by Mat Sorensen | Dec 8, 2014 | Uncategorized
Do you have a solo 401(k)? Have you been filing form 5500-EZ each year for the 401(k)? Are you aware that there is a penalty up to $15,000 per year for failure to file? While many solo 401(k)s are exempt from the 5500-EZ filing requirement, we have run across many solo 401(k) owners who should have filed and who have failed to do so. If you have a solo 401(k) and have no idea what I’m talking about, stay calm, but read on.
One of the benefits of a solo 401(k) is the ease of administration and control because you can be the 401k trustee and administrator. However, as the 401(k) administrator and trustee it is your own responsibility to make the appropriate tax filings. This would include filing any required tax returns for the 401(k). In general, there is no tax return to file for a self-directed solo 401(k). However, one exception to this rule is if the plan assets exceed $250,000 at the end of the plan year, in which case, a tax return filing is required. The return the 401(k) files is called a 5500-EZ. Recently, more and more solo 401(k) owners have contacted us because they set up their solo 401(k) online or with some other company and they were never made aware that they are supposed to file a 5500-EZ when their plan assets exceed $250,000. Some of these individuals have multiple years in which they should have filed the 5500-EZ but failed to do so. The penalties for failing to file a 5500-EZ when it is required can be quite severe, with fees and penalties as high as $15,000 for each late return, plus interest.
Fortunately, the IRS has a temporary pilot program that provides automatic relief from IRS Late filing penalties on past due 5500-EZ filings. This temporary program began on June 2, 2014, and will end on June 2, 2015. The IRS has yet to decide if they will continue with this program and make it permanent after June 2, 2015, but if they do, they plan to charge a filing fee. Under this temporary program, there is no filing fee.
In order to qualify for this program, your solo 401(k) plan must not have received a CP 283 Notice for any past due 5500-EZ filings, and the only participants of your solo 401(k) plan can be you and your spouse, and your business partner(s) and their spouse. This program is available to all solo 401(k) plans, regardless of whether it is a self-directed plan.
The IRS has provided a step-by-step process that can be found at http://www.irs.gov/Retirement-Plans/New-Penalty-Relief-Program-for-Form-5500-EZ-Late-Filers and at http://www.irs.gov/pub/irs-drop/rp-14-32.pdf. In order to qualify and receive a waiver of penalties under the program, you must follow the program exactly. Basically, you must do all of the following:
- File all delinquent returns using the IRS form in the year the filing was due.
- Write in red letters at the top of the first page of each filing, “Delinquent return submitted under Rev. Proc. 2014-32, Eligible for Penalty Relief”.
- Attach a one-page transmittal schedule to the front of each filing.
- Mail all documents to the IRS.
In sum, if you have a solo 401(k) plan that should have filed a 5500-EZ for years past because the plan assets exceeded $250,000 at the end of the plan year, then you should take advantage of this program, which will save you literally thousands of dollars in penalties and fees. Under this program, the IRS must receive your past due to 5500-EZ filings before June 2, 2015. If you have any questions about this program or would like assistance with submitting your late 5500-EZ filings under this program, please contact the law firm as we are assisting clients with current and past due 5500-EZ filings for their solo 401(K)s.
by Mat Sorensen | Dec 2, 2014 | Uncategorized
I posted a comprehensive article last week about 2014 retirement plan contributions in general. However, as the year ends I wanted to highlight three important deadlines you must know if you plan to set-up a Solo 401(k) in 2014. A solo 401(k) is a retirement plan for small business owners or self employed persons who have no other full time employees other than owners and spouses. It’s a great plan that can be self directed into real estate, LLCs or other alternative investments, and that allows a the owner to contribute up to $52,000 per year (far more than any IRA). Keep in mind though that it is just for self employed persons and new business owners.
2014 Solo 401(k) Setup Deadlines
First, the 401(k) must be adopted by your business by December 31, 2014. Practically speaking, this means you should be starting soon (if you haven’t already) so that documents can be completed in time. If the 401(k) is established on January 1, 2015, or later you cannot make 2014 contributions.
Second, both employee and employer contributions can be made up to the company’s tax return deadline INCLUDING extensions. If you have a sole proprietorship (e.g. single member LLC or schedule C income) or partnership then the tax return deadline is April 15, 2015. If you have an s-corporation or c-corporation, then the tax return deadline is March 15, 2015. Both of these deadlines may be extended 6 months by filing an extension and the date to make 2014 contributions will also be extended.
Third, while employee and employer contributions may be extended until the company tax return deadline you will typically need to file W-2’s for your wages (e.g. an s-corporation) by January 31, 2015. The W-2 will include your wage income and any deduction for employee retirement plan contributions from your wage income will be reduced on the W-2. As a result, you should make your employee contributions (up to $17,500 for 2014) by January 31, 2014 or you should at least determine the amount you plan to contribute so that you can file an accurate W-2 by January 31, 2015.
For more details on the contribution deadlines, please visit my prior blog article here.
by Mat Sorensen | Nov 18, 2014 | Uncategorized
The prohibited transaction rules are the most important rules to understand when you self-direct your retirement account. These rules restrict not what investments your retirement plan may acquire but whom your plan may transact with.
How It Happens
A prohibited transaction occurs when a retirement plan (e.g. self directed IRA or 401k) transacts with a disqualified person. IRC § 4975. A transaction is pretty easy to identify and is defined in the code as a sale, lease, exchange, payment, or other transfer of money from a retirement plan. If that transaction is with a disqualified person then the retirement plan has engaged in a prohibited transaction. The consequence of a prohibited transaction for an IRA is distribution of entire IRA while the consequence to a 401(k) or other employer based plan is a 15% excise tax on the amount involved and an additional 100% penalty if the transaction is not corrected. Regardless of the type of retirement account you are self-directing, the consequences are significant. IRC § 4975 (c)(3), IRC § 408 (e)(2)(A). IRC § 4975 (a),(b).
Often times, a disqualified person is generically referred to as a family member. While that definition can be accurate, it really can cause problems when applied as some family members are disqualified (e.g. spouse of plan owner) while others are not (e.g. brother of plan owner). Also, it can be really confusing to determine when a company is disqualified to a retirement plan or when partners are disqualified. Because of the confusion, I’ve created a disqualified person diagram to help sort out the details. If a party is in red, that means they are a disqualified person and that your retirement plan cannot transact with them. If the party is green, that means they are NOT disqualified and your retirement plan may transact with them.
Keep in mind that a self-dealing prohibited transaction can also arise if any disqualified party personally benefits from a retirement plans investments. In summary, you should avoid all transactions with disqualified persons and should seek legal counsel whenever a disqualified person is involved in any retirement plan investment.
by Mat Sorensen | Nov 11, 2014 | Uncategorized
If you’ve inherited an IRA, 401(k), or other qualified retirement plan from a parent, family member, of friend, you have three options on how to receive the retirement plan funds. Each option comes with different tax ramifications and benefits. I’ll outline the three options below. Keep in mind, that if you have inherited a retirement account from a spouse, you can roll those funds over into your own IRA by doing a spousal rollover. I’ve written previously on that option here. Here’s the options though when the account is being inherited from someone other than a spouse.
1.Take the Money as a Distribution. If you just take the funds from the IRA or as a distribution, you will receive a 1099-R from the IRA custodian and will need to report that distribution as income on your tax return. As a result, this is not the best option. While you will get access to the funds, you’ll also be taking in a large sum of income all in one-year and that can cost you a lot in taxes.
2. Transfer the Money to an Inherited IRA. The retirement plan funds are rolled into an inherited IRA where you are the beneficiary and can take distributions as you desire over time. The benefit to the inherited IRA is that the money stays as retirement plan funds and can continue to grow tax-deferred. The funds in the IRA must begin being distributed over time under what are known as required minimum distributions (RMDs). The good news is that you aren’t taxed on the full amount now but are taxed on it over time as you take distributions. In general, you take distributions using your life expectancy, which is typically longer than that of the deceased account owner and as a result you are stretching out the tax-deferred status of the account and only take distributions and pay taxes on the required minimum distribution amounts which can be 5% of the account depending on your age and life expectancy. The rules can be a little tricky as to RMD but are outlined here by the IRS.
3. Disclaim the Funds so They Go to an Alternate Beneficiary. This option allows you to disclaim your interest in the IRA to another beneficiary. This may be done if one child would rather inherit retirement plan funds while one would rather inherit other assets. The beneficiaries could make an arrangement where one disclaims their interest in the retirement account to another beneficiary. Also, a child may disclaim their interest so that it passes to their grandchildren. This is all governed by the beneficiary designations so make sure you review them and speak to an attorney before making a disclaimer.
If you are inheriting a retirement plan, consult with your tax or estate planning adviser as to the distribution rules and consider using an inherited IRA to stretch out the tax-deferred status of the account. This will allow funds to grow tax deferred, will give some income over time (RMDs), and will reduce your tax liability. And lastly, keep in mind that there are time-sensitive deadlines to follow for these options so don’t let the issue linger.
by Mat Sorensen | Nov 4, 2014 | Uncategorized
Limited Partnerships (LP) have taken a back seat over the past ten years to the more popular Limited Liability Company (LLC). That being said, LPs are still often used to hold assets, raise funds, or to achieve achieve specific tax benefits. Here are 5 things you should know about Limited Partnerships.
- General Partners and Limited Partners. Every Limited Partnership consists of at least one general partner and one limited partner. The general partner has decision-making authority and is also responsible for the liabilities of the limited partnership. The limited partners participate in the sharing of profits and losses but do not have a voting interest. Because the general partner is subject to liability of the LP, the general partner is usually a company that does not hold significant assets. The limited partner on the hand is not responsible for the liabilities of the LP. For example, the general partner may be an operating s-corp or a shell company LLC while the limited partner may be an individual or a trust.
- Limited Partnerships and Asset Protection. Limited partnerships provide asset protection for the limited partners of the LP against the activities of the LP. For example, if there is a judgment against the LP, that creditor cannot go after the limited partners. In addition, if an owner of an LP has a judgment against themselves personally, that creditor cannot go after the assets in the limited partnership. Instead, the creditor is given a charging order that only entitles them to the assets or income that the LP decides to distribute to the owner of the limited partnership. As a result, the assets of the limited partnership are protected from the personal activities/liabilities of the owner. Because of this, many individuals will use limited partnerships to hold their valuable assets. While some states offer this same liability protection to LLCs (protect the entity from the owners actions), most states do not.
- Hold Rentals in an LLC. Because LP’s are a great place to hold assets, it is important to know what assets should be held in an LP. The following assets are commonly held by LPs: brokerage/investment accounts; second homes; valuable personal property, and raw land. An LP, however, generally should not hold rental real estate, because the tax rules applicable to LP’s limit an owner’s ability to fully take advantage of certain tax losses. As a result, please consult with your CPA prior to placing rental real estate into an LP.
- Canadians Love LPs for Real Estate. While LLCs are great for U.S. Citizens, they cause corporate taxes in Canada for Canadian residents. As a result, Canadians who own rental real estate in the U.S. should use an LP to hold their properties as opposed to an LLC. The LP profits flow through to Canada and are only subject to personal level taxes and are not subject to Canadian corporate taxes. LLC income, on the other hand, flows to Canada and is subject to both corporate and personal taxes.
- Limited Partnerships Are Great Entities for Raising Money. Limited partnerships are often used to raise funds because under the LP structure, the general partner (the one usually raising the funds) has authority to run the LP while the investors or limited partners do not have a voting right or interest. Because the LP structure places the control in the hands of the person raising the funds, the LP is presumed to be a security for securities law purposes and as a result a securities law attorney should be consulted as to the proper filings and disclosures necessary to raise funds and sell limited partnership interests to investors.
While an LLC is the most common default entity amongst business owners and investors, the LP can be a more beneficial entity or choice in certain situations and circumstances. In a brief consult with you attorney, you will be able to determine what entity is right for you while taking into account the tax and asset protection issues that will apply to your specific situation.
by Mat Sorensen | Oct 28, 2014 | Uncategorized
The IRS recently announced 2015 retirement plan contributions limits. Despite the typical bad news coming from the IRS, this year we see increases in HSA and 401(k) contributions for 2015. Here’s a quick breakdown on the changes.
– IRA contribution limitations (roth and traditional) stayed at $5,500 with an additional $1,000 catch-up amount for those 50 and older.
– HSAs contribution limits increased ($50 indiv/$100 fam) from $3,300 individual and $6,550 family to $3,350 individual and $6,650 family.
– 401(k) contributions also increased on the employee and employer side. Employee contribution limitations increased from $17,500 to $18,000 for 2015. Also, the additional catch-up contribution for those 50 and older increased from $5,500 to $6,000. The annual maximum 401(k) (defined contribution) total contribution amount increased from $52,000 to $53,000 ($59,000 for those 50 and older).
There were additional modest increases to defined benefit plans and to certain income phase-out rules. Please refer to the IRS announcement for more details here.
All of these accounts provide tax advantageous ways for an individual to either save for retirement or to pay for their medical expenses. If you’re looking for tax deductions, you should determine which of these accounts is best for you. Keep in mind there are qualification and phase out rules that apply so make sure you are getting competent advice about which accounts should be set up in your specific situation.
By: Mat Sorensen, Attorney & Author of The Self Directed IRA Handbook
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