401 k plans for small business
When was the Solo 401k first available?
Employer-sponsored retirement plans have been about since the nineteenth century. The IRS has confirmed which the self-directed 401k plan continues to be available considering that the creation in the 401k in 1974, as a result of the enactment in the Employee Retirement Income Security Act of 1974 (ERISA). However, solo 401k plans didn’t gain popularity until 2002 caused by updated tax law. The solo 401k law change was created under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTTRA). The law change essentially caused it to be more advantageous to give rise to a solo 401k than other self-employed retirement plans including the SEP IRA and SIMPLE IRA because higher contributions can be produced to a solo 401k along with including the choice to process participant loans (solo 401k loans).
What can be a Solo 401k?
* Name: When a 401k feature is utilized in a self-employed plan, the blueprint is called a solo 401k plan or perhaps a cash or deferred arrangement (CODA). Solo 401k plans are afforded favorable tax treatment, including tax deductible contributions, deferral of taxation towards the employee, favorable tax treatment on distributions to employees, and tax deferred investment earnings on plan assets.
* Self-Employed: A solo 401k plan allows eligible self-employed (owner-only) business people the choice to contribute the world wide web earned income generated from business activity to your solo 401k with a tax-deferred basis or after-tax basis.
* Written Plan: The solo 401k have to be formerly adopted in some recoverable format through a plan document that may be reviewed and licensed by the IRS. The solo 401k plan document provider accounts for maintaining the blueprint document.
* Fully Vested: Unlike contributions designed to full-time employer 401k plans that could not always be fully vested when made, once contributions are made on the solo 401k plan, these contributions are fully vested.
* Solo 401k Loan: The solo 401k allows the company owner/participant to gain access to his or her solo 401k account balance without incurring tax liability by processing a solo 401k loan.
* Self-Directed: The solo 401k funds could be self-directed by this company owner. As the name solo 401k plan trustee, this company owner may invest the solo 401k in alternative investments for instance real-estate, promissory notes, tax liens, private company shares, and gold and silver (e.g., gold coins and gold bars together with silver coins and bars), together with stocks, mutual funds and commodities.
* Self-Managed: The solo 401k could possibly be self-managed and self-administered by this company owner. As the name trustee, the business enterprise owner has got the exclusive authority and discretion to control and control the assets from the solo 401k plan.
* Checkbook Control: Solo 401k Investments could be placed by writing a check mark from the self-directed 401k bank or brokerage account. Alternatively, solo 401k investments could possibly be funded by processing wires.
* Roth Solo 401k (Designated Roth Account)
Commonly referred to some Roth Solo 401k by those invoved with the industry, the IRS defines a solo 401k allowing for Roth contributions being a designated Roth account. A designated Roth account is not another solo 401k plan but alternatively a separate account in the solo 401k plan. Contributions into a designated Roth account solely incorporate employee contributions (salary deferrals): 2013 and 2014: $17,500 or $23,000 if age 50 or higher. Because the solo 401k plan is needed to keep separate accounting records for everyone contributions, in plan Roth conversions, gains and losses, another bank or brokerage account has to be established for your Roth designated account. To read more about how to begin a designated Roth account, simply click here.
Who usually takes advantage with the self-directed 401k plan?
* Business Owners: The solo 401k could be adopted by company owners that do not have full-time employees apart from their spouses.
* Entity Types: A self-directed solo 401k plan may be setup by an incorporated or non-incorporated business, the importance is to, at minimum, perform part-time self-employment activity. Therefore, this entity types may adopt a solo 401k plan. Sole proprietorships, Partnerships, S-Corporations, C-Corporations, and Limited Liability Companies.
Items to take into account before advancing with opening a self-directed 401k plan
* Am I truly self-employed? While part-time self-employment is normally the main dependence on adopting a solo 401k plan, don’t confuse second income with earned income, as exactly the latter meets the statutory requirement. Earned earnings are net earnings generated from the business in which this company owner’s services materially helped to provide the income. As such, capital gains tend not to count because they are considered second income. Also, social security benefits don't qualify as earned income since they are exempt from self-employment tax.
* Have I considered my future strategic business plans? For example, if full-time workers are hired, the solo 401k plan should be converted into a full-time employer 401k plan and wanted to those employees, producing higher annual plan fees and mandatory annual reporting, to mention a few.
* Have I considered annual filing requirements of your qualified plan (a solo 401k plan arrangements is really a “qualified” plan). While annual reporting is limited to some solo 401k plan when compared with 401k plans for full-time employers, different filing requirements come up at different stages with the solo 401k plan life time. For example, when the total valuation on all plan assets (e.g., cash, property, gold and silver, promissory notes, private shares, solo 401k loans, etc.) exceed $250,000, once a year Form 5500-EZ have to be filed. A final Form 5500-EZ also needs to be filed once the solo 401k plan is terminated no matter what asset value. Additional reporting applies on Form 1099-R when in-plan Roth conversions are processed, or distributions commence (e.g., required minimum distributions for the people aged 70 ½ or older). Depending about the type of entity sponsoring the solo 401k plan, annual reporting applies when contributions and rollover deposits are processed.
* Have I considered fees regarding adopting a professional plan (start-up, annual charge, etc…)? Because a solo 401k falls in the qualified plan category, it have to be formally adopted in making and continue to be operated in making. As a result, plan adoption fees apply in addition to annual plan document fees.
Solo 401k plan document comparison
Insurance Companies: Their solo 401k plan generally only permits investing in annuities and mutual funds.
Brokerage Firms: Their solo 401k plan generally only provides for investing in stocks and mutual funds.
Banks: Their solo 401k plan generally only enables investing in cd's.
Trust Companies: Their solo 401k plan generally only provides for investing in stocks and mutual funds.
Solo 401k Service Providers: Their self-directed solo 401k plan is one of the most liberal because it permits investing in alternative investments including precious metals, real-estate, promissory notes, tax liens, private placements, stocks and mutual funds and annuities. Their solo 401k plan also permits solo 401k loans and designated Roth accounts. Lastly, their solo 401k plan enables checkbook control.
Regulators of solo 401k plans
The IRS and also the DOL regulate solo 401k plans.
Solo 401k Loan Rules
Unlike the IRA rules, which usually do not permit the participant to loan form their own IRA, the self-directed 401k rules accommodate solo 401k loans. The maximum the self-employed owner may borrow from his / her solo 401k is 50% in the 401k balance not to ever exceed $50,000. More than one solo 401k participant loan could be taken though the maximum amount of the loan applies mixed with to all the loans. The loan payback period is five years, or nearly 30 years if your proceeds are used to the purpose of getting the self-employee’s principal residence. See (IRC Section 72(p)(2)(B)(ii); Reg. § 1.72(p)-1, Q&A-5,-6, -7, and -8)
401 k Plans For Small Business
Disallowed Solo 401k investments
Instead of spelling out allowable self-directed solo 401k investments, the interior revenue code (IRC) lists disallowed investments, which include these: collectibles (e.g., art pieces and stamps), liquor, rugs and antiques.
Allowed Solo 401k investments
Promissory Notes: whether secured or unsecured; however, generally that benefits the solo 401k plan must collected.
Real Estate: all types of property are permitted, from fixer uppers to rentals.
Precious Metals (coins & bullion): including coins and bullion; however, the next requirements under 408(m) apply:
A) any coin which is—
(i) a money described in paragraph (7), (8), (9), or (10) of section 5112(a) of title 31, United States Code,
(ii) a silver coin described in section 5112(e) of title 31, United States Code,
(iii)a platinum coin described in section 5112(k) of title 31, United States Code, or
(iv)a coin issued underneath the laws associated with a State, or
(B) any gold, silver, platinum, or palladium bullion of an fineness similar to or exceeding the minimum fineness that the contract market (as described in section 7 with the Commodity Exchange Act, 7 U.S.C. 7) requires for metals which can be delivered in satisfaction of any regulated futures contract, if such bullion influences physical possession of an trustee described under subsection (a) of the section.
Private Company including LLC: the solo 401k is listed because the member as well as the solo 401k trustee most likely are not an employee in the LLC.
Contribute to multiple 401k plans
Individuals who be employed by a full-time employer may participate for the reason that company’s retirement plan (e.g., 401k, 457b, 403b, etc.) as well as setting up as self-directed solo 401k because of their self-employed business. To find out more on contributing to multiple retirement plans click this link.
Solo 401k Contributions
The entrepreneur acts in capacities within a solo 401k plan: employee and employer. The small business owner can make both contribution types: employee and employer.
Type 1 Contribution: Employee contributions also called elective deferrals nearly 100% of net earnings from self-employment income up to your annual contribution limit:
· 2013 and 2014: $17,500 or $23,000 if age 50 or older; and
Type 2 Contribution: Employer profit sharing contributions nearly
· 25% of earned income after deducting one-half of self-employment tax.
Total Contributions: Total contributions with a solo 401k plan cannot exceed $51,000 for 2013 and $52,000 for 2014, along with an additional catch-up volume of $5,500 if age 50 or older.
IMPORTANT: The annual solo 401k contribution limits as affected from the type of entity sponsoring the solo 401k plan.
If the entity type is often a Sole Proprietor, the starting figure for calculating the annual solo 401k contribution is line 31 of Schedule C.
If the entity type is really a C-Corporation, the starting figure for calculating the annual solo 401k contribution is W-2 income.
If the entity type is definitely an S-Corporation, the starting figure for calculating the annual solo 401k contribution is W-2 income.
If the entity type is usually a Partnership, the starting figure for calculating the annual solo 401k contribution is K-1 (Form 1065) line 14.
Solo 401k Contribution Deadlines
The self-directed 401k contribution deadlines are based about the type of entity sponsoring the solo 401k.
If the entity type can be a Sole Proprietorship, the annual solo 401k contribution deadline is April 15, or October 15 if tax return extension is filed.
If the entity type can be an LLC taxed being an S-Corporation, the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is filed.
If the entity type can be an LLC taxed being a Partnership, the annual solo 401k contribution deadline is April 15, or October 15 if tax return extension is filed.
If the entity type can be a Partnership, the annual solo 401k contribution deadline is March 15, or October 15 if tax return extension is filed.
If the entity type can be an S or C-Corporation, the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is filed.
Self-directed 401k Adoption Deadline
The solo 401k plan need to be adopted by December 31 (i.e., the solo 401k plan documents have to be signed) so as to make the annual solo 401k contribution by this company’s tax return deadline plus extensions.
FDIC Coverage for solo 401k
The Federal Deposit Insurance Reform Act of 2005 increased the protection limit for solo 401k plans. Insurance coverage increased from $100,000 to $250,000. The FDIC compares the insurance limits every several years and, as of yet, hasn't increased a policy limit from $250,000.
401 k Plans For Small Business
Solo 401k IRS Levy
IRS tax levies on self-directed 401k plans tend not to violate the Internal Revenue Code’s anti-alienation provisions. See Treas. Reg. 1.401(a)-13(b)(2). However, the IRS has published in Field Service Advice Memorandum (FSA) 199930039 that the employer has the choice to wait until the participant becomes qualified to receive a distribution to adhere to the levy. Therefore, a self-directed solo 401k distribution triggering event for example normal retirement age (age 59 ½) or plan termination would subject the solo 401k decide to honoring the IRS levy.
Qualified Domestic Relations Orders
Solo 401k plans are at the mercy of QDROs. A QDRO is usually a court order that will require payment of or some with the solo 401k assets to a alternate payee like a spouse, former spouse or child.
Creditors and Solo 401k Plans
Solo 401k plan documents must provide the plan’s benefits most likely are not assigned or alienated. See Internal Revenue Code (IRC) Sec. 401(a)(13). The following or similar language is found in solo 401k plan documents: “No benefit or interest available hereunder will be governed by assignment or alienation, either voluntarily or involuntarily.”
Solo 401k Plans and Bankruptcy Protection
Resulting from enactment of Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both qualified plans and non ERISA plans are protected from creditors.
Solo 401k Prohibited Transaction Rules
Prohibited transactions result if the solo 401k company owner or any other disqualified person (e.g., the company owner’s spouse, parent, children, as well as any person providing services towards the solo 401k plan, for starters) uses the solo 401k plan assets for their personal benefit, sells or exchanges assets to or make up the solo 401k plan, lends money to your solo 401k plan, performs develop assets on the solo 401k plan (by way of example, the disqualified person performs repairs on the real estate home owned from the solo 401k plan). Click here to find out about the self-directed solo 401k prohibited transaction rules.
Source : http://mysolo401k.blogspot.com/2013/12/self-directed-401k-for-self-employed.html
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