Understanding Your Self-Directed Solo 401K : The Basics

If you’ve been reading this site, then you know about the benefits of self-directing your retirement account. You’ve read about 401(k) plans, Roth IRAs, and the like. You have all sorts of retirement ideas, and you know exactly how you want to get there. Then you realize that many of these plans aren’t provided by an employer because you’re your own entrepreneur. Suddenly, this idea of a Self-Directed Solo 401K comes along, and you’re forced to ask:

What if you’re in business for yourself, with no full-time employees except for yourself and maybe your spouse?

Small business owners need retirement plans, too, and that’s why this particular account exists: it gives self-employed entrepreneurs the opportunity to create their own 401(k) plans, and utilize the benefits of a 401(k) without being employed by anyone else. It means you can have your freedom and save for retirement. For many people, it’s not only the best of both worlds: it’s a way of life.

Defining the Self-Directed Solo 401K

First things first: we have to be clear about what exactly this retirement plan is. As the IRS website states, the Solo 401(k) plan itself isn’t a new type of 401(k). In fact, it’s the same type of retirement account…with the difference being that it’s designed for someone in charge of their own employment (and not the employment of anyone else except a spouse). If you own and operate your own enterprise by yourself, this is the 401(k) plan for you. The IRS states that these plans have the same “rules and requirements” as other 401(k) plans. If you’ve ever had a 401(k) in the past, that means you already know a little something about how these solo plans work.

But what about that key phrase in front: “Self-Directed”? It’s quite simple: a self-directed account is one you take charge of yourself,

Advantages and Requirements/Restrictions

First, the advantages of this Self-Directed Solo 401K:

  • High contribution limits. If you’re an aggressive sort of investor who wants to put a lot of money away for retirement, this retirement account might be for you. Contribution and deferrals can depend on your circumstances, however, so be sure to review the rules at the IRS website for more details.
  • Salary deferral based on your role as the “employee” of your company comes with a limit, but many investors find that it can be an advantage.

Of course, not everyone is eligible to use and manage their own Self-Directed Solo 401K:

  • If you employee non-qualified people full-time, then your ability to use a solo 401(k) ceases to exist. You can only use this kind of retirement account with yourself and potentially a spouse.
  • If you hold another 401(k) plan by working for a second company, your contributions are still limited to you, not on a plan-by-plan basis.

Who’s Right for the Self-Directed Solo 401K?

Anyone who meets the requirements for this type of retirement account will want to at least consider it, thanks to all of the benefits of investing through retirement accounts. Anyone who already employs themselves at their own company (without other full-time employees outside of a spouse) has some degree of individuality and entrepreneurship about them, so they’ll likely find that self-directing their own retirement plan isn’t a major leap for them.

If you think you not only qualify but would prefer this type of investing, be sure to contact us at 1-866-7500-IRA (472) or keep reading our material here at AmericanIRA.com to learn more information about retirement investing on your terms. You’ll be amazed at what you’re capable of when you take charge of your financial destiny.

 

Self-Directed IRA Plans for Small Business Owners

ereader_news_800_wht_8849There’s a lot of press out there about the Self-Directed IRA.

The problem with the IRA, however, is that while you can roll over as much money that’s already in other qualified retirement plans as you as you want you can only contribute a relatively small amount of new money each year. In 2015, most people can contribute up to $5,500 into a traditional or Roth IRA, provided they meet the income qualifications (double that amount to account for spousal IRAs, in the case of married couples where one spouse has less than $5,500 in earned income.

There is a special ‘catch-up’ provision that allows individuals age 50 or older to contribute an additional $1,000 per year. But that still leaves Self-Directed IRA holders with a relatively small amount of allowable IRA contributions each year.

Many of our clients find that while they are very attracted to the idea of taking personal control over their retirement investments rather than delegate it to some mediocre mutual fund or money manager they’ve never met, they would like to contribute substantially more money to the strategy.

Fortunately for them, there’s a solution: the option of self-direction also extends to a number of other retirement plans.

Let’s take a look at some options:

Simplified Employee Pension plans (SEPS)

gold_nest_egg_ribbon_800_wht_2725(1)These plans allow employers to make substantial contributions toward employees’ retirement security, but they are much easier to set up than large 401(k) and other plans. These plans are very popular among owner-employees of very small companies with no or few full-time employees other than the owner, because they allow for a contribution of up to 25 percent of compensation, or $53,000 per year (whichever is less). In most cases, that is substantially more than an IRA alone will allow.

Moreover, contributions to a SEP do not negatively affect your eligibility for contributions to an IRA. You can do both.

Solo 401(k) Plans

These are 401(k) plans that are specially designed for very small companies with just one or two owner/employees – commonly a married couple. These plans allow for both employee and employer contributions, and in many cases allow for even greater allowable contributions than the SEP. These plans are much easier and cheaper to establish than traditional pension plans and full-scale 401(k) plans, and also allow for substantial asset protection against the possible claims of creditors.

[tweetthis twitter_handles=”@iraexpert” hidden_hashtags=”#SelfDirectedIRA”]There’s a lot of press out there about the Self-Directed IRA…[/tweetthis]

The Solo 401(k) is also available in a Roth option. That means you can make contributions on an after-tax basis, and assets grow free of federal income taxes for as long as you live. They are also not subject to required minimum distributions.

SIMPLE IRAs

These plans are sort of a 401(k) lite, for employers with fewer than 100 businesses. business_woman_holding_briefcase_17207Employees can make pretax contributions to these plans, and employers can make matching or flat-rate contributions on employees’ behalf (subject to certain rules).

We have hundreds of small business owner clients nationwide that use accounts like these to help them direct tax-advantaged retirement dollars at potentially lucrative but unconventional IRA assets like direct ownership of real estate, gold and precious metals, tax liens and certificates, farms and ranches, partnerships and LLCs, closely held businesses, foreign assets, oil and gas, non-traded securities, private placements, venture capital and much more.

If you think you can benefit from this kind of freedom within your retirement investments, and you want to take more control over your own retirement assets, please call us right now at 866-7500-IRA(472). Or visit us online at www.americanira.com for much more information about all aspects of self-directed retirement investing.

 

 

 

 

 

 

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8 Steps to A Successful Retirement Including Tax Advantaged Self-Directed IRAs

Investors need every break they can get and tax advantaged Self-Directed IRAs are an important part of that formula.

It’s not easy these days to amass a nest egg sufficient to provide for real retirement security. A long period of stubbornly low interest rates has resulted in reduced returns on investments, lower dividends and lower income available from annuities and other traditional income-generators.

  1. Don’t forget health care expenses. For example, Medicare doesn’t mean “free health care.” You still have substantial deductibles to meet under Medicare Part A, unless you cover them with Medigap plans, Medicare Advantage, etc. You may also have at least some prescription drug expenses to consider, even if you have Part D or drug coverage within a Medicaid Advantage plan. Furthermore, consider the substantial cost of long term care coverage, including adult day care and skilled nursing home coverage. These types of facilities receive little or no coverage under Medicare. You’ll have to fund them out of pocket, or carry long-term care insurance.
  2. Avoid the scammers. Do your research and only invest with proven performers. If you use a Registered Representative, you can check out the disciplinary and enforcement records of your financial advisor with FINRA’s BrokerCheck.
  3. That doesn’t mean just holding assets in stocks, bonds and cash – though that’s a great start. You should also consider other asset classes that can accumulate tax advantaged profits within a Self-Directed IRA including real estate, gold and precious metals, foreign investments, direct ownership of property via a Real Estate IRA, tax liens and certificates and other out-of-the-box asset classes.
  4. Stay out of consumer debt. Yes, some debt can pay off – like debt for a lucrative degree that enables you to earn a better living and quickly pay off any student loan. But credit card debt, appliance loans, rental fees and most car notes will eat away at your choices and your eventual retirement security like a cancer.
  5. Take advantage of every tax-advantaged dollar you can contribute. That means making the most out of your IRA eligibility, 401(k) eligibility and other tax-advantaged retirement savings opportunities, to include a Self-Directed IRA and/or 401(k), SIMPLE or SEP component.
  6. Keep some assets in taxable accounts, as well. These assets allow you to tap them prior to age 59½ with no tax penalty, and also qualify for lower long-term capital gains rates if you hold them longer than a year. You can also practice tax loss harvesting strategies with these investments to further minimize your tax bill.
  7. Plan for a long life. Many people are living two or three decades into retirement now, and sometimes even longer. If you are married, the chance of at least one of you living into your 90s is very high. Plan accordingly by saving aggressively, and consider the role of permanent life insurance and life annuities in your portfolio.
  8. Speaking of Medicare, don’t miss your enrollment deadlines! You must enroll in Medicare during your open enrollment period, or face penalties. If you are turning 65 this year or next year, you should become very conversant with your options and requirements. Read up on open enrollment policies with the Center for Medicare and Medicaid Services

American IRA, LLC is a leading financial services company specializing in providing third party administrative services for Self-Directed IRAs and other retirement accounts. Our offices are in Asheville and Charlotte, North Carolina, but we cheerfully work with investors nationwide. To learn more about the benefits of self-directed retirement accounts, visit us at www.americanira.com, or call us today at 866-7500-IRA(472). We look forward to working with you!

Why Consider a Self-Directed Solo 401(k) Plan

If you are like most small, independently-owned business owners, you probably want to be able to pull as much cash out of the business as you can, put it aside on a tax-advantaged basis, and at the same time protect your growing nest egg from possible creditors.

This is a problem for many successful business owners, because they make too much money to qualify for tax-deductible IRA contributions.

Introducing the Self-Directed Solo 401(k)

For many business owners, the solo 401(k) has become one of the most attractive ways for them to set aside retirement funds – not least because of the extraordinarily high potential contribution limits compared to IRAs. Much of the advantage stems from the ability to combine the ‘employer contribution’ with the ‘employee’ contribution. This is a particularly potent idea for those business owners with few or no employees besides the owner and perhaps a spouse: The employer contribution doesn’t have to be spread among many employees. Instead, the benefits are concentrated with the owner.

2015 Contribution Limits

For 2015, any participant age 50 or less can contribute up to $18,000 in employee-deferred compensation (the elective deferral limit). Normally, these are made pre-tax, although an after-tax version that grows tax-free (the Roth option) is also available for those who would prefer to pay taxes now in exchange for a lifetime of tax-free growth.

As for the employer contribution, the plan sponsor may contribute up to 25 percent of your compensation up to $265,000 as an employer contribution (for corporations or multiple-member LLCs) or 20 percent in the case of sole proprietors and single-member LLCs. (The difference is due to the effect of self-employment taxes on contributions).

Catch-Up Limits

For those over age 50, the maximum amount of elective deferral contributions is increased to $24,000, either in pre-tax or after-tax dollars. Combined with the potential employer contributions, a business owner or entrepreneur could actually contribute up to $59,000

In contrast, the most an individual can contribute to an IRA or Roth IRA is $5,500 ($6,500 in the case of those over age 50). Likewise, the most you could set aside for yourself using a SIMPLE IRA is $12,500

Loans

401(k)s offer the ability to borrow from your plan for any purpose. This is a unique feature not allowed in any other retirement plan. Generally, if you choose to borrow from a 401(k) plan, you must repay the loan with interest within five years, or the unpaid balance is counted as a distribution. In this case, it could generate income tax in the current year, as well as penalties for early withdrawal.

Self-Directed Solo 401(k)s

You are not limited to the usual menu of mutual funds and other paper investments offered by most investment companies. By opening a solo 401(k) with American IRA, LLC, it is very easy to set up a truly Self-Directed Solo 401(k). This option opens a vast array of alternative investment options:

  • Real estate
  • Gold, silver, platinum and palladium coins and bullion
  • Farms and ranches
  • Private businesses, partnerships, LLCs and C corporations
  • Tax liens and certificates
  • Private banking and lending
  • Hard money
  • Land banking

And much more.

For more information about setting up your own Self-Directed Solo 401(k) plan, or about self-directed retirement strategies in general, visit us at www.americanira.com, or call us at 866-7500-IRA(472).

Self-Directed IRAs and How to Title Assets

You’ve taken the time to do everything else right. But there’s one item that seems to trip people up and sometimes causes some problems with Self-Directed IRA investing: Titling and vesting.

Here are some things to keep in mind:

You aren’t buying a property. Yes, you might be giving us the direction to execute a purchase, but you aren’t buying the property. Your IRA (or other self-directed retirement account) is.

It’s therefore very important to have all your IRA’s documents of ownership reflect that. Otherwise, the IRS could take a look at it and decide that the IRA doesn’t really own the asset. If you accidentally list yourself as the owner on the title, rather than your IRA or other account, they will likely deem that you have taken personal possession or ownership of the asset – and disallow the IRA treatment.

That could cost you big time in taxes, court costs, penalties and headaches.

So when you hold an IRA asset with us, don’t hold anything in your name, personally. Instead, you should title the asset as follows: American IRA, LLC FBO Client Name TYPE OF IRA/401k” OR “American IRA, LLC FBO Account Number”.

If there are multiple owners – for example, if the asset is held jointly with someone else, outside the IRA, your title should reflect that. Add the language “X percent, undivided interest,” with “X,” of course, representing the percentage of ownership interest your IRA has in the investment.

Note: Some states may have specific provisions on how property must be titled or vested. Make sure you consult with an attorney licensed in your state for specifics, as American IRA does not provide legal advice.

Exception

Do you hold property within an LLC in your IRA? Then the title doesn’t go in the IRAs name, but in the name of the LLC itself. If there is any doubt about how you should be titling assets, give us a call at 866-7500-IRA(472).

Signing Documents

Remember that you are not the signature authority on Self-Directed IRA transactions, except under certain circumstances. Generally, you should not sign documents yourself, but simply note them as “read and approved.” You then forward them to us, American IRA, LLC, your third-party administrator, and we handle the rest – including the signature line. You must sign them and date them as “read and approved,” however. American IRA, LLC cannot make any buy or sell transactions, other than receiving payments, without your approval.

 

 

 

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Your 401k Affects Your Self-Directed IRA

Your 401k Affects Your Self-Directed IRARetirement planning has something in common with pharmacology: Just as a doctor needs to understand how certain drugs may interact with one another, retirees and those who help clients plan for retirement should also understand how assets in different kinds of retirement accounts, or participation in a workplace plan such as a 401k, 403b or a defined benefit pension plan affect one another as how your 401k affects your Self-Directed IRA.

Background

Back in 1974, when Congress first passed ERISA, or the Employee Retirement Security Act – the law that authorized the IRA as we know it – they wanted the tax benefits to accrue primarily to people who, for whatever reason, were left out of the employer pension plan safety net. Of course, that safety net was much more robust in 1974 than it is now. At any rate, since Congress was giving up some current revenue and subsidizing retirement savings in IRAs in the form of an income tax exclusion, they wanted to focus that subsidy on those who needed it most: People who had no pension plan at work to fall back on.

They also wanted the benefits to accrue mostly to lower-income and middle-class families. The wealthier, it was thought, could take care of themselves with or without IRA contributions.

And so in order to meet these objectives, Congress came up with a scheme to set limits on who could deduct or exclude amounts contributed to IRAs from their income: Those who had a retirement plan at work had lower limits on allowable deductible contributions than those who didn’t. Furthermore, higher income individuals had their ability to deduct contributions restricted or denied altogether.

While over time the numbers have been adjusted to account for increases in the cost of living, we still have the same system in place for traditional (non-Roth) IRAs: You can contribute more on a deductible basis if you are not covered by a retirement plan at work than if you are. If your income is above a certain level, you may have your ability to deduct contributions restricted. You can, still, however, make non-deductible IRA contributions even if you fall above the income thresholds, up to the maximum total IRA contribution limit, which in 2014 is $5,500. Those age 50 or older can make an additional $6,000.

2014 Contribution Limits

As we mentioned, there are two tables defining allowable contribution limits. If you are covered by a retirement plan such as a 401k, you have to use the more restrictive of the two tables.

2014 Contribution Limits 1

2014 Contribution Limits 2

Note: These are the limits for 2014. If you’re reading this blog post after April 15, 2015, see www.irs.gov for the updated contribution limits, as appropriate. Note that for IRAs, you have up until April 15th of the following year to make contributions to an IRA for the previous year. This is different from the 401k deadline: If you are a 401k plan sponsor or contributor, you must complete all your contributions prior to January to have them count for the year.

Note as well that if both you and your spouse are not covered by a retirement plan at work, there are no phaseouts to worry about – you can contribute up to your maximum annual limit – again, $5,500 for 2014 – and double that for married couples, since you can make a spousal IRA contribution, as well. And don’t forget about the extra $1,000 ‘catch-up’ contribution.

Also, don’t let the income limits discourage you. Even if your modified adjusted gross income reaches the income phaseout limits, you can still make contributions to a traditional IRA on a non-deductible basis, provided you have at least that much in earned income.

So you can still get the benefit of tax-deferral on compounding and interest, plus the creditor protection features of IRAs, even though you don’t get the deduction on the contribution itself. Be sure to fill out an IRS Form 8606 if you make non-deductible IRA contributions so you will get credit for the taxes you did pay on money you contributed. Otherwise the IRS might not credit you properly and you will wind up paying needlessly higher taxes when you take the money out.

Since Your 401(k) Affects Your Self-Directed IRA, Many People Ask Whether They Can Max Out Both

In theory, contributing to your IRA does not limit your ability to contribute to your 401k plan, nor vice versa – though you may not be able to deduct some or all of your IRA contribution.

Roth IRAs and 401(k)s

Roth IRAs work differently than 401ks. Since the IRS is still getting its tax revenue on money you earned that you contribute to a Roth IRA (Roth contributions are not tax-deductible), then the original thinking when Congress passed ERISA doesn’t apply. Consequently, Uncle Sam doesn’t care if you also have access to a retirement plan: They are quite happy to let you contribute the maximum $5,500 annual limit (again, add another $1,000 in ‘catch-up’ contributions if you are age 50 or older), no matter what kind of plan you have at work. Contributions to or eligibility for a workplace retirement plan has no effect whatsoever on the amount you can contribute to a Roth IRA. The only factors are your earned income, which must be sufficient to cover the contribution to the Roth IRA, and your overall modified adjusted gross income as defined here:

2014 Contribution Limits 3

If you have more questions about how your 401k affects your Self-Directed IRA, call us today at 866-7500-IRA (472), or visit us at www.AmericanIRA.com. We’ll be happy to help!

 

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Deduction Limitations for Self-Directed IRAs (Traditional)

Self-Directed IRA Contribution LimitsWhen Congress passed the Employee Retirement Income Security Act of 1974 (ERISA) – the law that created the traditional Self-Directed IRA we still use today, lawmakers recognized that we as a country had a vested interest in encouraging workers to save for their own retirement security. And so they did so by granting a tax incentive: Contribute to these accounts, thereby committing to keep your money in the IRA until retirement age or pay a 10 percent early withdrawal penalty (to keep people honest!) and the IRS will let you take an immediate tax deduction for the contribution. For most people, they would not be taxed on money they weren’t consuming. By essentially deferring consumption and using the IRA, they can invest what would have been taxed, as well. And as a sweetener, the IRS let investors and savors defer income taxes on dividends and interest, as well.

Note: This article focuses specifically on issues related to the traditional IRA – whether self-directed or not. If you want information on the Roth IRA, that’s an upcoming blog post, so stay tuned!

Now, that tax deferral used to be a bigger deal than it is today, at today’s substantially reduced dividend levels and interest rates (remember the 70s and 12-13 percent mortgages?!). But the tax deferral still has significant value. And for active traders, it has even more – IRAs allow investors to avoid paying capital gains taxes on their trades.

But the Congress did not intend that tax break to go on forever. They designed the IRA so that the Treasury would, eventually, get that tax revenue it gave up when you made the contribution.

Congress also did not want just anybody taking the tax break. Instead, they wanted to focus the benefits of the IRA for people who were earning middle to upper-middle class incomes – especially if they do not have a retirement plan at work. And so Congress limited the ability of higher-earning workers and those with access to workplace plans to deduct contributions. (These workers may still make non-deductible contributions, up to $5,500 in 2014, but the current year tax breaks are still mostly reserved for those with more moderate incomes and those who do not have a workplace retirement plan.

Here are the tables for 2014, right from the IRS:

Self-Directed IRA Contribution Limits IRS 2

Normally, you must make IRA contributions with earned income. However, if you qualify, you can also make contributions for your spouse, even if your spouse is not working outside the home and therefore does not have earned income.

Applicability to Self-Directed IRAs

If you have a Self-Directed IRA, the income limitations on the allowable contribution are exactly the same. However, many Self-Directed IRA owners choose to boost their effective investments within their IRAs by using leverage: That is, borrowed money.

Generally, you can borrow up to about two times the assets within a Self-Directed IRA, or a little less, provided you do so on a non-recourse basis. In other words, the most you will be able to borrow is two dollars per dollar of collateral within the IRA. For example, the most companies that specialize in IRA lending will lend is 65 percent of an investment – you would have to start out with 35 percent down – even for real estate loans.

You cannot pledge anything outside the IRA as collateral for a loan to your IRA, and your IRA cannot borrow from you, from your spouse, your descendants or ascendants, nor any entity any of these people control.

By borrowing money and using leverage in this way, however, you can effectively nearly triple the amount of capital at work in your Self-Directed IRA.

For example: You start with a $70,000 balance in your Self-Directed IRA. You identify a property selling for about $200,000 and you would like to acquire it using your IRA. Your $70,000 that you have available down is sufficient for a 35 percent down payment. The lender puts up the remaining $130,000, so your IRA effectively has a $200,000 asset generating income and capital gains.

Caution: It’s not all gravy. The lender charges interest, of course. But more directly, the IRS only allows you to defer taxes on income attributable to your own contribution! Not on the income resulting from the money you borrowed!

Under unrelated debt-financed income tax rules, you will still have to pay income tax on 65 percent of the income your property generates.

This is something that catches some Self-Directed IRA investors unaware, but it’s important to know about, because you will need to have the cash ready from somewhere to pay the income tax!

This can be a problem. But with the right kind of planning well ahead of time, you can minimize or eliminate its effects. For example: Had an IRA owner in this situation not used an IRA for the transaction, but kept the assets in a self-directed solo 401(k) plan instead, the unrelated debt income tax would not have applied!

This is an example of the value of using an administrator with specific expertise in self-directed retirement accounts: Asset location can make a big difference when it comes to self-directed retirement accounts!

For more information on IRA deduction limits, see IRS Publication 590, Individual Retirement Arrangements. Or better yet, give us a call at 866-7500-IRA (472), or visit us at http://www.americanira.com. One of our experts will be able to boil things down for you quickly and help you apply it to your own situation, in conjunction with your own financial advisor.

 

 

 

 

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Can You Use Self-Direction in a 401(k)

Self-Directed 401K, Solo 401KThe use of Self-Directed IRAs, is gaining increasing popularity and acceptance with financial advisors, the media and the financial community. However, some individuals may be frustrated with the relatively low contribution limits available with IRAs. Is it possible to take advantage of the powerful concept of a Self-Directed 401(k) plan?

It turns out that yes, you can employ a Self-Directed 401(k) plan. Indeed, there are a number of advantages in doing so. But you do need to control your 401(k) plan. Self-direction is not something you are going to be able to do with an off-the-shelf 401(k) solution from a broker-dealer or mutual fund company. And it’s not an option your employer is likely to make available for you, if you happen to work for someone else.

Solo 401(k)s

Because the owner of the business sponsoring the Traditional 401(k) plan has to approve the concept of self direction, many 401(k) plans we see that allow for self-direction are actually “solo 401(k) plans.” That is, they were designed to work for a self-employed individual, LLCs, corporations, and partnerships.

These plans work well for self-employed individuals, LLCs, corporations, and partnerships because of the low startup costs and relatively high contribution limits. You can contribute up to $17,500 per year as an employee. On top of that, the business can also contribute up to 25 percent of compensation as an employer match. (Self-employed individuals must subtract half of their self-employment tax from total compensation before calculating allowable contributions.

Those participants over 50 may contribute an additional $5,500 in “catch-up” contributions.

Advantages of Self-Directed 401(k)s

  • Relatively high contribution limits compared to IRAs
  • Tax deferral of contributions.
  • Substantial protection from creditors
  • No unrelated debt-financed income tax liability
  • Opportunity for greater diversification into different asset classes
  • Qualifies for tax credit for startup costs for small business retirement plans
  • More control over fees. Mutual funds add a substantial expense ratio to your mutual fund holdings. With self-directed investments, you control the fees.
  • Ability to borrow from 401(k)s

Self-Direction vs. Brokerage Windows

Note that Self-direction and the use of brokerage windows are not quite the same thing. A brokerage window within a 401(k) plan allows you to maintain an account with a securities broker-dealer. That allows you to buy and sell individual securities through your 401(k). So if you want to restrict yourself to trading publicly-traded stocks, bonds, ETFs and closed-end funds, and you want the freedom to make intra-day trades, a brokerage window can service this purpose.

However, there are many, many types of investments that you can make using a self-direction option within a 401(k) that you cannot make with a brokerage window. Your broker/dealer cannot help you buy an individual piece of rental property, for example.

For more information, give us a call at American IRA, at 866-7500-IRA (472). We are an experienced third-party administrator specializing in self-directed retirement accounts. We look forward to working with you!

 

 

 

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Self-Directed Retirement Plans for Small Business Owners – An Overview

Self-Directed IRA, Self-Directed Solo 401KMuch has been written about the Self-Directed IRA. The concept is beginning to catch on more and more among entrepreneurially-minded and independent investors who aren’t satisfied with the modest, watered-down expected returns usually offered by run-of-the-mill investment companies, mutual funds, annuities and the like.

We are big fans of the Self-Directed IRA, of course – but the Self-Directed IRA has one major drawback compared to taxable investments: A $5,500 ceiling on annual contributions!

Yes, those who are age 50 or older can make an additional $1,000 per year in catch-up contributions. But that’s still a very modest sum compared to a lot of minimum investment figures and the real-world liquidity needs of a lot of assets held within a Self-Directed IRA.

Even if you rolled over a larger sum from another retirement account into a Self-Directed IRA, you are still constrained by the relatively low contribution limit on IRAs.

Fortunately, for many people, there are other options.

If you own a small business, you may be able to open up a self-directed small business retirement plan. Specifically, you can choose to establish one of these popular self-directed retirement plans:

  • Self-Directed Solo 401(k)
  • Self-Directed Simplified Employee Pension Plan (SEP)
  • Self-Directed SIMPLE plan

Each of these options offers most of the advantages of Self-Directed IRAs – but with significantly larger maximum annual contributions.

Self-Directed Solo 401(k)s

Solo 401(k) plans allow you, as an employee of your own entity, to set aside as much as $17,500 per year. For those over 50, you can contribute another $5,500 per year above that for a total of $23,000. The employee portion may be contributed as a Roth. That by itself is a big boost over the contribution limits available with Self-Directed IRAs.

  • The total combined contribution including the employee and employer may be as high as $57,500, depending on the circumstances. However, the IRS does limit the employer contribution to a maximum of 25 percent of employer compensation.
  • The Solo 401(k) can also be structured to allow for loans from within the plan. The maximum loan is $50,000 or 50% of the account balance, whichever is less.
  • The Solo 401(k) plan is designed for sole owners, corporations, LLCs, and partnerships.
  • One advantage to Solo 401(k) plans is they are not subject to unrelated debt taxable income (UDTI) under some circumstances unlike other retirement plans. This is of interest to those who plan to employ leverage within their self-directed 401(k)s, such as to buy real estate.

Self-Directed SEP IRA

  • This popular option allows for contributions of up to 25 percent of compensation, to a limit of $52,000 as of 2014.
  • Self-Directed SEPs can work well for sole proprietors and the self-employed/independent contractor. They can also work for partnerships and S-corporations, as well.
  • If you have employees, the SEP allows you to include them in the plan more efficiently than the Solo 401(k) plan. Administrative costs are also low compared to 401(k) plans and other plans designed for larger businesses.

Self-Directed SIMPLE

  • This plan is designed for small businesses with fewer than 100 employees who do not want the administrative burden of establishing a full 401(k) plan.
  • Employees can contribute up to $12,000 per year, and those over age 50 can contribute an additional $2,500 in “catch-up” contributions as of 2014.
  • Corporations/employers can also contribute to employees’ plans. But they are not required to, and can change the contribution each year, based on cash flow and any other factor they like.
  • This option may be appropriate for those business owners who have employees and who want to be able to offer them a valuable incentive while still retaining flexibility to contribute to their own accounts – and manage them on a self-directed basis.

Need more information? Give us a call! We are at 866-7500-IRA (472). We look forward to serving you.

 

 

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The Solo 401(k) Plan for the Self-Employed

Many self-employed individuals are looking for ways to set money aside, outside of the business, for retirement – but find they earn too much to qualify for IRAs, or that the $5,500 allowable contribution limits for IRAs are suffocatingly small. Fortunately, if you’re self-employed or the owner/employee of your own corporation, you may have a solution: The Solo 401(k), sometimes called the individual 401(k).

History of the Solo 401(k)

The Solo 401(k) became a reality in 2001, with the passage of the Economic Growth and Recovery Tax Relief Reconciliation Act – the same law that passed the so-called “Bush Tax Cuts” that politicians had been fighting about for more than a decade.

The law not only cut tax brackets for all taxpayers and lowered capital gains taxes, but it also relaxed the administrative requirements for 401(k)s for very small companies that only intended to cover the owner, or the owner and his or her spouse, under the plan.

Do you qualify for a Solo 401(k)?

To contribute to a Solo 401(k), you must have at least some self-employed income for the year. You do not have to be self-employed full-time. A number of our clients work for a corporation full time, and then do consulting work and route a large amount of their consulting income into a solo 401(k) plan.

Types of Solo 401(k)s

You can choose a traditional broker-supported Solo 401(k), in which a brokerage company selects the allowable investment options within the fund for you, or you can choose to control your investment menu yourself with a self-directed 401(k) plan – which is our specialty at American IRA.

The Self-directed 401(k) allows you to invest in a much broader array of investment options and asset classes than are normally available in a 401(k) package you can get from an investment house. For example, by establishing a Solo 401(k) with us, you can diversify your retirement assets – depending on your own personal strengths, expertise, and circumstances, into the following kinds of assets:

o   Rental real estate

o   Commercial real estate

o   House-flipping

o   Gold, silver and/or platinum

o   FOREX

o   Foreign real estate

o   Land banking

o   Tax liens and tax lien certificates

o   Closely held companies

o   Private lending

o   Private equity

o   Venture capital

o   Partnerships and LLCs

… and much more.

Roth Solo 401(k)s

In a relatively recent development, the IRS has begun to allow for designated Roth accounts within Solo 401(k)s. So if you don’t need an immediate tax deduction but you are more attracted to the prospect of unlimited tax-free growth, you may want to explore the Roth option within a Solo 401(k). Note that some employer-sponsored or broker-sold 401(k) plans do not allow for designated Roth accounts, so read plan rules carefully. With Solo 401(k)s, including self-directed plans, you can generally design the plan rules yourself, within certain limits.

Who Should Consider a Solo 401(k)?

A Solo 401(k) could work very well for you if:

o   You are self-employed, or the owner-employee of a corporation or LLC with no full-time employees other than your spouse.

o   You want to increase your retirement savings.

o   You want a lower current tax liability or to increase your available tax deductions.

o   You haven’t been able to contribute the max to a tax-deductible IRA or Roth IRA because of income limitations.

o   You have an uneven income that varies substantially from one year to the next, so you can’t commit to a fixed contribution every year.

o   You want to minimize paperwork and administrative expense.

o   Your earnings are significant enough to save substantial amounts of money every year. If you have the income to support it, a solo 401(k) will allow you to save as much as $52,000 per year if you are younger than 50, or up to $57,500 for those age 50 and older.

o   You want the flexibility to take a loan out of, or borrow against your 401(k) balance. 401(k) rules allow account holders to borrow up to $50,000 of their 401(k) balances. Not every plan allows for plan loans, however.

Contribution Limits

Allowable annual contributions to 401(k) plans are per person. So you can’t double up on two max-funded 401(k) plans. You can, however, contribute to multiple 401(k) plans, as long as you don’t exceed the overall annual limits.

If you’re a business owner, you get to wear two hats when it comes to Solo 401(k) contributions. For tax year 2014, you can make elective deferrals of up to $17,500, or up to $23,000 if you are age 50 or over.

In addition, in your role as your own employer, you can elect to contribute up to 25 percent of compensation (as defined by your plan rules), or if you are self-employed, up to your earned income after deducting one half of your self-employment tax and whatever elective deferrals you made to the plan for the year.

This sounds complicated, but give us a call and we can walk you through your options.

Notes

Unless you invest exclusively using a designated Roth account, Solo 401(k) plans are subject to required minimum distribution rules. So you must begin withdrawing from your plan and paying taxes on those withdrawals shortly after the year in which you turn age 70½.

For more information, see Department of Labor Publication 4222, 401(k) Plans for Small Businesses. Better yet, give us a call at 1-866-7500-IRA(472). We look forward to hearing from you!