by Mat Sorensen | Oct 6, 2022 | News
Many self-directed investors have the option of choosing between a self-directed IRA or a self-directed solo 401k. Both accounts can be self-directed so that you can invest in any investment allowed by law such as real estate, LLCs, precious metals, or private company stock. However, depending on your situation, you may choose one account type over the other. What are the differences? When should you choose one over the other?
We’ve been advising clients for over a decade on self-directed IRAs and solo 401(k)s and what we’ve learned is that there is no universal answer to the question. Instead, you need to learn what is best based on your personal situation and investment objectives. Do you even qualify for a solo(k)? What investments do you plan to make and does one account type make a difference for your investments? The good news is that either way you go, we can help with a self-directed IRA at Directed IRA, where we are a licensed trust company and can serve as custodian of your IRA. Or, we can set-up a solo(k) at KKOS Lawyers using our pre-approved plan documents.
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IRA |
Solo 401K |
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Qualification |
Must be an individual with earned income or funds in a retirement account to roll over. |
Must be self-employed with no other employees besides the business owner and family/partners. |
Contribution Max |
$6,000 max annual contribution. Additional $1,000 if over 50. |
$61,000 max annual contribution (it takes $140K of wage/se income to max out). Contributions are employee and employer. |
Traditional & Roth |
You can have a Roth IRA and/or a Traditional IRA. The amount you contribute to each is added together in determining total contributions. |
A solo 401(k) can have a traditional account and a Roth account within the same plan. You can convert traditional sums over to Roth as well. |
Cost and Set-Up |
You will work with a self-directed IRA custodian who will receive the IRA contributions in an SDIRA account. Most of the custodians we work with have an annual fee of $300-$350 a year for a self-directed IRA. |
You must use an IRS pre-approved document when establishing a solo 401k. This adds additional cost over an IRA. Our fee for a self-directed and self-trusted solo 401(k) is $995 with Atty consultation or $495 for the plan only. |
Custodian Requirement |
An IRA must have a third-party custodian involved in the account (e.g. bank. Credit union, trust company) who is the trustee of the IRA. Of course we recommend our company, www.directedira.com. |
A 401(k) can be self-trustee’d, meaning the business owner can be the trustee of the 401(k). This provides for greater control but also greater responsibility. |
Investment Details |
A self-directed IRA is invested through the self-directed IRA custodian. A self-directed IRA can be subject to a tax called UDFI/UBIT on income from debt leveraged real estate. |
A Solo 401(k) is invested by the trustee of the 401(k) which could be the business owner. A solo 401(k) is exempt from UDFI/UBIT on income from debt leveraged real estate. |
Keep in mind that the solo 401(k) is only available to self-employed persons while the self-directed IRA is available to everyone who has earned income or who has funds in an existing retirement account that can be rolled over to an IRA.
Conclusion
Based on the differences outlined above, a solo 401(k) is generally a better option for someone who is self-employed and is still trying to maximize contributions as the solo 401(k) has much higher contribution amounts. On the other hand, a self-directed IRA is a better option for someone who has already saved for retirement and who has enough funds in their retirement accounts that can be rolled over and invested via a self-directed IRA as the self-directed IRA is easier and cheaper to establish.
Another major consideration in deciding between a solo 401(k) and a self-directed IRA is whether there will be debt on real estate investments. If there is debt and if the account owner is self-employed, they are much better off choosing a solo 401(k) over an IRA as solo 401(k)s are exempt from UDFI tax on leveraged real estate.
Choosing between a self-directed IRA and a solo 401(k) is a critical decision when you start self-directing your retirement. Make sure you consider all of the differences before you establish your new account.
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.
by Mat Sorensen | Oct 3, 2022 | News
Have you taken a loan from your employer 401(k) plan and plan on leaving? Unfortunately, most company plans will require you to repay the loan within 60 days, or they will distribute the amount outstanding on the loan from your 401(k) account. Its one of the ways they try to keep their employees from leaving. “Don’t leave or we’ll distribute your 401(k) loan that you took from your money in your 401(k) account.”
How to Buy Yourself More Time & Avoid the Distribution
The good news is that following the Tax Cuts and Jobs Act (TCJA) you now have the option to re-pay the loan to an IRA to avoid the distribution and you have until your personal tax return deadline of the following year (including extensions) to contribute that re-payment amount to an IRA. By re-paying the amount outstanding on the loan to an IRA, you will avoid taxes and penalties that would otherwise arise from distribution of a participant 401(k) loan.
How It Works In Practice
Let’s say you left employment from your employer in February 2019 and that you had a 401(k) loan that was distributed by your employer’s plan following your termination of employment. You will have until October 15th of 2020 (if you extend your personal return, 6 month extension from April 15th) to make re-payment of the amount that was outstanding on the loan to an IRA. These funds are then treated as a rollover to your IRA from the 401(k) plan and your distribution and 1099-R will be reported on your federal tax return as a rollover and will not be subject to tax and penalty. While it’s not perfect it’s far greater time than was previously allowed. Traditionally, you had 30 or 60 days at most to make re-payment.
Limitations
The ability to rollover an outstanding 401(k) loan amount to an IRA is only available when you have left an employer (for any reason). It does not apply in instances where you are still employed and have simply failed to re-pay the loan or to make timely payments.
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.
by Mat Sorensen | Sep 21, 2022 | Investing
A SEP IRA is a powerful retirement account used by many self-employed persons and business owners. It is particularly attractive as you can contribute up to $61,000 into it annually. That’s in comparison to a Traditional IRA, where you can only contribute up to $6,000 a year. “But what if I have employees? If I have employees in my business do I need to offer then plan and contribute for them?” The answer is “yes” and “no,” as it depends on your employees. The devil’s – or perhaps we should say loopholes – in the details.
Employer Contribution
Keep in mind that the money contributed to a SEP IRA is an “employer contribution.” This means that the money comes from the company and is set at a maximum of 25% of the employee’s wage. So, if you are the only employee and you make $100,000 that year, the company can contribute $25,000 to the SEP IRA. For a business owner with no employees, it doesn’t really make a difference whether you pay into the SEP IRA from your company’s account or from your personal account as its all effectively your money in the end.
However, once you have employees, you are required to offer the same SEP IRA and same employer contribution to them that you offer to yourself. Now, you will likely care whether that money comes from the employee’s wages or from the company’s account. So, let’s say you had an S-Corporation and had a W-2 of $100,000, and you had one employee who had a W-2 of $40,000. The company would contribute $25,000 to your SEP IRA account (if doing the 25% max rate) and would also contribute $10,000 to the employee’s SEP IRA. While you, as the business owner, may be excited about contributing $25,000 into your own SEP IRA from the company’s funds, you may be less excited about contributing $10,000 to an employee’s SEP IRA account from the company’s funds. But, this is what’s required if the employee is eligible.
Employee Eligibility Loophole and Flexibility
The good news is that you only need to offer the SEP IRA to “eligible employees,” and you can make employees “ineligible” if they have not worked for you for 3 years out of the prior 5 years (see IRS SEP IRA FAQs). In other words, until someone has worked for the company for at least 3 years, you do not need to offer the SEP IRA to them. For many small businesses, self-employed persons and new companies, a SEP IRA can be an excellent choice for the business owner as they may be the only eligible person who has worked for the company for 3 years. You can also restrict eligibility if an employee has not yet turned 21. This 3 year employee eligibility rule under a SEP IRA is far superior to the 1 year employee eligibility rule that would apply when using a Solo K upon hiring employees.
Keep in mind that you are subject to the same eligibility rules. So, if this is a new company, then the strategy of offering the plan to yourself while restricting others doesn’t work so well. But, as is usually the case, if you have worked the business for years before having an employee, then you can set the work year requirement to make yourself eligible while setting it out up to 3 years for any employees.
If an employee has worked 3 out of the prior 5 years and is now eligible, the business owner can decide to cease the SEP IRA plan (and their own contributions), and can instead move to a 401(k) or other more common retirement plan structure where the company is not required to offer such a generous employer contribution.
A SEP IRA can be self-directed and invested into real estate, LLCs, private stock, notes, and precious metals. Directed IRA establishes SEP IRA accounts for self-directed investors and you can set-up an account entirely online. Learn more now at www.directedira.com.
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.
by Mat Sorensen | Sep 20, 2021 | News, Uncategorized
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.
https://www.house.gov/representatives/find-your-representative
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.
https://www.senate.gov/senators/senators-contact.htm
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.
Everyday IRA Savers Hurt by IRA Provisions
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?
House Tax Bill Summary From Ways and Means Committee (IRA Sections are138301 to 138315) House Ways and Means Tax Title Section-by-Section Explanation
House Bill Full Text House Ways and Means Neal Tax Bill
by Mat Sorensen | Sep 11, 2020 | Uncategorized
Required Minimum Distributions (RMD) from IRAs can be a burden for taxpayers, by raising your annual income levels and possibly boosting you into a higher tax bracket. Using the Qualified Charitable Distribution (QCD) Rule, there is a way for IRA’s to do good. This rule allows IRA owners to exclude their RMDs from their annual income if given to a qualified charitable organization. Essentially, owners can deduct their RMDs on their tax returns if they give the money to a charity. A key benefit to the QCD is you pay zero tax on the distribution. That’s right, it’s a tax free distribution to a charity. You win, the charity wins, and the IRS loses.
Some of the rules and regulations are as follows:
- You MUST be age 70½ or older on the date of the distribution.
- The maximum annual exclusion per individual is $100,000.
- The charity must qualify as a 501(c)(3) organization and be eligible to receive tax-deductible contributions.
- Each check will be made payable to the qualified charity and list your name as donor. Note: You should follow up with the charity directly for a receipt of your donation.
To break it down further, the charitable organization must qualify as a 501(c)(3) organization, which means it is federally tax exempt as a non-profit organization. Of course the owner of the IRA can give a larger sum than $100,00 to the charity of their choosing, though any excess distributions will not be excluded from their Adjusted Gross Income (AGI). It is also very important to obtain a receipt from the selected charity for tax purposes.
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.