Oct 30

New Podcast – The Trump Tax Plan and 401(k) Plan Retirement Accounts

In his latest podcast, IRA Financial Group’s Adam Bergman discusses the proposed tax plan from President Trump and the potential impact on 401(k) Plan retirement accounts and why the government thinks it needs to lower 401(k) Plan contribution limits.

Podcast 80

Click Here to Listen


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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.


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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Dec 06

Trump Tax Plan May Boost Attractiveness Of Rollover Business Start-Up Solution (ROBS)

This article originally appeared on Forbes.com

The subject of business taxes was a popular theme during President-elect Trump’s election campaign and will surely become a hot topic during his first year as president.  President-elect Trump has stated that he favors a 15% corporate rate as part of his tax plan as well as eliminate the corporate alternative minimum tax. This rate would be available to all businesses, both small and large, that want to retain the profits within the business.

When it comes to using retirement funds to invest in a business involving the retirement account holder or any of his or her lineal descendants (“disqualified persons”) there is generally only one legal way to do it and it involves the purchase of “C” corporation stock (qualifying employer securities) by a 401(k) qualified retirement plan.  The structure is known as a “rollover business start-up” or “ROBS”.

Trump Tax Plan May Boost Attractiveness Of Rollover Business Start-Up Solution (ROBS)The Internal revenue Code explicitly permits the purchase of corporate stock by a 401(k) qualified plan.  Nevertheless, the ROBS structure remains somewhat controversial. Although the Internal Revenue Service (“IRS”) has repeatedly confirmed its legality, it continues to be on the radar of the IRS and Department of Labor (DOL) due to a lack of compliance in some cases.

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 primary downside of the ROBS structure is the use of a C corporation as the business entity, an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are known to have double tax, first, when the company makes a profit, and then to the shareholder on their personal return when dividends are paid. The highest corporate income tax rate is currently at 35%. A sole proprietorship, LLC, or “S” Corporation is treated as a pass-through entity 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.  For example, assuming a corporate and personal income tax rate of 25%, a C Corporation earning $100 would be subject to a tax of 25% ($25) at the corporate level and then the individual shareholder would be subject to a tax of $18.75 on the dividend received ($75 dividend multiplied by a 25% tax rate) for an overall tax of  $43.75. In the case of an LLC, there would be no corporate tax rate and the individual member would be required to pay just $25 in taxes ($100 of allocated profits multiplied by a tax rate of 25%).  Therefore, clearly the use of a C Corporation has been a big reason why many individuals have walked away from using a ROBS solution to buy a business with retirement funds and have instead opted for a taxable distribution.  However, that may all change in 2017 and beyond.

A reduction in the corporate tax rate to 15% as President-elect Trump has promised would certainly make C Corporations a more attractive form of doing business from a tax standpoint than before and should make the ROBS solution a far more attractive option for people looking to use retirement funds to buy a business in 2017 and beyond.

For more information about using your retirement funds to start a business, please contact us @ 8900.472.0646.

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