Solo 401(k)s have become a popular retirement plan option for self-employed persons. These plans put the business owner in control of the plan but with that control also comes responsibility. Unfortunately, many solo 401(k) plans are not properly maintained and are at the risk of significant penalty and/or plan termination. If you have a solo 401(k), you need to ensure that the 401(k) is being properly maintained. Here’s a quick checklist to make sure your plan is on track:
1. Does your Solo 401(k) need to file a Form 5500-EZ?
There are two primary situations where you are required to file a Form 5500 for your Solo 401(k).
If your Solo 401(k) has more than $250,000 in assets, and
If the Solo 401(k) plan is terminated (regardless of total asset amount).
If either of these instances occurs, then the Solo 401(k) must file a Form 5500 to the IRS annually. Form 5500 is due by July 31st of each year for the prior year’s plan activity. Solo 401(k)s can file what is known as a 5500-EZ. The 5500-EZ is a shortened version of the Standard Form 5500. Unfortunately, Form 5500-EZ cannot be filed electronically and must be filed by mail. Solo 401(k) owners have the option of filing a Form 5500-SF online through the DOL. Online filing is preferred as it can immediately be filed and tracked by the plan owner. In fact, if you qualify to file a 5500-EZ, the IRS and DOL allow you to file the Form 5500-SF online, but you can skip certain questions so that you only end up answering what is on the shorter Form 5500-EZ. We regularly file Form 5500-EZs and 5500-SFs for Solo K clients in the law firm for only $250.
2. Is the plan up-to-date?
The IRS requires all 401(k) plans, including Solo 401(k)s, to be amended at least once every six years. If you’ve had your plan for over six years and you’ve never restated the plan or adopted amendments, it is not compliant and upon audit, you will be subject to fines and possible plan termination (IRS Rev Proc 2016-17). If your plan is out of date, your best option is to restate your plan to make sure it is compliant with current law. On average, most plan documents we see updated every two to three years as the laws affecting
the plan documents change. We’ve had two different plan amendments to our IRS pre-approved plan in the past six years.
3. Are you properly tracking your plan funds?
Your Solo 401(k) plan funds need to be properly tracked and they must identify the different sources for each participant. For example, if two spouses are contributing Roth 401(k) employee contributions and the company is matching employer Traditional 401(k) dollars, then you need to be tracking these four different sources of funds, and you must have a written accounting record documenting these different fund types.
4. Plan funds must be separated by source and participant
You must maintain separate bank accounts for the different participants’ funds (e.g. spouses or partners in a Solo K), and you must also separate traditional funds from Roth funds. In addition, you must properly track and document investments from these different fund sources so that returns to the Solo 401(k) are properly credited to the proper investing account.
5. Are you properly reporting contributions and rollovers?
If you’ve rolled over funds from an IRA or other 401(k) to your Solo 401(k), you should have indicated that the rollover or transfer was to another retirement account. So long as you did this, the company rolling over the funds will issue a 1099-R to you, but will include a code on the 1099-R (code G in box 7) indicating that the funds were transferred to another retirement account, and that the amount on the 1099-R is not subject to tax. If you’re making new contributions to the Solo 401(k), those contributions should be properly tracked on your personal and business tax returns. If you are an S-Corp, your employee contributions should show up on your W-2 (traditional and roth), and your employer contributions will show up on line 17 of your 1120S S-Corp tax return. If you are a Sole Prop, your contributions will typically show up on your personal 1040 on line 28.
Make sure you are complying with these rules on an annual basis. If your Solo 401(k) retirement plan is out of compliance, get with your attorney or CPA immediately to make sure it is up-to-date. Failure to properly file Form 5500 runs at a rate of $25 a day up to a maximum penalty of $15,000 per return not properly filed. You don’t want to get stung for failing to file a relatively simple form. The good news is there are correction programs offered for some plan failures. But, don’t get sloppy, or you’ll run the risk losing your hard-earned retirement dollars.
Check out the latest Directed IRA , Ep 62: Solo 401(k) Required Filings and Avoiding Common Mistakes. In this episode Mark and I outline common mistakes made in solo 401(k)s (aka, QRPs) when it comes to creation, documentation, contributions, handling of funds, and filings. They cover plan documents and update requirements (required every 6 years) as well as 5500-EZ solo 401(k) tax return filings.
A recent Tax Court case, McNulty v. Commissioner, held that a self-directed IRA owners “…[personal] receipt of the AE [American Eagle] coins constituted taxable distributions equal to their purchase price.” In this case, Donna McNulty established a self-directed IRA and invested those IRA funds into an LLC where she was the manager. She then established a bank account for the LLC. The IRA funded this bank account with cash and then the LLC bank account was used to purchase precious metals. The precious metals were then subsequently shipped to and stored at Mrs. McNulty’s personal residence in her personal safe.
The IRS challenged Mrs. McNulty’s personal possession of the precious metals stating that personal possession violated IRC 408 and said that, “Mrs. McNulty’s receipt of the AE coins constituted taxable distributions equal to their purchase price.”
The IRS has been of the opinion, and we have long communicated to our clients, that home storage of precious metals via an IRA owned LLC violates the IRA rules under IRC 408. See the IRS Announcement and my article from 2016 on the subject, here. Some IRA custodians and non-licensed companies promoting precious metals IRAs have argued that you can have personal possession and can personally store specifically approved coins, such as American Eagle Gold Coins, by using an IRA/LLC structure (aka, checkbook IRA). This argument for specifically approved coins was based on some ambiguity in the law surrounding storage requirements for precious metals and IRAs in IRC 408(m). We’ve always believed IRA precious metals home storage was an aggressive strategy and one we advised against for the reasons the IRS and the Tax Court expressed in the McNulty case.
I have seen some providers of solo 401(k)s and other alternative strategies claim that, “checkbook IRAs are illegal.” This is great clickbait – but terrible content and advice as the court did not say that checkbook IRAs (aka, IRA/LLCs) are illegal. That was not part of their holding nor was it a part of the case from the IRS. The holding in the case was specific to a distribution of precious metals stored personally by the IRA/LLC owner. Please talk to your attorney, CPA, or licensed tax professional at to the details of the case and its impact on your IRAs investments. For our clients, our advice remains the same – don’t personally store your IRA or IRA/LLC precious metals at your home or in your personal possession.
The Court’s opinion can be found at the link below.
The proposed $3.5 trillion budget-reconciliation package still working its way through Congress contains two provisions that will restrict IRA investments into startups, small businesses, and real estate LLCs. These provisions came as a surprise to the over one million IRA investors who already invest a portion of their IRA into these non-publicly traded assets. The problematic sections, 138312 and 138314, change more than 40 years of IRA laws and practice, which have allowed IRAs to invest into publicly traded companies as well as privately held small businesses, LLCs, real estate, and startups…
There are over one million IRA accounts that invest into real estate, small businesses, start-ups, LLCs, crowdfunding offerings, and private companies. Contrary to news headlines, these savers are not the ultra-wealthy and 98% of them have accounts less than $1M. Current legislation passed in the House Committee on Ways and Means would significantly limit investment choices for these savers who choose to diversify their retirement holdings in assets they value and believe in. The bill will effectively cut off IRA investments into small businesses, start-ups, real estate (using an IRA/LLC), and crowdfunding. Any IRA investor who is already invested into these assets, there are hundreds of thousands, will be forced to sell their asset prematurely or will be forced to distribute it. Early distribution will result in taxes and penalties for most IRA investors that aren’t yet at retirement age.
The proposed House Tax bill has several provisions that affect IRAs but most of them will only affect the very wealthy, cap IRA account balances at $10M (Section 138301), or those who have violated the IRA rules (Section 138313, Section 138315). The policy and political objectives on these provisions makes sense as the bill is designed to curb abuses and raise revenue from the wealthy. Unfortunately, two additional sections added into the bill are going to hurt everyday IRA savers who choose to invest into small businesses, start-ups, crowdfunding offerings, and real estate with an IRA owned LLC. My experience after 15 years in the industry is that those who self-direct their IRA aren’t “wealthy”. They are hard-working Americans trying to catch up to the wealthy by investing in assets and companies they know and believe in.
Two Sections Will Drastically Impact Savers with Small Accounts Who Are Trying to Catch Up to The Wealthy
Unfortunately, the bill contains two sections that will affect everyday IRA savers who choose to self-direct their IRAs into real estate (using LLCs or private funds), small businesses, start-ups, and crowdfunding offerings. It appears that the bill was intended to curb investments made by Peter Theil in growing his Roth IRA to $5 billion. Mr. Theil’s account was reported on by ProPublica and followed closely by democrats in Congress. The bill will curb Peter Theil’s $5B Roth IRA with the $10M cap, but these two problematic provisions are going to harm hundreds of thousands of everyday IRA investors who are only trying to get an IRA to an amount they can retire on. Congress needs the help of self-directed IRA investors and savers to understand that investment choices (not just Wall Street) are important to their IRA and that investing in small businesses, private companies and funds, real estate with an IRA/LLC, and crowdfunding offerings isn’t just something the ultra-wealthy do.
Section 138312 Should Be Removed from the Bill – This section prohibits investments in IRAs when the investment is permitted based on asset or income levels of the investor. This prohibition would effectively ban crowdfunding offerings under federal and state crowdfunding laws (investment amounts under these offerings is based on income or assets, and it’s not just accredited investors). Most crowdfunding investors who use their IRA to invest will invest $5K or $10K at a time and will invest their IRA in companies, people, and innovations they believe in. These retirement savers are everyday working Americans, many of whom make less than $100K a year but will likely be restricted under the legislation as crowdfunding investment amounts are based on income or assets.
This section, if enacted, will also hurt small businesses and innovating start-ups who raise money from accredited investors. Accredited investors are only permitted to invest into private companies, private funds, start-ups, and small businesses because they qualify under securities laws based on their income or assets. If enacted, the IRA laws will say the exact opposite and will say if you qualify to invest under securities laws then you can’t invest under IRA laws. I know, it doesn’t make sense but that’s how the law will be applied. Most IRA savers who we work with and who have invested as an accredited investor into a private offering or fund are working Americans who have saved and who have been able to obtain $1M in total assets over a decade of working and saving and who wish to build their retirement account by investing and diversifying into small businesses, start-ups, and private companies.
Section 138314 Should Be Removed from the Bill – This section prohibits several activities but the most destructive would affect retirement savers who buy real estate with their IRA. The most common real estate investment for an IRA saver is a single-family rental property. There are hundreds of thousands of single-family rentals owned by IRA savers and most of them use a structure known as an IRA/LLC, whereby their IRA owns an LLC 100% and the LLC in turn owns the single-family rental. The IRA owner is typically the manager (officer) of said LLC. Some IRA providers require their account holders to use an LLC when their IRA is buying real estate as they don’t want liability as the IRA provider in holding the asset directly. Under current law, the IRA owner cannot be compensated and cannot work on the property and has zero personal ownership interest but serves in an administrative and management function to sign on things for the LLC that owns the property. This section, it appears, would prohibit an IRA owner from serving as an officer of a company (LLC) that their IRA owns more than 10% of. If this provision passes, IRA savers will be forced to hire financial advisors, tax lawyers, or other professionals to manage (service as officer) their IRA owned LLCs that own real estate. This is something the ultra-wealthy already do and as a result it will only harm working Americans doing these actions for themselves who are trying to build an IRA they can retire on. If passed, the only other method for IRA real estate savers, or others who use an IRA/LLC, is they will need to give control back to their IRA companies to manager the real estate asset. This will increase fees and expenses, further hurting hard-working Americans and will take investment control away from the IRA saver.
What Can I Do to Save My IRA?
The entire industry is working diligently to educate Congress on how these two sections will disproportionately harm IRA savers, 98% of whom have IRAs less than $1M, and 80% who have IRAs less than $300k. I have spoken to multiple members of Congress, Senator staffers, and industry groups this past week. Industry efforts will not be enough. The only way these two sections will be removed is if Congress hears from IRA savers who will be affected. Congress needs to hear from you, their constituents, on how these two sections of the bill impact you.
This is moving fast, write and call your Senators and House member today.
Contact Your House Representative by phone, e-mail, and/or mail? You can look up your representative at the House of Representatives link below and then will need to go to their office’s specific page to get their e-mail, phone, and mailing address.
Contact Both of Your Senators by phone, e-mail and/or mail? If you don’t know your Senators (contact both), you can look them up at the link below and then go to their office’s specific page to get their e-mail, phone, and mailing address.
Once you select your state your two senators should pop-up and there will be a hyperlink called Contact next to each Senator that will take you to their office’s page to make contact by e-mail, web-form, or phone.
Remember, the two problematic sections of the House Tax Bill are sections 138312 and 138314.
FAQs
1. What Should I tell my House Representative or my Senator?
Ask them to save your IRA and to oppose Sections 138312 and 138314 in the House Tax Bill as those provisions take away investment choices for your IRA. It is critical that you let them know the following.
That you are their constituent. Give your address or leave your City and State so they know they represent you (e.g. I’m Sally Jones from Glendale, AZ).
There is a misconception in Congress that self-directed IRAs are only something the wealthy do and that this only hurts the wealthy. It’s helpful to be straightforward about who you are and about the size of your account. They need to know that this bill is going to disproportionately hurt IRA savers with IRAs less than $1M. Here are some examples but it may help to put it into your own words and situation explaining how you’re not an ultra-wealthy person using their IRA to invest in hedge funds (that’s what they presume).
I’m a working American with a $X IRA just trying to get to an account balance I can retire on. Sections 138312 and 138314 in the House Tax Bill will harm my IRA and my ability to grow a retirement account that I can retire and live on.
I’m a pilot, nurse, retired firefighter, realtor, etc. (insert profession or job so Congress doesn’t think this is just CEOs, doctors, lawyers, and wealthy heirs), and I have diligently contributed to my retirement account. I choose to invest some of my IRA into real estate, small businesses, start-ups, and crowdfunding offerings. These provisions will force me to sale my assets prematurely for a loss or will force me to distribute them where I will be subject to taxes and penalties. Please oppose Sections 138312 and 138314 as they will cause drastic tax consequences for my IRA ,and they will take away future investment choices that are important to growing my account to an amount I can retire on.
If you think the $10M cap is reasonable, say that so Congress doesn’t presume you’re an ultra-rich person with a $10M plus IRA (like some in Congress presume anyone opposing this bill is). We’re not opposing the $10M cap in our efforts as it effects very few account holders who self-direct.
2. This bill came from the Democrats in the House, Should I contract Republicans or Democrats?
Contract members of Congress from both parties in both the House and Senate. Since this is a democrat-controlled bill (they have majority in the house and senate), it is critical that you write and call your members who are democrats as they are the ones that will negotiate this bill in the end. Republicans have already come out in opposition to the bill in its entirety. It is still helpful to contact Republican members though as they may have a say or may have democratic colleagues who they can help understand this issue in a bipartisan way.
3. How Quickly is this Bill Moving and When Should I Write or Call my Representative or Senator?
You must reach out today. Right now. Take the time now to call, e-mail, and/or mail your Representative and Senator. This bill is being negotiated and voted on now. It could all be wrapped up in one to two weeks but if Congress doesn’t start hearing from self-directed IRA owners now, they won’t understand the issue and how it is going to affect their constituents.
4. What should I do if I am already invested into a LLC I manage without compensation or if I have invested into a private company, small business, private fund or crowdfund offering?
As the bill is currently written, you will be forced to distribute these assets (IRA/LLCs, private company or fund, small business, crowdfunding investment) within two years. We don’t want that to happen as we know it will cause losses, taxes, and penalties to distribute or sell these assets prematurely. The best thing to do is make your voice heard and contact your members of Congress and ask them to save your IRA and not take away investment choices from your IRA.
We are working to educate Congress on how these two sections will disproportionately harm IRA savers, 98% of whom have IRAs less than $1M, and 80% who have IRAs less than $300k. We need you to get engaged and the best method for Congress and their Staffs to understand a bills impact is to hear it from their constituents. This is moving fast, write your Senator or House member today.
5. What if I am looking to invest in a private company, small business, or crowdfunding offering, or use an IRA/LLC for a real estate deal?
You’ll want to seek our your own legal or tax advice but should consider the current bill and how it will affect your future investment options. If the bill passes you will have two years to sell, distribute, or change you investment structure to comply with the new law. We are working hard to get these two provisions out of the bill but won’t know until it is fully considered by the House and Senate.
The best thing you can do now is to write your Representative and Senator today to tell them to oppose Sections 138312 and 138314 so that you can have investment choices off wall street for your IRA.
6. Do you have any resources to share when writing or speaking to members of the House and Senate (and their staff)?
Yes, please see the resource below which is a quick summary of how the bill hurts IRA savers and the economy. We will be adding more resources and information as the bill develops.
7. Will There be More Information Coming, How Do I Stay Up to Date?
My partner Mark J. Kohler and I will have a live broadcast this Thursday, Sept 23rd at 4 MTN. Sign-up for our newsletter (see sign up at bottom of page) or follow our social channels for updates and information.
8. Where Can I Read the Bill and the Summary from Congress?
We’ve all heard the buzz words of crowdfunding, PPMs, and IPOs, but there are less complicated ways to raise money and start a business and one of the most reliable and most used methods is that of partnership LLCs or joint ventures.
If you ‘re raising money from others in an LLC, partnership, or joint venture, you must take specific precautions in structuring your documents so that the investment of money from any member, partner, or joint venturer does not constitute a violation of federal or state securities laws. Failure to comply with the securities laws can result in civil and criminal penalties. Many real estate investments and emerging companies rely on numerous strategies to raising capital that are outside of publicly traded stock and that do not require registration with a state securities division or the federal Securities and Exchange Commission. This article addresses those strategies and outlines some of the key issues to consider when raising funds through an LLC, partnership, or joint venture arrangement.
IS THE LLC MEMBER, PARTNER, OR JOINT VENTURER CONTRIBUTING MORE THAN JUST MONEY?
The courts have widely held that an investment in an LLC, joint venture, or partnership is a security when the investor is investing solely cash and has no involvement, vote, or say in the investment. In these instances where the cash partner just puts in cash (sometimes called “silent cash partner” arrangements), the investment will likely be deemed a security. In a famous securities law case called Williamson, the Fifth Circuit Court of Appeals held that a joint venture contract investment is a security if the investor has little say or voting power, no involvement in the business or investment, and no experience that would provide any benefit to the business or investment. Williamson, 645 F.2d 424. As a result, to avoid triggering these factors and having your investment or business deemed a security we strongly recommend that all cash partners, whether individuals or self-directed IRAs, in Joint Venture agreements, LLCs, or partnerships have voting rights and that they participate in the key decision-making functions of the investment or business. Cash partners do not have to be part of the management team but they do need to have voting rights and need to have real opportunities to use those voting rights. For example, they could have voting rights on incurring additional debt, on management compensation, and/or on buying or selling property.
DON’T GIVE YOURSELF UNLIMITED CONTROL AS MANAGER
In most LLCs with cash partners, the person organizing the investment and running the operations is often the manager of the LLC, partnership, or joint venture and has the ability to bind the company or partnership. When making this selection as the manager, it is key that you do not give yourself unlimited control and authority. If you do give yourself unlimited control as manager, your investors may be deemed to have purchased a security since their voting rights will have been extinguished by placing to much control and power in the manager/management. What is recommended is that the members have the ability to remove the manager by majority vote and that the manager may only make key decisions (e.g. incurring debt, selling an asset, setting management salaries, etc.) upon the agreement and majority vote of the investors. While key decisions and issues should be left to the members, day to day decisions can be handled by the manager without a vote of the members/investors.
DON’T COMBINE TOO MANY PEOPLE INTO ONE LLC, JV, OR PARTNERSHIP
The Courts have consistently held that even if a cash partner is given voting rights and has an opportunity to vote on company matters that the cash partners interest can be deemed a security if there are too many other cash partners involved in the LLC, JV, or Partnership. Holden, 978 F.2d 1120. As a general rule of advice, you should only structure investments and partnerships that include 5 or less cash partners as the securities laws and the involvement of more individuals than this could potentially cause the investment to be deemed a security. When there are more than 10 cash partners it is critical for clients to consider structuring the investment as a Regulation D Offering and that they complete offering documents and memorandums and make a notice filings to the SEC. Many people refer to this type of investment structure as a PPM. When there are a lot of investors involved, a Regulation D Offering provides the person organizing the investment with exemptions from the securities laws and can allow someone to raise an unlimited amount of money from an un-limited amount of investors.
In sum, there are many factors and issues to consider when raising money from others in an LLC, JV, or partnership and it is crucial that you properly structure and document these investments so that they can withstand these challenges of securities law violations. For help in structuring your partnership LLCs and joint ventures please contact the law firm at 602-761-9798.
Roth conversions are popular in 2020. Many Americans are taking advantage of low account values (asset values are low from stocks to real estate) and are converting Traditional dollars and assets to Roth. Others are seeing themselves in lower tax brackets than usual and see it as an opportune time to convert to Roth and pay taxes at a lower tax bracket. If you have a traditional IRA or 401(k), then that money grows tax-deferred, BUT you pay tax on the money as it is drawn out at retirement. And that’s a big BUT. On the other hand, you get zero tax deduction on Roth IRA and Roth 401(k) contributions but they grow and come out tax-free at retirement. What’s better? Well, in the end the Roth account is a much better deal as you’re pulling out what you put in AND the growth of the account after years of investing and saving. That’s likely a larger amount than what you put in so you’d typically be better paying tax on what you put in (or convert) rather than paying tax on the the larger sum that you will take out later. The trade-off of course, is you’re playing the long game. You’re skipping a tax deduction or paying tax now to convert in return for tax-free growth and tax-free distributions at retirement. The Roth seems to be the better deal. Yet, most Americans have been sucked into traditional IRAs and 401(k)s because we get a tax deduction when we put the money in a traditional account, saving us money on taxes now.
For more on the differences between Roth IRA and Roth 401(k), take a look at the video from my Partner Mark J. Kohler:
The good news is that you can convert your traditional IRA to a Roth IRA, or your traditional 401(k) to a Roth 401(k). The price to make that conversion is including the amount you convert to Roth as taxable income for the year in which you make the conversion. So, if I convert $100K from my traditional IRA to a Roth IRA in 2020, I will take that $100K as income on my 2020 tax return, then pay any federal and state taxes on that income depending on my 2020 tax bracket. Many retirement account owners want to move their traditional funds to Roth, but don’t like the idea of paying additional taxes to do so. It can be a big tax hit when you do your taxes. I get it. Nobody likes paying more taxes now, even if it clearly saves you more as your account grows and the entire growth comes out tax-free.
Chunking Conversions
One way to soften the tax blow of the Roth conversion is to chunk the amount you want to convert over two or more years. For example, if you are at the end of the year in November 2018 and you want to convert $100K to Roth, you may decide to convert $50K by December 31, 2020 to have that taxed in the current year and then convert the remaining $50k on January 1, 2021 to have that amount taxed in 2021. This way, you don’t have as much of an income swing and it spreads the tax due over the two years. You could also do $33K each year to spread it out of 3 years.
The following are three cut-and-dry situations of when you should definitely convert your traditional IRA or 401(k) funds to Roth:
1. Up-Side Investment Opportunity – I’ve had numerous clients over the years convert their traditional funds to Roth before investing their account into a certain investment. They’ve done this because they’ve had a tremendous investment opportunity arise where they expect significant returns. They’d rather pay the tax on the smaller investment amounts now, so that the returns will go back into their Roth IRA or 401(k), where it can grow to an unlimited amount and come out tax-free. These clients have invested in real estate deals, start-ups, pre-IPOs, and other potentially lucrative investments. So, if you have an investment that you really believe in and will likely result in significant returns, then you’re far better off paying a little tax on the amount being invested before the account grows and returns a large profit. That way, the profit goes back into the Roth and the money becomes tax-free.
2. Low-Income Year – Another situation where you should covert traditional funds to Roth is when you have a low-income tax-year. Since the pain of the conversion is that you have to pay tax on the amount that you convert, you should convert when you are in a lower tax bracket to lessen the blow. For example, if you are married and have $75K of taxable income for the year and you decide to convert $50K to Roth, you will pay federal tax on that converted amount at a rate of 15% which would result in $7,500 in federal taxes. Keep in mind that you also pay state tax on the amount that you convert (if your state has state income tax), and most states have stepped brackets where you pay tax at a lower rate when you have lower income. If you instead converted when you were in a high-income year, let’s say $250K of income, then you’d pay federal tax on a $50K conversion at a rate of 33% which would result in federal taxes of $16,500. That’s more than twice the taxes due when you are in a lower-income year. Now, you may not have taxable income fluctuations. But, for those who are self-employed, change jobs and have a loss of income, or have investment losses where taxable income is lower than normal for a year, you should think about converting your retirement funds to Roth. You may not have a more affordable time to make the Roth conversion.
3.Potential Need for a Distribution After Five Years – One of the perks of Roth accounts is that you can take out the funds that are contributed or converted after five years without paying tax or the early withdrawal penalty (even if you aren’t 59 1/2). For Roth conversions, the amount you convert can be distributed from the Roth account five years after the tax year in which you converted. The five-year clock starts to tick on January 1st of the tax year in which you convert, regardless of when you convert within the year. So, if you converted your traditional IRA to a Roth IRA in November 2020, then you could take a distribution of the amounts converted without paying tax or penalty on January 2nd, 2025. If you try to access funds in your traditional IRA or 401(k) before you are 59 1/2, then you will pay tax and a 10% early withdrawal penalty even if the amounts you distribute are only the contributions you put in, not the investment gains. Clearly, the Roth account is much more accessible in the event you need personal funds. Keep in mind, you don’t get this perk immediately: You have to wait 5 years from the tax year in which you converted before you can take out the converted amount tax and penalty free.
One final thought to consider when converting to a Roth is that there are no do-overs. You used to be able to do what was called a Roth re-characterization where you could undo a Roth conversion but the ability to undo a Roth conversion was eliminated in 2018 forward. As a result, make sure you’re committed before you convert as there are no mulligans, do-overs, or re-characterizations anymore. Also, if you want the conversion to fall onto your current year tax return, then make sure you convert those sums by December 31.
Mat has been at the forefront of the self-directed IRA industry since 2006. He is the CEO of Directed IRA & Directed Trust Company where they handle all types of self-directed accounts (IRAs, Roth IRAs, HSAs, Coverdell ESA, Solo Ks, and Custodial Accounts) which are typically invested into real estate, private company/private equity, IRA/LLCs, notes, precious metals, and cryptocurrency. Mat is also a partner at KKOS Lawyers and serves clients nationwide from its Phoenix, AZ office.
He is published regularly on retirement, tax, and business topics, and is a VIP Contributor at Entrepreneur.com. Mat is the best-selling author of the most widely used book in the self-directed IRA industry, The Self-Directed IRA Handbook: An Authoritative Guide for Self-Directed Retirement Plan Investors and Their Advisors.
The "Self Directed IRA Handbook" by attorney Mat Sorensen is the most comprehensive book ever written about one of the best investment and retirement savings tools ever created: the Self-Directed IRA. Mat has performed the impossible by effectively delivering complex information in an easily understandable manner for the layperson, while providing the necessary legal basis to suit the professional. Mat's book is a "must read" for investors, attorneys, CPAs, and other professionals and other interested individuals wanting to learn about all there is to know about Self-Directed IRAs.
Mat's books is a great reference guide for self-directed IRA investing – Best I’ve seen in 30 years of being in the business.
Harry Veldkamp
CEO, Polycomp Trust Company
Pamela Constantino
Mat's book is an excellent resource for self directed IRA owners and their advisors. It is the first of its kind in our industry. Mat has truly written an “Authoritative Guide” for self directed IRAs.
Pamela Constantino
President, Polycomp Trust Company
Mark J. Kohler
Mat is truly an expert on self directed IRAs, and his book is the one book that every self directed IRA investor should read.
Mark J. Kohler
CPA, Attorney, Author
Richard Davis
I was referred to Matt for help in setting up an IRA owned LLC. Matt and his team did an incredible job completing the work in a few short days. The process was professional, efficient and cost effective. I continue to rely on Matt for guidance running the LLC and related real estate matters. Not only is Matt a good lawyer, he runs a great office. It is easy for me to recommend Matt and his team.
Richard Davis
Christine Farkas
We have used Matt for many legal matters and he always comes through with shining colors. I highly recommend Matt for any legal or tax matter.
Christine Farkas
Real Estate Broker & Investor
Jennifer Cayton
Mathew is the legal partner for the majority of my clients. Matthew provides solid legal advice, precise strategic planning, appropriate corporate structure development, and is readily available to consult with his clients on all legal and business manners. Matthew is well respected and has an extremely large network in the successful real estate investor world. Matthew is reliable, professional and an all around great partner to have on your side
I have retained Mathew Sorensen several times for multiple real estate deals and have been very pleased with his efforts and work product and will continue to use him in the future.
Bill Sthay
Real Estate Investor
Kade Creamer
My wife and I recently sought Mat's help with estate planning and couldn't have been more satisfied. Mat's professionalism, honesty, creativity and attention to detail is second to none. What impresses me the most about Mat can be summed up as "diverse". Mat's vast knowledge and experience in a plethora of differing areas of the law is astounding. I highly recommend Mat to my clients and friends seeking legal help.
Mat's advice can be trusted. He is both knowledgeable about the impact of potential litigation and brings creativity to all that he does. It is enjoyable to work with him.
Mat is a highly qualified...lawyer specializing in real estate. He's personable and professional, knows his stuff and is a nice guy. It doesn't get any better than that. I really liked the way he explained everything to me at my level so I got it. He also advised the best way for me to proceed with my RE investments. He handled my case in a timely manner with high integrity.
I have had the opportunity to engage Mat's services on many occasions and have found him to be diligent and reliable. He has always been committed to delivering high-quality work and is very professional. He is well-liked and respected by his peers. He has my most sincere recommendation.
Mathew Sorensen is a great resource and I use him consistently for real estate law questions. He is a wealth of information and will always give you a great knowledge base. I have been using KKOS for a while now and am very impressed and happy with their services.
Mathew Owens
CPA, Real Estate Investor
Kenneth P. Child
[Mat] is completely devoted to his clients and continually strives to stay abreast of changes and updates in the law. Mat is an unbelievably hard worker and...I don't hesitate to recommend Mat's services to anyone as I know he will take care of them and give them simple, concise, and straightforward solutions to any legal issue they may be facing.
I am a partner in a law firm in Chicago and I have worked with Mat on my personal real estate and business ventures. Mat has given me practical and wise advice which has helped me make profitable decisions. I highly recommend Mat.
K.M.
Attorney & Real Estate Investor
Gary Shumm
Mathew is an excellent attorney, well versed in the Self-Directed IRA market…His ability to distil the complexities of the Self-Directed IRA so that the average person can understand them, and ensure that they don't get "tripped up" is second to none. Anyone interested in this Self-Directed IRA Market would do well to connect with Mathew and learn from the best.
"Mat's book is an excellent resource for self directed IRA owners and their advisors. It is the first of its kind in our industry. Mat has truly written an“Authoritative Guide” for self directed IRAs."
"Mat is an excellent attorney, well versed in the Self-Directed IRA market...His ability to distill the complexities of the Self-Directed IRA so that the average person can understand them, and ensure that they don't get "tripped up" is second to none.
"Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs."
"The Self Directed IRA Handbook by attorney Mat Sorensen is the most comprehensive book ever written about one of the best investment and retirement savings tools ever created: the Self-Directed IRA."
Tom Anderson
Founder and Retired CEO, PENSCO Trust Company
J.P. Dahdah
Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs.
Solo 401(k)s have become a popular retirement plan option for self-employed persons. These plans put the business owner in control of the plan but with that control also comes responsibility. Unfortunately, many solo 401(k) plans are not properly maintained and are at the risk of significant penalty and/or plan termination. If you have a solo 401(k), you need to ensure that the 401(k) is being properly maintained. Here’s a quick checklist to make sure your plan is on track:
