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 25, 2014 | Retirement & IRAs
Retirement account/plan contributions are one of the most powerful tax strategies you can implement but you’ve got to make them by the deadline so that they can reduce this years tax liability. With the end of the year fast approaching, now is the time to make certain you are maximizing this important tax strategy for your 2014 tax planning. Please find below a table outlining the deadlines for 2014 retirement plan contributions according to your type of retirement account. If you are self-employed, you’ll notice the deadline also may depend on the type of company you own (e.g. s-corp or LLC) but also whether you are making contributions as an employee of your company and/or as the employer. First, let’s summarize the IRA contribution deadlines.
IRA Contribution Deadlines
| Type of IRA |
Contribution Type |
Deadline Details |
| Traditional IRA |
Traditional, Deductible |
April 15, 2015, Due Date for Individual Tax Return Filing (not including extensions). IRC § 219(f)(3); You can file your return claiming a contribution before the contribution is actually made. Rev. Rul. 84-18. |
| Roth IRA |
Roth, Not Deductible |
April 15, 2015, Due Date for Individual Tax Return Filing (not including extensions). IRC § 408A(c)(7). |
| SEP IRA |
Employee |
N/A; employee contributions cannot be made to a SEP IRA plan. |
| Employer Contribution |
March 15/April 15th, Due Date for Company Tax Return Filing (including extensions). IRC § 404(h)(1)(B). |
| Simple IRA |
Employee Elective Deferral |
January 30, 2015. IRC § 408(p)(5)(A)(i). |
| Employer Contribution |
March 15/April 15, Due Date for Company Tax Return Filing (including extensions). IRC § 408(p)(5)(A)(ii). |
In summary, for traditional and roth IRA contributions you have until the individual tax return deadline of April 15, 2015 to make 2014 contributions. SEP and SIMPLE IRA contribution deadlines are based on the company tax return deadline which could be March 15th if the company is a corporation and April 15th if it is a sole proprietorship or partnership. Keep in mind that this deadline does NOT include extensions so even if you extend your personal tax return filing to September 15, 2015, you still have a April 15, 2015, contribution deadline for Roth and Traditional IRAs.
401(k) Contribution Deadlines
| Solo 401(k) |
Business Structure |
Type of Cont. |
Deadline Details |
| 401(k), including self-directed Solo 401(k) (plan must be adopted by 12/31/14) |
Sole Proprietorship |
Employee Elective DeferralContribution |
April 15, 2015, contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105. |
| Employer Profit Sharing Contribution |
April 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105. |
| S-CorporationOr C-Corporation |
Employee Elective Deferral contribution |
March 15, 2015 (corporation filing deadline), contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105. |
| Employer Profit Sharing Contribution |
March 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105 |
| Partnership (e.g. partnership LLC) |
Employee Elective Deferral Contribution |
April 15, 2015 (partnership return filing deadline), contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and Election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105. |
| Employer Profit Sharing Contribution |
April 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105. |
There are a few important things to keep in mind regarding 401(k) contributions.
401(k) Contribution Deadlines Can Be Extended
First, the contribution deadline for employer and employee contributions is the company tax return deadline INCUDLING extensions. So, if you have a solo 401(k) you can extend your company tax return and your contribution deadline is also automatically extended. For example, if you have a solo 401(k) plan adopted by your s-corporation, then your s-corporation tax return deadline is March 15, 2015, but that can be extended 6 months until September 15, 2015, upon filing an extension to extend the company tax return with the IRS. If you do this, you’d have until September 15, 2015, to make the 2014 employee and employer contributions. That being said, the employee contributions are taken from your salary/wages and if you make traditional 401(k) employee contributions those amounts are reported on your personal W-2 and reduce your taxable wages. The W-2 is effectively where your tax deduction for traditional employee contribution arises is it reduces your taxable wages on your W-2. As a result, you’ll need to make or at least know the amount you intend to make for employee contributions by January 31, 2015 as that is the W-2 filing deadline for 2014.
New 401(k)s Must Be Adopted by December 31st
Second, if you are establishing a new Roth or Traditional IRA, you can create that new account at the time of the IRA contribution deadline. However, if you are establishing a new solo 401(k) plan, you must have the plan established by December 31, 2014. Because there are a number of documents and procedures required to create a new 401(k) plan, this is not something that can be left to the last minute and you should start immediately if you intend to open a 401(k) this year.
Make 2014 Contributions in 2014
And lastly, while the deadlines for most 2014 retirement plan contributions for IRAs and 401(k)s runs into 2015, to keep things simple and stress-free we recommend making 2014 contributions by December 31, 2014, when possible.
As you can see, the contribution deadlines vary depending on the type of account/plan but also on the type of contribution. With respect to contributions to a self-directed solo 401(k), the contribution deadline also varies depending on the type of company you own that has adopted the plan. Therefore, it is important that you understand these deadlines and don’t miss out on an opportunity to maximize your tax deductions. For guidance on the contribution limits in 2014, please click here.
As previously stated, it is not too late to setup a retirement account/plan if you have not done so already. The deadline to set up a 401(k) and to make contributions for 2014 is typically the last day of the year, although I wouldn’t wait until the last day or even the last week of the year to do so. If you are interested in setting up a self-directed solo 401(k), please contact us immediately as we are helping clients establish these and so that we can get it set up before the end of the year.
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 | 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
by Mat Sorensen | Oct 14, 2014 | Uncategorized
As we reach the end of the year it is time to start thinking about how to best maximize your annual retirement plan contributions. One of the most commonly used strategies for our clients is an s-corporation and 401(k). A properly structured s-corporation is utilized best for tax purposes when the business owner adopts and contribute to a 401(k) plan. Whether the business has only one owner/employee (or spouses only) or whether the business has dozens or even hundreds of employees. Simply put, a 401(k) plan can be used as a tool for putting the income of the business owner (and applicable employees) away for retirement with the added benefit of a tax deduction for every dollar that can be contributed. There are so many neat things about 401(k) plans and there are so many options. For example, you can do Roth 401(k) plans, you can self direct a 401(k) plan, and you can even loan money to yourself from your 401(k) account. While books have been written about all of these options and benefits, one of the most misunderstood concepts of 401(k) plans is how s-corporation owners can contribute their income to the plan. That is the focus of this article.
In order to understand how s-corporations income can be contributed to a 401(k) plan, you need to understand the following three basic rules.
1. Only W-2 Salary Income can be Contributed to a 401(k). You cannot make 401(k) contributions from dividend or net profit income that goes on your K-1. See IRS.gov for more details. Since many s-corporation owners seek to minimize their W-2 salary for self-employment tax purposes, you must carefully plan your W-2 and annual salary taking into account your annual planned 401(k) contributions. In other words, if you cut the salary too low you wont be able to contribute the maximum amounts. On the other hand, even with a low W-2 Salary from the s-corporation you’ll still be able to make excellent annual contributions to the 401(k) (up to $17,500 if you have at least that much in annual W-2 salary).
2. Easy Elective Salary Deferral Limit of $17,500 or 100% of Your W-2, whichever is less. If you have at least $17,500 of salary income from the s-corporation, you can contribute $17,500 to your 401(k) account. Every employee under the plan is allowed to make this same contribution amount. As a result, many spouses are added to the s-corporation’s payroll (where permissible) to make an additional $17,500 contribution for the spouse’s account. If you are 50 or older, you can make an additional $5,500 annual contribution. Follow this link for the details from the IRS on the elective salary deferral limits. The elective salary deferral can be traditional dollars or Roth dollars.
3. Non-Elective Deferral of 25% of Income Up to a $52,000 total Annual 401(k) Contribution. In addition to the $17,500 annual elective salary contribution, an s-corporation owner can contribute 25% of their salary compensation to their 401(k) account up to a maximum of a $52,000 total annual contribution. This non-elective deferral is always made with traditional dollars and cannot be Roth dollars. So, for example, if you have an annual W-2 of $100,000, you’ll be able to contribute a maximum of $25,000 as a non-elective salary deferral to your 401(k) account. If you have employees who participate in the plan besides you (the business owner) and your spouse, then the non-elective deferral calculation gets much more complicated. But for now, let’s assume there are no other employees and run through the examples.
Lets run through two examples. The first is an s-corporation business owner looking to contribute around $30,000 per year. The second is a business owner looking to contribute the maximum of $52,000 a year.
Example 1, Seeking a $30,000 Annual Contribution.
S-Corporation Owner W-2 Salary = $50,000
Elective Salary Deferral = $17,500
25% of Salary Non-Elective Deferral = $12,500 (25% of $50,00)
Total Possible 401(k) Contribution = $30,000
Example 2. Seeking Maximum $52,000 Annual Contribution
S-Corporation Owner W-2 Salary = $138,000
Elective Salary Deferral = $17,500
25% of Salary Non-Elective Deferral = $34,500 (25% of $138,000)
Total Possible 401(k) Contribution (maximum) = $52,000
As a result of the calculations above, in order to contribute the maximum of $52,000, you need a W-2 salary from the s-corporation of $138,000. Keep in mind that if you have other employees in your business (other than owner and spouse) that you are required to do comparable matching on the 25% non-elective deferral and as a result such maximization is often difficult to accomplish in 401(k)s with employees other than the owner and their spouse. Consequently, the additional 25% non-elective salary deferral is best used in owner only 401(k) plans.
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