Self-Directed Solo 401k Plan. Kevin L. Kennedy, Esq. KKOS Lawyers
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1 Self-Directed Solo 401k Plan Kevin L. Kennedy, Esq. KKOS Lawyers 1
2 DISCLAIMER: This presentation is for educational purposes only and is not intended to constitute legal advice, nor does this presentation create an attorney-client relationship. You are encouraged to consult with your attorney, accountant, and financial professional before setting up a solo 401k and/or making investments. 2
3 Why Are We Talking About A Self-Directed Solo 401k? SELF-DIRECTED INVESTMENT VEHICLE ALTERNATIVE TO A SELF-DIRECTED IRA 3
4 Self-Directed Solo 401k Plan BENEFITS REQUIREMENTS SETTING IT UP ADMINISTRATION STRATEGIES PUTTING IT ALL TOGETHER 4
5 Top 10 Benefits of a Self-Directed Solo 401k Plan #1 - TAX DEDUCTIBLE CONTRIBUTIONS #2 - INCOME IS TAX-DEFERRED/TAX-FREE #3 - GENEROUS CONTRIBUTION LIMITS 5
6 Top 10 Benefits of a Self-Directed Solo 401k Plan #4 - EASY TO ADMINISTER / LOW ADMIN COSTS #5 - CHECKBOOK CONTROL #6 - SELF-DIRECTED INVESTMENTS 6
7 Top 10 Benefits of a Self-Directed Solo 401k Plan #7 - ROTH ACCOUNT #8-401K LOAN #9 - NO UDFI TAX #10 - ASSET PROTECTION 7
8 3 Main Requirements to Use a Self- Directed Solo 401k #1 - SELF-EMPLOYMENT #2 - NO FULL-TIME EMPLOYEES #3 - CAN T BE PART OF A CONTROLLED GROUP 8
9 Solo 401k Requirements Self Employment PART-TIME OK NEW BUSINESS OK SOLE PROP / S-CORP / LLC / C-CORP 9
10 Solo 401k Requirements No Full-Time Employees BUSINESS PARTNER OK SPOUSE OK KIDS OK INDEPENDENT CONTRACTOR OK 10
11 Solo 401k Requirements No Full-Time Employees UNDER AGE 21 OK LESS THAN 1000 HOURS / YEAR OK 1 YEAR EMPLOYMENT GRACE PERIOD SOLUTION: AMEND/ADOPT A GROUP 401K 11
12 Solo 401k Requirements Can t Be Part of a Controlled Group RULE: A CONTROLLED GROUP IS TWO OR MORE COMPANIES THAT ARE BOTH OWNED 80% OR MORE BY THE SAME FIVE OR FEWER INDIVIDUALS. RESULT: COMPANIES OF A CONTROLLED GROUP ARE TREATED AS ONE COMPANY FOR 401K PURPOSES. 12
13 Solo 401k Requirements Can t Be Part of a Controlled Group EXAMPLE: ABC Co. OWNED 80%+ BY YOU 5 FULL-TIME EMPLOYEES NO RETIREMENT PLAN 123 Co. OWNED 80%+ BY YOU NO FULL-TIME EMPLOYEES RESULT: YOU CANNOT SETUP A SOLO 401K FOR 123 CO. B/C 123 CO. AND ABC CO. ARE PART OF A CONTROLLED GROUP. 13
14 Solo 401k Requirements Can t Be Part of a Controlled Group EXAMPLE #2: ABC Co. OWNED 51% BY YOU AND 49% BUSINESS PARTNER 5 FULL-TIME EMPLOYEES NO RETIREMENT PLAN 123 Co. OWNED 80%+ BY YOU AND BUSINESS PARTNER NO FULL-TIME EMPLOYEES RESULT: YOU CANNOT SETUP A SOLO 401K FOR 123 CO. B/C 123 CO. AND ABC CO. ARE PART OF A CONTROLLED GROUP. 14
15 Solo 401k Requirements Can t Be Part of a Controlled Group EXAMPLE #3: ABC Co. OWNED LESS THAN 80%+ BY YOU 5 FULL-TIME EMPLOYEES NO RETIREMENT PLAN 123 Co. OWNED 80%+ BY YOU NO FULL-TIME EMPLOYEES RESULT: YOU CAN SETUP A SOLO 401K FOR 123 CO. B/C 123 CO. AND ABC CO. ARE NOT PART OF A CONTROLLED GROUP, UNLESS PART OF AN AFFILIATED GROUP. 15
16 Setting Up a Self-Directed Solo 401k HAVE YOUR BUSINESS ADOPT THE 401K PLAN DOCUMENTS. APPOINT A 401K PLAN ADMINISTRATOR/TRUSTEE. OPEN A 401K BANK ACCOUNT. 16
17 Setting Up a Self-Directed Solo 401k Your Business Solo 401k You 17
18 8 Tips For Administering a Self-Directed Solo 401k #1 TRACK THE FUNDS / MANAGE THE 401K ACCOUNT. #2 DOCUMENT THE TRANSACTIONS (CONTRIBUTION, INVESTMENTS, DISTRIBUTIONS, ETC.). #3 NO PERSONAL USE OF FUNDS / PROHIBITED TRANSACTIONS. 18
19 8 Tips For Administering a Self-Directed Solo 401k #4 ERISA COMPLIANCE IS NOT REQUIRED. #5 FILE IRS FORM 5500-EZ IF $250,000+. #6 ADOPT IRS PLAN AMENDMENTS. 19
20 8 Tips For Administering a Self-Directed Solo 401k #7 REPORT TAX OBLIGATIONS (DISTRIBUTION, UBIT TAX, ETC.). #8 USE IRS PLAN COMPLIANCE RESOLUTION SYSTEM AS NEEDED. 20
21 Administering a Self-Directed Solo 401k Managing the 401k Account: Deposits ROLLOVER CONTRIBUTIONS. EARNINGS. EMPLOYEE/EMPLOYER CONTRIBUTIONS. 21
22 Administering a Self-Directed Solo 401k Managing 401k Account: Contributions RULE: OVERALL ANNUAL CONTRIBUTION LIMIT OF $53,000 ($59,000 IF AGE 50+), OR YOUR COMPENSATION, WHICHEVER IS LESS. TO MAX OUT / REACH THE ANNUAL CONTRIBUTION LIMIT, COMPENSATION MUST BE $140,000 SALARY + (F0R S-CORP); FOR LLC/S0LE PROP/P-SHIP = $175,000+ NET INCOME. COMPENSATION = NET INCOME/EARNINGS (IF S- CORP = W-2 WAGE/SALARY) 22
23 Administering a Self-Directed Solo 401k Managing 401k Account: Contributions EXAMPLE #1: ABC, LLC (SOLE PROP) ANNUAL NET INCOME IS $20,000. THE MOST YOU CAN CONTRIBUTE IS $20,000. NOTE: IF ANNUAL NET INCOME WERE $175,000+, YOU COULD CONTRIBUTE THE FULL $53,
24 Administering a Self-Directed Solo 401k Managing 401k Account: Contributions EXAMPLE #2: 123, CORP (S-CORP). YOUR ANNUAL NET INCOME IS $60,000. YOUR SALARY/WAGE IS $30,000. THE MOST YOU CAN CONTRIBUTE IS $30,000. NOTE: IF YOUR SALARY WERE $140,000+, YOU COULD CONTRIBUTE THE FULL $53,
25 Administering a Self-Directed Solo 401k Managing 401k Account: Contributions RULE: $53,000 LIMIT = $18,000 EMPLOYEE CONTRIBUTION LIMIT + EMPLOYER CONTRIBUTION LIMIT. FOR LLC S/SOLE PROP/P-SHIPS, EMPLOYER CONTRIBUTION LIMIT = 20% OF YOUR NET INCOME. FOR S-CORPORATIONS, EMPLOYER CONTRIBUTION LIMIT = 25% OF YOUR SALARY. 25
26 Administering a Self-Directed Solo 401k Managing 401k Account: Contributions EXAMPLE #3: ABC, LLC (SOLE PROP). ANNUAL NET INCOME IS $100,000. MAX EMPLOYEE/DRAW DEFERRAL LIMIT= $18,000 + EMPLOYER CONTRIBUTION LIMIT (20% X $100,000) = $20,000 TOTAL OVERALL MAX CONTRIBUTION LIMIT= $38,000 (18K + 20K) 26
27 Administering a Self-Directed Solo 401k Managing 401k Account: Contributions EXAMPLE #4: 123, INC. (S-CORP). ANNUAL NET INCOME IS $100,000. SALARY/WAGE IS $50,000. MAX EMPLOYEE/SALARY DEFERRAL LIMIT = $18,000 + EMPLOYER CONTRIBUTION LIMIT (25% X $50,000) = $12,500 TOTAL OVERALL MAX CONTRIBUTION LIMIT= $30,500 (18K K) 27
28 Administering a Self-Directed Solo 401k Managing 401k Account: Withdrawals INVESTMENTS/INVESTMENT EXPENSES. 401K LOAN. ROLLOVERS. DISTRIBUTIONS. 28
29 Administering a Self-Directed Solo 401k Managing 401k Account: Investments 401K LLC. BROKERAGE ACCOUNT. REAL ESTATE, PRIVATELY HELD COMPANIES, PRECIOUS METALS, ETC. VESTING/TITLING SHOULD BE IN THE 401K NAME / 401k LLC Name. 29
30 Administering a Self-Directed Solo 401k Managing 401k Account: Distributions WAIT UNTIL RETIREMENT. IF AFTER 55 AND RETIRED, NO 10% EARLY WITHDRAWAL TAX. IF AFTER 59 ½, NO 10% EARLY WITHDRAWAL TAX. HARDSHIP DISTRIBUTIONS, ETC. 30
31 Administering a Self-Directed Solo 401k Managing 401k Account: Distributions REQUIRED MINIMUM DISTRIBUTIONS (RMD S) BEGIN AT AGE 70 ½. RMD S MUST BE TAKEN ANNUALLY. RMD AMOUNT IS BASED ON AGE AND 401K ACCOUNT BALANCE. FAILURE TO TAKE AN RMD CAN RESULT IN A 50% FEE/PENALTY. 31
32 Self-Directed Solo 401k: Top 6 Strategies #1-401K LLC. #2 - LEVERAGED REAL ESTATE INVESTMENTS. #3-401K LOAN. 32
33 Self-Directed Solo 401k: Top 6 Strategies #4 - UTILIZE A ROTH ACCOUNT. #5 - ROTH IN-PLAN CONVERSIONS. #6 -NON-DEDUCTIBLE CONTRIBUTIONS (MEGA BACKDOOR ROTH 401K). 33
34 Self-Directed Solo 401k Strategies 401k LLC Your Business Solo 401k 401K/LLC You 34
35 Self-Directed Solo 401k Strategies 401k LLC 401k LLC = ASSET PROTECTION. YOU CAN BE THE LLC MANAGER. 401k LLC ACCOUNT. VERY SIMILAR TO THE IRA LLC. 35
36 Self-Directed Solo 401k Strategies Leveraged Real Estate Investments $800,000 $400,000 Solo 401k $400,000 Non-Recourse Loan 36
37 Self-Directed Solo 401k Strategies Leveraged Real Estate Investments EXAMPLE: $800,000 PURCHASE PRICE. 401K INVESTMENT OF $400,000. NON-RECOURSE LOAN OF $400, % LEVERAGE. IRA RESULT: UDFI TAX ON 50% OF INCOME. 401K RESULT: NO UDFI TAX. 37
38 Self-Directed Solo 401k Strategies 401k Loan Solo 401k Promissory Note $$$ / Loan You 38
39 Self-Directed Solo 401k Strategies 401k Loan LOAN LIMIT: 50% OF 401K ACCOUNT OR $50,000, WHICHEVER IS LESS. LOAN IS FROM 401K TO YOU/PARTICIPANT. PROMISSORY NOTE / AMORTIZATION SCHEDULE. 39
40 Self-Directed Solo 401k Strategies 401k Loan 5 YEAR TERM. PRINCIPAL & INTEREST PAYMENT REQUIRED (AT LEAST QUARTERLY). NO RESTRICTIONS ON FUND USE, E.G., FUND YOUR BUSINESS, PAYOFF DEBT, DOWN- PAYMENTS, HARD MONEY LEND, ETC. 40
41 Self-Directed Solo 401k Strategies Roth Account SEPARATE ACCOUNT. CONTRIBUTIONS ARE NOT TAX-DEDUCTIBLE. EMPLOYEE CONTRIBUTIONS ONLY ($18,000 LIMIT). DISTRIBUTIONS ARE TAX-FREE (QUALIFIED DISTRIBUTIONS). 41
42 Self-Directed Solo 401k Strategies Roth In-Plan Conversion Solo 401k Account $$$ Roth Solo 401k Account 42
43 Self-Directed Solo 401k Strategies Roth In-Plan Conversion TRANSFER PRE-TAX DOLLARS FROM 401K ACCOUNT INTO ROTH 401K ACCOUNT. TAXABLE EVENT, I.E., AMOUNT CONVERTED IS INCLUDED IN GROSS INCOME. NO RE-CHARACTERIZATION ALLOWED. 43
44 Self-Directed Solo 401k Strategies Contribution Strategies #1 - EMPLOYEE TAX DEDUCTIBLE CONTRIBUTIONS V. ROTH CONTRIBUTIONS. #2 - MAXIMIZING CONTRIBUTIONS V. SELF EMPLOYMENT TAX SAVINGS. #3 - EMPLOYER TAX DEDUCTIBLE CONTRIBUTIONS V. EMPLOYEE NON-DEDUCTIBLE CONTRIBUTIONS (MEGA ROTH BACKDOOR 401K). 44
45 Self-Directed Solo 401k Strategies Allocating the Employee Contribution $18,000 EX: $3,000 TAX DEDUCTIBLE CONTRIBUTION $15,000 ROTH CONTRIBUTION. EX: $0.00 TAX DEDUCTIBLE CONTRIBUTION $18,000 ROTH CONTRIBUTION. EX: $10,000 TAX DEDUCTIBLE CONTRIBUTION $8,000 ROTH CONTRIBUTION. 45
46 Self-Directed Solo 401k Strategies Maximizing Contribution v. SE Tax Savings EX: $100,000 NET SELF-EMPLOYMENT EARNINGS/INCOME. 25% TAX BRACKET. LLC TAXED AS SOLE PROP. MAXIMUM CONTRIBUTION IS $38,000 ($18, % OF $100,000). INCOME TAX SAVINGS OF $10,000 ($25,000 V. 15,000). SELF-EMPLOYMENT TAX OF $15,300 (15.3% X $100,000). TOTAL TAX = $30,300 ($15,300 + $15,000). 46
47 Self-Directed Solo 401k Strategies Maximizing Contribution v. SE Tax Savings EX: $100,000 NET SELF-EMPLOYMENT EARNINGS/INCOME. 25% TAX BRACKET. TAXED AS S-CORPORATION ($50,000 SALARY/WAGE). MAXIMUM CONTRIBUTION IS $30,500 ($18, % OF $50,000 ($12,500)). INCOME TAX SAVINGS OF $6,375 ($25,000 V. $18,625). SELF-EMPLOYMENT TAX OF $7,650 (15.3% X $50,000). TOTAL TAX = $26,275 ($7,650 + $18,625). 47
48 Self-Directed Solo 401k Strategies Maximizing Contribution v. SE Tax Savings PRIOR EXAMPLES SUMMARY: TOTAL TAX WAS LOWER WITH S-CORP / SALARY EVEN THOUGH CONTRIBUTION WAS LOWER. RUN THE NUMBERS. 48
49 Self-Directed Solo 401k Strategies Mega Backdoor Roth ANNUAL ROTH LIMIT = $18,000. ROTH CONVERSION = TAXABLE EVENT. SOLUTION: MAKE NON-DEDUCTIBLE EMPLOYEE CONTRIBUTION AND TRANSFER TO ROTH = NON-TAXABLE EVENT. 49
50 Self-Directed Solo 401k Strategies Mega Backdoor Roth EXAMPLE: $140,000 NET BUSINESS INCOME. $18,000 ROTH CONTRIBUTION. $35,000 (25% X $140K) AVAILABLE ($53K- $18K). EMPLOYEE NON-DEDUCTIBLE CONTRIBUTION OF $35,
51 Self-Directed Solo 401k Strategies Mega Backdoor Roth EXAMPLE (CONTINUED): $100,000 IN 401K ACCOUNT. $65,000 PRE-TAX CONTRIBUTION/EARNINGS. $35,000 NON-DEDUCTIBLE CONTRIBUTION. OPTION 1: CONVERT/TRANSFER ALL $100,000 TO ROTH ACCOUNT. RESULT: $65,000 IS TAXABLE. 51
52 Self-Directed Solo 401k Strategies Mega Backdoor Roth EXAMPLE (CONTINUED): $100,000 IN 401K ACCOUNT. $65,000 PRE-TAX CONTRIBUTION/EARNINGS. $35,000 NON-DEDUCTIBLE CONTRIBUTION. OPTION 2: CONVERT/TRANSFER $35,000 TO ROTH ACCOUNT. RESULT: 65% OF $35,000 IS TAXABLE = $22,
53 Self-Directed Solo 401k Strategies Mega Backdoor Roth EXAMPLE (CONTINUED): $100,000 IN 401K ACCOUNT. $65,000 PRE-TAX CONTRIBUTION/EARNINGS. $35,000 NON-DEDUCTIBLE CONTRIBUTION. OPTION 3: ROLLOVER $65,000 PRE-TAX TO IRA AND CONVERT/TRANSFER $35,000 NON-DEDUCTIBLE TO ROTH ACCOUNT. RESULT: $0 IS TAXABLE UPON ROLLOVER/CONVERSION. 53
54 Self-Directed Solo 401k Putting It All Together SPOUSE, BUSINESS PARTNER EACH W/ OWN 401K ACCOUNT, CONTRIBUTION LIMITS. SPOUSE/TRUST AS 401K BENEFICIARY. DEC. 31 ST DEADLINE. TAX RETURN DEADLINE (PLUS EXTENSIONS). 54
55 Self-Directed Solo 401k Putting It All Together Rollover Your Business Solo 401k 401K/LLC Roth Solo 401k You Spouse Family Trust 55
56 Self-Directed Solo 401k Plan BENEFITS REQUIREMENTS SETTING IT UP ADMINISTRATION STRATEGIES PUTTING IT ALL TOGETHER 56
57 Self-Directed Solo 401k Plan Kevin L. Kennedy, Esq. KKOS Lawyers 57
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