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The Individual 401k Rules

An Individual 401K Plan also called a Solo 401K Plan offers a self-employed business owner the ability to use their retirement funds to make almost any type of investment tax-free, including real estate on their own without requiring custodian consent. As long as a business exists with no full-time employees other than the owner and his/her spouse, an Individual 401K Plan can be established.

An Individual 401K Plan is perfect for any sole proprietor, consultant, or independent contractor, such as a realtor, doctor, accountant, attorney, dentist, or sales agent. The Individual 401K Plan can be adopted by a sole proprietorship, LLC, Partnership, or Corporation.

There are many reasons why the Individual 401K Plan is considered the most attractive retirement solution for the self-employed.

High Contributions: Under the 2016 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $53,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $59,000.

Tax-Free Loan for any Purpose: With an Individual 401K Plan, a plan participant is eligible to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying personal expenses such as credit card bills, mortgage payments, personal or business investments, a car, vacation, or anything else. The loan has to be paid back over a five-year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate). There is no pre-payment penalty.

True “Checkbook Control”: One of the most popular aspects of the Individual 401K Plan is that it does not require the participant to hire a bank or trust company to serve as trustee of the Plan. Unlike an IRA, which requires a financial institution to serve as trustee and custodian of the IRA, in the case of a Individual 401K Plan, the plan account can be opened at any local bank or credit union and the plan participant can serve as trustee of the Plan. This flexibility allows the plan participant (you) to gain “checkbook control” over your retirement funds. In essence, all assets of the Individual 401K Plan will be under the sole authority of the 401k participant. An Individual 401K plan allows you to eliminate the expense and delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself. With an Individual 401K Plan, making a 401K Plan investment is as simple as writing a check.

It's Time To Let 401(k) Holders Invest Like the Pros Unlocking A World of Investment Opportunity: With an Individual 401K, you will be able to invest in almost any type of investment opportunity that you discover, including: Real Estate (rentals, foreclosures, raw land, tax liens etc.), Private Businesses, Precious Metals, Hard Money & Peer to Peer Lending as well as stock and mutual funds; your only limit is your imagination. The income and gains from these investments will flow back into your Individual 401K Plan tax-free!

Use Non-recourse Leverage Tax-Free: When an IRA buys real estate that is leveraged with non-recourse mortgage financing, it creates Unrelated Debt Financed Income (a type of Unrelated Business Taxable Income) on which taxes must be paid pursuant to Internal Revenue Code Section 514. An Individual 401K plan is generally exempt from UDFI. In other words, unlike an IRA, Internal Revenue Code Section 514(c)(9), allows an Individual 401K plan to use non-recourse leverage to make a real estate acquisition without tax or penalty.

After-Tax (Roth) Contributions: The Individual 401K Plan contains a built in Roth sub-account which can be contributed to without any income restrictions. An Individual 401K Plan will allow you to make pre-tax and/or after-tax (Roth) employee deferral contributions to your Plan.

Simple Plan Administration: The Individual 401K Plan is easy to operate and effortless to administer. There is generally no annual filing requirement unless the assets in your Individual 401K Plan exceeds $250,000, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

Roth 401K Conversion: The Individual 401K Plans allows for the conversion of pre-tax 401K funds to an after-tax Roth sub-account contained in the Individual 401K Plan. However, the Individual 401K Plan participant must pay income tax on the amount converted.

Offset the Cost of Your Plan with a Tax Deduction: By paying for your Solo 401(k) with business funds, you would be eligible to claim a deduction for the cost of the plan, including annual maintenance fees. The deduction for the cost associated with the Solo 401(k) Plan and ongoing maintenance will help reduce your business’s income tax liability, which will in-turn offset the cost of adopting a self-directed Solo 401(k) Plan. The retirement tax professionals at the IRA Financial Group will help you take advantage of the available business tax deduction for adopting a Solo 401(k) Plan.

Asset & Creditor Protection: In the case of a bankruptcy, the general exemption found in sec­tion 522 of the Bankruptcy Code, 11 U.S.C. §522, provides an unlimited exemption for retirement assets exempt from taxation for Section 401(a) (tax qualified retirement plans—pen­sions, profit-sharing and section 401(k) plans). Thus, ERISA qualified plans as well as Self-Directed 401K plans are afforded full bankruptcy exemption. Outside of bankruptcy, state law will govern whether Individual Solo 401K Plan assets are protected from creditors. Most states will provide protection for Individual Solo 401K Plan assets from creditors outside of the bankruptcy context.

IRA Financial Group will take care of setting up your entire Individual 401K Plan. The whole process can be handled by phone, email, fax, or mail and typically takes between 2-10 days to complete, the timing largely depending on the time it takes your current retirement asset custodian to move the funds to the new Individual 401K Plan account. Our tax and ERISA professionals are on-site greatly reducing the setup time and cost. Most importantly, each client of the IRA Financial Group is assigned a retirement tax professional to help with the establishment of the Self-Directed 401K Plan.

For additional information on the Individual 401(k) Plan, please contact us at 800-472-0646.

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