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SEP IRA vs. Solo 401(k) & Venmo or Zelle? The IRS Wants to Know! – Episode 325

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. covers two unique topics. First he compares the SEP IRA and Solo 401(k), and which one is better for your business. Also, the IRS now wants to know if you use a mobile app, such as Venmo or Zelle, to collect more than $600 for commercial use during the year.

Examining the best retirement plans in 2022. Do you use Zelle or Venmo? Well, the IRS is going to find out. These topics and much more on today’s episode of Adam Talks.

Hey everyone, Adam Bergman here, tax attorney and founder of IRA Financial. I got a great episode for you today. Going to explore a new format for doing this podcast. Going to actually try to do two topics, sometimes more. Shorter duration on each topic. So at least that’s some of the feedback I got.

Keep people more vested, more interested in the topic being presented. We got a new sponsor as well in the new year, so really excited to announce sponsorship by Capital2Market who is sponsoring the Adam Talks podcast. So I will get to that also shortly. But Happy New Year, everyone. Again, I hope everyone’s doing great.

Tons of COVID going around. I actually caught COVID. I feel great. Honestly. It’s got a bit of a tickle in my throat, but no fever.

Double vaxed/boosted, so I think that actually helped a bit. But I’m young, I’m pretty healthy, so I’m good. But otherwise I just wanted to let you guys know because if you hear it in my voice, that’s why. So let’s get started. Topic number one is the best retirement plans for 2022.

The Best Retirement Plans for 2022

So when I say retirement plans, I’m not going to focus on traditional IRA or Roth, but I’m going to focus on the SEP and the Solo 401(k), which again, if you’re self-employed, you have options. If you work at Tesla or Apple or a big law firm or a big accounting firm, you don’t really have any choice. You got to use what you get. So you’re generally going to have access to a 401(k). You’ll generally be able to make employee deferral contributions.

2022 is $20,500 or $27,000 if you’re over 50. You’re probably potentially going to get a safe harbor contribution option as well. But you’re not going to do profit sharing, and you’re not going to probably be able to do a mega backdoor. And that’s really going to be all of your options. But if you’re self-employed, you got some options.

Self-Employed Retirement Plans

So, let’s talk about the two main retirement plans and explain why 2022 is even better than 2021. Let’s start with the SEP. The SEP is a pure profit-sharing plan. Generally, 20% of your net Schedule C if you’re a sole proprietor or single member LLC; 25% if you’re a W-2. Okay.

So for example, you make $40,000. You’re self-employed – net Schedule C. After self-employment tax and FICA, you can do 20% of $40 or $8 if it was a W-2 and you made $40,000 W-2. Because you have an S Corp or C Corp, it’d be 25% of $40.

If you have employees in a SEP, you generally have to make similar percentage profit sharing contributions. However, there’s something called a three out of five year rule, meaning if your employees have not been with you three of the last five years, you do not have to offer them contribution percentage options or opportunities in the SEP, meaning you don’t have to make the corresponding profit sharing contributions for them. You could just do it for those that satisfy the three out of the five year rule, including obviously yourself as an owner. So something to consider.

The SEP has no loan feature, which we’ll get to in a second. Also, all contributions are pretax. You can convert to Roth, but that conversion is subject to tax. All contributions are due when you file or your business files it’s return, whether it’s a Schedule C or an 1120, CRS or 1065.

And it includes extensions, right? So as long as you file or make your contributions by the time you file your return, including extensions, for the prior year, you’re good to go with a SEP. However, as I mentioned, it’s basically just a pure profit sharing plan. So the maximum you can put in is $61,000 in 2022, which is more than it was in 2021, which is $58,000. So, 2022 you can put away more than you can in 2021.

No catch-up contributions like a Solo 401k. So, let’s move to the Solo 401k. I guess this is like comparing, I don’t know, maybe like LeBron James and Steph Curry, right? It’s hard to argue LeBron James or Michael Jordan. I’m more old school.

I would still say Michael Jordan’s better than LeBron James but comparing current NBA stars and I’m a big NBA fan, maybe the SEP IRA, maybe it’s Steph Curry and the Solo 401(k) is arguably LeBron James, which over 17-18 year career won four or so titles, been MVP a number of times. Steph Curry’s a younger player, has got some time to catch up, but right now, still a little bit behind LeBron James.

SEP IRA is a fine retirement plan. It’s a great plan. If you’re going to max out. If you’re going to make $3-400 grand a year and you’re under 50, the SEP IRA will do the job. It’s going to give you that $61,000, right? Even though 20% of $500 more than $61, you’re capped at that $61.

The same token, if you make only ten grand, you’re going to be capped at that ten grand. You can’t contribute more than you make. Solo 401(k) – it has an employee deferral. And I mentioned this many times on blogs, podcasts, videos. Since 2001, EGTRRA, President Bush signed after 9/11, the Solo 401(k) became the Superman versus just a regular retirement plan. Why? It added the employee deferral feature, which allowed you, or allows you, in 2022 to go $20,500 dollar for dollar or $27,000. Plus, it has the profit-sharing contribution option as a SEP. So, it gets the benefits of the SEP, and it also gets the benefits of a 401(k) where you can do employee deferrals. $25 or $27,000 if you’re over 50 should say $20,500, not $25,000. $20,500 contributions can be pretax or Roth and you’re going to be able to put away a whole lot more than a SEP. So, if you made $40,000, Schedule C, under 50, Solo K would let you do $25,000 plus $8 – $28,500. SEP will just let you do eight. Pretty big difference.

If you’re $100,000, W-2, over 50, SEP IRA will give you $25K. Solo K will give you $27, because there’s a catch-up plus the $25. So $52, right? So more than double. Okay, as I mentioned, employee deferrals, pretax, or Roth. Employer contributions have to be pretax, but you can convert it to Roth like SEP.

After the SECURE Act was passed in 2019, you can now set up a Solo K like a SEP; same rules in the current year. For the prior year, same rules apply. Employer contributions need to be made before the business files a return, although employee deferrals for a W-2 should be made by 12/31. Whereas employee deferrals for a sole proprietor or single member LLC using a Schedule C can be made up until the return, including extensions. Okay, so otherwise, same rules.

Solo K also has a loan feature, where you can borrow, for any purpose, $50,000 or 50% of your account value, whatever’s less. Five-year loan, payable at least quarterly, current interest rate is still 3.25%. It probably will go up a little bit if interest rates go up. Something to keep in mind, if you’re looking to a loan, this could be a good time to do it. What else? So, as I mentioned, Roth contributions. ‘-

Both plans you can do alternative assets, whether it’s a Self-Directed SEP or a Self-Directed Solo, you can do real estate or crypto. Same rules apply. Other than an IRA cannot buy life insurance, a 401(k) can.

One other big difference is if you’re a real estate investor and loves using leverage, the Solo 401(k) will let you use a non-recourse loan to buy real estate (Non-recourse is a loan you do not personally guarantee) without triggering a tax known as UBTI or UBIT, unrelated business taxable income tax, which can go up as high as 37%. So it’s a big, big advantage to use a Solo 401(k) if you’re able to use leverage. And if you are interested, I have tons of non-recourse loan providers I can share with you. Generally, they’re looking for at least 35% to 40% down because they’re taking a greater risk. You may pay a little bit more in terms of points because of the fact that it’s non-recourse, but it has to be non-recourse because code section 4975 does not allow you to personally guarantee an obligation of your IRA. So you don’t really have a choice if you want to use leverage. But if you use leverage in an IRA, you’re going to pay UBIT tax on a net portion of that associated with the loan. Whereas, if you did it in a 401(k), you generally wouldn’t. So it’s another big win.

One area where I think the SEP wins, like Steph Curry is a better shooter than LeBron James, is administration. SEP IRA – your IRA custodian will file the 5498 or the 1099R for distributions. In the Solo K, it’s basically you. Now if you work with IRA Financial, we’ll assist you and take care of it with you. But if you have more than $250K in your 401(k), you have to file a 5500-EZ. If you have less than $250, you don’t have to file anything. So in that case you are in a better position than the SEP.

But in the SEP, the custodian does all the reporting anyway. So you’re not really doing much, other than maybe giving a value to the custodian. Whereas, if you have more than $250 in your plan, you got to follow the 5500-EZ which is due end of July of the following year. You can also get an extension until October 15 or so. That’s really the one area where the SEP I think has an advantage over the Solo.

So, those are the two best retirement plans in 2022, like 2021. I do believe the Solo 401K wins almost every time. Other than if you’re going to max out and you’re under 50, then the SEP will do the job, assuming you don’t need a loan and you’re not a Roth lover. But if you are a Roth lover and you want to do real estate and you’re going to want to use leverage and you don’t make enough money to just guarantee max out on profit sharing and you’re going to need the employee deferral, which will help you reach your maximum of the $61 or five. Excuse me, the $61 or the $67.5 if you’re over 50, then the Solo K is going to win. And again, the admin is not super hard if you’re over $250 in assets, $250,000, it’s an easy form. We help you do it. It’s literally one page. It’s like six questions. It takes literally seven minutes to do. So, I wouldn’t let that stop you from doing the Solo.

But otherwise just like basketball. Lebron, I think, still beats Steph Curry overall today. So we’ll see what happens next year. But using a basketball analogy, I would do the Solo 401k over the SEP pretty much any day of the week. So just like if you’re starting an NBA team, well, maybe if you’re not starting an NBA team today, because maybe Steph Curry is younger, got more years. But if you’re just picking the best NBA player today between Steph and LeBron, I think you still have to give the nod to LeBron. And I think the Solo gets the nod over the SEP.

So I’m going to take a break and then come back and talk about Zelle and Venmo and the IRS.

IRA Financial Partners with Capital2Market

So, excited to announce a new sponsorship for Adam Talks: Capital2Market, which I’ve known for some time and I’ve known the guys at Capital2Market. It’s a marketplace for alternative asset investments for individuals and retirement accounts. From real estate, startups, private equity, hedge funds, and even mature private companies. The capital2Market marketplace is your place to go for all your alternative asset investment needs. And you can check out C2M @ capital2market.com. Just note, this ad does not constitute an offer to sell or solicit an offer to buy or recommendation of any security or any product or service offered by Capital2Market. Nothing in this ad is intended to provide tax, legal or investment advice, and nothing in this ad should be construed as a recommendation to buy, sell or hold any investment or security, or engage in any investment strategy or transaction by IRA Financial or C2M.

Tax Reporting Changes to PayPal, Venmo, and Zelle

So let’s turn to Venmo, PayPal and Zelle. We’ve all used one or the other, right? Venmo? I use it all the time. My wife uses it to pay for coaches, tutors for my kids, things like that. It really comes in handy with Zelle, PayPal, whatever your choice is. The IRS is going to get more info now. Starting January 1, a lot of people didn’t realize this, this did not make the type of news that I expected. So as of January 1, the mobile payment apps like Venmo, PayPal, Zelle and Cash App are required to report commercial, not personal, but commercial transactions totaling more than $600 per year. So, it used to be $20,000.

Okay? It used to be mobile app payments only have to tell the IRS when the person had over 200 commercial transactions per year that exceeded $20,000. Now it’s $600. Okay, that’s a very big difference. So, basically what’s going to happen is they’re going to acquire all these apps, like Venmo, to file a 1099k reporting on all the commercial income they collected through the app.

And again, this only applies to commercial goods or services, not personal charges to friends and family. If you’re sending money to buy a Christmas gift or a birthday gift, things like that. So the IRS basically says the changes also apply to people who sell items on the Internet, like eBay, or have any type of commercial transaction business. Okay. But PayPal basically said, PayPal and Venmo, will offer a way for customers to tag their peer-to-peer. So they’re going to let you know, basically let you indicate whether this is like a peer-to-peer transaction, ie, I’m giving you $25 to pay for John’s birthday gift, or if this is a commercial transaction, like paying for a tutor or coach or a t-shirt or some other services being performed.

So this is a pretty big game changer. $600 is not a lot. $20,000 is. And this is just an information grab. This is basically what a lot of the provisions in the Build Back Better bill are about, especially in the retirement world.

It’s all about collecting info. But a lot of people slept on this thing. They felt that the BBB bill, since it didn’t pass, a lot of people felt that this was in the BBB bill, but it wasn’t. It was in the American Rescue Plan Act, and it was basically a COVID-19 response bill that was passed back in March. Okay, so this thing slipped through.

Everyone had a good time. New Year’s Eve party, January 1 rolled around. Bang, this thing’ss in place! And just keep this in mind, hey, if you’re doing commercial transactions and you’re not reporting it because you’re like, hey, it’s only $5,000 or $8,000, like, the IRS will never know.

Hey, now they may know because if it’s over $600 and it’s tagged as commercial, they’ll know. And by Venmo or Zelle filing the 1099k and they don’t see on your tax return, you’re going to get audited. So just be aware of it. It’s just caution. I know a lot of people kind of use this stuff for commercial transactions, but it doesn’t reach 20 grand, right?

Like, my kids have tutors and I have a basketball coach that comes to help my eight year-old and his friends. Every week we pay them each like $10, it’s like four or five kids, and who knows how much he makes. He does other families as well. He’s a kid, he’s probably in college. So I don’t know if he hits $20K, but I know he makes more than $600.

I actually told him this yesterday, I think, a couple of days ago, and he was like, oh, no, it’s pretty much in shock. He’s like, okay, I got to make sure I’m doing this right because I don’t want to not report this stuff and then get into trouble with the IRS. So, beware $600 is not a lot. You can tag it if it’s personal, but just obviously be accurate. If you’re selling t-shirts and doing this a bunch over these cash apps and then indicating it’s personal and it’s commercial and you get audited, you could be in a tough situation.

So you want to be accurate. Again, just report it, right? If it’s taxable. The IRS obviously feels they’re losing a bunch of tax revenue. They want to collect more data on all of us. So let’s see where it goes.

It will have an impact generally on way more people because $600 is such a low threshold. Where the $20K, I think a lot of people were under it and probably just weren’t reporting the income on their tax return. Now, the IRS is going to find out because they’re forcing these cash app companies to provide the info on the 1099k. Just a heads up. It’s my job to help educate everyone, not just on self-directed retirement stuff, but on tax-related current events that I think are important.

And this kind of caught me by surprise. I forgot about this. I remembered it back in March. And then I actually read a tax blog on this at the beginning of this year, and I was like, oh, I should totally talk about this on Adam Talks because I bet there’s so many people out there that use Venmo, PayPal, Cash App, Zelle and have no idea that the IRS is going to be looking at this stuff very closely. So, make sure if you’re tagging it you’re tagging it correctly and if you’re above the $600 and you’re doing it for commercial purposes, treat it as a business. It may actually work out because you can get business expenses associated with it, so you may end up in being in a good position by reporting it,  treat as a business because you may be able to get deductions which may zero out your income anyways. But, just be aware of it. Otherwise, that’s it.

I hope you guys enjoyed today’s episode of Adam Talks. Hope you guys like this format as well. Thanks to our friends at Capital2Market for sponsoring today’s episode. Great guys. Again, if you’re interested in alternative assets, not promoting anything, just check out their marketplace.

You may find investments that you find interesting. I have no vested interest. There’s no conflict of interest. They are a sponsor, but I know a bunch of people that have used them and made investments. So, check it out if you’re interested. Otherwise, stay safe. If you catch COVID, then you probably want omicron because it’s super mild. I feel great. If I had to, I’d run a marathon now, not that I want to, but other than a tickle in my throat, I feel great. Still drinking wine every night. So, catch it if you can, because we’re all going to get this damn thing but otherwise hope this is the end of COVID. It’s been a long journey. I don’t know how I’ve lasted this long but interesting enough my kids don’t have it. My wife doesn’t have it.

Just me and we do everything together. I’m not sure how I caught it, just I guess like AOC in Miami, it’s in the air. Who knows? But, stay safe, be well and talk to everyone again next week.


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