Solo 401k Basics & Top 3 Reasons to Open a Solo 401k

Solo 401k Basics & Top 3 Reasons to Open a Solo 401k great so today is a we're gonna go over
a solo 401k webinar and really you know a solo 401k is a very powerful tool and
so the point of today's session is really educational we're not going to be
giving any type of legal advice or tax advice and so we're gonna really talk
about it at a high level in terms of who's eligible to set up a solo 401k and
really some of the start to learn about some of the powerful benefits of it in
terms of what you can do with the solo 401k so to go into the first
introductory slide here these are the questions that we're gonna be going
through what is a solo 401k am I eligible to set up a solo 401k can I
roll over my retirement funds to my solo 401k who holds my solo 401k funds can I
invest my solo 401k in real estate can I borrow from my solo 401k and
finally how much can I contribute to my solo 401k so to get started here we're
gonna talk about what is a solo 401k a 401k is a solo 401k is is really just a
traditional 401k if you look at the IRS guidance and language they talk about
how it's really just a traditional 401k but it's it's a special subset or kind
of 401k which is referred to as a one participant planning that's the
technical terminology and that in the in the rules and really it's designed for
self-employed individuals because so you in order to have a 401k you need to have
a business and so even though it might be a one-person business the rules allow
that business to set up a solo 401k and so it's called a one participant 401k
and again it's not it's not a new type of 401k plan it's got all of the same
features of a 401k but actually less compliance requirements and the reason
for that is a lot of the compliance requirements
that apply it 401k plans are there to to protect your common law employees but
the the reason for those requirements really goes away if you've got really
just a one-person business or has been in a wife business because the business
is not going to be it's not going to discriminate against themselves of
course so a lot of them of compliance requirements go away and so it's much
more streamlined it's much it's much more cost effective than a full-fledged
multi employee 401k and so as you're reading about in researching solo for
one case you might come across different terminology and I've got it listed here
on this slide you've got it sometimes referred to as an individual 401k single
k unique a self-directed 401k and all that's really all those are really
marketing terms and referring to what it again is called a one participant 401k
plan now before we go into the next slide I do want to touch on some of the
exceptions to that one participant rule one exception is for spouses so if you
have a husband and wife let's say or gotta realize a realtor business right
even though there's that quote one participant requirement there's an
exception for spouses there's also there's also exception for
other owners of the business so if you have two partners two owners of an LLC
and it's a consulting firm they're going to be eligible again and as long as the
business doesn't have any full-time w2 employees so that's the other feature in
terms of eligibility it's good the business cannot have any full-time w2
employees and so in terms of what it means to be full-time that's really
going to be defined as working a thousand hours or more this is going to
bleed right into our next slide which is you know
they'll code in order to be eligible it needs to be a business with no full-time
w-2 employees in terms of the business itself it's got to be in a quote active
business you look at IRS Publication provides which is landmark guidance
firms I'm sorry we getting some feedback I'm gonna go ahead and mute everyone great I believe everyone can still hear
me but go going ahead with the presentation that it needs to be a quote
active business so if you if you look again at the IRS guidance which is the
landmark guidance is found in IRS Publication five six feet they they talk
about what it means to be self-employed and really it comes down to making money
off of your personal effort and so some common examples of course would be like
I mentioned a little too before you got a realtor
perhaps a consultant a solo practitioner attorney is going to be eligible any
type of professional services of course are going to be eligible even an uber
driver right because that person is getting paid on a 1099 basis so an
independent contractor or somebody that might be you know working for a big
corporation but they're getting paid on a 1099 basis those are all good examples
of people who are eligible to set up a solo 401k because they're making money
from their personal effort now a common question that comes up is do I have to
have a business you know do I have to have an LLC do I have to have an S
corporation and the answer is no the how you organize your business is not going
to impact whether or not your L now later on keep that in mind we're
going to talk about contributions and that that does impact how the
contribution limits are determined but in terms of eligibility the biz you're
self-employed business could be organized as a sole proprietorship it
could be organized as an LLC it could be organized as an S corporation what's
really important is the nature of the business you've got to be making money
from your personal effort speaking on that topic just a little bit a lot of
people will ask whether or not they have they would might be making money off of
a real estate say real estate investments you know they might have a
w-2 day job so working for a you know a large corporation that individual is not
going to be self-employed based off of that activity but they might have a side
LLC as a rental property it's just they're earning passive income that's an
example that would typically not qualify because the income from that real estate
investment is passive you know it's oftentimes it's going to
flow on the Schedule C on their taxes which is going to be passive income
they're not going to be paying any type of self-employment tax on that income so
they're not going to be able to take the position that an LLC that where they're
earning passive income is somehow a self-employed business for purposes of
setting up a solo 401k and if you go back to the that key concept that basic
concept of making money from your personal effort if you're simply
invested in real estate you're really making money off of money
that you already had right and and so it's passive income you're not paying
self-employment tax that's not going to be eligible now another common question
that will come up is someone will ask those they'll present a scenario where
they have a w-2 job but there also might have a side business not the real estate
context but instead they could be for example an IT professional that might
have some type of website hosting business or perhaps a web design
business that they work on during nights and weekends
in that individual even though they have a w-2 day job that's not going to impact
their eligibility because they're able to use their side business again
assuming they're making money off their personal effort and there's no w2
employees to set up a solo for a link at again that's another one we'll keep that
in mind when we go on to discuss contributions because that will that can
impact their ability to contribute so just to finish up with some other
important concepts in terms of eligibility we did talk about spouses
and partners and how they may participate those are exceptions to that
one participant requirement another important fact there is control groups
so when determining eligibility it's important to look at all the businesses
that are owned you might have a serial entrepreneur they could have a
consulting business it might also be invested in a have another business that
has w-2 employees if that person owns both businesses 100% then those two
businesses are going to constitute what's called a control group and for
purposes of determining 401k eligibility and who needs to be offered the 401k
plan the control group rules will will tell us that the employees of any of
either of those businesses are going to be considered employees for purposes of
the plan so if that person even though they have a one-person shop that's a
consultant consultancy business the fact that they have another business with w-2
employees is it going to preclude that individual and there they would not be
indelible to set up a solo 401k ok so let's move on then off of the
eligibility topic and go on to our next question that we've covered over the at
the beginning of the presentation what you know can I roll over my retirement
funds in a solo 401k and the answer is generally yes most type of retirement
accounts are gonna be eligible even knowing you could have traditionally
often scenario is going to be somebody who's self-employed you know they may
not have a 401k because they never worked at a big company right so this
could be their first 401k they may have been saving money in a SEP IRA or a
traditional IRA and it may have had a previous job and rolled over money into
a rollover IRA so all of those all of those accounts are eligible accounts as
long as they can liquidate that investment they're going to be able to
transfer it over to the solo 401k a simple IRA is also going to be an
eligible type of account provided they satisfy the two year the two year
requirement so they're gonna have to have that for two years before they're
gonna be able to transfer it over a former employer retirement plan so once
they have left their job and that their money is still with the previous
employer sponsored plan such as a 401k or a pension savings plan all of these
again are going to be eligible types of plans and they're all gonna believe
moved over as what are called trustee to trustee transfers or direct rollovers
depending on whether it's coming from an IRA or a an employer plan and whenever
you transfer money via a trustee to trustee transfer or direct rollover that
is going to be a reportable event so the previous custodian or administrator of
that account is going to report that transfer it's not a taxable transfer
because it's not it's going directly to another qualified plan as long as it's
going to a qualified plan such as a qualified solo 401k plan then that's not
going to be a taxable event but it will be reportable the prior administrator of
custodian would issue a 1099 are in the following the following January to
report that to the IRS and they would be issuing that with a code G in box 7 so
that indicates the IRS that this is not a taxable transfer so that's going to be
important that so in the whole transfer process
that's where you really want to work with a you know people who have
experience and expertise in guiding that transfer process because otherwise you
could set yourself up for some pain and suffering because if it gets reported as
a taxable transfer then you would likely get a letter from the IRS when they
don't see that income reported on the individuals taxes they're going to be
looking for it so we we've we commonly see those if you know if the
administrator I mean it's uncommon with our clients because we leave the
transfer process but on occasion you will see a an administrator that it
makes a mistake and so you know typically they can be resolved but it's
not something that you obviously want to set yourself up for so sticking on the
transfer and rollover topic another type of transfer would be an indirect
rollover and that's come up actually there's been some activity in this area
in terms of indirect rollovers in an example of an indirect rollover would be
where someone takes money out of their IRA for example and then they have quote
60 days they have 60 days to put it back into another IRA or a qualified plan so
to avoid paying the taxes and penalties that would apply if it was a
distribution so those have recently been restricted such that now one is only
able to do one indirect rollover regardless of the number of say IRA
accounts that the individual has in a 12-month period so that's definitely not
an ideal way to transfer the money because number one if you've done an
indirect rollover in the past 12 months then it's going to be considered to be a
taxable distribution if you take the money out when where it comes directly
to you as opposed to going to the new plan number two now you've used up your
indirect rollover in if there is ever a need where you to take an indirect
rollover in the in the next 12 months you're not going to be able to do that so again
upon this slide a couple keep a couple important more concepts would be a
current employer plan and Roth IRA accounts these are examples of accounts
but often times the money is not able to be transferred definitely not with a
Roth IRA because the IRA rules do not allow one to transfer money from a Roth
IRA to a 401k plan the other example would be a current employer plan so the
rules although the rules would allow one to transfer money from a current
employer plan what's often referred to as an in-service distribution typically
the rules that apply under that plan are not gonna allow it so your current
employer is going to say you're not going to be able to transfer money out
of your 401k to another 401k until you leave your job and sometimes they'll
have a waiting period of say a month or even longer particularly if you're in
working at a smaller company and you might be invested in say this
stock of a closely held corporation when they can't just liquidate your your in
your 401k assets quickly you know okay so let's move on to the next topic which
is who holds my 401k my solo 401k funds so the standard is really that the funds
be held a financial institution so that could be a bank you know such as at
local bank or a credit union it could also be a brokerage in terms of that
accounts setup what's going to be most important from a 401k person perspective
is that the account is established in the name of the plan and that it uses
the ein for the 401k so just to use our establishment process as an example you
know our clients will fill out our application and then by the next day
we'll email them all the establishment documents that are
needed to establish the 401k plan and that same day we would go ahead and get
an EIN from the IRS for the plan and that's the IRA based on guidance that
we've gotten from the IRS specifically that's their expectation for solo 401k
plans so this is a this is going to be an EIN that's actually separate and
distinct from the ein that they might have for their self-employed business
such as their LLC or their S corporation so this is an EIN in the name of the
plan and as part of the registering that plan with the IRS you know of course
we're going to indicate that it's a 401k plan and the IRS will issue an SS for
form or essentially looks like a letter from the IRS that that has the ein
number and that ye I n letter is gonna is gonna have some good language that
confirms that the plan is a tax you know tax deferred entity which is which is
great and so in establishing the account you know the individual is able to go to
their local bank we have contact people for example a financial Institute
institutions such as Wells Fargo they can also have the accounts set up at a
at a brokerage for example fidelity or Schwab or TD Ameritrade and wherever
they go what's again what's important is that
the account is up in the name of the plan the name of the solo 401k plan and
then it uses that IIM for the plan in and if you think about it that's that's
important because let's say that there's you know some type of interest or some
type of return that's earned on that account and the financial institution is
issuing a 1099 well they're going to issue that 1099 in the name of the using
the ein for the plan so the IRS is going to know that hey this is a 401 k plan so
they're not going to go look for the that income to be reported on anybody's
taxes right so in terms of Bank versus brokerage account what's important to
understand is that the individual number one can have you can actually have a bow
types of accounts so oftentimes we'll see individuals that for example are
looking to invest in real estate and we'll get into more this in a moment but
they'll want for purposes of the real estate investment they'll want to have a
bank account the one I'd be able to get certified checks
they'll want because they might be going to auctions for example they might want
to have a debit card so the bank will issue a debit card there's with respect
to that account so that's going to make it easier to pay for expenses related to
their real estate investment the advantage of the brokerage account is of
course that you're able to still invest in traditional investments right if you
want to invest in a stock market or a mutual fund of course you can't do that
through a bank account you need a brokerage account and so the brokerage
firm or the bank they're gonna act as the custodian in the account they're not
going to police it you know that's going to be our responsibility we're the 401k
provider we have the IRS approved plan we handle all the ongoing compliance
requirements with respect to the 401k plan so we'll you know if you take a
distribution from your plan the 1099 our we need to be reported to the IRS and we
would handle that fidelity or Wells Fargo your bank is not going to do that
again they're not police in the account they're just a custodian and so sticking
with the brokerage accounts though what's interesting is some of these a
number of these brokerage firms that we work with will ask you actually issue a
checkbook on the account so the individual still has that checkbook
access like they do with the bank account but they'll also get the
investment options that come with a brokerage account you know they can
invest in mutual funds stocks CDs so it's kind of a hybrid between the bank
and the brokerage account again not all brokerage firms do that but a number of
them do such as fidelity Schwab and TD Ameritrade so sticking on this topic in
terms of you know where the account is at and who holds my funds the thinking
back to our eligibility discussion where you had save the realtor right the
husband and wife they've got their realtor business
no w-2 employees so they're eligible to set up a solo 401k plan when what's
important is that the husband and wife's money is actually kept in separate
accounts so there there could be they could name their plan say realtor solo
401k trust and so husband will have an account in the name of realtor solo 401k
trusts for his benefit and then the spouse would have another say bank
account in the name of the 401k for her benefit so when the funds are rolled
into the plan her money is going to go into her account and then his money
would go into his account and so this same concept of keeping
separate accounts also applies even if you have one person if you have pre-tax
money and Roth money so with the solo 401k you can have a Roth account so you
can have Roth funds provided your provider plan allows for it I mean for
example our plan does and so when you have that Roth money it actually needs
to be kept in a separate account so even if it's just just one individual say
they have an IT the IT person that has a w-2 day job it has the side business
right you know that person might have their IT solo 401k trust account if
they've got Roth money and pre-tax money they're gonna have two accounts one is
going to be for the the Roth money and one's gonna be for the pre-tax money and
in just a shed a little more light on this I mean as part of our services we
do handle all of the documents that are needed for example to open the accounts
at the different brokerage firms that we work with so we would prepare all that
paperwork and then the individual the clients just needs to sign the paperwork
and when it's submitted to the brokerage firm and then the accounts typically
open and in just a couple of matter of a couple days so typically this these
accounts can be set up in just a you know less than a week and then it's just
a matter of transferring the funds over from wherever they are today whether
it's you know back to our list of the eligible accounts to transfer funds from okay so let's keep going let's talk
about investing in real estate so if you if you ask me what are the top three
reasons that people want to set up a solo 401k plan with us it's going to be
realist investing in alternative investments such as real estate it's
going to be the ability to make contributions and it's going to be the
loan feature so what that's what we're going to focus on now we're going to
talk about all those topics right now so let's start out with investing in real
estate and these concepts keep in mind do apply to other the other types of
alternative investments that you can invest in because really in terms of
investing and when people ask what type of investments can I invest in it's
really a two-step analysis number one is can it is it allowed under the rules
right the statutory rules that apply to 401k plans and then is it allowed under
the plan itself so it's got to be allowed under both so even though the
rules do allow for investing in real estate
typically a 401k plan most most 401k plans that people have experienced where
they're not going to allow for that type of investment because you could might
have a big you know your corporate plan where you're just able to invest in say
an aggressive mutual fund or a conservative each will fund or even if
you have a solo 401k through another company such as fidelity or Schwab they
offer solo 401ks but their plans are going to limit you to investing in
something where they make money because that's that that's how they make their
money is they they'll allow you to set up a 401k but they want to capture that
deposit because the investment options and their theya plan is just going to be
could be a you know a mutual fund that they offer or it could be equities where
you're going to be incurring trading fees and so with our plan you know our
plan essentially tracks what's allowed under the law and so if you can invest
in it under the law you can invest in an under our plan
so clearly real estate is allowed under our plan and so since that's one of the
top reasons that people want to set up a solo 401k I definitely
wanted to spend some time talking about some key concepts when it comes to
investing in real estate so the answer is yes you can the in terms of those key
concepts one very important concept is that in terms of the titling of the
investment it's going to be very important that it's done in the name of
the 401k plan but the name that you would choose as part of the
establishment process so that real estate title is going to be it's got to
be in the name of the solo 401k the income and expenses related to that
investment let's say it's a rental property right so as those rental stream
as that rental stream comes in or as you incur expenses all of that money is
going to come in and out of the that 401k account right so your renters are
writing checks to your 401k you're depositing in in your 401k bank account
and then when it comes time to fix the toilet or pay for some other type of
expense related to that investment you're going to be paying for it out of
that account so thinking back to our discussion of where the money's at you
may recall I mentioned a lot of people like to have a bank account right so
that a lot of that goes back to just as simple administrative ease of having a
debit card right because that's gonna just make it easier to pay for those
expenses going onto the next board here no personal use so you know let's say
it's an Airbnb place right it's a it's a rental property that you're marketing
you own three or 401k and you're market on Airbnb and you know you're not able
to rent it out one weekend you know you're not going to be able to use that
or have your family members who are in town visiting you use that property
right no personal use it's a vacation home right you're not going to be able
to go and you know and use it for one week even if it's just one week even if
you pay your 401k you know you cannot do any of that all that is gonna be clearly
prohibited under the rules another type of restriction is notes
quotes sweat equity so what I mean by that is you know let's say you're a type
of person that likes to you know fix up a house even though you have that
skillset even though you're saving your quote saving your 401k money
you're not able to work on the property so if the toilet breaks you're gonna
have to call someone and a contractor to come and fix it
so let's moving on let's talk about another common scenario let's talk about
spouses so again let's think about that realtor couple right that is
self-employed no employees they set up a solo 401k the husband has his account
the wife has her account they're both in the name of the 401k for his and her
benefit they rollover money saved from an IRA you know and they're in the real
estate industry so they know the market they invest in a rental property right
when it comes time to invest in that property if they both want to use their
funds they certainly can what's going to be important though is that the income
and expenses related to that investment need to be allocated based on the amount
of money that they invested so if the wife invested 60% and the husband
invested 40% she's going to be entitled to 60% of that income and but she's
going to be responsible for 60% of the expenses so when it comes time to buy
the property you know they're gonna write two checks right so the money
comes from each of their respective accounts going forward though for
administrative ease they could have the money coming in and out of one account
they would want to reconcile though they wouldn't to reconcile at least on a
yearly basis and certainly before they took any type of distribution from the
plan so let's stick on real estate because there are some you know some
other good topics that we can go over that often come up another would be a
tenants in common so this is going to be similar to the spouse scenario but
there's some key differences so tenants in common refers to the fact that you
have two owners essentially so you might have a scenario where someone says well
I have you know say I've got of kind of some money you
maybe an inheritance whatever it might be they've got it's not qualified funds
right it's a $50,000 in there they want to invest in real estate and let's say
they have $50,000 in their 401k right so that individual might want to go out and
buy a property I guess we obviously pretty cheap property for $100,000 but
let's just to go with it so in that situation the individual and
the 401k are going to be the owner are gonna be the owners of the property and
they're gonna own it on it as tenants in common so similar to the spouse concept
where you you know the funds come from both both accounts and the income and
expenses are split according to in accordance with the ownership
percentages so in that situation it's 50/50 right the difference though with
the spouse situation is that you wouldn't have you know let's say it's a
rental property you know you wouldn't have your renters writing checks just to
the 401k they'd actually need to send money to both both the person the
individual person and the 401k so you couldn't have the money coming into one
account like we talked about where you have two spouses that have a solo 401k
so that's going to be an important difference but that is a way where one
is able to couple money that's in the 401 and their 401k account along with
funds that are in their personal account so that can be a pretty powerful tool
sticking on sticking on real estate the final concept is non-recourse financing
so what we mean by the this is that you're actually able to use funds that
are in your 401k to buy real estate along with debt but it's got to be a
special kind of debt it's got to be what's referred to as non-recourse
financing so most banks you know they're only going to do conventional financing
so that means that for example take your house write you own your house and if
you don't pay your mortgage you know the bank is gonna
or close on the property they're gonna sell it for quickly it's gonna sell
cheaply they're gonna take that money and apply it to the balance of your of
your loan right and then they're gonna turn around and sue you for the for the
outstanding balance whatever's left that you owe the bank because the bank has a
recourse against you personally that's conventional financing in a nutshell
non-recourse financing is different because the bank is not going to have
recourse against the the owner so in this case if it's the 401k right the
bank is not going to be able to go after your 401k and so that means that they're
gonna view this differently from an underwriting perspective you're gonna
see higher down payment requirements you know it could be thirty forty percent
you're really looking at specialty finance companies out there to do this
another difference is the terms could be shorter the interest rates are going to
be higher but there are ways to to combine your 401k funds with that and
again that's can be a powerful tool okay so let's go on so another again back to
the list of common reasons known top three reasons another is going to be
taking a solo 401k loan so again think about the you know think about the the
realtor couple again you know they may have been self-employed you know they're
their entire life they may not have a 401k they may have accumulated funds in
an IRA right and you're not able to borrow from an IRA the IRA rules don't
allow you to take a loan so the they may want to even use that money to grow
their business you know they might want to do some type of marketing campaign so
if they're eligible to set up a solo 401k they've got eligible type of
retirement money they can transfer it over say from their traditional IRA into
their 401k and there it looks at borrow from that 401k and there is no type of
there isn't any type of a approval process you know it can be in a matter
of a day you know if the money is in their account then you know they can
just take that alone they're able to take up to 50% of the
balance not to exceed $50,000 so if they transfer over a hundred thousand they
can take out fifty they transfer over fifty they can take 25 they transfer
over two hundred they can take out they can take out fifty because again it
cannot exceed fifty thousand in terms of the of the of the terms the the loan is
going to be payable either monthly or quarterly it's up to the client it's
going to be payable with payments of principal and interest and the interest
rate has got to be a reasonable rate based on guidance from the Department of
Labor it would be prime plus one percent so that's definitely were you the vast
majority arrive there is some flexibility for example you can look to
CD rates as another resource to build the rate but it's typically going to be
that prime plus one percent so currently that's going to be four and a half
percent of course you are not paying it to us you're not paying it to the
fidelity or whoever is holding the account you're paying it to yourself
right you paint it back to your 401k those payments are going to be spread
out over a five-year term unless you're using the money to purchase your
personal residence in which case you can make have a longer term but it's simply
gonna be five years your there's really no restriction on what you can use those
proceeds for you know you could pay down a credit card debt you could use it for
business financing if you don't grow yourself and play business you'd use it
for your kids tuition I mean there's all kinds of uses you're really not limited
and what you can use it for it's going to be important that the loan is
documented that's because it's going to look like a distribution right you're
taking money out of your 401k so it actually Falls been an exception for
participant loan in order to meet that exception though you've got to have
these different terms that we just went over and the loan itself needs to be
documented so as part of our services we handled that loan documentation
requirement and we do that for no additional charge you do it within one
business day once the client notifies us they want to take a loan so it's very
fast and easy you can pay off the loan with no prepayment penalty
in terms of some of the a little bit of a complexities in terms of loans one is
going to be multiple loans here at the bottom of the slide and other espouses
so in terms of spouses a common question that comes up is well the $50,000 limit
does that apply across the whole plan or is it just to my account and the answer
is it's at the participant level so if you have the realtor couple again you
know they're both able to take a $50,000 loan if they each have at least a
hundred thousand in their account now in terms of multiple loans the key concept
here is even a common question that comes up is someone might say well I
want to take a $50,000 loan I'm gonna use it to for this investment I'm gonna
think I'm gonna get paid back in six months so I want to then just pay off
the loan and then I'll probably take another one and months later and so the
answer is you cannot do that because there's a 12-month look-back period in
turn in determining the balance or the maximum amount you can take over of the
loans so if you have a if if you had a $50,000 loan the outstanding balance on
your loan in the previous 12 months even if you pay back that loan you're not
gonna be able to then just take another $50,000 so the actual calculations a
little bit complex but essentially that's the key key takeaway for purposes
of today's discussion obviously with our clients we work through that calculation
and determine exactly what they're able to take out okay so let's go on to that
last slide here for today's session how much can I contribute to a solo 401k
again one of the top reasons that people will contact us about setting up a solo
401k the answer is a lot more than you can contribute to say an IRA or even if
you have a w-2 employer-sponsored plan because what's interesting with the solo
401k is that you there's actually two types of contributions and you can make
you know in the words of the IRS if you look at their guidance they actually
talk about how you wear two hats right you're both the employer and the
employee so you can make both employee as well as
employer contributions right now in terms of determining the limits there's
several factors you know like I talked about before one at the beginning in
terms of eligibility you've got how the businesses organ organized in taxed
that's a factor age is a factor the income the self-employment income that
the individual makes is going to be a factor as well as whether or not and the
individual is participating in another 401k plan so we have a we have a
calculator on our website we have a lot of great information we work with our
clients of course to figure out what they're able to contribute but just to
kind of take some simple examples to illustrate these contribution limits you
know let's say you've got an S corporation that's your business
organizes an S corporation so the one factor again is how much you make so you
cannot contribute more than your self-employment income if it's an S
corporation that's that's a function of the w-2 wages so let's say you have an S
corporation where you have $50,000 of w2 income you're self-employed it's just
you right no w2 employees let's say you're one
situation is you're under 50 right so in that situation you're going to be able
to contribute up to $18,000 of your w2 income as an employee contribution if
you're 50 or older you can make what's called a catch-up
contribution so that would be an additional $6,000 so that takes you up
to 24 so that's the employee limit it's gonna be 18 or 24 the the next
contribution type is employer so sticking with that same individual that
has $50,000 at w2 income from his S corporation he's able to make a 25%
contribution as a profit-sharing contribution or employer contribution so
at 50,000 that's gonna be 12,500 so if the individual is under 50 he's able to
make up to 30,000 500 or an additional six if he's 50 or older now the overall
limb is gonna be 53,000 so even if the
individual is making say $200,000 they're not gonna be able to put in more
than 53,000 or 59 if they're 50 or older and that's the 2016 limits they they
could go up often times they do you know for cost of living and and we'll know
more at the end of the year whether the limits will be raised for 2016 but
that's the 2016 limit so now let's layer let's add some some complexities right
let's say that the individual is that let's go back to that individual that's
the IT professional right it has the w-2 job and that has their side business
it's the web design company right let's let's say that that individual is maxing
out at their w-2 job you know they're trying to get all the match they can get
from their w-2 employer so they're putting eighteen thousand into their w2
employer sponsored plan so the employee limit is at the employee level so the
limit is going to look at all the plans that they're participating in and since
they're maxed out under their employer sponsored plan they're not going to be
able to put any more into their 401k their solo 401k so if that person is an
escort making fifty thousand at w-2 wages they would still be able to make
the employer contribution the profit sharing contribution the because the
employer limit is at the employer level so it's not going to matter whether they
have another plan that they're participating in making contributions to
so that's a key concept in terms of other types of just to stick on how it
varies you know again one you can so we've started to learn a little bit
about how it varies you know one is age so you're able to make the catch up if
you're 50 or older another variance is going to be whether
you're participating in another plan so you can see that if you're pertaining
another plan it's gonna that's going to count towards the employee limit but not
the employer another factor again is how the business is organized so if it's an
S corporation it looks at w-2 wages that is going to be the determining number if
it's a say you know a sole proprietorship or your reporting that
income or a single member LLC we're reporting that income on Schedule C then
the determining number is gonna it's going to be a little bit of a
calculation you take line 31 off of Schedule C and you reduce that by
one-half of the self-employment tax and that would be the driving number if you
went through that calculation and that was 50,000 say for a sole proprietorship
you would still be 18 thousand dollars of that or 24 in terms of the employer
limit in terms of the profit sharing limit though it's not going to be 25
percent it's going to be 20 percent so it's gonna be a little bit different and
again we've got a calculator and of course we work with our clients to
determine those limits so there it can be a little complex but that would be
another factor in terms of different types of contributions you know
continuing on on the slide here you've got Roth contributions and after-tax
contributions so this is definitely some some higher-level concepts here so just
a touch on it a little bit Roth contributions those are gonna be part of
your employee contribution that's an employee contribution just like a Roth
IRA it's after-tax you know Steve already paid tax and the money you're
putting it in if you satisfy the qualified distribution requirements you
know such as keeping the account for at least five years wait until you're 59
and a half then you're gonna be able to take that money out tax-free including
it you know including the games so that's going to count again towards your
employee limit so just to illustrate that a little bit you know sticking with
that sole proprietor that is the escort that puts in eighteen thousand dollars
as employee as an employee contribution that person would put that into a
separate account because remember we talked about how with a Roth account it
needs to be a separate bank account a brokerage account and they could put
that eighteen thousand into that Roth account I'm after tax that's another
higher level concept not as widely known if your plan allows for it you
actually make after-tax contributions even above and beyond the Roth limits
you know provided your plan allows for it that the after-tax limit is going to
be subject to the overall in it which again is that 53 or the 59 so it's not
going to be subject at 18,000 like you have with a Roth it actually goes into a
separate even another separate account so a lot of number of our clients
actually have they could have three separate accounts they could have a pre
a Roth account and then the the the after tax account so so that's another
concept then we can talk about that offline with you individually if that's
something that you that you want to look at self-employment income like we talked
about in even though the overall limits 53 if you only make $20,000 you're not
gonna be able to put more than $20,000 into your 401k plan spouses we talked
about that how so we talked about that a lot of you know in terms of separate
accounts separate loan so it's similarly it's gonna be separate contribution
limits so if it's that S corporation right it's going to be based off of that
spouses w2 income you're not able to double dip off of one person's w2 income
in determining the contribution limits and finally we talked we touched on
contributing the multiple 401k plans that's the gig and the concept with the
individual that has the day job that they're contributing to and then they're
also contributing to the solo 401k so that goes through all the contribution
topics that we wanted to go over today B and that really brings us to the end of
the presentation I do appreciate everyone for joining
will go ahead and send around the recording of this presentation and
please don't hesitate to contact us you can reach us at one eight hundred four
eight nine seven five seven one you can email us at info at my solo 401 K dotnet
or you can email me directly at George at my solo 401k met

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