Study Confirms Americans Happy with 401k Plans

A recent study by the Investment Company Institute confirms Americans are happy with their 401k plans due to flexibility and control.

While the report does not specifically reference solo 401k plans, a solo 401k is a 401k but for the self-employed and I can tell you that our clients like their solo 401k plans because of control that they have to self-direct the solo 401k accounts into alternative investments such as real estate, metals, notes, tax liens, private equity, bitcoin as well as equities. They also like the flexibility of being able to borrow from their solo 401k plans through a solo 401k participant loan.

Here are some of the findings found in the study performed by Investment Company Institute:

  • Respondents are confident that 401(k) and other DC plans will help them meet their retirement goals.
  • Confidence was higher among households that currently own DC accounts or IRAs at 83%, but even 62% of non-owners expressed confidence in the DC system.
  • Respondents also strongly oppose changes to key DC plan features — and this was consistent even if they are not currently taking advantage of a DC account.
  • 88% of respondents disagreed that the government should either remove the tax advantages of DC plans, or reduce the amount that individuals can contribute to their DC accounts.
  •  85% of DC-owning individuals agreed that the “tax treatment of my retirement plan is a big incentive to contribute.”
  • When asked whether “knowing that I’m saving from every paycheck makes me less worried about the short-term performance of my investments,” nearly 80% of DC-owning individuals agreed with that statement. This finding ranged from 64% of DC-owning individuals with household incomes of less than $30,000 to 84% of those with household incomes of $100,000 or more.
  • Strong majorities of respondents disagreed with proposals to take away investment choices or control of account balances during retirement, further reinforcing the notion that participants strongly support retaining the structure of DC plans.
  • Respondents also largely agree that employer-sponsored retirement accounts help them think about the long-term, making it easier for them to save. Nearly half (49%) of DC-owning individuals agreed with the statement, “I probably wouldn’t save for retirement if I didn’t have a retirement plan at work.”
  • The 11th annual update of ICI’s survey includes the views of more than 2,000 American adults on DC retirement account saving, as well as their reactions to possible policy changes and their confidence in 401(k) and other DC plans.

Solo 401k Reporting Hinges On Certain Factors

Reporting for the solo 401k plan hinges on the factors listed bellow. Please review and let me know if you fall under any of these.

Question: 

When do I need to make my Solo 401(k) Contributions?

Answer: 

Contributions to a Solo 401k plan must be made by your business tax return due date or any timely filed extensions. For more information: Click Here

Question:

When does a Form 5500-EZ need to be completed?

Answer:

If your solo 401k plan balance exceeded $250,000 as of December 31, a Form 5500-EZ is due to the IRS by July 31. A Form 5500-EZ is used by the self-employed business owner to report on a yearly basis the total value of the Solo 401k plan; however, Form 5500-EZ does not need to be filed until the Solo 401k plan total assets exceed $250,000. Since we don’t have access to your funds, it is your responsibility to let us know if you would like us to assist in preparing the Form 5500-EZ.  For more information on this please visit the following link and read our FAQ page on Form 5500-EZ: Click Here

Question: 

When do I need a Form 1099-R?

Answer:

Anytime a plan participant or beneficiary takes a distribution from his or her self-directed solo 401k, IRS reporting requirements apply. 1099-R reporting also applies to in-plan Roth 401k conversions. Payers must send a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to the IRS and to the individual receiving the distribution. The form is due to the IRS by February 28. Again, Since we don’t have access to your funds, it is your responsibility to let us know. For more information please see the following link: Click Here

Question:

When are Solo 401k IRS Required Plan Updates needed?

Answer:

As the solo 401k plan provider, we are responsible for updating the plan for any required IRS changes, with the next required update occurring in 2020. You will be required to sign all new solo 401k plan documents, and only the solo 401k plan provider can handle such an update with the IRS. For more information: Click Here

Use Fidelity Investments for The Mega Back Door Roth Roth Solo 401k

While Fidelity Investments does not offer a solo 401k that allows for voluntary after-tax contributions, which is the first step in implementing the “mega back door Roth solo 401k strategy, “Fidelity does offer a custodial brokerage account to hold the voluntary after-tax solo 401k funds for a solo 401k plan provided by a solo 401k provider such as My Solo 401k Financial.

When you open a solo 401k plan with My Solo 401k Financial, we not only provide an IRS approved plan document that allows for voluntary after-tax contributions  but it allows for in-service distributions of the voluntary after-tax funds which is the second piece of the mega backdoor strategy.

We also fill out all of the applicable Fidelity Investment brokerage forms in order to open the correct voluntary after-tax brokerage account for the solo 401k.

Following are some of the rules regarding this type of solo 401k voluntary after-tax setup for implementing the mega back door Roth solo 401k strategy:

  • Voluntary after-tax solo 401k contributions fall under the employee (salary deferral) contribution umbrella.
  • This type of contribution is not considered employer (profit sharing) contributions, so the contribution is not tax deductible because it is considered made with post-tax dollars.
  • When voluntary after-tax solo 401k contributions are converted to a Roth IRA or the Roth Solo 401k, the conversion has to be documented in writing by completing a conversion Form ( the IRS will expect to see a copy of this form upon request), and a Form 1099-R has to be issued to report the conversion whether taxable or not.  This reporting is covered by our annual service and fee.
  • Voluntary after-tax solo 401k contributions can be distributed and thus converted at any time. This is why the conversion of voluntary after-tax solo 401k contributions has been dubbed the “mega-backdoor Roth solo 401k.”
  • There is a lesser known rule called the “overall 415 limits.” The overall 415 limit for 401(k) plans including solo 401k plans. For 2018, the overall limit is $55,000. The overall limit looks at the total annual additions to all of a participant’s accounts in plans maintained by one employer and includes not just their salary deferrals, but also matching contributions, allocations of forfeitures and other amounts. Voluntary after-tax solo 401k contributions are subject to the overall annual limit (“The 415 Limit) $55,000 for 2018.

Lastly, don’t confuse Roth solo 401k contributions with voluntary after-tax contributions.  VISIT HERE to learn more about the differences.

Who is Not Required to Take a 2019 RMD by December 31?

While most solo 401k owners who are 70 ½ or older will need to take a 2019 required minimum distribution (RMD) by December 31, 2019. 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 2019. 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 2019 RMD until your Required Beginning Date (RBD) which is April 1, 2020. 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 2020 to take your 2019 RMD. You will need to take your RMD for 2019 by April 1 and the 2020 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 2019 and 2020 if you took your 2019 RMD in 2020.

With respect to reporting the solo 401k RMD on your Form 1040 tax return,, if you take the 2019 RMD this calendar year, reporting is due when you file your 2019 personal tax return, which will be April 15, 2020.  If you wait to take your 2019 RMD in 2020, then both RMDs (2019 & 2020) will be due on your 2020 personal tax return, which would would be filed by April 15, 2021.

Lastly, don’t get confused with the IRA RMD aggregation rules which allow the IRA owner to aggregate all her IRA balances and take the RMD one IRA. This same rule does not apply to qualified plans such as a solo 401k plan. The RMD due from the solo 401k must be withdrawn from the solo 401k plan, not from your IRA  or from your current employer 401k plan if you also have a full-time job and participate in that employer’s 401k plan.

Investing a Self-Directed IRA in Notes Vs Investing a Solo 401k Plan in Notes

After physical real estate, investing retirement funds such as self-directed IRA and solo 401k funds in promissory notes secured by real estate (also known as trust deeds) is quite popular.

Investing in notes is especially attractive for those not looking to contend with the challenges that can arise with real estate. Challenges from making sure the property remains occupied  to actually managing the property. With note investments, the self-directed IRA or the solo 401k plan is effectively acting like a bank since the funds are loaned out to an unrelated third-party.

SIMILARITIES of Investing a Solo 401k or a Self-Directed IRA in Promissory Notes:

Since the retirement account is making the note investment, the note investment cannot be to a disqualified party such as the retirement account participant, her spouse, parents,children, grandchild, and her business, to name a few.

The promissory note can be structured as a secured or unsecured note. It is preferable to invest in notes secured by real estate in the event the borrower cannot make the note payments. In which case, the retirement account will take over the property.

When processing the funding of the promissory note, the funds have to flow from the retirement account directly to the borrower, not your personal or business bank account, as doing so would result in a taxable event.

The note investment must be documented in writing and list the retirement account as the lender (beneficiary).

A note interest rate that will benefit the retirement account must be charged while also not running afoul with the usury rules.

All note payments must be deposited directly into the retirement account not your personal bank account.

DIFFERENCES of Investing a Solo 401k or a Self-Directed IRA in Promissory Notes:

It is generally easier and less costly to invest in notes via solo 401k plan over a self-directed IRA.  For example, because the solo 401k owner is the trustee of the plan and thus manages the solo 401k bank account, she can process the funding of the note by wiring a check to the borrower from the solo 401k bank account or submit a wire directive to the bank.  On the other hand, if the investment is done through a self-directed IRA the IRA custodian will charge a transaction fee, a wire fee and an ongoing note holding fee.

When titling the note investment, the self-directed IRA custodian is listed as the lender (beneficiary) for the benefit of the IRA.  If processed through the solo 401k plan, tile is taken in your name as trustee of the solo 401k plan. Click here to learn more on how to title the note investment.

The promissory note instrument is safe-kept by the solo 401k owner. With an IRA, the self-directed IRA custodian safe-keeps the note paperwork and charges a holding fee for doing so.

The promissory note payments flow to the solo 401k bank account instead of the self-directed IRA custodian for deposit into your IRA.

 

Consider Using Roth IRA for College Savings

With college tuition increasing each year, utilizing a Roth IRA to cover some of those college costs may be be a good idea. Also, Roth IRA contributions will not affect the amount of financial aid your student receives because Roth IRA contributions are not tax deductible.

Roth IRA Distributions

Roth IRA contributions can be distributed at any time tax and penalty free and used for any purpose including paying for college. What is more, Roth IRA earnings can also be distributed penalty free (i.e., the 10% early distribution penalty does not apply even if you are under age 59 1/2 at time of the distribution); however, federal and state taxes still apply unless you are both age 59 1/2 or older and meet the 5 year holding requirement which would allow for tax free distribution for earnings.

What is an Educational Institution?

Any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education, which generally includes all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

Other Options

If you are self-employed and participate in a solo 401k plan, you can take a participant loan up to the applicable limit (50% of account balance or maximum amount of $50K.) from the solo 401k and use those funds for any purpose including to pay for higher education expenses.

 

TCJA Impact to Alimony Payments from Solo 401k Plans

In addition to impacting IRAs, the Tax Cuts and Jobs Act (TCJA) of 2017 (TCJA) also impacts alimony payments from solo 401k plans. Prior to 2019, the alimony payer (i.e. the solo 401k participant) received an above-the-line deduction and the recipient treated the alimony as income.  Now any divorce agreements adopted on or after January 2019 no deduction for alimony payments are allowed, and alimony payments are not treated as income.

This essentially means that the rules are now more favorable to the payee but results in higher tax liability to the payer (i.e., the solo 401k participant).  What is more, alimony payments no longer can be treated as earned income for the receiving spouse so the funds can no longer be used for IRA contributions purposes effective January 1, 2019.

Highlights of Pending The Retirement Security and Savings Act of 2018

Jointly sponsored by Senators Rob Portman (R-OH) and Ben Cardin (D-MD), the Retirement Security and Savings Act of 2018  is considered as sweeping as prior bills (Economic Growth and Tax Relief Reconciliation Act of 2001 and the Pension Protection Act of 2006). It will be interesting to see which parts of the bill if any will be approved in 2019.

Here are some of the key provisions in the bill:

  • Create a new automatic-enrollment/automatic-escalation safe harbor for 401(k)-type plans with higher contribution levels
  • Provide a small employer tax credit for implementing automatic enrollment
  • Simplify participant notices in automatic-enrollment type plans
  • Liberalize the saver credit for contributions to employer-sponsored plans and IRAs, and make it refundable and payable to a retirement account
  • Liberalize employer plan eligibility rules for less-than-full-time workers
  • Apply certain retirement plan nondiscrimination tests (e.g., top-heavy) separately to part-time employees
  • Allow nonspouse retirement account beneficiaries to do indirect (60-day) rollovers to inherited IRAs
  • Exempt small aggregate retirement balances ($100,000 or less) from required minimum distributions (RMDs)
  • Increase the RMD age in stages to age 75
  • Reduce excise tax for RMD failures from 50 percent to 25 percent, and under certain circumstances to as low as 10 percent
  • Reduce, under certain circumstances, the excise tax for IRA excess contributions from six percent to three percent
  • Exempt earnings on timely-removed IRA excess contributions from the 10 percent excise tax on early (pre-59½) distributions
  • Modernize the mortality tables that dictate RMD amounts
  • Enhance the small employer tax credit for establishing a retirement plan
  • Provide an employer tax credit for implementing automatic employee re-enrollment every three years
  • Treat certain student loan repayments as qualifying for employer matching contributions to a retirement plan
  • Treat employer-provided retirement planning services received in lieu of compensation as nontaxable
  • Allow an employer to make additional nonelective contributions to SIMPLE IRA plans
  • Allow self-correction of more inadvertent retirement plan operational failures
  • Expand the investments suitable for 403(b)(7) custodial accounts
  • Allow “de minimis” incentives to employees to contribute deferrals to certain employer-sponsored plans (without being considered to violate the contingent benefit rule)
  • Provide a second, higher catch-up deferral amount for those contributing at age 60 or older (current basic catch-up eligibility begins at age 50)
  • Raise the maximum qualifying longevity annuity contract (QLAC) contribution amount (amount excludable from RMDs) from $125,000 to $200,000
  • Allow certain annuities that feature accelerating payments to satisfy RMD requirements
  • Enhance the ability to partially annuitize retirement benefits
  • Authorize a study and report to Congress on current reporting and disclosure requirements
  • Consolidate certain defined contribution retirement plan notices
  • Simplify retirement plan distribution notice requirements
  • Exempt retirement plans from required recoupment of inadvertent overpayments to participants, and legitimize the rollover of such amounts
  • Allow custodial accounts of terminating 403(b)(7) plans to remain subject to 403(b)(7) rules, rather than requiring distribution from the account to the owner
  • Allow greater flexibility to use base pay for determining retirement benefits (excluding certain overtime pay)
  • Allow Roth-type deferral contributions to be made to SIMPLE IRA plans
  • Permit an employer to apply catch-up deferral eligibility requirements separately to legitimate separate lines of business
  • Liberalize the substantially equal periodic payment rules to allow transfers or rollovers between certain qualified plans if net periodic distributions (e.g., annual) comply with the distribution schedule
  • Enhance the ability of terminating employees to contribute payments for accumulated sick leave, vacation pay, severance or back pay to a deferral-type retirement plan
  • Permit the merger or transfer of plan assets from qualified retirement plans into 403(b) plans
  • Exempt designated Roth accounts in employer-sponsored plans (e.g., Roth 401(k), Roth 403(b)) from RMD requirements
  • Extend the qualified charitable distribution exemption from taxation to include SEP, SIMPLE IRA, qualified retirement, 403(b), and governmental 457(b) plans
  • Permit rollovers from Roth IRAs to employer-sponsored plans including solo 401k plans, with directive to the Secretary of the Treasury to modify the regulations to permit
  • Permit a spouse beneficiary of an employer-sponsored retirement plan account to elect to be treated as the employee for RMD purposes
  • Address certain interest crediting rates, mortality rates, and PBGC premiums for defined benefit plans

 

For Third Quarter of 2018 Retirement Assets Total $29.2 Trillion

According to a report released on December 20, 2018 by the Investment Company Institute (ICI),Retirement Assets Total $29.2 Trillion in Third Quarter. This is an increase of 2.8 percent from the previous quarter. The report goes on to say that retirement funds make up 33% of household financial assets as of the end of September 2018.

Here are some more items found in the report:

Assets in individual retirement accounts (IRAs) totaled $9.5 trillion at the end of the third quarter of 2018, an increase of 3.0 percent from the end of the second quarter of 2018. Defined contribution (DC) plan assets (note that solo 401k plans fall under this category) were $8.1 trillion at the end of the third quarter, up 3.3 percent from June 30, 2018.

Americans held $8.1 trillion in all employer-based DC retirement plans on September 30, 2018, of which $5.6 trillion was held in 401(k) plans. In addition to 401(k) plans, at the end of the third quarter, $550 billion was held in other private-sector DC plans, $1.0 trillion in 403(b) plans, $332 billion in 457 plans, and $606 billion in the Federal Employees Retirement System’s Thrift Savings Plan (TSP). Mutual funds managed $3.7 trillion, or 67 percent, of assets held in 401(k) plans at the end of September 2018. With $2.3 trillion, equity funds were the most common type of funds held in 401(k) plans, followed by $1.0 trillion in hybrid funds, which include target date funds.

The quarterly retirement data tables are available at “The US Retirement Market, Third Quarter 2018.”

 

Interesting IRA Rollover and 401k Rollover Statistics for 2018

The Investment Company Institute (ICI) release data on December 19, 2018 regarding IRA rollovers and 401k rollovers from businesses. To view the full report, CLICK HERE, and visit here for a summary from the ICI’s website.

Here are some of the findings included in the report:

  • One-third of US households owned IRAs in 2018. More than eight in 10 IRA-owning households also had accumulations in employer-sponsored retirement plans. More than 60 percent of all US households had either retirement plans through work or IRAs, or both.
  • More than one-quarter of US households owned traditional IRAs in 2018. Traditional IRAs were the most common type of IRA owned, followed by Roth IRAs (owned by about 18 percent of US households) and employer-sponsored IRAs (owned by 6 percent).
  • IRA-owning households cover a wide range of incomes. In 2018, the majority of IRA-owning households had incomes less than $100,000: 12 percent had household incomes less than $35,000 and 40 percent had household incomes between $35,000 and $99,999.
  • Most traditional IRA–owning households have a planned retirement strategy. Nearly two-thirds of traditional IRA–owning households indicated they have a strategy for managing income and assets in retirement. Typically, these strategies have many components, often including reviewing asset allocations, determining retirement expenses, developing a retirement income plan, setting aside emergency funds, and determining when to take Social Security benefits.
  • About MySolo401k

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