THE SELF- DIRECTED SOLO 401(K) RETIREMENT PLAN

Transcription

1 THE SELF- DIRECTED SOLO 401(K) RETIREMENT PLAN PH: By: Mat Sorensen & Kevin Kennedy, Attorneys KKOS Lawyers ~ Navigator Business & Retirement Services

2 Disclaimer & About Us DISCLAIMER All information and materials are for educational purposes only. All parties are strongly encouraged to consult with their attorneys, accountants, and financial professionals before entering into any type of investment. This presentation does not constitute an attorney client relationship. ABOUT MAT Partner at KKOS Lawyers, Principal at Navigator. Mat s practice focuses on self-directed IRA and self-directed 401(k) tax and legal issues. Mat is routinely recognized as a leading attorney in the self-directed retirement plan field. Mat is the author of The Self Directed IRA Handbook: An Authoritative Guide for Self Directed Retirement Plan Investors and Their Advisors, an Amazon Best Seller and a required textbook for the Retirement Industry Trust Association s Self Directed IRA Professional Designation Course where he is also an instructor. The Self Directed IRA Handbook is the most widely used book in the self-directed retirement plan industry. ABOUT KEVIN Attorney at KKOS Lawyers, where he advises clients regarding self-directed 401(k)s and other retirement plans. He routinely consults clients and establishes self-directed solo 401(k)s. He also advises clients on self-directed retirement plan transactions and on related tax and legal issues. Kevin is also an experienced business and real estate attorney.

3 Table of Contents 1. What is a Self-Directed Solo 401k 2. Benefits of a SD Solo 401k 3. Myths of a SD Solo 401k 4. Requirements to Establish a SD 401k 5. Setting up a SD Solo 401k 6. Rollovers 7. Contributions 8. Roth Conversions 9. How/What to Invest Using a SD Solo 401k 10. Avoiding Prohibited Transactions 11. Unrelated Debt Financed Income Tax (UDFI) Real Estate Leverage Exemption k Loan for Personal Expenses 13. Distributions 14. Self Directed IRA vs. Self Directed Solo 401k

4 What is a Self-Directed Solo 401k? The IRS calls it a one-participant plan; it is also known as an owners-only plan or a solo 401k plan. It is a qualified retirement plan that is exclusively for business owners and their spouses; it combines the benefits of a typical 401k plan without the complex administrative requirements of a large 401k plan with other employees.

5 Why Are Self-Directed Investors & Self-Employed Persons Using These Plans? Self-Administer & Self-Trustee With No Third Party Custodian Required. Total control with bank account control and investment authority in the hands of the account owner. Greater Contribution Amounts. You can contribute more in a 401(k) than IRAs and can have Roth account options. Loan Options. The account owner can access up to $50K via loan from their account to themselves personally for business start-up or education expenses (or any other personal expense). Leveraged Real Estate Investments. A 401(k) s real estate investments may be leveraged with debt with no UDFI tax.

6 Self-Directed Solo 401k IRA/401k Accounts Rollover XYZ, Inc. (Client s Co.) Contributions Self-Directed Solo 401k Invest Compensation Administered by the Client/Business Owner Client/Business Owner

7 What are the Benefits of a Self- Directed Solo 401k Plan? Grow your Retirement Account quickly through generous contributions limits as high as $52,000 per year (2014), $53,000 per year (2015). Obtain flexibility and control to self-direct investments of the 401k plan because no custodian is required as with a self-directed IRA. Receive tax deductions for contributions made to the 401k plan as both the employee AND the employer as well as having the option to have a Roth 401k account. Take a personal loan from the 401k plan and use it according to your needs. Leverage/Finance your 401k plan real estate investments without being subject to UDFI tax

8 What are Some Common Myths about a Self-Directed Solo 401k Plan? MYTH #1: Everyone who wants to self-direct a retirement account should have a solo 401k. TRUTH: Every client s situation is different; the self-directed solo 401k is a great option for many, but not all clients. MYTH #2: The self-directed solo 401k provides the same creditor protection as an ERISA based large 401k plan with employees. TRUTH: Most state s laws provide the same creditor protection as an ERISA based large 401k plan with employees; but not all. The self-directed solo 401k plan is a qualified plan but it is not subject to ERISA. Yates v. Hendon, 541 U.S. at It does not have the same creditor protections as other ERISA plans, Check your state s laws to find out more. MYTH #3: You can merely set up a new business to adopt a self-directed solo 401k even though you never intend to run an actual business or make contributions to your self-directed solo 410k. TRUTH: You may start a new business to adopt a self-directed solo 401k IF your business is being ran with the intent to be profitable AND you intend to make contributions to your self-directed solo 401k plan.

9 What are the Requirements For Setting up a Self-Directed Solo 401k? The Self-Directed Solo 401k is only for business owners whose business has no other full-time employees other than the owner and spouse. A client may setup a new business at the same time they set-up the Self-Directed Solo 401k. The business owner/client is the 401k plan Trustee and 401k plan Administrator. Since there is no third-party custodian involved, the business owner/client is responsible for properly administering the 401k plan. We have a 401k maintenance service to help with these requirements.

10 (Continued) What are the Requirements of Setting up a Self-directed Solo 401k? Since the only participants of this 401k plan are the business owner(s) and their spouses, this plan is not subject to ERISA, which means administering this 401k plan is much easier than that of a 401k plan adopted by a company with employees. If your business eventually hires full-time employees, this 401k plan will need to be amended; as presently written and approved by the IRS, employees are not allowed to participate; in that event, the plan would become subject to ERISA and administering it would become much more difficult.

11 Setting up a Self-Directed Solo 401k Plan and Other Related Services We will provide you with our IRS Pre-Approved 401k plan documents, as well as the necessary forms to maintain and administer your 401k plan, including but not limited to designated beneficiary forms, contribution forms, rollover forms, 401k loan forms, in-service conversion forms, and distribution forms. We will also provide you with the forms and information to open up the trust bank account(s) for your 401k plan.

12 (Continued) Setting up a Self-Directed Solo 401k Plan and Other Related Services Entity Setup. In addition to setting up a Self-Directed Solo 401k, we can also set up the business or company to adopt the 401k plan; we can also set up an LLC for your 401k to invest into to receive liability protection and to make your real estate and other investments out of the 401k LLC. Miscellaneous. We can prepare the loan documents for you to obtain a 401k loan; or if you intend to convert some of the traditional dollars in your 401k plan into ROTH; or making sure that if you take a distribution that you understand the tax consequences and that it is properly reported to the IRS.

13 (Continued) Setting up a Self-Directed Solo 401k Plan and Other Related Services Tax Reporting. Your 401k plan affords you the opportunity to make a tax-free (roth) or tax-deferred (traditional) return/gain on your investments, so generally, there is no tax return to file. However, if your 401k plan makes certain types of investments, it may be subject to UBIT Tax, in which case a 990-T tax return will need to be filed. Also, if your plan assets exceed $250,000 in a given year, your plan will need to file a informational return known as Form EZ). We can assist with any tax or informational reporting that is required of your 401k plan and we will provide you with a schedule of fees for these services.

14 (Continued) Setting up a Self-Directed Solo 401k Plan and Other Related Services XYZ, Inc. (Client s Co.) Self-Directed Solo 401k 401k/LLC Rental Investment

15 Rollover of Retirement Funds to the Self-Directed Solo 401k Plan You can rollover almost every other type of retirement account, such as an IRA or a 401k with a prior employer. You should only complete a Direct Rollover / Trustee-to-Trustee Rollover; you should not do a 60-Day Rollover as this will trigger a withholding of 20% of the amount that is to be rolled over. You cannot rollover a ROTH IRA to a ROTH 401k account. You cannot rollover a 401k account with an existing employer, unless you qualify for and your plan allows for an in-service withdrawal (e.g. you are 59 ½).

16 Making Contributions to the Self-Directed Solo 401k Plan Employee Contributions. You as the employee can make traditional taxdeductible or Roth after-tax contributions. Annual employee contribution limit in 2014 is $17,500 ($23,000 if age 50+) and in 2015 is $18,000 ($24,000 if age 50+). Employer Contributions. You as the employer can only make traditional tax deductible contributions up to 25% of your employee compensation. You can do a Roth in-plan conversion if you desire in order to make all of your account to Roth funds. The total contribution limit for a participant s account(s) is $52,000 in 2014 ($57,500 if age 50+) and in 2015 is $53,000 ($59,000 if age 50+).

17 Making Contributions to the Self-Directed Solo 401k Plan XYZ, Inc. (Client s Co.) Employer Contributions (Limited to 25% of Employee Compensation) Self-Directed Solo 401k Compensation Client/Business Owner Total Annual Contribution Amount is limited to $52,000 in 2014, $53,00 in 2015

18 Completing an In-plan Roth Conversion The self-directed solo 401k plan allows you to convert amounts from your traditional account into a Roth account. We will provide you with the forms to complete this transaction upon request. Note: There is a fee to complete this transaction. There are taxes associated with such a conversion based on the participant s personal income tax bracket and certain filings which need to be made to document the conversion, but there is not a 10% early withdrawal penalty. Despite the tax, such a conversion makes sense for a client who would otherwise benefit from having a Roth account. It is best to convert the funds when they are in cash. If you convert when the funds are invested you must get a FMV appraisal of the value of the investment before you can convert.

19 (Continued) Completing an In-plan Roth Conversion XYZ, Inc. (Client s Co.) Employer Contributions (Always Traditional) Self-Directed Solo 401k (Traditional Account) Client/Business Owner In-Plan Roth Conversion/Transfer Self-Directed Solo 401k (Roth Account)

20 Using the Self-Directed Solo 401k to Make Investments You can self-direct your 401k Investments into any investment allowed by law. All investment assets should be held/vested in the 401k s name. Examples of common investments include. Real Estate (commercial, residential, raw land, notes/loans, etc.) Brokerage Accounts (stocks, bonds, and mutual funds) Precious Metals Private Companies (not s-corps)

21 Avoid Prohibited Transactions In Your 401(k) Investments If your 401k engages in a prohibited transaction, your 401k will incur severe taxes and penalties (15% excise tax on amount involved and a potential addtional100% penalty if not corrected). IRC 4975 A prohibited transaction comes in three varieties: 1. Per Se Prohibited Transaction: A transaction with a disqualified person. A disqualified person is the 401k account owner, their spouse, children, and parents, as well as companies that are owned 50% or more by disqualified persons AND officers, directors, or highly compensated employees of such companies. A transaction includes a purchase, sale, lease, exchange, loan, extension of credit or services or goods, etc.

22 (Cont d) Avoid Prohibited Transactions (Continued) A prohibited transaction comes in three varieties: 2. Extension of Credit Prohibited Transaction: An extension of credit by or between the 401k and a disqualified person. (exception: 401k loan) 3. Self-Dealing Prohibited Transaction: A transaction when a disqualified person personally benefits from the 401k investments.

23 Using Financing/Loans to Leverage 401k Investments Unlike a self-directed IRA, the self-directed solo 401k plan can obtain financing/loans to leverage real estate investments tax-free, i.e., no UDFI tax. IRC 514 I (9)(C)(ii). However, any loans/financing obtained by the 401k must be non-recourse, i.e., a disqualified person cannot personally guarantee the loan, as that would be considered an Extension of Credit Prohibited Transaction.

24 (cont d) Using Financing/Loans to Leverage 401k Investments Example: John Doe has $80,000 in his 401k account. He would like to purchase a property valued at $200,000. John Doe s 401k can obtain a non-recourse loan of $120,000 to purchase the property. If this were a selfdirected IRA investment, since the loan consists of 60% of the purchase price, there would be UDFI tax on 60% of the profits, so if he later sold the property for $240,000, he would pay UDFI tax on $40,000, which tax rate upon sale is the capital gains rate equating to a sizeable tax bill; however, here, there is no UDFI tax.

25 Taking a 401k Loan A plan participant can receive a personal loan from their 401k up to $50,000 or 50% of the plan participant s account balance, whichever is less. The loan must be properly documented with a promissory note and an amortization schedule. The loan must be paid back within 5 years, with limited exception; payments must be made at least quarterly. The loan interest rate should be the prime rate +2% (currently 3.25% + 2% = 5.25%). The loan can be used for anything the account owner wants (such as start-up business or education expenses) but must be paid back in full or the outstanding balance will be considered a distribution.

26 Receiving a Distribution From Your Self-Directed Solo 401k Plan As with all retirement plans, distributions from your 401k can be subject to taxes and penalties if they are not qualified retirement plan distributions. IRC 72 (t) The rules and requirements for taking a distribution from your 401k are complex and proper counsel should be contacted prior to making a distribution. The rules of distribution vary depending on whether the distribution will come from a Roth 401k account or a Traditional 401k account.

27 Traditional 401k Distributions Distributions from a Traditional Account A distribution is always subject to tax (included in gross income). A distribution will also be subject to a 10% early withdrawal penalty unless one of the following: Age 59 ½ Death Disability Age 55 AND retired

28 Roth 401k Distributions Distributions from a Roth Account Contributions/Converted Amounts are not subject to taxation or the 10% early withdrawal penalty. Gains/Profits will be subject to tax unless they are part of a Qualified Distribution. Gains/Profits will also be subject to a 10% early withdrawal penalty unless they are part of a Qualified Distribution or the participant is age 55+ and retired.

29 (Cont d) Roth 401k Distributions A Qualified Distribution A two-part test: (1) made after age 59 +, death or disability; and (2) the Roth account has satisfied the 5 year rule. Note: The 5 year rule is satisfied when 5 years have passed since contributions have been made to this Roth account OR contributions were made to Roth amounts rolled over to this Roth account.

30 Required Minimum Distributions from the Self-Directed Solo 401k The participant must begin taking distributions from the Traditional account of their 401k at the age of 70 ½. The participant must also begin taking distributions from their Roth account of their 401k at the age of 70 ½. This is unlike a Roth IRA, where there are no Required Minimum Distributions. You could of course roll out the Roth 401(k) funds to a Roth IRA to avoid RMD.

31 Summary of The Self-Directed Solo 401k Plan SUMMARY: The Self-Directed Solo 401k Plan is a great retirement and investment vehicle for business owners whose business has no full-time employees and who want to grow their retirement account(s) quickly through generous contribution limits and self-direct their retirement account(s) into traditional investments (stocks, bonds, mutual funds, etc.) and alternative investments (real estate, precious metals, private companies, etc.).

32 SELF-DIRECTED SOLO 401(K) VS. THE SELF-DIRECTED IRA PH: By: Mat Sorensen & Kevin Kennedy, Attorneys KKOS Lawyers ~ Navigator Business & Retirement Services

33 The REAL Answer Clients often ask which is better, and whether they should set-up a Self-Directed Solo 401(k) or a Self- Directed IRA? Answer: It Depends

34 The Self-Directed IRA Promissory Notes Rental(s) IRA/401k Accounts, Roll-over r Invest Rollover Maximum Annual Contribution Limit of $5,500 (2014/15) Self-Directed IRA r Invest IRA / LLC Administered by a Third Party Custodian Note: Please refer to The Self Directed IRA Handbook, written by Mat Sorensen, for a complete and authoritative analysis of self-directing an IRA.

35 Self Directed Solo 401k Rentals IRA/401k Accounts 401k / LLC Rollover Invest XYZ, Inc. (Client s Co.) Difference #1: For Business Owners Only Maximum Annual Contribution Limit of $52,000 Difference#2: Higher Contribution Limits Self-Directed Solo 401k Administered by the Client/Business Owner Invest Promissory Notes, etc. Difference #3: No self-directed Custodian required. YOU are the custodian b/c you are the Plan Trustee/Administrator and can control account funds and investment transactions

36 Breaking Down the Differences SDIRA No Self-Employment Necessary Maximum Annual Contribution Amount =$5,500 Third Party Custodian is Required No Personal Loans Allowed If Leveraged, Subject to UDFI Tax If Prohibited Transaction occurs, entire SDIRA account is subject to distribution and taxation. Generally less expensive and easier to administer. Solo 401(K) Must be Self-Employed w/ No Fulltime Employees (other than owners and spouses) in company adopting the plan Maximum Annual Contribution Limit = $52,000 (2014) $53,000 (2015) Third Party Custodian is not Required Personal Loans Allowed If Leveraged, not Subject to UDFI Tax on real estate investments If Prohibited Transaction occurs, consequences are typically less harsh than with an SDIRA (only amount involved).

37 Self Directed Investor Account Options By Example Self Directed Solo 401k Self Directed IRA Self-Employed Business Owner w/ No full-time Employees W-2 day job with Company 401k w/ self-employed side business Self-Employed Business Owner w/ multiple businesses Retired investor w/ some self-employment Investor w/ no selfemployment Business owner and spouse are the only employees of the business. They both want to contribute as much as possible per year to grow their account balances. They want to invest in real estate, private companies, and precious metals. Their company should adopt a self-directed solo 401k plan and they can each set up their own account to make contributions. Note: Their company can have part-time employees but these employees cannot participate in the plan. Wants to invest his 401k in assets like real estate which he can t do with his day job 401k. Has IRA and a 401k with a prior employer, both of which are available to rollover. Spouse works part-time in the side business. He/she wants to use debt/financing to leverage his real estate investments. They should adopt a selfdirected solo 401k for their side business. Note: His ability to make contributions to their selfdirected solo 401k will be limited if he has already maxed out his day job 401k. Dentist owns a dental practice with several fulltime employees and a real estate investment co. which has no full-time employees. Wants to invest both into traditional assets (stocks, bonds, mutual funds) and alternative investments (real estate, private companies, etc. He/she should establish a self directed solo 401k for his real estate investment co. Note: He/she can do this because the real estate co. is a separate line of business from his dental practice; he couldn t set up a management co. just for the sole purpose of setting up a self-directed solo 401k for him/her. Retired investor w/ existing IRA or prior 401k funds. Isn t looking to contribute but wants to grow account through investment earnings via real estate. Isn t planning to use debt/financing to leverage investments. He should rollover his retirement account(s) to a self-directed IRA as this structure will be easier to establish and maintain than a selfdirected solo 401k Investor has no selfemployment. Is looking to invest prior 401k and IRA into private companies, real estate, and precious metals. Investor should use a self directed IRA and an IRA/LLC for the planned real estate investments as he/she would not qualify for the self directed solo 401k.

38 THANKS! PLEASE CONTACT US TO START TAKING CONTROL OF YOUR RETIREMENT TODAY PH: By: Mat Sorensen & Kevin Kennedy, Attorneys KKOS Lawyers ~ Navigator Business & Retirement Services