Oct 18

Choosing a Solo 401(k) Over a SEP IRA

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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May 22

Why a Solo 401(k) is the Best Retirement Plan for the Self-Employed

Here’s a great article from Dough Roller touting the advantages of the Solo 401(k) Plan

If you’re self-employed, you have several retirement plan options available to you as an individual or small business owner. The best retirement plan for the self-employed, though, is probably the Solo 401(k).

Also called an individual 401(k), it has similar advantages to the traditional, employer-sponsored 401(k) plans available to large companies. However, it brings with it more benefits because you’re self-employed.

How a Solo 401(k) Plan Works

A Solo 401(k) plan is essentially a 401(k) for a self-employed individual. But there are several features of the plan that distinguish it from the larger, employer-based 401(k) plans. These include:

  • Since you are the business owner, you act as both employer and employee on the plan.
  • A Solo 401(k) plan is just for the owner of the business and the owner’s spouse; it is not available for employees of the business.
  • The amount you can contribute to a Solo 401(k) are generally more generous than they will be for an employee participant in typical large company 401(k) plans.
  • You can set up a Solo 401(k) even if you are an independent contractor or a freelancer.

Solo 401k Contribution Limits

As an employee of the business, contribution limits to a solo 401(k) plan are exactly the same as they are for a traditional 401(k) plan. You can contribute up to 100% of your salary or up to the contribution limit, whichever is greater. The current contribution limit for 2017 is $18,000 of your salary, or up to $24,000 if you’re age 50 or older.

It’s here that being the employer comes in handy.But since you are also the employer in the solo plan, you can also contribute as much as 25% of your net income to the plan as a profit-sharing contribution. (See IRS examples of the

As an employer, you can also contribute as much as 25% of your net income to the plan as a profit-sharing contribution. (See IRS examples of the employer matching contribution — it varies by business entity.)

Solo 401k Contribution Deadline

One other important point about the solo 401(k) plan is that you must make your contributions to the plan no later than the end of the calendar year. That means that you must make your contribution no later than December 31 in order for the contribution to be deductible for the tax year in question.

This is unlike contributions to IRA plans, which allow you to make deductions up until the filing deadline for the preceding tax year.

Simplicity

One of the biggest advantages of a Solo 401(k) is that you can essentially set it up similar to a self-directed IRA. That means that you are free to choose your investment trustee. You can also select a discount investment broker. This will provide you with an opportunity for unlimited investments and very low fees.

This is unlike many traditional 401(k) plans, which often limit your investment options to a few mutual funds and charge high plan fees.

Very Generous Contributions

As I noted above, with the Solo 401(k) you can make both employee and employer contributions. So, let’s say you’re self-employed as a sole proprietor and report your income and expenses on Schedule C of your income tax return. If your net income from the business is $100,000, you can contribute $18,000 as an employee. But then you can also contribute 25% of the net profit as the employer.

This means that your total contribution could reach $43,000!

That’s an enormous retirement contribution based on a $100,000 income. If you are in the 25% federal tax bracket, for example, a $43,000 contribution could result in a tax savings of $10,750 (although it’s important to consult a tax expert to be sure).

This is much more generous than other types of self-employed retirement plans. For example, let’s take the contribution scenario above. In it, you are contributing 43% of your income to your retirement plan using the Solo 401(k).

SEP IRA

Under a SEP IRA, your contribution would be limited to 20% of the same income, or $20,000. (The SEP IRA provides for a deduction equal to 25% of your net income, after the deduction for the contribution is removed from your income… That means that the net contribution to a SEP IRA is effectively limited to 20% of your income.)

SIMPLE IRA

Under a SIMPLE IRA, your contribution limit is even lower. The maximum contribution that you can make as an employee is $12,500. (This bumps up to $15,500 if you are age 50 or older.) SIMPLE IRAs also provide for an employer match. As the employer in the business, you can provide either a 3% matching contribution, or a 2% non-elective contribution (up to $5,000). That means that your total contribution to the plan is limited to a total maximum of $20,500 per year.

Traditional IRA

And, of course, a traditional IRA or a Roth IRA limits your annual contribution to $5,500, or $6,500 if you are 50 or older.

The maximum contribution to any and all tax-sheltered retirement plans, including the Solo 401(k) plan, is $54,000 for 2017. However, with a Solo 401(k) plan, you can reach that maximum much more quickly than you can with other self-employed retirement plans.

There is one important limitation pertaining to S corporations: distributions paid from an S corporation are considered dividends, and are therefore not considered earned income. For this reason, you cannot make contributions to a Solo 401(k) plan that include your distributions from the S Corp.

You Can Add a Solo Roth 401(k) to the Mix

Just as with a traditional 401(k), you can allocate part of the plan to a Solo Roth 401(k) plan. That will enable you to allocate up to $5,500 of your employee contribution to the Roth portion. If you are age 50 or older, up to $6,500 can go toward the Roth portion. The remainder of your allowed contribution will go into the regular portion of your Solo 401(k) plan.

The employer matching portion can only go into the regular part of your Solo 401(k), and not the Roth portion.

You Can Include Your Spouse

An owner cannot add employees to a Solo 401(k) plan. He or she can, however, add a spouse. Your spouse can make contributions based on his or her earnings from the business.

For example, let’s say that you have an S corporation. You take a salary of $50,000 per year, and your spouse takes an equal amount. You can each make a contribution of up to $18,000 on your respective salaries. As an employer, you can then match up to 25% of the same amount.

Converting the Solo 401(k) to a Traditional 401(k)

Many businesses start out as one-person affairs. The owner starts out working for himself and only adds employees as the business grows.

A Solo 401(k) plan really shines when you hire employees. Why? Because you can convert these plans to a traditional 401(k) plan as soon as you begin adding employees.

When you start adding staff, you can easily convert your Solo 401(k) to a traditional plan. As you do, you can enable your employees to participate in the plan. That’s a big advantage because offering a 401(k) plan — particularly as a small business — is an attractive advantage for drawing potential talent. Many employees prefer to work in a business that offers a retirement plan. With the Solo 401(k), you will already have a plan in place when that day comes.

As with all things related to retirement plans, be sure to consult a tax expert before making any decisions.

If you would like more information about the Solo 401(k) plan, please contact a 401(k) at the IRA Financial Group at 800.472.4646.

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May 11

Pass-Through Tax Cut May Impact Small Business Owner Retirement Savings Strategies

This article originally appeared on Forbes.com

President Donald Trump’s plan to cut the tax rate to 15 percent for so called pass-through businesses, such as partnerships, LLCs and S Corporations, will help many small business owners reinvest in their business by saving on taxes.  President Trump also plans to cut the corporate tax rate to 15 percent.  While many applaud the President’s plan to cut taxes on businesses, which they believe will help stimulate the U.S economy as well as make American businesses more competitive globally, the discrepancy in tax rates between businesses and individuals could prove problematic, especially for retirement savings.

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President Trump has announced that he plans to cut personal income tax rates by reducing the number of individual income tax brackets from seven to three — 10, 25 and 35 percent.  Individual tax rates currently have a ceiling of 39.6 percent and a floor of 10 percent. Most Americans pay taxes somewhere between the two.  With corporate and business pass through tax rates at 15 percent compared with generally higher individual income tax rates for most Americans, various tax planning opportunities will present themselves, including the ability to structure business payments at a 15 percent tax rate versus taking compensation at a generally higher income tax rate.  For example, under the Trump tax plan, if an LLC owner has $100,000 of net income currently taxed at 35 percent, the allocated portion that is compensation would be taxed at 35 percent while the portion that is allocated as business income would be taxed at a 15 percent tax rate. Thus, taking compensation of $20,000 versus $60,000 could save a significant amount of taxes.  Furthermore, since retirement savings is based on the amount of compensation one receives and not on the amount of profits the business generates, the less compensation one receives will directly impact the amount of retirement savings that may be available.  For example, a husband and wife business partnership would be incentivized to take less compensation and allocate more of the available income to business income in order to reduce their tax liability.  If the partnership has established a 401(k) plan or SEP IRA, the maximum amount they would be able to contribute would likely be reduced since their maximum plan contribution amount is directly based on the amount of compensation they earned from the business in a year.

In general, many economists believe that cutting taxes for small businesses is a positive plan by the president.  However, sizable tax rate discrepancies between different forms and categories of income could create decisions that are more tax than business based and run counter to the principles of tax neutrality.  In addition, such circumstances will likely invite abusive tax schemes, as well as some unanticipated results, such as a potential cut in retirement savings for small business owners.

For more information, please contact the IRA Financial Group @ 800.472.0646.

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May 03

New Trump Passthrough Tax Plan Could Impact Retirement Savings for Small Business

Proposed 15% tax rate on business income could reduce Solo 401(k) Plan and SEP IRA contributions

IRA Financial Group, the leading provider of self-directed solo 401(k) plans, has issued a report that believes that President Trump proposed 15% tax rate for so called pass-through businesses, such as partnerships, LLCs and S Corporations, will help many small business owners reinvest in their business by saving on taxes, but could also result in less solo 401(k) plan or SEP IRA contributions for many small business owners. “Because business passthrough income will be taxed at a lower tax rate then compensation and since compensation is the basis for solo 401(k) or SEP IRA contributions for many small business owners, President Trump’s proposed tax rate of 15% could result in small business owners making less plan contributions,” stated Adam Bergman, a tax partner with the IRA Financial Group.

According to Mr. Bergman, since retirement savings is based on the amount of compensation one receives and not on the amount of profits a business generates, the less compensation one receives will directly impact the amount of retirement savings that may be available and could impact the amount of Solo 401(k) plan or SEP IRA contributions available to many small business owners.

The solo 401(k) Plan, also known as the individual 401(k) Plan or self-directed 401(k), is an IRS approved qualified retirement plan that was created specifically for the self-employed. The IRS created the solo 401k Plan to be a cost effective retirement solution for the self-employed or a business owner with no employees. A solo 401K is perfect for sole proprietors, small businesses and independent contractors such as consultants. A solo 401k plan offers the same advantages as a self-directed SEP IRA, but without having to hire a special custodian or create an LLC. With IRA Financial Group’s IRS approved solo 401(k) plan, a plan participant can make annual contributions up to $54,000 or $60,000 over the age of 50, as well as borrow up to $50,000 tax-free, and make traditional as well as tax deferred alternative asset investments, such as real estate.

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.

IRA Financial Group is the market’s leading provider of self-directed IRA LLC and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

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

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Apr 10

Can You Make Contributions to Both a Solo 401k and a SEP IRA?

Yes. You can make contributions to both a SEP and a Solo 401K Plan. In other words, a business can have both a SEP IRA and a Solo 401(K) Plan, although, there is generally no advantage for a business to have both active at the same time.

A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan.

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

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

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

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

In other words, having both a SEP IRA and a Solo 401(k) Plan will not allow a business owner to defer more than $54,000 ($60,000 if the individual is over the age of 50) for 2017. Most individuals will use a Solo 401(k) Plan vs. a SEP IRA since you can reach the maximum annual contribution limit quicker than a SEP IRA since the Solo 401(k) Plan includes both an employee deferral and profit sharing component, whereas, a SEP IRA just includes just a profit sharing component.

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

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Mar 10

Who Will Benefit Most From a Solo 401k Plan?

The Solo 401(k) plan is unique and so popular because it is designed explicitly for small, owner only business. It’s a tax efficient and cost effective plan that offers all the benefits of a Self Directed IRA plan, and includes additional benefits, such as high contribution limits (up to $60,000) and a $50,000 loan feature. There are many features of the Solo 401(k) plan that make it so appealing and popular among self employed business owners. A solo 401(k) Plan is typically used by owner owned business for the following purposes:

  • High Contribution Limits: Under the 2017 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral.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.
  • Loan Feature: While an IRA offers no participant loan feature, the Solo 401k allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose.
  • Finance a Business or investment: Borrow up to $50,000 to finance a business or make an investment.
  • Flexible Investment Options: You can invest in almost any type of investment, including real estate, private business entities and commercial paper and channel the gains back into your 401(k) tax free.
  • Roth Type Contributions: With IRAs, those who earn high incomes are disallowed from contributing to a Roth IRA or converting their IRA to a Roth IRA. The Solo 401(k) plan contains a built in Roth sub-account which can be contributed to without any income restrictions.
  • Cost Effective Administration: In general, the solo 401(k) plan is easy to operate. There is generally no annual filing requirement unless your solo 401(k) plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500).
  • Exemption from UDFI: 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.

Retirement Saving Consolidation Through Rollovers

A solo 401(k) plan can accept rollovers of funds from another retirement savings vehicle, such as an IRA, a SEP, or a previous employer’s 401(k) plan.

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

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Nov 18

Should You Choose a Solo 401k or a SEP IRA?

A Solo 401(k) Plan is an IRS approved retirement plan, which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. The “one-participant 401(k) Plan” or Individual 401(k) Plan is not a new type of plan. It is a traditional 401(k) Plan covering only one employee.  Like a SEP IRA, a Solo 401(k) Plan offers the plan participant the ability to contribute up to $59,000 each year.  Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) became effective in 2002, there was no compelling reason for an owner-only business to establish a Solo 401(k) Plan because the business owner could generally receive the same benefits by adopting a profit sharing plan or a SEP IRA.  After 2002, EGTRRA paved the way for an owner-only business to put more money aside for retirement and to operate a more cost-effective retirement plan than a SEP IRA or 401(k) Plan.

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

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

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

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

Whereas, a SEP IRA would only allows for a profit sharing contribution.  Hence, a participant in a SEP IRA would be limited to 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum of $53,000 for 2016. No employee deferral exists for a SEP IRA.

For example, Joe, who is 60 years old, owns 100% of an S Corporation with no full time employees.  Joe earned $100,000 in self-employment W-2 wages for 2016.  If Joe had a Solo 401(k) Plan established for 2016, Joe would be able to defer approximately $49,000 for 2016 (a $24,000 employee deferral, which could be pre-tax or Roth, and 25% of his compensation giving him $49,000 for the year).   Whereas, if Joe established a SEP IRA, Joe would only be able to defer approximately $25,000 (25% if his compensation) for 2016.

2. No catch-up Contributions: With a Solo 401(k) Plan you can make a contribution of up to $53,000 to the plan each tax year ($59,000 if the participant is over the age of 50).  However, with a SEP IRA, the maximum amount that can be deferred is $53,000 since a SEP IRA does not offer any catch-up contributions.

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

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

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

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

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

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

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

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

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Sep 09

Can You Contribute to Both a Solo 401k and SEP IRA?

Yes. You can make contributions to both a SEP and a Solo 401K Plan. In other words, a business can have both a SEP IRA and a Solo 401(K) Plan, although, there is generally no advantage for a business to have both active at the same time.

A Solo 401(k) Plan includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan.

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

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

Whereas, a SEP IRA would only allows for a profit sharing contribution. Hence, a participant in a SEP IRA would be limited to 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum of $53,000 for 2016. No employee deferral exists for a SEP IRA.

For example, Joe, who is 60 years old, owns 100% of an S Corporation with no full time employees. Joe earned $100,000 in self-employment W-2 wages for 2016. If Joe had a Solo 401(k) Plan established for 2016, Joe would be able to defer approximately $49,000 for 2016 (a $24,000 employee deferral, which could be pre-tax or Roth, and 25% of his compensation giving him $49,000 for the year). Whereas, if Joe established a SEP IRA, Joe would only be able to defer approximately $25,000 (25% if his compensation) for 2016.

In other words, having both a SEP IRA and a Solo 401(k) Plan will not allow a business owner to defer more than $53,000 ($59,000 if the individual is over the age of 50) for 2016. Most individuals will use a Solo 401(k) Plan vs. a SEP IRA since you can reach the maximum annual contribution limit quicker than a SEP IRA since the Solo 401(k) Plan includes both an employee deferral and profit sharing component, whereas, a SEP IRA includes just a profit sharing component.

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

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Aug 12

Millennials and Solo 401(k) Plans

Here’s an article from Rebecca Lake at USNews.com touting the advantages for Millennials to grow their business an retirement by utilizing a Solo 401(k) Plan:

In the world of millennial entrepreneurs, Mark Zuckerberg is the unofficial gold standard for achievement. At the tender age of 32, he’s leveraged Facebook’s (FB) popularity to amass a net worth of more than $35 billion. That’s pretty impressive for a company that got its start in a dorm room.

While Zuckerberg is certainly one of the best known millennial CEOs, plenty of other young adults share a similar ambition to succeed as entrepreneurs. An October 2014 survey from Bentley University revealed that 66 percent of millennials say they’d like to start their own business.

According to the 2016 BNP Paribas Global Entrepreneur Report, so-called “millennipreneurs” have started an average 7.7 businesses, and collectively they hold $5.6 billion in investable wealth. When the profits start rolling in, the big question for these burgeoning business owners is what to do with it. Stuffing it under the mattress is one option but a Solo 401(k) account holds a lot more appeal.

Solo 401(k)s are designed for sole proprietors who are running a business single-handedly and from a wealth perspective, they make a lot of sense for millennial entrepreneurs. Here’s a look at why it’s worth considering if you’re focused on growing your business and your retirement portfolio at the same time.

Higher contribution limits mean more investing power. If your goal is to bank as much of your entrepreneurial wealth as possible, a Solo 401(k) has the edge over other self-employed retirement plans.

Robert Farrington, founder of TheCollegeInvestor.com, uses a Simplified Employee Pension IRA to illustrate how much more a Solo 401(k) can allow you to save.

“While both a Solo 401(k) and a SEP allow you to contribute the same amount for profit-sharing (i.e., the portion of your business’s net profit), the Solo 401(k) also allows you to make an employee contribution,” Farrington says.

That’s where the Solo 401(k) sets itself apart. He gives an example of a millennial entrepreneur with a net business income of $100,000. With the SEP IRA you could contribute $18,587 a year, while in a Solo 401(k), the business would contribute that amount but you could also elect to contribute another $18,000 as an employee. That brings the total annual contribution to $36,587.

That can make a substantial difference in how much wealth a 20- or 30-something could accumulate over time. An annual investment of $18,587 would grow to $1.47 million over 30 years, assuming a 6 percent annual return. A millennial entrepreneur who’s investing $36,587 over that same period with the same annual return, on the other hand, would see their nest egg increase to $2.89 million.

A Solo 401(k) offers a sizable tax break. Besides being able to contribute more to a Solo 401(K), these plans can create some insulation for millennial entrepreneurs who are worried about getting hit with a big tax bill.

Sterling Neblett, a certified financial planner and founding partner of Centurion Wealth Management in McLean, Virginia, says that the tax benefits associated with a Solo 401(k) are significant.

“Let’s say you’re a 33-year-old, self-employed individual with $200,000 in net earnings. Assuming that you fall into the 33 percent federal income tax bracket and a 5.75 percent tax bracket at the state level, you could potentially save up to $20,537 a year in taxes by maxing out a Solo 401(k),” Neblett says.

By comparison, Neblett points out that contributing to a SEP IRA would reduce the tax savings to $14,723 while it drops even further to $6,987 for entrepreneurs who save in a SIMPLE IRA, assuming they’re making the maximum contribution to either plan.

The Solo 401(k) emerges as the clear winner on the tax front. For a millennial entrepreneur who’s focused on growing an existing business or starting a new one, having an extra $20,000 a year to work with can be extremely advantageous.

You’ve got the ability to borrow if you need it. Running a business requires a steady cash flow and if you need money quickly, a Solo 401(k) is an asset you can tap in a pinch. That can be invaluable, says Wayne Bland, a retirement consultant with Metro Retirement Plan Advisors in Charlotte, North Carolina.

“As a small business owner, it’s not uncommon to face a downturn in your business cycle that presents a challenge to your cash flow. While I strongly discourage borrowing from a 401(k) if at all possible, a Solo 401(k) loan is an option you simply don’t have with a SEP or SIMPLE IRA,” Bland says.

“If there are no other funding sources available, you could borrow up to 50 percent of your vested balance or $50,000, whichever is less,” he says. “The loan provision can literally keep the doors of your business open in hard times.”

Do your research before jumping in. Like any qualified retirement plan, a Solo 401(k) does have guidelines that millennial investors need to be aware of. Farrington advises young entrepreneurs to understand the contribution rules.

“One of the biggest hidden pitfalls of a Solo 401(k) is that you can’t contribute more than $18,000 per year yourself and total contributions are limited to $53,000,” Farrington says. “You’d have to do the math each year to ensure that you don’t exceed the contribution limits.”

Making contributions over the allowed limit can trigger a hefty tax penalty that could eat into your bottom line. That’s the last thing you can afford when you’re building personal wealth.

You also need to keep an eye on the calendar, Farrington says. The deadline for opening a Solo 401(k) is Dec. 31 and that’s the cutoff for making employee contributions. You’d have until you file your taxes to make the employer contribution.

Excessive fees are another thing to watch out for, says Scott Patterson, a certified financial planner with Core Financial Resources in Anderson, South Carolina.

“The good thing is that Solo 401(k)s don’t have to be expensive. Many brokerages will file the annual tax return and handle the administrative work very inexpensively,” Patterson says.

Even more importantly, he cautions, millennial entrepreneurs should be mindful of what a particular Solo 401(k) plan offers in terms of investments.

“Make sure you have access to the kind of investments you’re comfortable with,” Patterson says. “Don’t settle for a cheap broker with bad options.”

For more information, or to open your own Solo 401(k) Plan, please contact the IRA Financial Group @ 800.472.0646.

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Jul 18

The Self-Employed 401k Solution

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

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

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

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

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

Solo 401k Solution

The Solo 401(k) Plan Advantage

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

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

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