Summary of January 2020 Government Accountability Office (GAO) Report on Self-Directed IRAs Including IRA LLC | Checkbook IRA

Why did the GAO Perform the Study?

According to the GAO, non-traditional IRA investments—such as real estate, certain precious metals, private equity, and virtual currency—can
introduce risks to IRA participants who assume greater responsibility for navigating the complex rules that govern tax-favored retirement savings.

What Does the GAO Report Examine?

  1. How much guidance the IRS provides for IRA participants so that they understand the IRA rules as they relate to alternative investments.
  2. How challenging it is for the IRS to enforce the IRA rules, especially the prohibited transaction rules.

What Resources did They Review?

GAO identified and analyzed IRS information to help taxpayers understand four compliance areas. GAO reviewed IRS analysis of nonmarket IRA assets reported by IRA custodians, and IRS audit procedures and training materials; and interviewed relevant IRS officials to identify enforcement challenges.

What does the GAO Recommend?

GAO recommends the IRS (1) update IRA Publication 560 and related publications with more information surrounding the rules for investing in alternative investments including real estate, virtual currency and IRA LLCs, (2) evaluate the feasibility of requiring disclosure for high-risk IRA asset types associated with abusive tax schemes, and (3) develop auditor resources (such as training materials or job aids) that explain how IRAs with unconventional assets can generate unrelated business income tax.

You can review the full GAO January 2020 report by CLICKING HERE.

 

Making 2019 Solo 401k Contributions Extended to July 15, 2020

As a result of the  Treasury Department and Internal Revenue Service extending the 2019 tax filing deadline in Notice 2020-18 in response to the Coronavirus Disease for 2019 to July 15, 2020, certain self-employed persons may also delay making 2019 contributions to a self-directed solo 401k:
 
  • The deadline to make contributions to a Solo 401k is tied to the tax deadline that applies to your self-employed business (See the chart on page 3 of IRS Publication 560).   
  • This means that for self-employed individuals who report their self-employment income on IRS Form 1040 (including sole proprietors and single-member LLCs taxed as sole proprietors), the deadline to make Solo 401k contributions is the deadline to file Form 1040.
  • If the self-employed business  is a C-corporation with an April 15, 2020 due date for filing the Form 1120, then the grace period under section 404(a)(6) for the employer to make contributions to its solo 401k  plan that are treated as made on account of 2019 ends on July 15, 2020.
  • Therefore and with the extension of the deadline to file Form 1040 to July 15, 2020, these self-employed individuals may now make their solo 401k contribution any time up until July 15, 2020 or later if they file a timely extension. 
  • Please note that this is an automatic extension, so no phone call to the IRS or filing of forms is required.The extended deadline will still be the standard October 15th Form 1040 tax filing deadline.
  • Please note that this extension does not impact the deadline to set up a Solo 401k (which was 12/31/2019) so if you had not adopted a Solo 401k plan on or before December 31, 2019, this extension won’t allow you to make Solo 401k contributions for 2019.

More Things to Know

  • You do not have to be sick, or quarantined, or have any other impact from COVID-19 to qualify for relief. You only need to have a Federal income tax return or payment due on April 15, 2020, as described above.

 

  • The Notice postpones the filing and payment of Federal income taxes reported on the following forms:
  1. Form 1040, 1040-SR, 1040-NR, 1040-NR-EZ, 1040-PR, 1040-SS
  2. Form 1041, 1041-N, 1041-QFT
  3. Form 1120, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF
  4. Form 8960
  5. Form 8991

 

  • With respect to Form 990-T, if that Form is due to be filed on April 15, then it has been postponed to July 15 under the Notice. For taxpayers whose Form 990-T is due on May 15, that due date has not been postponed under the Notice.

 

  • With respect to returns due on March 16, 2020, which include Form 1065, Form 1065-B, Form 1066, and Form 1120-S for calendar year taxpayers, the filing of those returns has not been postponed.
  • State income taxes will still need to be filed and paid by the normal deadline.

Click here to vie the IRS Coronavirus tax relief page, and visit IRS Notice 2020-18

Pending CARES Act Would Provide Relief to IRA, Self-Directed Solo 401k and ROBS 401k Plans

The pending Coronavirus, Aid, Relief, and Economic Security (CARES) Act, which was introduced by Senate Majority Leader Mitch McConnell (R-KY) this week would have the following effects on retirement plans such as self-directed IRAs, self-directed solo 401k plans and ROBS 401k plans.

Distributions Due Hardship

The 10% early distribution penalty, which applies to distributions made prior to the participant reaching age 59 1/2, would be waived on early  withdrawals up to $100,000 if the individual meets the following:

  1. is diagnosed with COVID-19;
  2. whose spouse or dependent is diagnosed with COVID-19;
  3. who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
  4. other factors as determined by the Treasury Secretary.
  • Individuals would be permitted to pay tax on the income from the hardship distributions over a three-year period.
  • Individuals could also choose to repay hardship distribution amounts back to the plan over the next three years.
  • Th repayments would not count toward the annual retirement account contribution limits.

401k Participant Loans

  • Solo 401k and ROBS 401k participants would be able to borrow up to $100,00 from their 401k plans.

 

  • Participants with outstanding 401k loans could delay their loan payments for one year.

Relief From Required Minimum Distributions (RMD)

  • RMDs would be waived for calendar year 2020 for 401k plans including solo 401k plans, 403b and 457b plans, as well as SEP and SIMPLE IRAs.

Latest Upstate on the Coronavirus Stimulus

Now that both the House and the Senate have approved the  Coronavirus, Aid, Relief and Economic Security (CARES) Act (H.R. 748 as amended) it is only a matter of days before it makes its way to President Trump’s desk for final approval. All the pending changes to retirement plans including self-directed solo 401k and ROBS 401k plans that are listed above are included in the pending bill, so the odds are good that they will all pass.

 The Bill Passed

The  Coronavirus, Aid, Relief and Economic Security (CARES) (H.R. 748) Act passed on March 27, 2020. CLICK HERE to learn more.

 

Deadline for Making 2019 IRA Contributions (both Roth and Traditional) Extended to July 15, 2020

As a result of the  Treasury Department and Internal Revenue Service extending the 2019 tax filing deadline for 2019 to July 15, 2020, both Traditional and Roth IRA contributions for 2019 may also be made by July 15, 2020. State income taxes will still need to be filed and paid by the normal deadline.

This is an automatic extension, so no phone call to the IRS or filing of forms is required.

Regardless of the amount owed, federal income tax payments due on April 15, 2020 have also been deferred to July 15, 2020.

Click here to vie the IRS Coronavirus tax relief page.

This extension to make the 2019 solo 401k annual contribution by July 15, 2020 also applies to certain solo 401k plans. VISIT HERE to learn more  and visit IRS Notice 2020-18

2020 Solo 401k Contributions-Pretax, Roth & Voluntary After Tax

General Information regarding Solo 401k Contributions:

NET INCOME: Solo 401k contributions are based net- income from self-employment (i.e. you can’t contribute more than you make).

Business or Personal Bank Account: You can make the contributions from your business or personal checking account as long as the funds stem from self-employment income.

2020 Contribution Limit: The total contribution limit for tax year 2020 is $57,000 plus an additional $6,500 catch up if age 50 or older. For 2019, the total contribution limit was $56,000 or $61,000 if age 50 or older.

Making Contributions: To make the contribution, you will make the check payable in the name of the solo 401k and write “Annual Contribution” on the memo section of the check.

Solo 401k contributions can be made periodically or in one lump sum.

You can use our on-line solo 401k contribution calculator to calculate the contribution amount.

Here is the link and it works best on Internet Explorer browser.

https://www.mysolo401k.net/Calc/Individual401kContribution.html

You may also use the online annual contribution form located on our website to internally document the contribution. This form is for your records only.

https://www.mysolo401k.net/wp-content/uploads/2014/09/Solo_401k_Annual_Contribution_Form.pdf

 

Additional information regarding the solo 401k contribution rules.

Solo 401k Contributions

The business owner acts in both capacities in a solo 401k plan: employee and employer.  As such, the business owner can make both contribution types: employee and employer. (Note: Matching contributions do not apply to a Solo 401kplan).

 

Type 1 Contribution (Employee): Employee contributions also known as elective deferrals up to 100% of net earnings from self-employment income up to the annual contribution limit; Note: See information below regarding how to determine your self-employment income for contribution purposes since it depends on how your self-employed business is organized (e.g. sole proprietor, S-Corp, etc.).

 

2020: $19,500 plus an additional $6,500 catch-up contribution if you are 50 or older; and

 

Note: If the Solo 401k participant is participating in another qualified plan such as a 401k plan offered through a w-2 “day job,” any employee contributions made by the individual to such plan will be aggregated with any employee contributions made to the Solo 401k plan in determining whether the limit has been met.

 

Type 2 Contribution (Employer): Employer profit sharing contributions up to:

  • If taxed as an unincorporated business (e.g., sole proprietor or partnership) then 20% of net business income (i.e. from Line 31 on Schedule C or Line 14 of K-1 as applicable) after deducting one-half of self-employment tax; or
  • If taxed as a corporation, then 25% of w-2 income.

 

Note: For a solo 401k with multiple participants (e.g. husband and wife), the employee & employer contribution limits are calculated for each participant individually (i.e., based on each person’s self-employment income).

 

Total Contributions: Total contributions to a solo 401k plan cannot exceed $57,000 for 2020, plus an additional catch-up amount of $6,500 if age 50 or older.  Please note that if you intend to also make Roth and/or after-tax contributions, please contact us for more information on making such contributions.  See more regarding making voluntary after-tax contributions below.

 

IMPORTANT:  The annual solo 401k contribution limits depends on the type of entity sponsoring the solo 401k plan.

  • If the entity type is a Sole Proprietor, it is equal to line 31 of Schedule C(after deducting one-half of self-employment tax).
  • If the entity type is a C-Corporation, it is equal to W-2income from your self-employed business (“Box 1 plus any pre-tax elective deferrals NOT in Box 1).
  • If the entity type is an SCorporation, it is equal to W-2income from your self-employed business (“Box 1 plus any pre-tax elective deferrals NOT in Box 1).
  • If the entity type is a Partnership, it is equal K-1 (Form 1065) line 14 from your self-employed business (after deducting one-half of self-employment tax).

 

Note: To determine the amount equal to one-half of the self-employment tax, please take the following steps:

 

  • Navigate to our online calculator: https://www.mysolo401k.net/Calc/Individual401kContribution.html
  • For Business Type: select “Unincorporated Sole Proprietorship”
  • Enter your net income as applicable (e.g. for a Sole Proprietor enter net income from line 31; for a Partnership enter Line 14 from your K-1).
  • Enter your age
  • Click “View Report”
  • In the sentence beginning “*Calculated as net business income…” the amount equal to one-half of the self-employment tax will appear in the phrase “Self-Employment Tax of ___”

 

Solo 401k Contribution Deadlines:

 

The self-directed 401k contribution deadlines are based on the type of entity sponsoring the solo 401k.

  • If the entity type is a Sole Proprietorship, the annual solo401k contribution deadline is April 15, or October 15 if tax return extension is timely filed.
  • If the entity type is an LLC taxed as an S-Corporation (calendar year), the annual solo401k contributiondeadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is an LLC taxed as a Partnership (calendar year), the annual solo401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is a Partnership (calendar year), the annual solo401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is an S-Corporation (calendar year), the annual solo401k contribution deadline is March 15, or September 15 if tax return extension is timely filed.
  • If the entity type is an C-Corporation (calendar year), the annual solo401k contribution deadline is April 15, or September 15 if tax return extension is timely filed.

Making Voluntary After-Tax Contributions

What is the maximum amount of voluntary after-tax contributions that I can make?

You can contribute up to the lesser of (i) 100% of your self-employment compensation (i.e. see below information regarding how to determine your self-employment compensation) or (ii) the overall limit ($57,000 for 2020 contributions) reduced by any pre-tax or Roth employee contributions/salary deferrals and any pre-tax employer/profit sharing contributions.

The amount of self-employment compensation depends on the type of entity sponsoring the solo 401k plan [SEE ABOVE].

 

When is the deadline to make voluntary after-tax contributions?

 

The self-directed 401k contribution deadlines are based on the type of entity sponsoring the solo 401k. [SEE ABOVE].

 

How do I make the voluntary after-tax contributions?

  • To make the contribution, you will make the check payable in the name of the solo401k and write “Annual Contribution” on the memo section of the check.
  • Deposit the amount of the voluntary after-tax contributions that you elect to make in the separate voluntary after-tax sub-account.
  • You will then transfer the funds to the Roth sub-account for the Solo401k.  Please let us know right away when you do so that we can send you the applicable forms to capture the information that we need to handle the required 1099-r (which we will do as part of our services for no additional charge).

 

Where do I report the voluntary after-tax contributions?

  • For self-employment income reported on a w-2, you may (but are not required to) report voluntary after-tax contributions in Box 14 of the w-2.
  • For all others, there is no place to report voluntary after-tax contributions.

Where do I report the conversion of funds form the voluntary after-tax sub-account to the Roth sub-account?

  • On Form 1040, report the amount converted in Line 4c and “0” in Line 4d unless there is a taxable gain.  Enter the word “Rollover” next to line 4b.
  • A taxable gain would result if the funds in the after-tax account accrued a gain after being contributed to such account in which case the amount of such gain is a taxable and needs to be listed on Line 16b.

The SECURE Act Extended the Deadline to Establish / Open a Self-Directed Solo 401k | Self-Directed 401k | Solo K | Individual 401k

In years prior to 2020, owner-only businesses had to establish / adopt  the self-directed solo 401k by their business year end which was December 31 for most businesses.

This all changed for the better, however, for future tax years starting with 2020 due to the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is part of the Further Consolidated Appropriations Act, 2020 (FCAA) and President Trump made law in late December 2019. Thanks to the new law, owner-only employers can now adopt the solo 401k plan by their business tax return due date plus business tax return extensions.  Basically, the solo 401k plan establishment deadline is now based on the business tax return due date instead of the business tax year end.

Entity Type is  a Sole Proprietorship or C-corporation

For example, if your self-employed business entity type is a sole proprietorship or C-corporation, and you want to establish a solo 401k plan for the 2020 tax year, you can wait to open the solo 401k plan by October 15, 2021.

Entity Type is  a Partnership or  S-corporation

If your self-employed business is a partnership or S-corporation, the 2020 solo 401k plan establishment deadline is September 15, 2021.

The purpose of this extension to open the solo 401k plan is to give owner-only businesses more time to determine if a solo 401k plan is right form them. The increased deadline to open a solo 401k plan now aligns with the SEP IRA establishment deadline.

A Pending New Jersey Bill Would Require Gig Economy Companies to Provide Retirement Benefits

The S.B. 94 Bill was approved by New Jersey Senate Labor Committee on February 13 and is now pending   before the Senate Budget and Appropriations Committee. This bill would require gig economy companies such as Lyft and Uber to provide retirement plan benefits to New Jersey-based workers. Other states like New York and California are working on similar legislation to treat gig workers more like employees instead of  contractors.

Here are some of the highlights of the New Jersey bill:

  • The bill would require “contracting agents” that facilitate the provision of services by at least 50 workers (i.e., independent contractors) over a 12-month period to contribute funds to qualified benefit providers to provide benefits to the workers.
  • The requirement to contribute funds under only applies when the services are provided to consumers located in New Jersey. The contribution amount would  be the lesser of 25 percent of the total fee collected from the consumer for each transaction of services provided or six dollars for every hour that the worker provided services to the consumer. If determined per hour, then the determination shall be prorated per minute.
  • Contributions would be made to the qualified benefit provider on no less than a monthly basis and no later than 15 days after the end of the month in which the services were provided.

In conclusion, the solo 401k plan may be the solution for now while the states and the federal government figure out how to best serve the retirement needs for workers in the gig economy which is estimated to makeup one third of American workforce according to Senator Troy Singleton.  The solo 401k plan is for the self-employed including 1099 contractors and it allows for high pretax contributions.

eQRP is Fancy Marketing Term to Refer to a Self-Directed Solo 401k Plan

QRP stands for Qualified Retirement Plan, and the Solo 401k falls under the qualified retirement plan umbrella designed for businesses with no full-time  common-law employees. These plans allow for salary deferrals and discretionary matching and/or profit sharing contributions.  We are aware of promoter/company (Total Control Financial) that has coined the eQRP terminology which is another way to refer to a self-employed 401k plan.
Other names used to refer to 401k plans for the self-employed include the following:
  • Solo 401(k)
  • Solo-k
  • Uni-k
  • One-participant k
Whether you refer to a  qualified plan for the self-employed as a solo 401k plan, eQRP, Solo-k, etc., the same IRS statutory rules apply.
These IRS statutory rules include the following.
Protection from Creditors:
In order for a 401k or a QRP to be protected fully protected from creditors, the plan would need to fall under Title I of ERISA. In order for a plan to fall under Title I of ERISA the plan would need to have common-law employees (non-business owners) participating in the plan, for example a plan provided by a full-time employer such as the Home Depot.
Whether a plan for the self-employed such as a solo 401k or a QRP is protected from creditors depends on the solo 401k participant’s state of residence not on terminology (eQRP) used to describe a qualified plan. For example, in Colorado, Florida, Texas and Idaho, self-employed plans are afforded full protection from creditors.
For states where creditor protection is not afforded to self-employed plans, a C-corporation or an LLC can be setup. The self-employed plan would then invests in the C-corporation or LLC resulting in the plan being the sole shareholder or member. Passive investments are then placed through the C-corporation or LLC not the self employed plan solo 401k. This results in indirect creditor protection for the self-employed plan since the passive investments (e.g., real estate, notes, metals, tax liens, etc) are placed through the LLC or C-corporation.
We offer the LLC or C-corporation setup for investing self-employed plans passively in alternative investments  for $800 in addition to the solo 401k plan setup fee of $550. Please see the following for more information. https://www.mysolo401k.net/the-process-of-investing-a-solo-401k-plan-in-a-single-member-llc/
Bankruptcy Protection: Resulting from the the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,  solo 401k plans are afforded full protection under the federal bankruptcy rules similar to full-time employer qualified plans.

Use Solo 401k For Coffee Farm Investment

Can I invest my self-directed solo 401k in  a coffee farm investment in Panama?

While the solo 401k rules do allow for investing in alternative investments such as farm that produces crops, the following items should be considered.

The investment  by the solo 401k plan will be passive, and the solo 401k participant/trustee does not  hold any position in the company such as an officer, board member, employee, etc. The investment would be held in the name of the Solo 401k plan using the plan’s EIN and all income and expenses would be deposited and paid by the Solo 401k.
Please note that: while a Solo 401k can invest in a private company, the investment could be subject to Unrelated Business Income Tax (UBIT) on pass-through income (e.g. if the Solo 401k owns an equity interest in an active business that provides goods and/or services and is taxed as a pass-through entity).  Ultimately, it will depend on the specific facts and circumstances such that it would be prudent for the client to determine this in consultation with his/her tax adviser.  (https://www.mysolo401k.net/solo-401k/private-company-investment/)

 

 

Proposed Bill: Retirement Plan Modernization Act Would Increase Auto Payout to $8,000 from $5,000

Recently, Tim Walberg (R-MI) and Gregorio Kilili Camacho Sablan (D-N. Marianas) proposed the Retirement Plan Modernization Act  which would affect terminated employees in full-time employer 401k plans in that the employer could automatically transfer their 401k funds to an IRA (this is known as an automatic IRA rollover) if the balance of their 401k funds is $8,000 or less. The current threshold is $5,000 so this would an increase of $3,000.

Some of the highlights of the pending bill include the following:

The  Senators proposing the bill argue that the bill would make it easier for small businesses to offer retirement plans and better manage the administrative expenses of retirement plans.  They also say plan fees would decrease becasue the plan would not be required to pay fee for participant accounts where the employee has separated from service.

Under current law, automatic IRA rollovers occur if a participant is no longer employed by the employer sponsoring the retirement plan and their balance is between $1,000 and $5,000. Congress has periodically adjusted the cash-out limit over the years to reflect increasing costs of administration; however, the last time it was updated was 1997. The Retirement Plan Modernization Act would raise the automatic IRA rollover limit, based on the rate of inflation, from $5,000 to $8,000 and allow for future increases to be indexed for inflation.

  • About MySolo401k

    We help our clients take control of their retirement money. Our products and services provide our clients the freedom to invest their retirement savings in their own business as well as alternative investments such as real estate, private companies, promissory notes, precious metals, tax liens and equities.
    Learn more

    Connect with us

  • We’re here to help.

    Call: 800-489-7571

    Monday-Saturday

    7:00 am - 5:00 pm PT

    Why us?
MENU