax-free manner.

Step 4 – 401(k) Plan Invests in the new Corporation

The IRA Financial Group’s in-house retirement tax professionals will draft a customized stock purchase agreement detailing the 401(k) Plan’s purchase of new company stock. The IRA Financial Group will coordinate with the selected independent business appraisal to assure that the stock purchase agreement is in compliance with IRS and ERISA rules. Once the 401(k) Plan has purchased stock in the new corporation, the corporation will have the funds to purchase new business assets or help grow the business.

Step 5 – Compliance with IRS and ERISA Rules

Once your retirement funds have been invested in your new business, the retirement tax professionals at the IRA Financial Group will continue to work with you to ensure that the structure remains compliant with IRS and ERISA rules and procedures. In the case of a corporation with employees, the IRA Financial Group will work with a third-party administrator to ensure that the Plan remains compliant so that the structure continues to meet IRS and ERISA rules and requirements.

Work Directly with our on-site tax and ERISA professionals!

Each client of the IRA Financial Group is assigned an individual retirement tax professional who will customize a structure that satisfies his or her financial and retirement needs while ensuring the structure is developed in full IRS & ERISA compliance!

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 or existing business within 14-21 days.

Call us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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Feb 19

Free Information Kit – The Business Funding Solution

Are you an entrepreneur having trouble getting financing for a new business?

Free Information Kit The Business Funding SolutionThe IRA Financial Group’s Business Acquisition Structure is your solution!

Use your retirement funds to purchase a new business or franchise tax free and without penalty!

Earn a reasonable salary from your new business!

It’s 100% IRS compliant.

Sign up now for our free information kit to learn how the Business Funding Solution can allow you to purchase a business or franchise tax-free and without penalty!  Click here to sign up!

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Dec 05

Why Choose IRA Financial Group to Use Your 401k to Fund a Business

The IRA Financial Group was founded by a group of top law firm tax and ERISA professionals who have worked at some of the largest law firms in the country, including White & Case LLP and Dewey & LeBoeuf LLP.

The legality of using 401(k) retirement funds to purchase employer corporate stock is firmly established in the Internal Revenue Code and under ERISA law. Although codified under law, the IRS has been concerned that a number of promoters marketing this type of structure have not had the expertise to develop a structure that is fully compliant with IRS and ERISA rules and regulations. With this in mind, the IRA Financial Group’s in-house retirement tax professionals spent the last two years carefully studying IRS materials and guidance in order to design an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free!

How to Use My 401(k) Retirement Funds to Buy a BusinessThe Business Acquisition & Compliance Solution Structure (“BACSS”) was developed to specifically address and solve each of the non-compliant areas addressed by the IRS creating a business acquisition and funding solution that is in full compliance with IRS and ERISA rules and procedures. Unlike our competitors who have been offering this type of structure for many years, which according to the IRS, a significant portion have been found to be non-compliant, the IRA Financial Group has patiently waited for clear IRS guidance before offering a business acquisition structure that would be fully compliant with IRS and ERISA rules and procedures. Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP to ensure the structure satisfies IRS and ERISA rules and procedures.

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 typically be ready for investment into your new or existing business within 14-21 days.

Call us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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Dec 01

Types of Investments You Can Make with a Solo 401k

A Solo 401(k) Plan offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The following are some examples of types of investments that can be made with your Solo 401(k) Plan:

  • Residential or commercial real estate
  • Domestic of foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

Solo 401k

Real Estate

The IRS permits using a Solo 401(k) to purchase real estate or raw land. Since you are the trustee of the 401(k) Plan, making a real estate investment is as simple as writing a check from your 401(k) Plan bank account. The advantage of purchasing real estate with your Solo 401(k) Plan is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

For example, if you purchased a piece of property with your Solo 401(k) Plan for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a Solo 401(k) Plan. By using a Solo 401(k) Plan to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

More importantly, with a Solo 401(k) Plan, you, as trustee of the 401(k) Plan, will have “checkbook control” over your retirement funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Loans & Notes

The IRS permits using 401(k) funds to make loans or purchase notes from third parties. By using a Solo 401(k) Plan to make loans or purchase notes from third-parties, all interest payments received would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

For example, if you used a Solo 401(k) to loan money to a friend, all interest received would flow back into your 401(k) Plan tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Private Businesses

With a Solo 401(k) you are permitted to purchase an interest in a privately held business. The business can be established as any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using 401(k) funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512. The retirement tax professionals at the IRA Financial Group will work with you to develop the most tax-efficient structure for using your Solo 401(k) Plan to invest in a private business.

Precious Metals & Coins

Our Solo 401(k) Plan documents allow for investments into precious metals and certain coins. The advantage of using a Solo 401(k) Plan to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the metals and/or coins can be held in the name of the 401(k) Plan at a financial organization (any local bank) safe deposit box eliminating depository fees.

Foreign Currencies

The IRS does not prevent the use of 401(k) funds to purchase foreign currencies, including Iraqi Dinars. In fact, our Solo 401(k) Plan documents permit the purchase of foreign currencies. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

By using a Solo 401(k) to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Solo 401(k) may purchase stock, bonds, mutual funds, and CDs. The advantage of using a Solo 401(k) Plan with “Checkbook Control” is that you are not limited to just making these types of investments. With a Solo 401(k) Plan with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless!

For additional information on the advantages of using a Solo 401K Plan to make investments, please contact one of our 401(k) Experts at 800-472-0646.

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Nov 07

The Business Acquisition and Compliance Solution Structure Flow Chart

THE BUSINESS ACQUISITION & COMPLIANCE SOLUTION STRUCTURE (BACSS)

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Business Acquisition Solution

Call the IRA Financial Group today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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Jul 08

The Self-Employed 401k Plan

A Solo 401K Plan also called a Self-Employed 401K Plan offers a self-employed business owner the ability to use their retirement funds to make almost any type of investment tax-free, including real estate on their own without requiring custodian consent. As long as a business exists with no full-time employees other than the owner and his/her spouse, a Self-Employed 401K Plan can be established.

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

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

High Contributions: Under the 2014 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $17,500. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $52,000, an increase of $1,000 from 2013.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $23,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $57,500, an increase of $1,000 from 2013.

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

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

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

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

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

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

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

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

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

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

IRA Financial Group will take care of setting up your entire Self-Employed 401K Plan. The whole process can be handled by phone, email, fax, or mail and typically takes between 2-10 days to complete, the timing largely depending on the time it takes your current retirement asset custodian to move the funds to the new Self-Employed 401K Plan account. Our tax and ERISA professionals are on-site greatly reducing the setup time and cost. Most importantly, each client of the IRA Financial Group is assigned a retirement tax professional to help with the establishment of the Self-Employed 401K Plan.

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

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