I have an opportunity to invest in a car wash in CA. I will be partnering with a local, experienced car wash operator who will be responsible for the car wash operations. My role is to provide equity and oversight. My goal is to participate in the revenue upside.
My understanding is that Business Income will be taxable, but the debt-financed income will not be taxable. For the record, a seller financed interest-only loan is being offered.
I want to check with you first make sure that I am headed in the right direction here and this is feasible through my Solo 401k.
1) Please note that if you make an equity investment (via the Solo 401k) in a business that provides goods/services and is taxed as a pass through entity (e.g. S corp, LLC, etc.) the gains that are attributable to that investment will be subject to UBIT. Please see more at the following link:
2) Please note that your investment must be passive (i.e. you can’t be involved in the operations/oversight of the business), your investment be limited to a minority ownership position, the investment must be titled in the name of the Solo 401k, the other owners must be unrelated persons.
Can a 403(b) be transferred to a solo 401k plan?
Yes a 403(b) plan can be transferred to a solo 401k plan.
What is an IRC Sec. 403(b) plan?
Similar to a solo 401k plan, an IRC Sec. 403(b) plan is a retirement plan that allows employees to make employee/salary deferrals. However, unlike 401k plans, 403(b) plans can only be offered by certain tax-exempt organizations, public and tribal government schools, and certain ministers. Lastly, employers do not generally establish a trust to hold the plan assets. Rather, each employee establishes his own annuity contract or custodial account to hold his 403(b) plan assets.
- Contributions to IRAs and Roth IRAs are aggregated. This means that you cannot contribute $5,500 to each type (i.e., traditional and Roth IRA); however, you can contribute some to each up to the $5,500 combined limit. If you are aged 50 or older in 2017, your IRA contribution increases to $6,500.
- TRADITIONAL IRA CONTRIBUTIONS: While the IRS rules allow for contributions to both Solo 401k plan and IRAs, since you are participating in a solo 401k plan, your traditional IRA contributions may not be deductible. See the chart listed on the following IRS link for these limits:
- ROTH IRA CONTRIBUTIONS: While you can also contribute to Roth IRAs and solo 401k plans, not everybody qualifies if their modified AGI is over a certain limit. For these limits, please see the following charts.
Unlike an IRA LLC in California where the IRA is the member of the LLC which is subject to the California annual franchise tax of $800, a solo 401k LLC where the solo 401k is the member of the LLC is not subject to the $800 annual franchise fee provided the solo 401k LLC solely invests in passive real estate (i.e., buy and hold rentals). If the Solo 401k LLC is used to invest in assets other than real estate, the exemption will be lost.
The exemption from the California Franchise Tax is found in R&TC Section 23701x.
Applying for the Waiver
- Complete CAFT Form 3500: https://www.ftb.ca.gov/forms/misc/3500.pdf
- The fee for processing the Application is $25
Again, this exemption only applies to solo 401k plans, profit sharing plans, defined benefit plans, stock bonus plans, and does not apply to IRAs including SEP IRAs.
Form 5498 does not apply to qualified plans including solo 401k plans. This form only applies to IRAs.
Unfortunately, financial institutions that process IRA distributions as 60-day rollovers instead of processing the movement of funds as a “direct-rollover” to a solo 401k plan or full-time employer 401k plan will incorrectly inform the account holder that the 401k provider will issue a 5498 for the solo 401k or 401k to report the 60-day rollover, which is not correct since Form 5498 only applies to IRAs.
While most solo 401k owners who are 70 ½ or older will need to take a 2018 required minimum distribution (RMD) by December 31, 2018. However, that deadline does not apply to all solo 401k owners. Solo 401k owners who are age 70 ½ or over are not required to be take an RMD from their solo 401k by the upcoming December 31 deadline if you just reached 70 1/2 in 2018. Generally, when you reached age 70 ½ you must take an RMD. However, for the first year you catch a break. You do not have to take your 2018 RMD until your Required Beginning Date (RBD) which is April 1, 2019. This is only a one-time exception. All future Solo 401k RMDs must be taken by December 31. However, there is a downside to waiting until 2019 to take your 2018 RMD. You will need to take your RMD for 2018 by April 1 and the 2019 RMD for your second distribution calendar year by December 31. That means two taxable distributions, which would need to be included in income so you won’t be able to spread your tax liability over 2018 and 2019 if you took your 2018 RMD in 2019.
I am the co-founder and CEO of a company. I am on payroll as an employee, and we don’t yet have a retirement vehicle setup for our employees (we hope to by mid-2018).
My questions has to do with my personal situation. Do you offer a retirement vehicle, other than my personal Roth IRA, that I can leverage as a separate retirement account? I’ve looked at SEPs and SIMPLE Roth accounts and Solo 401K but I don’t believe any of those would apply to my situation.
In short – there are no other options as there is no way around offering the plan to your employees.
However, if your looking to self-directed your retirement funds, you can explore investing your retirement funds in alternative investments such as real estate, promissory notes even bitcoin via an IRA LLC
as this can be done without any impact to your employees.
Those existing solo 401k clients of Ascensus that want to convert their existing solo 401k plan to a self-directed solo 401k that will allow for checkbook control for investing in alternative investments such as bitcoin, real estate, metals, tax liens, and private equity can do so by restating their Ascensus solo 401k plan to a self-directed solo 401k from My Solo 401k Financial.
When an existing solo 401k plan is restated to a self-directed solo 401k plan from My Solo 401k Financial, the following Ascencus forms apply, which we will fill-out as part of the self-directed solo 401k process:
- Individual (K) Termination Kit/ Plan Conversation Form (3 pages)
- Plan Termination Payout Request Form (4 pages)
The above forms get submitted to Ascensus once you setup the self-directed solo 401k with us which starts by you completing our on-line self-directed solo 401k application.
We will then assist you in opening a bank account or brokerage account for your self-directed solo 401k. To learn more about the differences and similarities between the bank account and the brokerage account, VISIT HERE.
While the 401k provider will take care of annual compliance items related to the business financing 401k (ROBS 401k), the business CPA should be aware of the following main items:
- The ROBS 401k funded business must be and remain a C-Corporation and NOT be an S corp as long as the 401k owns equity in the corporation.
- Ownership will be via (i) 401k for your benefit and (ii) you personally since you will invest at least 1% of your personal funds in the C-corporation.
- Any compensation that you receive for the work performed needs to be paid as w-2 wages
- No personal loans to company.
- No interact between the ROBS 401k funded business and other businesses that you own.
- Your only relationship should be w-2 employee and owner of the company.
While the House of Representatives recently passed a tax bill that would affect IRAs and retirement plans such as solo 401k plans, it is not final until the Senate approves it.
Here are some of the proposes changes in the tax bill that would affect retirement accounts.
1. No more Roth IRA re-characterizations. While re characterizations do not apply to Solo 401k plans, they do apply to IRAs. Under the pending tax bill, those that convert their pretax or after-tax IRAs to a Roth IRA will no longer be able to change their mind and reconvert back to an IRA.
2. No more contributions to both 457 plans and 401k plans including solo 401k plans. Under current law, one can maximize both 457 plan and solo 4o1k contributions, allowing one to essentially double up on contributions. The pending tax bill would eliminate this.
Following are some of the proposed changes that are NOT in bill:
Mandatory Roth 401(k) catch-up contributions
- Currently, employees under age 50 can save up to $18,000 a year in a 401(k)-type plan before taxes, while those 50 or older can set aside up to $24,000.
Under an amendment introduced recently by Sen. Orrin Hatch (R., Utah), anyone eligible to put in an amount above $18,000 would have to do so in a Roth account, which unlike a 401(k) offers no upfront tax deduction but instead allows the money to be withdrawn tax-free.
- This amendment wasn’t included in a list of modifications to the bill backed by the Senate Finance Committee chairman on Wednesday.
- To make the change more palatable, the amendment would have raised the catch-up contribution limit from $6,000 to $9,000 a year, Ms. Borland says
Elimination of 401(k) catch-up contributions for high earners
- As originally proposed, the Senate bill would have done away with the extra $6,000 workers age 50 and older can contribute each year to 401(k)-type plans—but only for those with salaries of $500,000 or more. Lawmakers have removed the provision.
A 10% penalty on early withdrawals from 457 plans
- People who withdraw money from most 401(k)-style plans before age 59½ must pay income tax plus a 10% early withdrawal penalty on the money. Thanks to a quirk in the law, the 10% early withdrawal penalty doesn’t apply to 457 plans. While the original Senate bill would have imposed the 10% penalty on 457 plans, the Senate Finance Committee chairman removed that measure from the bill Wednesday.