Another Bill (Inclusive Prosperity Act of 2019) Trying to Fee 401k Plans

This month Sen. Bernie Sanders (I-VT) and Rep. Barbara Lee (D-CA) introduced the Inclusive Prosperity Act of 2019 in an effort to once again try to tack on fees to 401k plans including solo 401k plans of course.

If the bill passes, a transaction tax ranging from 0.005 to 0.10 percent would apply to trades of stocks, derivatives and bonds.  However, the bill states that “In the case of individuals of modest means who actually trade directly or through brokers, the legislation would provide an income tax credit to offset the entire financial transaction tax for individuals with incomes less than $50,000 and married couples with incomes less than $75,000.”

The bill claims the purpose is to reduce frequent trading in retirement accounts while also collecting more taxes from wealthy investors. The taxes collected would then be used to improve infrastructure and our environment, while also reducing market volatility. It is estimated that the amount of extra revenue generated from the bill is $2.4 trillion during a 10 year span.

Closing comments

This bill is also similar to the Wall Street Tax Act that was introduced earlier this year, was also backed by Sen. Bernie Sanders,  but has not yet passed.  If any of this legislature passes, it will be interesting to see if more retirement account investors such as solo 401k and IRA LLC account holders will invest in alternative investments such as real estate, notes, metals, tax liens and private equity since these types of investments are not traded frequently by their nature of being long term investments.


The ROTH IRA LLC Five-Year Rules

Can the Roth IRA LLC participant take Roth IRA distributions prior to the 5 year period?

Yes.  However, part or all of the distribution may be taxable depending on your age and the source of funds being distributed (basis vs gains).   The IRS refers to the tax treatment of Roth IRA LLC distributions as either qualified (tax-free) or nonqualified (taxable). Under either scenario, the funds must first flow back to the Roth IRA from the LLC bank account before the distribution can be processed from the Roth IRA since the distribution is occurring from the Roth IRA not the Roth IRA funded LLC. If the funds are distributed from the LLC bank account to your personal bank account instead of from the Roth IRA, the Roth IRA prohibited transactions rules will be triggered.

The IRS Rules Required Roth IRA LLC Funds Distributed in the Following Order: 

Regular Contributions: Roth IRA annual contributions for all years—contributions that were not tax-deductible when made—are deemed to be withdrawn first, and are tax- and penalty-free.

Conversions & Rollovers: After Roth IRA contributions have been distributed, next in line are   amounts converted from Traditional IRAs and pretax amounts that have been rolled over from an employer-sponsored retirement plan such as a solo 401k plan (excluding rollover from Roth Solo 401k accounts) to a Roth IRA.

Earnings: Finally, after contributions and amounts converted have been distributed, Roth IRA earnings can be distributed.

The reason regular contributions, conversion and rollovers are not taxable is because they went into the Roth IRA on an after-tax basis (i.e., the Roth IRA owner did not deduct the these amounts on her taxes).

There are Two Five-Year Waiting Periods:

To further analyze if taxes will apply from the Roth IRA LLC distribution, the five year period has to be reviewed separately for the Roth IRA earnings and the Roth IRA conversions and pretax employer plan rollovers from 401k plans and other qualified plans.

The Five-Year Period for Earnings on Roth IRA Contributions:

Ad discussed above, Roth IRA contributions can always be distributed tax and penalty free; however, the earnings on Roth IRA contributions are subject to both the 5 year rule and the age 59 1/2 rule when determining if the distribution is “qualified” vs “nonqualified.”

The five-year period is per Roth IRA owner not per Roth IRA. Therefore, the Roth IRA owner may have multiple Roth IRAs, but the 5 year-period will apply to the first (oldest) Roth IRA not each  Roth IRA. The five-year rule will also not start over even if all the Roth IRAs are emptied out and an new one is later opened.

For a Roth IRA distribution to be considered “qualified,” the following two requirements have to be satisfied:

1. Five Year Period: Starting on January 1 of the year the first Roth IRA contribution was made regardless if not made until the end of December, 5 years must have passed.

2. Age 59 1/2:  The distribution must be made on or after the Roth IRA owner attains age 59½, has died, has become disabled, or has qualified first-time homebuyer expenses. See (IRC Sec. 408A(d)(2)(A)).

The Five-Year Period for Conversions and Rollovers from Qualified Plans (e.g., 401k plans):

Once all Roth IRA contributions have been distributed, the next to be distributed are traditional IRA conversions and rollovers from pretax qualified plans. Wiled the amounts converted will not be subject to taxes, the 10% early distribution penalty will apply if the account owner is under age 59 1/2 regardless if they have had the Roth IRA for less or over 5 years.  The 10% penalty does not apply if the Roth IRA has been opened for both 5 years or longer and if the account holder 59 1/2 or older.

Note: If traditional IRA conversion or Rollovers from retirement plans were made to the Roth IRA in multiple years, the “first-in, firs-out” concept applies. This means the oldest traditional IRA funds and qualified plan rollovers will be first distributed.

Closing Comments

In sum, Roth IRA contributions are always tax free and penalty free. However, amounts converted to a Roth IRA from traditional IRAs or pretax qualified plans such as solo 401k plans will also not be taxable but may be subject to the 10% early distribution penalty if both the 5 year-rule and the age 59 1/2  rule are not met.


Solo 401k Contribution Eligibility vs. Destructibility Differences

From a contribution side, the self-employed primarily establish a solo 401k plan to make tax-deductible contributions. If not eligible for the tax deduction, they decide not to contribute to the plan at all. This is often the case because they are not aware the contribution can still be made just not deducted. The deduction eligibility rules differ from the contribution eligibility rules.

Solo 401k Contribution Eligibility

Whether the solo 401k contribution is tax deductible or not, the solo 401k participant first has to be eligible to contribute to a solo 401k plan. The participant must have self-employment income from services rendered. The 70 1/2 age limit does not apply to solo 401k plans which means the participant can contribute past age 70 1/2 as long as she has self-employment income.

Solo 401k Contribution Limit

The solo 401k participant may contribute up to 100 percent of her eligible compensation up to the statutory maximum amount per year—$55,000 for 2018 and $56,000 for 2019, plus an additional $6,000 catch-up contribution if age 50 or older.

All of the solo 401k participant’s contribution sources (i.e., pretax, Roth and voluntary after-tax) are aggregated for purposes of the annual contribution limits.

Solo 401k Deduction Eligibility

Once self-employment income eligibility is satisfied, part of all of the solo 401k contribution may be tax deductible. The following factor affects whether or not the solo 401k contribution is deductible (pretax).

  1. Contributing to other qualified plans such as a full-time employer 401k plan

Currently Contributing to a Full-Time Employer 401k Plan

Someone who is participating in or receiving contributions from a full-time employer 401k plan is an active participant. The IRS will know if you are also contributing to your day-time job 401k plan by reviewing box 13 (this box will be checked off) of your W-2 which is issued by your day-time job employer.

The Right Way to Establish a Solo 401k Plan

On the surface, establishing a solo 401k plan may seem like a fairly simple process, but it can be easy to skip a step. Overlooking any steps may cause the solo 401k plan to be out of compliance, resulting in no longer considered a tax shelter vehicle.

Make Sure You Qualify

While your solo 401k provider is not required to determine whether a client is eligible to open a solo 401k plan or even make contributions, it is important to ask questions before proceeding to prevent the client from opening a solo 401k before meeting the eligibility requirements. This will also prevent the client from funding the account with disallowed transfers (e.g., Roth IRA funds), and from making excess contributions which can occur if the client is already making contributions to other qualified plans.

Complete All Required Paperwork

This step is crucial in order to keep the solo 401k plan in compliance and it may seem obvious.  Incomplete or not completing all the solo 401k documents can be a big headache for clients and the solo 401k plan provider.  The following documents must be provided by the solo 401k plan provider and completed by the client in order to properly establish a solo 401k plan.

  • Adoption Agreement
  • Trust Agreement
  • Self-Employed Business Consent to Establish a Plan
  • Basic Plan Document
  • IRS Plan Determination Letter

Equally important, the solo 401k plan establishment documents must be properly completed and signed. The solo 401k plan is deemed “adopted” once the solo 401k plan trustee sign the solo 401k adoption agreement and business consent form. The solo 401k plan does not exist without a signed adoption agreement.

Once the solo 401k plan has been adopted, the next step is to open the solo 401k bank/brokerage account. If funding the solo 401k plan by making an annual contribution, the account must then be funded by the self-employed business tax due date plus timely filed business tax return extension.

Complete the Beneficiary Election Form

While not an IRS requirement to name a beneficiary, it is an important step in establishing a solo 401k plan. If not completed or filled out incorrectly, it will be difficult to payout the funds to the beneficiary and may result in the surviving beneficiary having to to empty out the solo 40k plan more quickly. Make sure to also date and sign the beneficiary election form including (if married) having the form notarized if naming someones other than your spouse (spousal consent) as the primary beneficiary.

If the solo 401k participant does not have the beneficiary’s birth date or Social Security number (federal tax identification number if naming a living trust as the beneficiary), the signed beneficiary form is still valid. It is best to provide this information upfront because it will be required when performing the Form 1099-R reporting when it comes to time to process the beneficiary / decedent claim.

Make sure to also list all of the primary beneficiaries and the applicable percentages if naming more than one.

Retain All Forms

The solo 401k p trustee should keep all of the solo 401k plan establishment documents and may be retained as hard or electronic copies.

Choose a Reputable Solo 401k Plan Provider

Using the services of a proven solo 401k plan provider is essential to a successful solo 401k plan. It may seem like not a big deal, in the long run it could be detrimental if the provider did not setup the plan correctly, did not keep up with the plan updates or closed down shop. While the IRS has consistently recognized that a solo 401k plan allows for the self-employed business owner to serve as trustee of his or her solo 401k plan including the alternative investments, they have also increased their IRS compliance checks in the last couple years. They have also found that some solo 401k plans contain violations.  This is not surprising as the solo 401k plan rules are complex with pitfalls for the uninformed. For this reason, it is important to work with a company that specializes in solo 401k plan compliance rather than a provider that “dabbles” in solo 401k plans or does not have a proven compliance record. Moreover, you should select a provider who will make sure that you work directly with an attorney and other compliance professionals throughout the entire solo 401k plan setup process.  These attorneys and professionals can ensure that you satisfy the solo 401k requirements that apply to your specific circumstances.

IRS Releases the 2018 Data Book

In May, the IRS released its annual “Data Book” for 2018. The report discusses activities conducted by the IRS during Fiscal year 2018 (October 1, 2017 through September 30, 2018). It provides information on returns filed and taxes collected, enforcement, taxpayer assistance, the IRS budget and workforce, and other selected activities.

Highlights of the Data

  • In Fiscal Year (FY) 2018, the IRS processed more than 250 million tax returns and collected
    nearly $3.5 trillion in federal taxes paid by individuals and businesses.
  • The IRS also took steps in FY 2018 to begin implementation of the Tax Cuts and Jobs Act, the December 2017 legislation that reflected the most sweeping set of changes in our tax system in more than 30 years.
  • In the service area, the IRS handled almost 55 million taxpayer calls in FY 2018, and our website,, had more than 608 million visits.
  •  The IRS audited almost 1.0 million tax returns, approximately 0.5 per-cent of all returns filed in Calendar Year (CY) 2017.
  • The IRS audited 0.6 percent of all individual income tax returns filed in CY 2017, and 0.9 percent of corporation income tax returns (excluding S corporation returns).
  • The IRS examined 15,562 tax exempt organization, employee retirement plan (the solo 401k plan falls under this category and the data shows 260 Form 5500-ezs were examined–see page 34), government entity,tax exempt bond, and related taxable returns in FY 2017.
  • In FY 2018, the IRS issued a total of 5,132 determination letters on employee retirement plans. These consisted of 1,404 determination letters for defined benefit plans and 3,728 determination letters for defined contribution plans.
  • In Fiscal Year (FY) 2018, the IRS provided taxpayer assistance through almost 608.8 million visits to, assisted more than 64.8 million taxpayers through correspondence,its toll-free telephone helpline or at Taxpayer Assistance Centers, and had more than 309.2 million inquiries to the “Where’s My Refund” application.

Retirement Plan Participants Stayed the Course During 2018

Even though the markets were up and down throughout 2018, the ICI defined contribution plan recordkeeper data shows participants stayed the course by continuing to make annual contributions.

The data looks at a number of items such as contributions, distributions and various activity draw from defined contribution recordkeeper data covering 30 million plus participant accounts in defined contributions plans such as solo 401k plans, and ROBS 401k plans.

Here is some of the data found in the the ICI’s record keeper data report:

Contributions: Only 2.3 percent of defined contribution (e.g., 401k plans, and profit sharing plans) plan participants discontinued their contributions during 2018.

Distributions: In 2018, 3.4 percent of DC plan participants took withdrawals, the same share as in 2017. Levels of hardship withdrawal activity also remained low, with only 1.6 percent of DC plan participants taking hardship withdrawals during 2018, compared with 1.7 percent in 2017.

Consistent: In 2018, 9.7 percent of DC plan participants changed the asset allocation of their account balances, and 5.1 percent changed the asset allocation of their contributions. These levels of reallocation activity are similar to the activity levels in 2017.

401k Loans: At the end of December 2018, 16.7 percent of DC plan participants had plan loans outstanding, the same share as in 2017.

Additional Reading

The US Retirement Market, Fourth Quarter 2018:

The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2017:
ICI Resources on 401(k) Plans:

The U.S. House Approves the SECURE ACT but Still Needs Blessing from The Senate

Designed to strengthen retirement savings,  on May 23, 2019 the U.S. House of Representatives approved by a vote of 417-3 the Setting Every Community Up for Retirement Enhancement (SECURE) Act (H.R. 1994). However, this landmark or legislation must also pass the Senate before it becomes law, bu the odds are very good that it will also pass the Senate based on the following comments by the Finance Committee Chairman and he Committee’s Ranking Democrat:

“The SECURE Act, which passed today in the House of Representatives and includes my Retirement Enhancement and Savings Act, takes an important step forward to help encourage and facilitate retirement savings. This legislation is an example of bipartisan cooperation to solve issues on behalf of Americans. I appreciate the hard work of my colleagues in the House and look forward to its quick passage in the Senate,” said Grassley.

Sen. Ron Wyden (D-OR) also said that,  “The House-passed legislation is very similar to the Senate bill and I’m working with Chairman Grassley to get legislation signed into law as soon as possible.

Visit HERE to read the SECURE ACT bill language posted by the House.

If it fully passes, The SECURE ACT would result in the following big changes for solo 401k plans, IRAs and ROBS 401k plans:

1. 401k plans including solo 401k plans could be adopted by the business tax return filing deadline instead of by December 31.

2. Extending the required minimum distribution (RMD) from age 70 1/2 to age 72 for IRAs and 401k plans.

3. Long-term part-time works could participate in 401k plans.

4. Traditional IRA contributions could be made past age 70 1/2; thus, resulting in allowing for the back-door Roth IRA past age 70 1/2.

5. The 10% early distribution penalty (distributions prior to age 59 1/2) would not apply to IRA distributions made for the purpose of using the funds to pay for “qualified birth or adoption distributions.”

6. The 10 year rule would apply to decedent accounts (both 401ks and IRAs). The retirement accounts would need to be fully distributed by the non-spouse beneficiary by the end of the tenth calendar year following the participant’s death, so the stretch IRA would essentially no longer apply to non-spouse beneficiaries.



DOL to Propose Another Fiduciary Rule in Late Summer of 2019

Early this month, the Committee on Education and Labor of the U.S. House of Representatives, Secretary of Labor Alexander Acosta discussed how the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) plan to work together by the end of the year in rule making surrounding the Fiduciary rule.   SEC Chairman Clayton has said this rulemaking package picks up where the DOL’s defeated approach left off.

The DOL posted their plan to issue their proposed rule making for the Fiduciary Rule and Prohibited Transaction Exemptions on their Agency Rule List.

Advisers and those in the 401k industry will continue to follow closely being that the proposed change to the Fiduciary Rule from April 18, 2016, which would have resulted in more advisers and brokers to be deemed fiduciaries to retirement plan participants including solo 401k and ROBS 401k participants under the Employee Retirement Income Security Act (ERISA) did not pass after The United States Court of Appeals for the Fifth Circuit ruled (by a two-to-one majority) to vacate it.

Number of 401(k) Millionaires Up End of 2018

According to a Fidelity Investments analysis of over 30 million retirement accounts, the number of 401k millionaires increased by 34% to $133,000 since the end of 2018. The number of IRA millionaires also increased from 138,800 to 168,100 in the 4th quarter of 2018.

Following are some other key items from the quarterly analysis:

Balances Up: The average 401k balance rose to $103,700 in first quarter of 2019, a 9% jump from 4th quarter 2018.

Record Employee Contributions: Average contribution increased in the first quarter of 2019 by 15% to $2,370 from the prior year.

Record Employer Contributions: The average 401k employer contribution reached $1,780 in first quarter — a record high and a 6% increase from a year earlier.

10-Year Anniversary of the 2008 Financial Crisis

The Fidelity Investments report also compared the same accounts of 1.64 million individuals who continued to have accounts after the 2008 financial crisis an reported the following:

GroupAverage 401(k) Balance – Q1 2009Average 401(k) Balance – Q1 2019Cumulative Percentage Change
Overall      $52,600  $297,700   466%
Millennials        $7,000  $129,800 1,762%
Gen X     $37,000  $268,900    626%
Baby Boomers     $76,000  $357,200    367%

Closing Comments

My solo 401k Financial was founded in 2009 and services over 8,000 accounts. A quick glance at our book of business also paints a similar picture to the Fidelity report analysis. For example, we have seen a large increase year over year in the number of solo 401k clients who have used our Form 5500-EZ filing services which applies once the total fair market value of the solo 401k plan exceeds $250,000. Many of our solo 401k clients have also steadily raised their annual contribution amounts each year.

Bill Reintroduced by Senators to Create Federal Retirement Commission

It has been 4o years when Jimmy Carter was president since a federal commission has conducted a survey as extensive as the one (Federal Retirement Commission Act) reintroduced on May 14, 2019 by Sens. Todd Young (R-IN) and Cory Booker (D-NJ). The commission would be made up of the Secretaries of Treasury, Labor and Commerce, two presidential appointees, six U.S. Senate appointees and six U.S. House of Representatives appointees.

These members of the commission would perform a review of the following:

  • private benefit programs in the U.S., with a focus on moving from DB to DC models (the solo 401k plan falls under the DC model);
  • private retirement coverage, individual and household accounts balances, investment trends, costs and net returns, and retention and distribution during retirement;
  • societal trends – including wage and economic growth, small business challenges, gig economy and health care costs – that could lead future generations to be less financially secure in retirement; and
  • other countries’ retirement programs.

The commission would then review private retirement benefit programs and then submit a report to Congress to recommend on how to improve private retirement security.

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