by Mat Sorensen | Aug 4, 2014 | Uncategorized
Do you need access to your retirement account funds to start a business, to pay for non-traditional education expenses, to make a personal investment, or to pay off high interest debt? Rather than taking a taxable distribution from your 401(k), you can access a portion of the funds in your 401(k) via a loan from the 401(k) to yourself without paying any taxes or penalties to access the funds. The loan must be paid back to the 401(k) but can be used for any purpose by the account owner. Many people are familiar with this loan option but are confused at how the rules work. Here is a summary of the items to know. For more details, check out the IRS Manual on the subject here.
FAQs on Loans from Your 401(k)
- How much can I loan myself from my 401(k)? 50% of the vested account balance (FMV of the account) of the 401(k) not to exceed $50,000. So if you have a $200,000 401(k) account value you can loan yourself $50,000. If you have $80,000, you can loan yourself $40,000.
- What can I use the funds for? By law, the loan can be used for anything you want. The funds can be used to start a business, for personal investment, for education expenses, to pay bills, to buy a home, or for any personal purpose you want. Some employer plans restrict the purpose of the loan to certain pre-approved purposes.
- How do I pay back the loan to my own 401(k)? The loan must be paid back in substantially level payments, at least quarterly, with-in 5 years. A lump sum payment at the end of the loan is not acceptable. For loans where the funds were used to purchase a home, the loan term can be up to 30 years.
- What interest rate do I pay my 401(k)? The interest rate to be charged is a commercially reasonable rate. This has been interpreted by the industry and the IRS/DOL to be prime plus 2% (currently that would be 5.75%). If the loan was for the purchase of a home for the account owner then the rate is the federal home loan mortgage corporate rate for conventional fixed mortgages. Keep in mind that even though you are paying interest, you are paying that interest to your own 401(k) as opposed to paying a bank or credit card company.
- How many loans can I take? By law, you can take as many loans as you want provided that they do not collectively exceed 50% of the account balance or $50,000. However, if you are taking a loan from a current company plan, you may be restricted to one loan per 12 month period.
- What happens if I don’t pay the loan back? Any amount not re-paid under the note will be considered a distribution and any applicable taxes and penalties will be due by the account owner.
- Can I take a loan from my IRA? No. The loan option is not available to IRA owners. However, if you are self-employed or are starting a new business you can set up a solo or owner only 401(k) (provided you have no other employees than the business owners and spouses) and you can roll your IRA or prior employer 401(k) funds to your new 401(k) and can take a loan from your new solo 401(k) account.
- Can I take a loan from a previous employer 401(k) and use it to start a new business? Many large employer 401(k) plans restrict loans to current employees. As a result, you probably won’t be able to take a loan from the prior 401(k). You may, however, be able to establish your own solo or owner only 401(k) in your new business. You would then roll over your old 401(k) plan to your new solo/owner only 401(k) plan.
- Can I take a loan from my Roth 401(k) account? Yes, so long as your 401(k) plan doesn’t restrict loans from the Roth account.
- What if I have a 401(k) loan and change employers? Many employer plans require you to pay off any outstanding loans within 60 days of your last date of employment. If your new employer offers a 401(k) with a loan option or if you establish a solo/owner only 401(k), you can roll over your prior employer loan/note to your new 401(k).
The 401(k) loan option is a relatively easy and efficient way to use your retirement account funds to start a small business, to pay for non-traditional education expenses, or to consolidate debt to a better rate of interest. If you have more questions about accessing your 401(k) funds, please contact us at the law firm at 602-761-9798.
by Mat Sorensen | Feb 18, 2014 | Uncategorized
A properly structured s-corporation is utilized best when business owners adopt 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 (any 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.
Rules for 401(k) Contribution
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:
- 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).
- 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.
- 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.
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 = $50,00
- 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.
by Mat Sorensen | Feb 4, 2014 | Uncategorized
In President Obama’s recent State of the Union Speech he proposed a new method to save for retirement called a MYRA. The MYRA, will work like a Roth IRA as contributions are from after tax dollars and withdrawals will be tax free. Or, will they? Like the President’s last proposal (you can keep your health insurance plan if you like it, you can keep your doctor), the devil is in the details. The myRA will be available to workers of businesses whose employers does not offer a 401(k) or other employer based retirement plan. Under the myRA, and upon voluntary cooperation from the employer, an employee can have contributions to their own myRA made directly from their payroll contributions. The minimum amount to start an account is $25 and the minimum payroll contribution amount can be as little as $5. While the details have not been discussed, presumably the maximum amount that may be contributed per year is the same as Roth IRAs ($5,500, under 50, $6,500, 50 or older). The myRA will be a government account managed by a private third party company. The accounts entire balance will be invested automatically, and without choice by the myRA account owner, into U.S. Treasury Securities. These securities earn about 2.5% a year. The government promises that no fees will be associated with these accounts. Additionally, there is an account maximum such that once an account reaches $15,000, it must be rolled over to a private Roth IRA account. In other words, the myRA is only good for $15,000. A myRA is by no means a retirement account you will retire on but rather a starter account that gets you into another retirement account (e.g., Roth IRA). What is very unclear in the current pronouncements is how myRA account owner’s can access these funds before retirement (again, presumably 59 ½). While the President and Treasury Secretary Jack Lew have stated that a myRA can be rolled over to a Roth IRA, they have made contradictory comments about worker’s access to the funds in a myRA. The President stated that funds may be accessible by a worker before retirement in an emergency while Secretary Lew stated that contributions invested into a myRA can be withdrawn at any time. As many Roth IRA owners know, withdrawls of Roth IRA contributions (not earnings) can occur at any time without penalty. So, how will this rule apply to a myRA. What is President Obama talking about when he says withdrawals can occur if there is an emergency? Well, needless to say, additional rules will be provided by the Tresuary Department as the President has tasked them with creating the rules for myRA accounts. Bottom line, these accounts offer no investment options outside of one government security and can only be used up to $15,000. While it will be a tool used for some, most other worker’s are waiting for a real solution that increases contribution amounts in existing plans being offered (401(k)s, IRAs, Roth IRAs, SEPs, etc.) while offering unfettered investment options. The myRA fails on both fronts.
by Mat Sorensen | Dec 10, 2012 | Retirement & IRAs
By: Mathew Sorensen, Partner KKOS Lawyers
Good news. The IRS has announced increases into the amount of money individuals may contribute into their retirement plans in 2013. The IRS increased the amounts that may be contributed to Traditional and Roth IRAs. The IRS also increased the total amount that may be contributed as employee contributions into 401(k) plans. Here’s how the increased annual limits broke down.
Traditional and Roth IRAs- Increased from $5,000 to $5,500 a year. Those over 50 can still make an additional catch-up contribution of $1,000. Also, the income qualification limit for Roth IRA contributions increased from $183,000 to $188,000 for married couples and from $125,000 to $127,000 for those filing single.
401(k) Plans- The annual employee contribution amount that may be contributed into a 401(k) increased from $17,000 to $17,500. The catch up contribution from employee plans is still $5,500 per year for those who are 50 or older.
SIMPLE IRA- The amount that may be contributed to SIMPLE IRAs annually is increased from $11,500 to $12,000. Catch-up contributions for those over 50 stays at $2,500.
SEP IRA- The total amount that may be contributed annually increased from 25% of compensation or $50,000 to 25% of compensation or $51,000, whichever is less.
With increased tax rates on the horizon the tax benefits of making retirement plan contributions are only that more valuable. There are also tax credits for employers adopting new plans as well as savers credits for low income workers contributing to retirement plans. Please contact us at the law firm for assistance in determining which retirement plan is right for you.
Page 8 of 8« First«...45678
