THE SELF- DIRECTED SOLO 401(K) RETIREMENT PLAN - Self-Directed IRA Handbook
THE SELF- DIRECTED SOLO401(K) RETIREMENT PLANwww.navbrs.comPH: 888-801-2336By: Mat Sorensen & Kevin Kennedy, AttorneysKKOS Lawyers Navigator Business & Retirement Services
Disclaimer & About UsDISCLAIMERAll information and materials are for educational purposes only. All parties are strongly encouraged to consult with theirattorneys, accountants, and financial professionals before entering into any type of investment. This presentation does notconstitute an attorney client relationship.ABOUT MATPartner at KKOS Lawyers, Principal at Navigator. Mat’s practice focuses on self-directed IRA and self-directed 401(k) taxand 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 andTheir Advisors, an Amazon Best Seller and a required textbook for the Retirement Industry Trust Association’s Self DirectedIRA Professional Designation Course where he is also an instructor. The Self Directed IRA Handbook is the most widely usedbook in the self-directed retirement plan industry. www.sdirahandbook.com.ABOUT KEVINAttorney at KKOS Lawyers, where he advises clients regarding self-directed 401(k)s and other retirement plans. He routinelyconsults clients and establishes self-directed solo 401(k)s. He also advises clients on self-directed retirement plan transactionsand on related tax and legal issues. Kevin is also an experienced business and real estate attorney.
Table of Contents1. What is a Self-Directed Solo 401k2. Benefits of a SD Solo 401k3. Myths of a SD Solo 401k4. Requirements to Establish a SD 401k5. Setting up a SD Solo 401k6. Rollovers7. Contributions8. Roth Conversions9. How/What to Invest Using a SD Solo 401k10. Avoiding Prohibited Transactions11. Unrelated Debt Financed Income Tax (UDFI) Real Estate Leverage Exemption12. 401k Loan for Personal Expenses13. Distributions14. Self Directed IRA vs. Self Directed Solo 401k
What is a Self-Directed Solo 401k ? The IRS calls it a “one-participant” plan; it is alsoknown as an “owners-only” plan or a “solo” 401kplan.It is a qualified retirement plan that is exclusivelyfor business owners and their spouses; it combinesthe benefits of a typical 401k plan without thecomplex administrative requirements of a large401k plan with other employees.
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 handsof the account owner.Greater Contribution Amounts. You can contribute more in a 401(k) thanIRAs and can have Roth account options.Loan Options. The account owner can access up to 50K via loan from theiraccount to themselves personally for business start-up or educationexpenses (or any other personal expense).Leveraged Real Estate Investments. A 401(k)’s real estate investments maybe leveraged with debt with no UDFI tax.
Self-Directed Solo 401kIRA/401kAccountsRolloverSelf-DirectedXYZ, Inc.(Client’s Co.)Solo 401kContributionsCompensationClient/Business OwnerAdministered by theClient/Business OwnerInvest
What are the Benefits of a SelfDirected Solo 401k Plan? Grow your Retirement Account quickly through generous contributions limits as highas 52,000 per year (2014), 53,000 per year (2015).Obtain flexibility and control to self-direct investments of the 401k plan because nocustodian is required as with a self-directed IRA.Receive tax deductions for contributions made to the 401k plan as both theemployee AND the employer as well as having the option to have a Roth 401kaccount.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 toUDFI tax
What are Some Common Myths abouta 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 allclients.MYTH #2: The self-directed solo 401k provides the same creditor protection as an ERISA based large 401kplan with employees.TRUTH: Most state’s laws provide the same creditor protection as an ERISA based large 401k plan withemployees; but not all. The self-directed solo 401k plan is a qualified plan but it is not subject toERISA. Yates v. Hendon, 541 U.S. at 20-21. It does not have the same creditor protections as otherERISA 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 neverintend 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 withthe intent to be profitable AND you intend to make contributions to your self-directed solo 401k plan.
What are the Requirements For Settingup a Self-Directed Solo 401k? The Self-Directed Solo 401k is only for business owners whosebusiness has no other full-time employees other than the owner andspouse.A client may setup a new business at the same time they set-up theSelf-Directed Solo 401k.The business owner/client is the 401k plan Trustee and 401k planAdministrator. Since there is no third-party custodian involved, thebusiness owner/client is responsible for properly administering the401k plan. We have a 401k maintenance service to help with theserequirements.
(Continued) What are the Requirements ofSetting up a Self-directed Solo 401k? Since the only participants of this 401k plan are the businessowner(s) and their spouses, this plan is not subject to ERISA,which means administering this 401k plan is much easierthan that of a 401k plan adopted by a company withemployees.If your business eventually hires full-time employees, this401k plan will need to be amended; as presently writtenand approved by the IRS, employees are not allowed toparticipate; in that event, the plan would become subject toERISA and administering it would become much moredifficult.
Setting up a Self-Directed Solo 401kPlan and Other Related Services We will provide you with our IRS Pre-Approved 401kplan documents, as well as the necessary forms tomaintain and administer your 401k plan, including butnot limited to designated beneficiary forms, contributionforms, rollover forms, 401k loan forms, in-serviceconversion forms, and distribution forms.We will also provide you with the forms andinformation to open up the trust bank account(s) foryour 401k plan.
(Continued) Setting up a Self-Directed Solo401k Plan and Other Related Services Entity Setup. In addition to setting up a Self-Directed Solo 401k, wecan also set up the business or company to adopt the 401k plan; wecan also set up an LLC for your 401k to invest into to receive liabilityprotection and to make your real estate and other investments out ofthe 401k LLC.Miscellaneous. We can prepare the loan documents for you toobtain a 401k loan; or if you intend to convert some of thetraditional dollars in your 401k plan into ROTH; or making sure thatif you take a distribution that you understand the tax consequencesand that it is properly reported to the IRS.
(Continued) Setting up a Self-Directed Solo401k Plan and Other Related Services Tax Reporting. Your 401k plan affords you the opportunity to makea tax-free (roth) or tax-deferred (traditional) return/gain on yourinvestments, so generally, there is no tax return to file. However, ifyour 401k plan makes certain types of investments, it may besubject to UBIT Tax, in which case a 990-T tax return will need to befiled.Also, if your plan assets exceed 250,000 in a given year, yourplan will need to file a informational return known as Form 5500EZ).We can assist with any tax or informational reporting that isrequired of your 401k plan and we will provide you with a scheduleof fees for these services.
(Continued) Setting up a Self-Directed Solo401k Plan and Other Related ServicesXYZ, Inc.(Client’s Co.)Self-DirectedSolo 401k401k/LLCRental Investment
Rollover of Retirement Funds to theSelf-Directed Solo 401k Plan You can rollover almost every other type of retirement account, such as an IRA or a401k with a prior employer.You should only complete a Direct Rollover / Trustee-to-Trustee Rollover; you shouldnot do a 60-Day Rollover as this will trigger a withholding of 20% of the amountthat 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 forand your plan allows for an in-service withdrawal (e.g. you are 59 ½).
Making Contributions to theSelf-Directed Solo 401k Plan Employee Contributions. You as the employee can make traditional taxdeductible or Roth after-tax contributions. Annual employee contributionlimit 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 taxdeductible contributions up to 25% of your employee compensation. Youcan do a Roth in-plan conversion if you desire in order to make all of youraccount 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 ).
Making Contributions to theSelf-Directed Solo 401k PlanXYZ, Inc.(Client’s Co.)Employer Contributions(Limited to 25% of EmployeeCompensation)Self-DirectedSolo 401kCompensationClient/Business OwnerTotal Annual ContributionAmount is limited to 52,000in 2014, 53,00 in 2015
Completing an In-plan Roth Conversion The self-directed solo 401k plan allows you to convert amounts from your traditionalaccount 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 personalincome tax bracket and certain filings which need to be made to document theconversion, but there is not a 10% early withdrawal penalty.Despite the tax, such a conversion makes sense for a client who would otherwise benefitfrom having a Roth account.It is best to convert the funds when they are in cash. If you convert when the funds areinvested you must get a FMV appraisal of the value of the investment before you canconvert.
(Continued) Completing anIn-plan Roth ConversionXYZ, Inc.(Client’s Co.)Employer Contributions(Always Traditional)Self-DirectedSolo 401k(Traditional Account)In-Plan RothConversion/TransferClient/Business OwnerSelf-DirectedSolo 401k(Roth Account)
Using the Self-DirectedSolo 401k to Make Investments You can self-direct your 401k Investments into any investmentallowed by law. All investment assets should be held/vested in the401k’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)
Avoid Prohibited TransactionsIn Your 401(k) Investments If your 401k engages in a prohibited transaction, your 401k will incursevere taxes and penalties (15% excise tax on amount involved and apotential addtional100% penalty if not corrected). IRC § 4975A prohibited transaction comes in three varieties:1.Per Se Prohibited Transaction: A transaction with a disqualifiedperson. 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 highlycompensated employees of such companies.A transaction includes a purchase, sale, lease, exchange, loan,extension of credit or services or goods, etc.
(Cont’d) Avoid Prohibited Transactions (Continued) A prohibited transaction comes in three varieties:2.Extension of Credit Prohibited Transaction: An extensionof credit by or between the 401k and a disqualifiedperson. (exception: 401k loan)3.Self-Dealing Prohibited Transaction: A transaction whena disqualified person personally benefits from the 401kinvestments.
Using Financing/Loans toLeverage 401k Investments Unlike a self-directed IRA, the self-directed solo 401kplan can obtain financing/loans to leverage real estateinvestments tax-free, i.e., no UDFI tax. IRC § 514 I(9)(C)(ii).However, any loans/financing obtained by the 401kmust be non-recourse, i.e., a disqualified person cannotpersonally guarantee the loan, as that would beconsidered an Extension of Credit ProhibitedTransaction.
(cont’d) Using Financing/Loans toLeverage 401k Investments Example: John Doe has 80,000 in his 401k account. Hewould 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% ofthe purchase price, there would be UDFI tax on 60% of theprofits, so if he later sold the property for 240,000, hewould pay UDFI tax on 40,000, which tax rate upon sale isthe capital gains rate equating to a sizeable tax bill;however, here, there is no UDFI tax.
Taking a 401k Loan A plan participant can receive a personal loan from their 401k up to 50,000 or50% of the plan participant’s account balance, whichever is less.The loan must be properly documented with a promissory note and an amortizationschedule.The loan must be paid back within 5 years, with limited exception; payments must bemade 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 businessor education expenses) but must be paid back in full or the outstanding balance willbe considered a distribution.
Receiving a Distribution From YourSelf-Directed Solo 401k Plan As with all retirement plans, distributions from your 401kcan be subject to taxes and penalties if they are notqualified retirement plan distributions. IRC § 72 (t)The rules and requirements for taking a distribution fromyour 401k are complex and proper counsel should becontacted prior to making a distribution.The rules of distribution vary depending on whether thedistribution will come from a Roth 401k account or aTraditional 401k account.
Traditional 401k DistributionsDistributions 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 withdrawalpenalty unless one of the following: Age 59 ½ Death Disability Age 55 AND retired
Roth 401k DistributionsDistributions from a Roth Account Contributions/Converted Amounts are not subject to taxation orthe 10% early withdrawal penalty.Gains/Profits will be subject to tax unless they are part of aQualified Distribution. Gains/Profits will also be subject to a10% early withdrawal penalty unless they are part of aQualified Distribution or the participant is age 55 and retired.
(Cont’d) Roth 401k DistributionsA 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 sincecontributions have been made to this Roth account OR contributionswere made to Roth amounts rolled over to this Roth account.
Required Minimum Distributions fromthe Self-Directed Solo 401k The participant must begin taking distributions from theTraditional account of their 401k at the age of 70 ½.The participant must also begin taking distributions fromtheir Roth account of their 401k at the age of 70 ½.This is unlike a Roth IRA, where there are no RequiredMinimum Distributions. You could of course roll out theRoth 401(k) funds to a Roth IRA to avoid RMD.
Summary of TheSelf-Directed Solo 401k Plan SUMMARY: The Self-Directed Solo 401k Plan is agreat retirement and investment vehicle for businessowners whose business has no full-time employeesand who want to grow their retirement account(s)quickly through generous contribution limits andself-direct their retirement account(s) intotraditional investments (stocks, bonds, mutual funds,etc.) and alternative investments (real estate,precious metals, private companies, etc.).
SELF-DIRECTED SOLO 401(K)VS.THE SELF-DIRECTED IRAwww.navbrs.comPH: 888-801-2336By: Mat Sorensen & Kevin Kennedy, AttorneysKKOS Lawyers Navigator Business & Retirement Services
The REAL Answer Clients often ask which is better, and whether theyshould set-up a Self-Directed Solo 401(k) or a SelfDirected IRA?Answer: It Depends
The Self-Directed IRAPromissory NotesRental(s)IRA/401kAccounts, Roll-overr InvestRolloverSelf-DirectedIRAIRA / LLCr InvestMaximum Annual ContributionLimit of 5,500 (2014/15)Administered by a ThirdParty CustodianNote: Please refer to The Self Directed IRA Handbook, written by MatSorensen, for a complete and authoritative analysis of self-directing anIRA.
Self Directed Solo 401kRentalsIRA/401kAccounts401k / LLCRolloverInvestSelf-DirectedXYZ, Inc.(Client’s Co.)Solo 401kInvestMaximum Annual ContributionLimit of 52,000Promissory Notes, etc.Administered by theClient/Business OwnerDifference #1:For BusinessOwners OnlyDifference#2: Higher ContributionLimitsDifference #3: No self-directed Custodian required. YOU are the“custodian” b/c you are the Plan Trustee/Administrator and cancontrol account funds and investment transactions
Breaking Down the Differences SDIRANo Self-Employment NecessaryMaximum Annual Contribution Amount 5,500Third Party Custodian is RequiredNo Personal Loans AllowedIf Leveraged, Subject to UDFI TaxIf Prohibited Transaction occurs, entireSDIRA account is subject to distributionand taxation.Generally less expensive and easierto administer. Solo 401(K)Must be Self-Employed w/ No Fulltime Employees (other than ownersand spouses) in company adopting theplanMaximum Annual Contribution Limit 52,000 (2014) 53,000 (2015)Third Party Custodian is not RequiredPersonal Loans AllowedIf Leveraged, not Subject to UDFI Taxon real estate investmentsIf Prohibited Transaction occurs,consequences are typically less harshthan with an SDIRA (only amountinvolved).
Self Directed Investor Account Options By ExampleSelf Directed Solo 401k Self Directed IRASelf-EmployedBusiness Owner w/ Nofull-time EmployeesW-2 “day job” withCompany 401k w/self-employed “side”businessSelf-EmployedBusiness Owner w/multiple businessesRetired investor w/some self-employmentInvestor w/ no selfemployment Business owner andspouse are the onlyemployees of the business. They both want tocontribute as much aspossible per year to growtheir account balances. They want to invest inreal estate, privatecompanies, and preciousmetals. Their company shouldadopt a self-directed solo401k plan and they caneach set up their ownaccount to makecontributions. Note: Their company canhave part-time employeesbut these employeescannot participate in theplan. Wants to invest his 401kin assets like real estatewhich he can’t do with hisday job 401k. Has IRA and a 401k witha prior employer, both ofwhich are available torollover. Spouse works part-timein the “side” business. He/she wants to usedebt/financing toleverage his real estateinvestments. They should adopt a selfdirected solo 401k fortheir “side” business. Note: His ability to makecontributions to their selfdirected solo 401k will belimited if he has already“maxed out” his day job401k. Dentist owns a dentalpractice with several fulltime employees and a realestate investment co. whichhas no full-time employees. Wants to invest both intotraditional assets (stocks,bonds, mutual funds) andalternative investments (realestate, private companies,etc. He/she should establish aself directed solo 401k forhis real estate investment co. Note: He/she can do thisbecause the real estate co. isa separate line of businessfrom his dental practice; hecouldn’t set up amanagement co. just for thesole purpose of setting up aself-directed solo 401k forhim/her. Retired investor w/existing IRA or prior401k funds. Isn’t looking tocontribute but wants togrow account throughinvestment earnings viareal estate. Isn’t planning to usedebt/financing toleverage investments. He should rollover hisretirement account(s) toa self-directed IRA asthis structure will beeasier to establish andmaintain than a selfdirected solo 401k Investor has no selfemployment. Is looking to investprior 401k and IRA intoprivate companies, realestate, and preciousmetals. Investor should use aself directed IRA and anIRA/LLC for the plannedreal estate investmentsas he/she would notqualify for the selfdirected solo 401k.
THANKS!PLEASE CONTACT US TO STARTTAKING CONTROL OF YOURRETIREMENT TODAYwww.navbrs.comPH: 888-801-2336By: Mat Sorensen & Kevin Kennedy, AttorneysKKOS Lawyers Navigator Business & Retirement Services
The Self Directed IRA Handbook is the most widely used book in the self-directed retirement plan industry. www.sdirahandbook.com. 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.
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Tee - Reducing (continued) Socket x Socket x Socket 401-422 4X3 6 0 040 77.83 401-4261 4X6 4 0 040 419.22 401-4281 4X8 2 0 040 1157.12 401-4861 5X2 5 0 040 182.51 401-4871 5X2-1/2 4 0 040 200.79 401-488 5X3 4 0 040 182.51 401-490 5X4 3 0 040 182.51 401-4921 5X6 4 0 040 428.13 401-4941 5X8 1 2 040 1472.94 401-5261 6X1-1/4 6 0 040 267.96 401-5271 .
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