ROTH IRA LLC Contribution Facts

  • Contributions can be made if you have earned income
  • You contribute already taxed funds (after-tax funds) to a Roth IRA
  • You cannot take a tax deduction for your Roth IRA contribution like you can for a Traditional IRA
  • You can make Roth IRA contributions both before and after age 70 ½ whereas Traditional IRAs cannot accept contributions after you reach age 70 ½.
  • Qualified withdrawals are income-tax free (a withdrawal made after any Roth account has been established for 5 years and the Roth owner is over the age of 59 ½ or qualifies for the first-time home buyer exception or the distribution is due to the account owner’s death or disability)
  • You can also have and contribute to a spousal Roth IRA, based on your income even if your spouse has no earned income
  • Withdrawals of converted amounts may be subject to the 10 percent early distribution penalty if the 5-year exclusion period has not been met (this is a separate 5-year period from the one noted above) and the Roth owner is under age 59 ½ at the time of the withdrawal
  • Roth IRAs are exempt from Required minimum distributions for owners only
  • Roth IRA designated beneficiaries can stretch distributions over their lifetimes just like traditional IRA beneficiaries
  • All contributions and distributions must flow through the Roth IRA not the LLC.

401k Business Financing C-Corp vs. S-Corp

C-Corp vs. S-Corp:

In terms of taxes the choice between a C-Corp and an S-Corp will really depend on your particular circumstances and ultimately what you make.  While some advisors will almost always recommend an LLC/S-Corp over a C-Corp there are certain advantages of a C-corporation generally – see for example, the advantage discussed in the following article: http://www.legalzoom.com/incorporation-guide/corporate-tax-advantage.html   As a general matter, those advisors will make such a recommendation because of the perception that C-Corporations are subject to a “double tax” (where the “double tax” refers to the fact that the corporation must pay tax on its income and any corporate profits distributed to the stockholders are subject to capital gains tax).   While this may be generally true, it is worth noting that with respect to our 401k business financing plan (i) any double taxation effect is mitigated by the fact that any dividends paid with respect to the stock held in your 401k will paid to your 401k on a tax-deferred basis; and (ii) any taxable income at the corporate level can be reduced by a reasonable salary paid to you as an employee of the corporation (since this would be an expense to the corporation).  Ultimately, if you want to use your retirement funds to finance the business the business must be organized as a C-corporation.  As such, perhaps a better comparison would be (i) the cost to access to your retirement funds, vs. (ii) the cost to obtain other types of financing vs. (iii) the taxes and penalties that you would owe if you simply withdrew the funds (often 40% of the distribution).  For example, consider the costs of our plan vs. a $100,000 loan with a 7 year term at an interest rate of 7%.  With our plan, our set-up fee and annual fee over 7 years will total $7,000 plus an additional estimated costs of $4000 for annual valuations and if needed premiums for a fidelity bond (estimated total: $11,000).  With the loan, you would pay over $26,000 in interest (see calculator at https://smallbusiness.yahoo.com/advisor/business-tools/loan-calculator).

After-Tax Contributions

For taxable years beginning on or after January 1, 2007, PPA removes the restriction that required the receiving plan to be of the same type as the distributing plan. Plans eligible to receive after-tax assets, plan permitting, are governmental 457(b) plans, IRC Secs. 401(a) (including solo 401k plans for the self-employed), 403(a), and 403(b) plans, and IRAs. While individuals must directly roll over after-tax assets between eligible retirement plans, they can indirectly roll over after-tax assets from retirement plans to IRAs.

Some 401(k) plans including solo 401k plans may allow employees to make additional contributions to the plan on an after-tax or nondeductible basis. All earnings on such contributions are tax-deferred. The plan documents will specify whether this option is available to participants.  As a solo 401k provider, My Solo 401k Financial offers a solo 401k plan that allows for after-tax contributions.

Planning and Distribution Strategy for my Solo 401k

Doing some longer term planning trying to figure out a distribution strategy for my Solo K.   Presently it’s worth about $600K, $500K in rental real estate and $100K in cash.

My wife is 55 and I’m 54.  We intend to work at least the next year.   The business associated with the 401K is doing better than I expected, which only means I’m working more than I wanted…

A couple of questions:

  • Am I correct in assuming there is no way to do a 72t early distribution since that would require us to quit, and end the justification for the Solo K?

ANSWER:

Good question. 72t periodic distributions are not as favorable to Solo 401k plans as they are to IRAs. I personally think that this is the only instance where the solo 401k is not as advantageous as an IRA. To learn more about the 72t Substantially Equal Periodic Payment Rules, click here.

  • We do expect to have at least a year or two with little to taxable income before retirement age, a perfect time to consider this, if possible.

2) Now fast forward to year 2020 when we will both be able to take normal distributions.  Can the 401K outlive the business?   If not, is the only solution to liquidate the property and rollover to an IRA to avoid a huge tax hit?

ANSWER:

I’m not aware of any language in the code that says a solo 401k must be terminated once the self-employed business sponsoring the plan closes its doors. On the other hand, pursuant to IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), contributions to a solo 401k may only be made if the individual generates self-employment income from the business sponsoring the solo 401k. As such, as long as you cease making contributions to the solo 401k once the self-employed business or self-employment ceases, one can continue to with the solo 401k.

Outside of the 401K we have another $250K of rental property.   What we want to figure out eventually is a way to strip off the rental income to retire early without selling any of the property.   But the 401K has more than half of the income stream.

3) I figure the worst case scenario is we have to wait to 59 1/2 and take distributions based on cash flow, keep the business until we are ready to liquidate (or distribute) the property.

Could not find many “FAQs” on the distribution side of the Solo K.

ANSWER:

Please click here to read my blog post on taking distributions from a solo 401k.

 

 

Contribute to IRA LLC and Self-Directed 401k MAGI Rules

I’m a business attorney in Texas and I have utilized your services in the past to set-up Self Directed 401(k)’s for my clients. I have a quick question regarding a contribution scenario:

QUESTION 1:

Can a husband utilize profit sharing from side business to increase his contributions even though he has a day time job?

ANSWER: Yes, provided the rules outlined in the following link are satisfied.  See following link for more on this. http://www.mysolo401k.net/multiple-retirement-plan-solo-401k-contribution-rules/

 

QUESTION 2:

Finally, how would these 401k contributions effect the deduct-ability of an IRA LLC contribution if we were to set those up through your firm as well?

ANSWER:  See below charts for this.

I’m making a late year push to get several clients to set up self directed 401k accounts and I plan to utilize you services in a similar manner as last year. It was very efficient.

Table 1-2. Effect of Modified AGI1 on Deduction if You Are Covered by a Retirement Plan at Work

If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction.
IF your filing
status is …
AND your modified adjusted gross income (modified AGI)
is …
THEN you can take …
single or
head of household
$59,000 or less a full deduction.
more than $59,000
but less than $69,000
a partial deduction.
$69,000 or more no deduction.
married filing jointly or
qualifying widow(er)
$95,000 or less a full deduction.
more than $95,000
but less than $115,000
a partial deduction.
$115,000 or more no deduction.
married filing separately2 less than $10,000 a partial deduction.
$10,000 or more no deduction.
1 Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI) , later.
2 If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” filing status).

Table 1-3. Effect of Modified AGI1 on Deduction if You Are NOT Covered by a Retirement Plan at Work

If you are not covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction.
IF your filing
status is …
AND your modified adjusted gross income (modified AGI) is … THEN you can take …
single,
head of household, or
qualifying widow(er)
any amount a full deduction.
married filing jointly or separately with a spouse who is not covered by a plan
at work
any amount a full deduction.
married filing jointly with a spouse who is covered by a plan
at work
$178,000 or less a full deduction.
more than $178,000
but less than $188,000
a partial deduction.
$188,000 or more no deduction.
married filing separately with a spouse who is covered by a plan
at work2
less than $10,000 a partial deduction.
$10,000 or more no deduction.
1 Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI) , later.
2 You are entitled to the full deduction if you did not live with your spouse at any time during the year.

Spousal Consent when Naming Trust as Beneficiary of 401k

QUESTION: I want to specify my family trust as the primary and only beneficiary of the solo 401k tust. My wife is the primary beneficiary of our family trust. Does she need to sign and acknowledge that she is not the listed as the primary beneficiary of the 401k trust?

ANSWER: Good question. The 401k regulations by default deem the spouse as the primary beneficiary. Therefore, yes she must sign and acknowledge that she is not the primary beneficiary if the family trust is named as the primary beneficiary, even if she is the trustee of the family trust. If this is not done, she will automatically be deemed the primary beneficiary regardless of who you name as the primary beneficiary.

Who is the Custodian of My Solo 401k?

QUESTION: Who is the custodian for my Solo 401k now? Does your company serve as the custodian of my Solo 401k?

ANSWER: No we do not serve as the custodian of your Solo 401k but rather as the Solo 401k provider. The custodian of your Solo 401k depends on whether the funds are liquid or invested in alternative investments such as real estate and tax liens, for example. If the funds are liquid, the bank that you opened the Solo 401k bank account at is the custodian of the non invested funds. On the other hand, if the Solo 401k funds are invested in real estate, you are the custodian of the real estate documents, such as the recorded deed. As the trustee of the Solo 401k, you are responsible for safekeeping the real estate assets of the Solo 401k. Read More »

Year-end Solo 401(k) Contribution Questions | C-Corporation Solo 401k

I was successful and presenting your Solo 401k trust establishment documents to my banker at Chase Bank and opened the Solo 401k bank account with Chase. Thank you for your Wells Fargo contact information. I may still end up at Wells Fargo if my relationship with Chase changes at some point.  Chase cleared everything through their legal department and got on board with your instructions so everything worked as planned. I made my initial Solo 401k contribution of $1,500.00 to fund my new Solo 401k plan.

QUESTION: I have a couple of questions related to year-end tax planning. It is my understanding that I can do an employer contribution up until the date of filing my tax return and the employer contribution will act as a reduction in self-employed income and not be subject to self-employment tax since my self-employed business is a C-corporation.  Is that correct?  I am planning on doing an employer contribution of $42,000.  I have the self-employment income to more than cover the $42,000.

ANSWER: Because your business type is a C-Corporation, both of your Solo 401k contribution types (employee and employer) will be based on W-2 income generated from your self-employed business.

Visit Solo 401k contribution calculator to determine your maximum contribution for the tax year.

Please also visit calculating Solo 401k contribution for a Corporation for detailed instructions. Read More »

Multiple Solo 401k contribution Sources

QUESTION: I have a quick question.  I’m operating a C Corp small business, but I expect to receive income from multiple sources such as other employers.

Should I consider setting up my Solo 401k as a sole proprietor under
my own name, so that all income sources can be used for plan
contributions?

Thanks, JP

ANSWER: As detailed in IRS Publication 560, “you can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set. “  As such, if you have multiple businesses from which you generate self-employment income, it might be wise to setup a separate Solo 401k planfor each.  Note that the 401k rules permit the self-employed to participate in multiple 401k plans; however, the annual contribution limit applies to all 401k plans that the self-employed individual is participating in.

Lastly, the Solo 401k rules prohibit contributions of income earned from your full-time employer unless you are an independent contractor receiving 1099 income, which would afford you option to open a Solo 401k plan.

Solo 401k Roth Question

Good morning,

I had one question about my scenario. I have about $25,000K in my employer 401K, which can be rolled over to a self-directed Solo 401k plan. As per our discussion yesterday, this money can be rolled over to my Solo 401k (pretax) plan and later be converted to Roth Solo 401k (paying tax on the amount converted).

My question:
1) can I keep this 25,000 in my Solo 401k (pretax) account and invest?
2) Should I pay your company extra for having both pretax and post tax account?

Thank you in advance. LK Read More »

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