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The Self Employed 401k Plan Solution

A Self Employed 401K Plan offers a self employed business owner the ability to use his or her retirement funds to make almost any type of investment, including real estate, tax liens, private businesses, precious metals, and foreign currency on their own without requiring custodian consent tax-free! In addition, a Self Employed 401K Plan will allow you to make high contribution limits (up to $62,000 for 2019) as well as borrow up to $50,000 for any purpose. Have an investment opportunity, such as real estate or a business investment that you would love to make with your 401(k) funds? Want the ability to make high tax deductible or Roth contributions? Need to access up to $50,000 of your retirement funds for personal use? Then the Self Employed 401k Plan is your solution!

The Self Employed 40IK Solution

A Self Employed 401K Plan offers a self employed business owner the ability to use his or her retirement funds to make almost any type of investment, including real estate, tax liens, private businesses, precious metals, and foreign currency on their own without requiring custodian consent tax-free! In addition, a Self Employed 401K Plan will allow you to make high contribution limits (up to $62,000 for 2019) as well as borrow up to $50,000 for any purpose. Have an investment opportunity, such as real estate or a business investment that you would love to make with your 401(k) funds? Want the ability to make high tax deductible or Roth contributions? Need to access up to $50,000 of your retirement funds for personal use? Then the Self Employed 401k Plan is your solution!

A Self Employed 401(k) is perfect for sole proprietors, small businesses and independent contractors such as consultants. A Self Employed 401K plan offers the same advantages as a Self Directed IRA LLC, but without having to hire a custodian or create an LLC.

The Self Employed 401(k) plan is unique and so popular because it is designed explicitly for small, owner only business. There are many features of the Self Employed 401(k) plan that make it so appealing and popular among self employed business owners.

Self Employed 401k Plan Eligibility

A Self Employed 401(k) plan is well suited for businesses that either do not employ any employees or employee certain employees that may be excluded from coverage. A Self Employed 401K plan is perfect for any sole proprietor, consultant, or independent contractor.

To be eligible to benefit from the Self Employed 401(k) plan, investor must meet just two eligibility requirements:

(i) The presence of self employment activity.

(ii) The absence of full-time employees.

The Presence of Self Employment Activity

Self employment activity generally includes ownership and operation of a sole proprietorship, Limited Liability Company (LLC), C Corporation, S Corporation, and Limited Partnership where the business intends to generate revenue for profit and make significant contributions to the plan.

Generate Revenue for Profit

There are no established thresholds for how much profit the business must be generated, how much money must be contributed to the plan, or how soon profits and contributions must happen. It is generally believed that the IRS will consider you eligible if the business being conducted is a legitimate business that is run with the intention of generating profits. The self-employment activity can be part time, and it can be ancillary to full time employment elsewhere. A person can even participate in an employer’s 401(k) plan in tandem with their own Self Employed 401k Plan. In such a case, the employee elective deferrals from both plans are subject to the single contribution limit.

The Absence of Full-Time Employees

Unlike a regular 401(k) plan, a Self Employed 401(k) plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees and are not employed by any business owned by them or their spouse (an exception applies if your full-time employee is your spouse). The business owner and their spouse are technically considered “owner-employees” rather than “employees”.

The following types of employees may be generally excluded from coverage:

  • Employees under 21 years of age
  • Employees that work less than a 1000 hours annually
  • Union employees
  • Nonresident alien employees

 

If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up. However, a Self Employed 401k eligible business can have part time employees and independent contractors.

Self Employed 401k Plan Advantages

The Self Employed 401(k) plan is unique and so popular because it is designed explicitly for small, owner only business. There are many features of the Self Employed 401(k) plan that make it so appealing and popular among self employed business owners.

High Contribution Limits: While an IRA only allows a $5,500 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), a plan participant of a Self Employed 401K Plan can make annual contributions up to $56,000 annually with an additional $6,000 catch up contribution for those over age 50.

Under the 2019 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $19,000. 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 $56,000, $1,000 more than 2016.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $25,000. 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 $62,000, $1,000 more than 2016.

Loan Feature: While an IRA offers no participant loan feature, the Self Employed 401k Plan allows plan participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying 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)

“Checkbook Control”: The most noteworthy cost benefit of the Self Employed 401k Plan is that it does not require the participant to hire a bank or trust company to serve as trustee. This flexibility allows the Plan Participant (you) to serve in the trustee role. This means that all assets of the 401(k) trust are under the sole authority of the Self Employed 401k participant. A Self Employed 401(k) 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. Making a Self Employed 401K Plan investment is as simple as writing a check.

Flexible Contribution Options: Contributions to a Self Employed 401(k) plan are completely discretionary. You always have the option to try to contribute as much as legally possible, but you always have the option of reducing or even suspending plan contributions if necessary.

Roth Type Contributions: With IRAs, those who earn high incomes are disallowed from contributing to a Roth IRA or, in most years, converting their IRA to a Roth IRA. The Self Employed 401(k) plan contains a built in Roth sub-account which can be contributed to without any income restrictions.

Cost Effective Administration: In general, the Self Employed 401(k) Plan is easy to operate. There is generally no annual filing requirement unless your Self Employed 401(k) Plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

Exemption from UDFI: When an IRA buys real estate that is leveraged with 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 Section514. A Self Employed 401(k) plan is generally exempt from UDFI.

Roth Conversion: The Small Business Jobs Act of 2010, signed by President Obama contained a little-known provision, which went to affect on Sept. 27, 2010, allowing for the conversion of a traditional 401(k) or 403(b) account to a Roth in the same plan if their employer offers one. However, the 401(k) Plan participant (employee) must pay income tax on the amount converted. The new law covers Self Employed 401(k) Plans offered by the IRA Financial Group.

To learn more about the Self Employed 401(k) Plan structure, contact one of our 401(k) Experts at 800-IRA-0646 today!