Can I use this to buy a boat?

QUESTION:

I have an IRA. I need the entire amount to buy a boat that I will use as a business (cruises and AirBNB).

Would I have to take a loan and pay it back w/in 5 years at prime? What happens if I miss two or more payments?

Thanks,

Beth

ANSWER:

If you are self-employed with no full-time employees (which could be your boat business):

  • You can set up a Solo 401k and then take a loan of up to 50% of the balance not to exceed $50,000 which you can then use the funds in your business.
  • You would have to pay back the loan on a monthly or quarterly basis (however you prefer) in equal payments of principal and interest (prime +1%) over a five-year term.
  • If the loan goes into default (i.e., you miss a payment and don’t make it up by the end of the following quarter), the outstanding balance of the loan will be considered a taxable distribution.

Alternatively:

Alternatively, you could use our 401(k) business financing plan which would allow you to invest all of the funds in your business and would not have to be paid back since it would be structured as an equity investment rather than loan. There are, however, significant compliance requirements (e.g. you must run the business as a C Corporation, etc.) and the cost are higher (i.e. we charge $4000 for the first 12 months and $899 per year thereafter).  For these reasons, you may find that these requirements and costs are not justified.

Please see more of the following links

Learn More:

    • SOLO LOAN VS ROBS 401K BUSINESS FINANCING
      • You are looking to use your retirement funds for business financing.
      • One option is our 401k Business Financing (or rollover as business startup).  This option would allow you to invest all of the retirement funds and does not require repayment but is a higher cost and would require operating the business as a C-corporation.  The funds not invested in the business can be invested in alternative investments.
      • Another option is to use our Solo 401k Loan for Business Financing which would allow you to borrow up to 50% of the balance (not to exceed $50,000) that you could use for business financing.  This option has a lower cost and would allow you to operate the business through an LLC or S-corporation but requires repayment of the loan(s) and is designed for a business with no w-2 employees who work more than 1000 hours per year.
      • Solo 401k vs. ROBS 401k Business Financing
  • TRANSFERS:We would handle the transfer from your former employer plan and/or IRA accounts as a non-taxable trustee-to-trustee transfer/direct rollover to the Solo 401k.  You can’t transfer funds from a Roth IRA because of the Roth IRA rules.
  • 401K LOAN: Our Solo 401k plan would allow you to take a 401k participant loan of up to 50% of the balance (not to exceed $50,000) & we would prepare all the required loan documents as part of our services for no additional charge.   As far as the terms of the loan, you would need to pay it back on a monthly or quarterly basis (as you select) over a five-year term with payments of principal and interest at a rate of prime +1% (which would currently amount to 6.25%).   Please see the following link for more information:

Solo 401k Loan Facts

Solo 401k Loan Rules

Process Solo 401k Loan

  • ACCOUNT SETUP: As part of our services, we would guide you through the process to set up an account for yourSolo 401k.  You can have a bank or brokerage account for your solo 401(k), or even both (and we would help you set up the accounts as part of our services).  For example, if you wish to have an account at a brokerage like Fidelity, we would prepare all of the paperwork that Fidelity needs to set up a free account for the Solo 401k (i.e. no set up or maintenance fees) that comes with a free checkbook and through which you can invest in traditional investments (e.g., stocks, mutual funds, bonds, etc.) as well as alternative investments such as real estate, promissory notes, etc. since they are allowed under our IRS-approved plan documents. Please see more at the following links:

o   Fidelity Brokerage Account

o   Bank vs. Brokerage Account

  • FLAT PRICING: 

Our Solo 401k fee structure is 100% flat. Our initial fee is $550 which covers everything to establish the plan (for both of you), including account set up, transfer of existing retirement funds as well as the first 12 months of ongoing compliance support.  Starting 12 months later, we charge a flat annual fee of $125.  Please see more the following link:

In 2019 IRS to Conduct Pension Plan & Solo 401k Burden Survey

The IRS will conduct a survey of pension plans which will include solo 401k plans through 2019 to help estimate the amount of time and money it costs retirement plan sponsors to fulfill tax reporting requirements with which they must comply.

The IRS will use this information to learn how to reduce taxpayer burden. All information provided will be used for research purposes only and participation is voluntary. The IRS is using Westat to conduct an online survey of plan sponsors. Only randomly selected plans sponsors may participate in the survey. The randomly selected will be drawn from filers of Form 5500-EZ, Form 5500, and 5500SF for play year 2017. The IRS estimate that it will take 10 to 15 minutes to complete the survey.

You may view the survey by going to the survey link provided in IRS letter you received.

Sample Plan Year 2017 Pension Plan Burden Survey

Sample Plan Year 2017 IRS Letter

The IRS has stated that participation in the survey is voluntary and that responses will be used for research purposes only and not for enforcement purposes.

IRS Audits of Qualified Plans Such as Solo 401k Plans

 

IRS audits are always a strong possibility when it comes to qualified plans such as solo 401k plans; therefore, it is important to understand both how to prepare and what causes an IRS audit.

In our experience IRS audits usually occur because the employer or the participant did something wrong.

IRS Audits

Here are some of the issues the IRS Employee Plans examiners generally check out:

  1. Plan Termination: IRS interest can arise when a solo 41k plan is terminated in a final Form 5500-EZ is not filed.
  2. IRS Approved Solo 401k Plan Provider: The IRS will confirm the solo 401k plan document provider is an IRS approved plan document provider by requesting a copy of the plan IRS Determination Letter. An IRS determination letter expresses to the plan sponsor the Service’s opinion regarding the qualified status—the compliance—of the plan’s document. It is not an opinion or affirmation of the plan’s compliance in operation.
  3. Plan Documents: Plan sponsors mistakenly think the adoption of a 401k plan is a one-time event.  Failing to adopt amendments in a timely manner can lead to automatic plan disqualification.
  4. Distributions and 401k Participant Loans. These are issues that come up the most in audits of both full-time employer and solo 401k plans. This is not surprising because specific rules apply to both type of transactions. (1) Plan participants who receive premature distributions or defaulting on plan loans fail to report the distributions and/or pay the 10% excise tax on their individual tax returns. (2) The participant take a distribution without meeting a triggering event, or the required  documentation is not completed. (3) Both in-plan conversions and distributions of in-kind assets such as real estate are not properly valued or the value is understated.
  5. 401k Contribution Limits. Plans may exceed Section 415 limits when participants are participating in more than one 401k plan. Employees also may exceed the Section 402(g) limit when participants are participating in more than one plan that offers elective deferrals.
  6. Titling of Plan Assets: Failure to properly reflect all solo 401k plan assets in the name of the trust.

Preparing and Responding to IRS Investigations

  • When asked to provide information, make sure to provide it in connection with your solo 401k plan and self-employed business not your personal accounts or assets. You should also consult with your solo 401k plan provider to make sure all disclosures are up to date.
  • If the IRS asks for supporting documents, make sure to provide all the documents listed on the IRS examination notice.
  • If IRS requires an interview,  prepared for as if it were a trial or a deposition.

 

IRS Puts Qualified Plans (solo 401k) and IRAs on Its 2019 Priority List

On April 5, 2019, the IRS  released the 2018-2019 fiscal year Priority Guidance Plan (PGP).

The items on this list are similar to a wish list that the IRS plans in addressing each year, and some carry over from prior years.

Here are some of the items listed in this years guidance as they relate to solo 401k plans, IRAs and ROBS 401k plans.

  • Regulations under Internal Revenue Code Section (IRC Sec.) 401(a)(9) updating life expectancy and distribution period tables for purposes of the required minimum distribution (RMD) rules
  • Guidance on hardship distributions from employer-sponsored retirement plans (in response to the Balanced Budget Act of 2018 provisions)
  • Guidance on missing retirement plan participants
  • Guidance on Traditional and Roth IRAs, Including contributions and excise taxes
  • Affiliated service group guidance
  • Additional guidance on lifetime income payments from employer plans and I

 

 

 

April 2019 IRS Release FAQs for Code Section 199A QBI Deduction

In April of 2019 the IRS released its much anticipated FAQs surrounding qualified business income (QBI) deduction. While somewhat delayed in publishing these FAQs, (the deduction was created by the 2017 Tax Cuts and Jobs Act, under Internal Revenue Code Section 199A) better late than really late.

This piece of legislation is important for solo 401k plan participants because In Q32 the IRS specifically addresses how the deductible contributions that the self-employed individual makes to a qualified retirement plan (a solo 401k plan falls under this umbrella) are accounted for when determining QBI.

Primary Residence Solo 401k Participant Loan Question

 QUESTION:

Can I take a participant loan from my solo 401k plan for  15-year or 30-year  term  if I use the funds for the purchase of my primary residence even though there will be no mortgage or bank loan on the property.  The reason there is no loan is that either a) the house is purchased all cash using the 401k loan funds or b) the seller is caring the note for the home purchase.

ANSWER:

The Code does not state that in order for the solo 401k participant loan to qualify under the primary residence loan term  payment exception  where the 401k plan loan can be paid over a period longer than 5 years a mortgage is required.  Therefore, understanding in the industry is that as long as the 401k loan is for the purchase of a primary residence, the repayment term could be either 15-year or 30-year repayment term (based on the general loan terms in your local area). IRC Section 72(p)(2)(B)(ii) says that 5-year max does not apply to principal residence loans (but does not provide a higher max).  Lastly, the solo 401k plan documents would also need to include language allowing for the 15 or 30 year 401k participant loan term payment period.

Retirement Enhancement and Savings Act (RESA) Has a Good Chance of Passing in 2019

Earlier this month, the Retirement Enhancement and Savings Act (RESA) was reintroduced by by Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR). Both the Senate and the House appear to be onboard with the bill so it has a darn good chance of passing in 2019.

Here are some of the provisions outlined in the bill:

Allow more time to establish a plan: Permit qualified plans (e.g.,  solo 401k, profit sharing or pension plans) to be established as late as the sponsoring employer’s tax return deadline, including extensions. (effective for 2020 and later taxable years).

Raise plan start-up credit for small employers: The plan start-up credit for small plans would raise from $500 to a maximum of $5,000 per year, available for three years beginning with the year the plan is established (effective for 2020 and later taxable years).

Plan reporting failures would be more costly: Retirement plan information reporting failures would result in the following penalties (effective for returns, statements, and notices required January 1, 2020, and thereafter).

  • Form 5500 and Form 5500-EZ, $100 per day, up to a maximum of $50,000

Require quicker payout to beneficiaries: With limited exceptions, most nonspouse beneficiaries of IRAs, qualified defined contribution including from solo 401k plans, 403(b), and governmental 457(b) plans would be required to distribute inherited amounts within five years. New reporting requirements to ensure compliance would apply (effective for plan participant/IRA owner deaths occurring in 2020 or later, and to beneficiary reporting beginning with the 2021 calendar year).

Exceptions include the following.

  • Aggregate inherited IRA and employer plan balances that do not exceed $400,000
  • Disabled
  • Chronically ill
  • Beneficiaries not more than 10 years younger than the deceased participant or IRA owner
  • Minors (a five-year payout period would begin upon reaching the age of majority)

Allow for Traditional IRA contributions past age 70 1/2: Similar to Roth IRA owners, Traditional IRA owners with earned income could make IRA contributions at any age, not just before age 70½ (effective for 2020 and later taxable years).

Allow graduate student IRA contributions: Certain fellowship, stipend, and similar payments to graduate students and postdoctoral students would be treated as earned income for IRA contribution purposes (effective for 2020 and later taxable years).

Permit IRAs and S Corporation bank shares: IRAs would be permitted to hold shares of S Corporation banking entities (effective January 1, 2020).

Does the 10% Early Distribution Pentaly Apply to QDRO Divorce Payments from Solo 401k Plans?

QUESTION:

My husband an I recently divorced. As is typical, half of my solo 401k got awarded to him pursuant to a qualified domestic relations order (QDRO). If he elects to take his portion from the solo 401k as a distribution instead of rolling it over to an IRA or another 401k plan, will he have to pay the 10% early distribution penalty since he is under age 59 1/2?

BACKGROUND:

A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant in a retirement plan including a solo 401k plan.

The QDRO must contain certain spe-cific information, such as the name and last known mailing address of the participant and each alternate payee, and the amount or percentage of the participant’s benefits to be paid to each alternate payee. A QDRO may not award an amount or form of benefit that isn’t available under the solo 401k plan.

A spouse or former spouse who receives part of the benefits from a retirement plan including a solo 401k plan under a QDRO reports the payments received as if he or she were a plan participant. The spouse or former spouse is allocated a share of the participant’s cost (investment in the contract) equal to the cost times a fraction. The numerator of the fraction is the present value of the benefits payable to the spouse or for-mer spouse. The denominator is the present value of all benefits payable to the participant.

A distribution that is paid to a child or other dependent under a QDRO is taxed to the plan participant.

ANSWER:

Taxes and penalties does not apply to QDRO funds that are transferred to another 401k plan or directly rolled over to an IRA. In the case where the alternate payee is the former spouse and he or she elects to take a distribution, unlike IRAs, no the 10% early distribution penalty does not apply from a qualified retirement plan such as a solo 401k plan to an alternate payee under a qualified domestic relations order. This rule is outlined in IRS Publication 575.

 

IRA LLC / Checkbook IRA Required Beginning Date Top Items

The required beginning date (RBD) applies to IRA participants and IRA beneficiaries, and is significant because it results in having to take distributions from the IRA. Following are some important items to know about the RBD.

1. The RBD for IRA LLC owners is the date that required minimum distributions (RMD) must commence.

2. The RBD for IRA LLC owners is April 1 of the year after the year the IRA owner reaches age 70 1/2.

3. The first year of for which the RMDs must begin (distributions for the age 70 1/2) is the only year the IRA LLC owner can wait until the following April 1 to take the distribution.  For subsequent years, RMDS must be taken by December 31.

4. If the IRA LLC owner delays the firs RMD until the following year to distribute the first-year RMD, she must also take the second-year RMD by December 31 of the same year.

For example, when Cindy turns 70 1/2 on May 19, 2019, she can either take the her first RMD by December 31, 2019 or she can delay her first RMD and take it by April 1, 2020. If Cindy decides to take her first RMD by April 2020, she will also need to take her 2020 RMD by December 31, 2020.

5. If an IRA LLC owner dies before their RBD, there is no RMD due for the year of death, even if the IRA LLC owner was age 70 ½ at the time of their death.

6. If the IRA LLC owner dies after their RBD, the  RMD  due for that year must be distributed by the IRA beneficiary if the IRA owner did not make it prior to her death.

7. For IRA LLC owners who deceased prior to their RBD, the IRA beneficiary can elect to take required distributions over her life expectancy or by the end of the 5th year.

8. For IRA LLC owners who deceased on after their RBD, the IRA beneficiary can not delay distributions until the end of the 5th year.

9. If the IRA LLC owner dies on or after their RBD, the beneficiary can use the age of the IRA holders death or her age to to base the RMDs.

10. If the IRA LLC owner also participates in a solo 401k plan, the RMDs due from the IRA LLC must be distributed from the IRA LLC not the solo 401k plan.

11. Roth IRA LLCs are not subject to RMDs.

 

Solo 401k/IRA Money to Exercise Stock Options

BACKGROUND:

I have recently left a job and need to exercise stock options by June 12th.  My husband and I would like to combine the $ from my 401k ($79k) with $ from his rollover IRA ($46k) and use the combined amount to exercise the stock options.  From what I understand so far, a solo 401k or a self-directed IRA LLC may be a mechanism for doing this.

ANSWER:

Both the solo 401k and the IRA regulations do not allow for the use of retirement funds to invest in stock options for your employer or stock options that you already own and would like to exercise. Doing so would result in a prohibited transaction subjecting the IRA or the solo 401k plan to disqualification and taxes.

To learn more about the prohibited transaction rules, please see the following. https://www.mysolo401k.net/solo-401k/prohibited-transactions-solo-401k/

The prohibited transaction rules are found both in the Internal Revenue Code (IRC) and in ERISA.

  • Click here to learn about prohibited transactions under ERISA.
  • To learn about prohibited transactions under Internal Revenue Code click here.

 

 

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