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  Copyright© 2002 to 2015 Colin M. Cody, CPA and TraderStatus.com, LLC, All Rights Reserved.
 

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Normally traders are prohibited from having a retirement plan based on their income (IRS Code §475(f)(1)(D)).  But traders may be able to contribute annually to IRA,  401(k),  Keogh,  SEP,  SIMPLE, Roth and Profit Sharing Plans with a little foresight and planning. Usually this means forming a separate trading entity, such as a partnership, LLC or corporation to be established first in order to transition the trading income into "earned income" (all retirement plan require earned income which normally requires the payment of Social Security/Medicare taxes).  Once the retirement plan is established you can make annual contributions of some portion of your income.

The retirement plan can be:
  • a deductible, tax-deferred plan, or
  • a non-deductible, income tax-free Roth plan


The money can be used by the plan:

  •  in a normal fashion "cash-account" at a brokerage of your choice.  The problem with this is most brokers do not allow retirement plans to have margin accounts, and therefore the three-day settlement rule limits the amount of day trading before the Reg T  free-riding rule puts the account on hold.  Shorting stocks is also normally prohibited.  ...or
  • in a LLC that you control that in turn opens a margin account at a brokerage of your choice.  The LLC can then short stocks and can buy and sell without regard to the three day settlement free riding rule, assuming that the broker allows the LLC to have a margin account (which is usually the case since the account is in the name of an LLC, not in the name of a retirement plan). 
  • to lend out.  Certain plans allow you to borrow the money back out and charge you a fair interest rate
  • to purchase real estate with non-recourse debt; as long as there's no related party use


Quick look-ups:

Self-employed 401(k)
generally must be established either prior to December 1st of the current year or by the business tax year-end and funded either by January 15th (per DOL) or funded by the extended due date of that year's business tax return (generally, per IRS).
2015 §401(k) limits:  $18,000 under age 50  and $24,000 over age 49
2014 §401(k) limits:  $17,500 under age 50  and $23,000 over age 49
2013 §401(k) limits:  $17,500 under age 50  and $23,000 over age 49
2012 §401(k) limits:  $17,000 under age 50  and $22,500 over age 49
2011 §401(k) limits:  $16,500 under age 50  and $22,000 over age 49
2010 §401(k) limits:  $16,500 under age 50  and $22,000 over age 49
2009 §401(k) limits:  $16,500 under age 50  and $22,000 over age 49
2008 §401(k) limits:  $15,500 under age 50  and $20,500 over age 49
2007 §401(k) limits:  $15,500 under age 50  and $20,500 over age 49
2006 §401(k) limits:  $15,000 under age 50  and $20,000 over age 49
2005 §401(k) limits:  $14,000 under age 50  and $18,000 over age 49
2004 §401(k) limits:  $13,000 under age 50  and $16,000 over age 49
https://www.fidelity.com/retirement-ira/small-business/self-employed-401k/overview


SEP-IRA & PROFIT SHARING (including most other qualified retirement plans / defined contribution plans)
SEP plans generally must be established and funded by the extended due date of the business tax return in the following year. 
Profit Sharing plans generally must be established by the business tax year-end and funded by the extended due date of the business tax return. 
Total maximum combined limits including any SE401(k) contribution:

2015 §415(c)(1)(A) limits:  $53,000 and if coupled with a SE401(k) then up to $59,000 over age 49
2014 §415(c)(1)(A) limits:  $52,000 and if coupled with a SE401(k) then up to $57,500 over age 49
2013 §415(c)(1)(A) limits:  $51,000 and if coupled with a SE401(k) then up to $56,500 over age 49
2012 §415(c)(1)(A) limits:  $50,000 and if coupled with a SE401(k) then up to $55,500 over age 49
2011 §415(c)(1)(A) limits:  $49,000 and if coupled with a SE401(k) then up to $54,500 over age 49
2010 §415(c)(1)(A) limits:  $49,000 and if coupled with a SE401(k) then up to $54,500 over age 49
2009 §415(c)(1)(A) limits:  $49,000 and if coupled with a SE401(k) then up to $54,500 over age 49
2008 §415(c)(1)(A) limits:  $46,000 and if coupled with a SE401(k) then up to $51,000 over age 49
2007 §415(c)(1)(A) limits:  $45,000 and if coupled with a SE401(k) then up to $50,000 over age 49
2006 §415(c)(1)(A) limits:  $44,000 and if coupled with a SE401(k) then up to $49,000 over age 49
2005 §415(c)(1)(A) limits:  $42,000 and if coupled with a SE401(k) then up to $46,000 over age 49
2004 §415(c)(1)(A) limits:  $41,000 and if coupled with a SE401(k) then up to $44,000 over age 49
2003 §415(c)(1)(A) limits:  $40,000 and if coupled with a SE401(k) then up to $42,000 over age 49
http://www.irs.gov/uac/2013-Pension-Plan-Limitations
http://www.dol.gov/ebsa/publications/SEPPlans.html
Self-Employed Contribution Calculator


SIMPLE IRA generally must be established prior to October 1st of the current year,
and funded by the extended due date of that year's business tax return.
2015 SIMPLE limits:  $12,500 under age 50  and $15,500 over age 49 (plus 1% to 3% employer match)
2014 SIMPLE limits:  $12,000 under age 50  and $14,500 over age 49 (plus 1% to 3% employer match)
2013 SIMPLE limits:  $12,000 under age 50  and $14,500 over age 49 (plus 1% to 3% employer match)
2012 SIMPLE limits:  $11,500 under age 50  and $14,000 over age 49 (plus 1% to 3% employer match)
2011 SIMPLE limits:  $11,500 under age 50  and $14,000 over age 49 (plus 1% to 3% employer match)
2010 SIMPLE limits:  $11,500 under age 50  and $14,000 over age 49 (plus 1% to 3% employer match)
2009 SIMPLE limits:  $11,500 under age 50  and $14,000 over age 49 (plus 1% to 3% employer match)
2008 SIMPLE limits:  $10,500 under age 50  and $13,000 over age 49 (plus 1% to 3% employer match)
2007 SIMPLE limits:  $10,500 under age 50  and $13,000 over age 49 (plus 1% to 3% employer match)
2006 SIMPLE limits:  $10,000 under age 50  and $12,500 over age 49 (plus 1% to 3% employer match)
2005 SIMPLE limits:  $10,000 under age 50  and $12,000 over age 49 (plus 1% to 3% employer match)
2004 SIMPLE limits:  $9,000 under age 50  and $10,500 over age 49 (plus 1% to 3% employer match)
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-SIMPLE-IRA-Contribution-Limits


IRA (Roth or Traditional) generally must be established and funded by April 15th of the following year.
2015 IRA limits:  $5,500 under age 50  and $6,500 over age 49
2014 IRA limits:  $5,500 under age 50  and $6,500 over age 49
2013 IRA limits:  $5,500 under age 50  and $6,500 over age 49
2012 IRA limits:  $5,000 under age 50  and $6,000 over age 49
2011 IRA limits:  $5,000 under age 50  and $6,000 over age 49
2010 IRA limits:  $5,000 under age 50  and $6,000 over age 49
2009 IRA limits:  $5,000 under age 50  and $6,000 over age 49
2008 IRA limits:  $5,000 under age 50  and $6,000 over age 49
2007 IRA limits:  $4,000 under age 50  and $5,000 over age 49
2006 IRA limits:  $4,000 under age 50  and $5,000 over age 49
2005 IRA limits:  $4,000 under age 50  and $4,500 over age 49
2004 IRA limits:  $3,000 under age 50  and $3,500 over age 49



2015 IRA Phase-out range: Single $61,000 to $71,000  MFJ $98,000 to $118,000  MFS $0 to $10,000 Spousal $183,000 to $193,000
2014 IRA Phase-out range: Single $60,000 to $70,000  MFJ $96,000 to $116,000  MFS $0 to $10,000 Spousal $181,000 to $191,000
2013 IRA Phase-out range: Single $59,000 to $69,000  MFJ $95,000 to $115,000  MFS $0 to $10,000 Spousal $178,000 to $188,000
2012 IRA Phase-out range: Single $58,000 to $68,000  MFJ $92,000 to $112,000  MFS $0 to $10,000 Spousal $173,000 to $183,000
2011 IRA Phase-out range: Single $56,000 to $66,000  MFJ $90,000 to $110,000  MFS $0 to $10,000 Spousal $169,000 to $179,000
2010 IRA Phase-out range: Single
$56,000 to $66,000  MFJ $89,000 to $109,000  MFS $0 to $10,000 Spousal $167,000 to $177,000
2009 IRA Phase-out range: Single $55,000 to $65,000  MFJ $89,000 to $109,000  MFS $0 to $10,000 Spousal $166,000 to $176,000
2008 IRA Phase-out range: Single $53,000 to $63,000  MFJ $85,000 to $105,000  MFS $0 to $10,000 Spousal $159,000 to $169,000
2007 IRA Phase-out range: Single $52,000 to $62,000  MFJ $83,000 to $103,000  MFS $0 to $10,000 Spousal $156,000 to $166,000
2006 IRA Phase-out range: Single $50,000 to $60,000  MFJ $75,000 to $85,000  MFS $0 to $10,000 Spousal $150,000 to $160,000
2005 IRA Phase-out range: Single $50,000 to $60,000  MFJ $70,000 to $80,000  MFS $0 to $10,000 Spousal $150,000 to $160,000


2015 Roth IRA Phase-out range: Single $116,000 to $131,000  MFJ $183,000 to $193,000  MFS $0 to $10,000
2014 Roth IRA Phase-out range: Single $114,000 to $129,000  MFJ $181,000 to $191,000  MFS $0 to $10,000
2013 Roth IRA Phase-out range: Single $112,000 to $127,000  MFJ $178,000 to $188,000  MFS $0 to $10,000
2012 Roth IRA Phase-out range: Single $110,000 to $125,000  MFJ $173,000 to $183,000  MFS $0 to $10,000
2012 Roth IRA Phase-out range: Single $110,000 to $125,000  MFJ $173,000 to $183,000  MFS $0 to $10,000
2011 Roth IRA Phase-out range: Single $107,000 to $122,000  MFJ $169,000 to $179,000  MFS $0 to $10,000
2010 Roth IRA Phase-out range: Single $105,000 to $120,000  MFJ $167,000 to $177,000  MFS $0 to $10,000
2009 Roth IRA Phase-out range: Single $105,000 to $120,000  MFJ $166,000 to $176,000  MFS $0 to $10,000
2008 Roth IRA Phase-out range: Single $101,000 to $116,000  MFJ $159,000 to $169,000  MFS $0 to $10,000
2007 Roth IRA Phase-out range: Single $99,000 to $114,000  MFJ $156,000 to $166,000  MFS $0 to $10,000
2006 Roth IRA Phase-out range: Single $95,000 to $110,000  MFJ $150,000 to $160,000  MFS $0 to $10,000
2005 Roth IRA Phase-out range: Single $95,000 to $110,000  MFJ $150,000 to $160,000  MFS $0 to $10,000

Starting 2010 Roth Conversion - allowed - there is no income limitation.  Special one-time election - the tax can be elected to be paid in 2011 & 2012 rather than in 2010
2005 to 2009 No Roth conversion allowed if AGI exceeds $100,000


HSA (very) generally must be established by December 1st and funded by April 15th of the following year.
2014 §223 HSA limits:  Self $3,300 under age 55  and $4,300 over age 54   Family $6,550 under age 55  and $7,550 over age 54*
2013 §223 HSA limits:  Self $3,250 under age 55  and $4,250 over age 54   Family $6,450 under age 55  and $7,450 over age 54*
2012 §223 HSA limits:  Self $3,100 under age 55  and $4,100 over age 54   Family $6,250 under age 55  and $7,250 over age 54*
2011 §223 HSA limits:  Self $3,050 under age 55  and $4,050 over age 54   Family $6,150 under age 55  and $7,150 over age 54*
2010 §223 HSA limits:  Self $3,050 under age 55  and $4,050 over age 54   Family $6,150 under age 55  and $7,150 over age 54*
2009 §223 HSA limits:  Self $3,000 under age 55  and $4,000 over age 54   Family $5,950 under age 55  and $6,950 over age 54*
2008 §223 HSA limits:  Self $2,900 under age 55  and $3,800 over age 54   Family $5,800 under age 55  and $6,700 over age 54*
* assumes that only one spouse has the HSA
http://www.irs.gov/publications/p969/ar01.html


Other limits and information - listed here:
Calhoun Law Group, P.C.

QB alance.com
University of Minnesota
IRS COLA Increases

DOL Consumer Publications
SEP vs. SIMPLE vs. Self-employed 401(k)


New Tax Free Roth 401(k) coming January 1, 2006:  (but as of 2008, they are still scarce!!)  - as of 2011, they are becoming available with more retail brokers, including thinkorswim / TD Ameritrade (done properly, in our opinion, using a two-account Ascensus prototype) and several other firms (done totally 1/2 a$$ed, in our opinion, using a tax-deferred/tax-free comingled approach).

Roth Contributions to 401(k) Plans

Pensco Trust, Asset Exchange Strategies and 401kBrokers.com claim to offer these for a fee
Also see more details below, as they become available...
 


Traders, Investors and other taxpayers who are looking for a self-employed §401(k) or other plan so that they can to set aside some tax-deductible money for their retirement can do so by forming a separate trading entity such as a Corporation, Limited Liability Company (LLC) or Partnership.  The entity (or a spouse) will pay out a "salary" to themselves so that they will have the required amount of "earned income" from which they can maximize their tax-deductible contributions.

Salary, wages, bonuses, consulting fees, guaranteed payments, etc. are all considered "earned income" and are subject to an employment tax sometimes called: FICA, Medicare, Social Security or SECA.  This tax is generally 15.3% of the first $102,000 of annual earned income ($15,606.00 for year 2008) plus 2.9% on any amount above that.

In addition to being allowed a retirement plan deduction, the "earned income" also allows you the ability to deduct certain medical expenses each year!

Tax, Benefits & ERISA Law Benefitsblog

Public access to ERISA employer plans information



Credit for Pension Plan Start-up Costs. This new §45E tax credit helps traders offset the costs of setting up and administering a new qualified employer plan and educating employees about it. The credit is 50% of these costs, with a maximum amount of $500 per year.   You must have one employee besides yourself in the plan.  In other words, let the Gov't pay half while you get a full tax write-off for the other half paid!


Credit for elective deferrals and IRA contributions for taxpayer with income under $50,000.  This §25B tax credit helps traders fund their Roth IRA (for example) with a tax credit up to $2,000.  In addition many taxpayers still have immediate access to their Roth IRA cash, because withdrawals from a Roth IRA for many taxpayers are not subject to the penalty or tax - yet they get to keep the $2,000 tax credit!!   Imagine that. Deposit money into a Roth to get the $2,000 tax credit and then immediately withdraw the money with no penalty, no tax and no need to return the $2,000 tax credit!


IRA, self-employed §401(k) or other Retirement Plan deductions:
To gain a deduction to a retirement plan for yourself you generally need to create earned income, income that is subject to SECA or FICA/Medicare taxation.  As a sole proprietor, a trader does not generate earned income directly from his trading gains.  Earned income may be generated by paying a salary to your spouse or children and then a retirement contribution may be made based on that earned income paid.  But that leaves you without a contribution made for yourself.  A sole proprietor may not pay himself a salary.

The use of a separate entity (or a spouse) can create the required earned income.  A C-Corp or S-Corp, for example, should hire the trader to work for it, making the wages paid subject to FICA/Medicare. The corporation then would create a retirement plan.  A multi-member LLC or Partnership may pay for services rendered to it by the trader in the form of a "guaranteed payments to partners," which is subject to SECA taxation.  The member or partner would then create a Keogh plan or other retirement plan.

For 2025 SECA or FICA/Medicare taxation as of 6/24/16 estimate is 15.3% on the first $175,200 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2024 SECA or FICA/Medicare taxation as of 6/24/16 estimate is 15.3% on the first $168,300 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2023 SECA or FICA/Medicare taxation as of 6/24/16 estimate is 15.3% on the first $161,700 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2022 SECA or FICA/Medicare taxation as of 6/24/16 estimate is 15.3% on the first $155,100 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2021 SECA or FICA/Medicare taxation as of 6/24/16 estimate is 15.3% on the first $148,800 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2020 SECA or FICA/Medicare taxation as of 6/24/16 estimate is 15.3% on the first $142,500 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2019 SECA or FICA/Medicare taxation as of 6/24/16 estimate is 15.3% on the first $135,900 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2018 SECA or FICA/Medicare taxation as of 6/24/16 estimate is 15.3% on the first $129,900 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2017 SECA or FICA/Medicare taxation is 15.3% on the first $127,200 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2016 SECA or FICA/Medicare taxation is 15.3% on the first $118,500 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2015 SECA or FICA/Medicare taxation is 15.3% on the first $118,500 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2014 SECA or FICA/Medicare taxation is 15.3% on the first $117,000 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that..

For 2013 SECA or FICA/Medicare taxation is 15.3% on the first $113,700 earned by an individual plus 2.9% for anything beyond that up to $200,000 / $250,000 plus 0.9% for anything beyond that.

For 2012 SECA or FICA/Medicare taxation is 13.3% on the first $110,100 earned by an individual plus 2.9% for anything beyond that.

For 2011 SECA or FICA/Medicare taxation is 13.3% on the first $106,800 earned by an individual plus 2.9% for anything beyond that.

For 2010 SECA or FICA/Medicare taxation is 15.3% on the first $106,800 earned by an individual plus 2.9% for anything beyond that.

For 2009 SECA or FICA/Medicare taxation is 15.3% on the first $106,800 earned by an individual plus 2.9% for anything beyond that.

For 2008 SECA or FICA/Medicare taxation is 15.3% on the first $102,000 earned by an individual plus 2.9% for anything beyond that.

For 2007 SECA or FICA/Medicare taxation is 15.3% on the first $97,500 earned by an individual plus 2.9% for anything beyond that.

For 2006 SECA or FICA/Medicare taxation is 15.3% on the first $94,200 earned by an individual plus 2.9% for anything beyond that.

For 2005 SECA or FICA/Medicare taxation is 15.3% on the first $90,000 earned by an individual plus 2.9% for anything beyond that.

For 2004 SECA or FICA/Medicare taxation is 15.3% on the first $87,900 earned by an individual plus 2.9% for anything beyond that.

For 2003 SECA or FICA/Medicare taxation is 15.3% on the first $87,000 earned by an individual plus 2.9% for anything beyond that.

http://www.ssa.gov/OACT/COLA/cbb.html

https://www.ssa.gov/oact/cola/cbb.html



Generally for 2004 through 2012 the maximum annual contribution available for>:

  • a self-employed §401(k) or single-participant §401(k) / Profit Sharing plan is usually $18,000/$24,000 up to $53,000/$59,000.
  • for 2014 this was $17,500/23,000 up to $50,000/$57,500.
  • for 2013 this was $17,500/23,000 up to $52,000/$56,500.
  • for 2012 this was $17,000/22,500 up to $51,000/$55,500.
  • for 2011 this was $16,500/22,000 up to $49,000/$54,500.
  • for 2010 this was $16,500/22,000 up to $49,000/$54,500.
  • for 2009 this was $16,500/22,000 up to $49,000/$54,500.
  • for 2008 this was $15,500/20,500 up to $46,000/$51,000.
  • for 2007 this was $15,500/20,500 up to $45,000/$50,000.
  • for 2006 this was $15,000/20,000 up to $44,000/$49,000.
  • for 2005 this was $14,000/18,000 up to $42,000/$46,000.
  • for 2004 this was $13,000/16,000 up to $41,000/$44,000.
     
  • an IRA §408 is $5,000/$6,000 plus $5,000/$6,000 for a spouse with no earned income.
  • a SIMPLE IRA §408(p) is $11,500/$14,000 by employee plus $12,000/$14,500 by the business.
  • a SAR-SEP §408(k) is $15,500/$18,000.
  • a Keogh defined contribution $53,000/59,000 in a paired plan.
  • a §415(b)(1)(A) Keogh defined benefit plan is $200,000 ($195,000 for 2009-2011 and $185,000 for 2008).
  • While you can form as many retirement plans as you wish, generally there is an overall annual contribution limit of $49,000/$54,500 unless a defined benefit plan is established.  For most traders, if your broker offers it, the self-employed §401(k) is the best way to go!



    PDF file to calculate your own maximum contribution - see how it's done, manually

    ASP application to calculate your own maximum contribution - let the computer do it for you

     
  • For 2004 most traders would need from $140,000.00  to $147,424.10 in earned income from their trading entity (or a spouse) to maximize their §401(k)/Profit Sharing plan deduction at $41,000 ($44,000 for those over age 49).

    The self-employment tax on that would be from $0 to $14,848.
    The federal income tax savings (using a 28% tax rate) would be $11,480 to $12,320.
    So you are basically able to sock away money onto a tax-deferred plan for little net difference in your annual tax bill.
     
  • To maximize only the §401(k) component to $13,000 / $16,000 for 2004 most traders would need from $13,517.03  to $17,216.29 in earned income from their trading entity (or a spouse).

    The self-employment tax on that would range from $0 to $2,433.
    The federal income tax savings (using a 28% tax rate) would be $3,640 to $4,480.
    So you are basically able to sock away money onto a tax-deferred plan while the IRS puts some money into your pocket!

Profit Sharing & §401(k) contribution limits (and catch-up §401(k) contributions for those over 49 years of age):
2002: $29,000 + $11,000 + $1,000
2003: $28,000 + $12,000 + $2,000
2004: $28,000 + $13,000 + $3,000
2005: $28,000 + $14,000 + $4,000
2006: $29,000 + $15,000 + $5,000
2007: $29,500 + $15,500 + $5,000
2008: $30,500 + $15,500 + $5,000
2009: $32,500 + $16,500 + $5,500
2010: $32,500 + $16,500 + $5,500
2011: $32,500 + $16,500 + $5,500
2012: $33,000 + $17,000 + $5,500
2013: $33,500 + $17,500 + $5,500
2014: $34,500 + $17,500 + $5,500
2015: $35,000 + $18,000 + $6,000
2016: $36,000 estimated + $18,000 estimated + $6,000 estimated


IRA contribution limits (and catch-up §401(k) contributions for those over 49 years of age):
2002: $3,000 + $500
2003: $3,000 + $500
2004: $3,000 + $500
2005: $4,000 + $500
2006: $4,000 + $1,000
2007: $4,000 + $1,000
2008: $5,000 + $1,000
2009: $5,000 + $1,000
2010: $5,000 + $1,000
2011: $5,000 + $1,000
2012: $5,000 + $1,000
2013: $5,500 + $1,000
2014: $5,500 + $1,000
2015: $x,x00 + $x,x00
2016: $6,000 estimated  + $1,000 estimated


The Pension Protection Act of 2006 brings the most comprehensive reform of traditional private pension plans since 1974

  • Starting with 2007 individual tax returns, a new line and a related form will allow tax refunds to be sent directly to the taxpayer's IRA, thereby facilitating retirement savings, particularly for lower-income taxpayers.
     
  • Form 5500 reporting requirements are simplified.
    • Beginning in 2010, for example, small employers with no more than 500 employees may create a combined defined benefit/401(k) plan  [to be called a DB(k) plan]  using a single plan document and trust fund. Only one Form 5500 annual report would need to be filed for the combined plan.
    • After 2006, no Form 5500 will be required for plans covering a single person if the assets of the plan are less than $250,000.
    • Treasury and Department of Labor have been instructed to provide simplified reporting for plans with fewer than 25 participants.

Pension Protection Act of 2006 - White House

Pension Protection Act of 2006 - IRS
Pension Protection Act of 2006 - IRS slide show presentation

Pension Protection Act of 2006 - DOL
Pension Protection Act of 2006 - DOL Employee Benefits Security Administration

Pension Protection Act of 2006 - U.S. House of Representatives
Pension Protection Act of 2006 - U.S. House of Representatives, technical explanation

Pension Protection Act of 2006 - Library of Congress

Pension Protection Act of 2006 - Council on Foundations, Washington, DC

Pension Protection Act of 2006 - AON publication

Pension Protection Act of 2006 - CCH Wolters Kluwer publication

Pension Protection Act of 2006 - Principal Financial Services summary

Pension Protection Act of 2006 - TIAA CREF booklet on sunset provisions


Beginning January 1, 2002 the new self-employed 401(k) option is available
Also available is a higher limit on annual additions which is defined as the lesser of 100% of your compensation or $40,000 (as adjusted for inflation).  IRC Sec 415(c)(1)


Beginning January 1, 2006 the new self-employed Roth 401(k) option is available
These offer the greatest flexibility of making withdrawals upon retirement.  A large withdrawal, for example to buy a new automobile or boat, does not push your Adjusted Gross Income (AGI) higher and therefore the detriments associated with higher AGI are eliminated.  Try that with your regular self-employed 401(k) or IRA and you could be at the maximum tax bracket, and lose many of your tax credits, exemptions and itemized deductions.

Roth IRAs are restricted to taxpayers with Modified AGI under $160,000 if married filing joint or $110,000 in single. But with the new Roth 401(k) there are no income limits.  If your income is too high for a Roth IRA, then a Roth 401(k) will be something to consider.

Roth 401(k) appear to have minimum distribution requirements (MDR) at age 70½, but roll it into a Roth IRA and there are no MDR.


Beginning January 1, 2011 Roth in-plan conversion option is available
The Small Business Jobs and Credit Act, which was signed into law on Sept. 27, 2010 has a number of provisions that affect those saving for retirement, including one that allows participants in 401(k), 403(b) and governmental 457 plans to roll over pretax account balances into a Roth account instead of having to roll those assets into an outside Roth IRA. And that in effect helps those saving for retirement save more money on an after-tax basis.


Beginning March 9, 2011 a Tax Court approved "unlimited" annual Roth IRA / Roth 401(k) funding mechanism is available
A plan structured with multiple entities allows highly profitable traders the ability to put "unlimited" funds into their Roth each year.   Erin N. Hellweb v. Comr


Links for more information from various service providers and brokerage houses:

403(b) Plan 15 Year Rule Limit on Elective Deferrals

Click here for more information

Highlights of the Self-Employed 401(k) Plan - The Basics Explained

Super §401(k) for the self-employed

§401(k) help center

Individual(k).com

TaxPlanning.com


401kBrokers.com - Solo Roth 401k
     https://infodaddy.powweb.com/forms1/use/Solo401kenrollonline/form1.html

Advest Individual §401(k) - merged with Merrill Lynch in 2006

AIG SunAmerica Individual (k)

AIM Solo §401(k)sm

American Century one person §401(k)

American Estate & Trust
    Self-Directed IRA-LLC  (ICO)

Ascensus Individual §401(k)

Edward Jones Owner K

citi smith barney Super-Simplified 401(k) Plan
citi smith barney Super-Simplified Roth 401(k) Plan

Enterprise Funds Individual(k) Plan

Entrust Individual K

Entrust USA

Entrust Administration

Equity Trust Company Individual(K)
Equity Trust Company Maximum Deduction Calculator

Fidelity Investment's self-employed §401(k)

Fidelity Investment's $1MM Private Access Group allows alternative investments w/o the "normal 1% of assets fee

InvestSafe's Self-Employed §401(k)

Lincoln Trust

Merrill Lynch Individual §401(k) / Owner-Only §401(k)

Millennium Trust
    Self Directed - Alternative Investments

North Star Trust

Pensco Trust
Pensco Trust solo(k) plan establishment kit

Pioneer Investments Uni-K

Principal Trust Company - Individual 401(k) Plan

Qualified Pension Services' One Person §401(k) Plan

online401k.com (for large plans, a subsidiary of Schwab)
The 401(k) Company  (for large plans, a subsidiary of Schwab)

Schwab Single(k)tm
theonline401k.com

Scudder Personal(k)sm

Seligman One(k)

Sterling Trust

Sterling's Solo §401(k)

T.Rowe Price Individual §401(k)

Waterhouse Individual §401(k) - merged with TD Ameritrade in 2005


Links for more information on non-standard asset service providers:

"Standard assets" include stocks, covered call writing (covered shares are restricted), buying calls (funds equal to the aggregate exercise value of the long calls are restricted), and buying puts (shares subject to exercise are restricted), selling cash secured puts, spreads securities with European style expiration, futures contracts, and futures options. The IRA is structured as a Stock Cash Account (if you choose to trade only stocks) or as a Stock Options Level I Account (if you choose to trade options in your IRA). IRAs may also invest in US dollar denominated futures contracts, and future option contracts, etc.

"Non-standard assets" include real estate, art work, bullion & precious metals, shorting stocks, naked call options, margin accounts, private offerings, investments in non-public companies, a membership interest in your family controlled LLC, etc.
When investing in or holding such "non-standard assets" the following types of service providers may be needed:


Little 401(k)
National Retirement Plans Training Conference, Inc. NRPTC
National Pension Insurance Network (NPIN)

APS Pension and Financial Services, Inc - Roth 401(k)


Google Search:
http://www.google.com/search?hl=en&q=third+party+administrator


IRA Non-Recourse Loans in all 50 States:

North American Savings Bank, F.S.B.

Administrators: (party responsible for the day-to-day activity, this may be performed by the employer himself, provides record keeping services for the retirement plan)
Entrust
Polycomp
Sunwest Trust Company

Custodians:  (party responsible to hold custody of the plan assets, keeping them separate from and protected from employer and employer's creditors)
PENSCO Trust Company
Sterling Trust Co.
Equity Trust Company
Lincoln Trust Company
Trust Administration Services Corporation
Millennium Trust Company

Plan Document Provider:  (in theory, a self-employed 401(k) may be done using your own docs)
IRA Association of America  (FAQ)
Sorting Out the Custodian vs. Facilitator Riddle

IRA LLC Facilitators:  (party responsible for advising, planning and establishing the LLC plan)
Guidant Financial Group  (additional info)  (summary link)   (summary link 2
Entrust Group  (FAQ)  (alternate FAQ)
accuplan benefits services
IRA Resources, Inc.
Asset Exchange Strategies - $3,500 to $5,000 "nearly turnkey" package
Truly Self Directed IRA   (short video)
Self Directed IRA LLC
Real Estate IRA Facilitators, LLC
What's so special about the IRA LLC?    (Alternate link)


Rules, rules and more rules...

Retirement Savings and Planning Calculators available...

IRS - Rollovers as Business Start-Ups (ROBS) project



Self-directed IRA plans

http://www.webcpa.com/article.cfm?articleid=20043&searchTerm=maxwell


You have an IRA, but have you considered an LLC?
By Paul E. Maxwell

One wealth management strategy that has gained popularity in past years with many individual retirement account customers involves creating a limited liability company wherein the IRA accountholder is named the manager of the LLC.

The accountholder retains control of all the assets held by the LLC. This includes having signature control over all accounts under the LLC on a day-to-day basis. Here's a quick run-down of some important facts.

History
The foundation of this strategy is based upon a Supreme Court case (Swanson v. Commissioner, 106 T.C. 76 (1996)) wherein the court rejected the Internal Revenue Service position that the structure constituted a prohibited transaction.

Many attorneys who assist clients in setting up such arrangements may also refer to various advisory opinions issued by the Department of Labor that have addressed similar issues, such as DOL Advisory Opinion 97-23A and 2000-10A. These opinions tend to focus on a specific set of facts and circumstances relating to an individual transaction and are normally quoted by attorneys as a general guide as to how the government views such activity.

Authorizing initial investments
Overall, the structuring of this arrangement is fairly easy. Accountholders need to work with a competent attorney and advisor who are familiar and experienced with the concept. These professionals will form the limited liability company and generate and file all the necessary documents.

Next, accountholders should contact the IRS and obtain a separate tax identification number for the LLC. Accountholders will then need to establish a bank or brokerage account under the name of the LLC. Finally, the accountholder instructs the IRA custodian to deposit IRA assets into the newly formed LLC. This is accomplished by completing the applicable investment authorization form provided by the custodian.

The accountholder will also need to provide the IRA custodian with the operating agreement for the LLC, properly executed subscription documents, and an opinion letter from an attorney indicating that the initial structure does not constitute a prohibited transaction. Upon receipt of these items, the IRA custodian releases funds to the LLC.

This arrangement does not remove the IRA custodian from the account. Assets are consolidated under the LLC, which now becomes the sole asset of the accountholder's self-directed IRA. When all is said and done, the IRA statement from the custodian will simply reflect one asset, i.e., the LLC.

Accountholders will need to provide an annual market value for the LLC to the IRA custodian once a year for tax reporting purposes (some custodians may require a valuation from a third party). The custodian will use this information to file Form 5498 with the IRS at the end of each year.

Daily operations
The limited liability company operating agreement outlines the various powers of the manager of the LLC. Operating agreements should be drafted by an attorney and usually contain disclosures regarding day-to-day operations. It is very important that the IRA accountholder understand these restrictions.

The most notable concern is focused on operating the LLC in such a way as to not cause a prohibited transaction. For example, many attorneys recommend that the IRA accountholder not take any management fee from the LLC, as this may result in a violation of the prohibited transaction rules.

Note that merely acting as the manager of a limited liability company does not, in and of itself, create a prohibited transaction. It is the actions of the manager on a day-to-day basis that will determine if a prohibited transaction has occurred. IRA accountholders wishing to utilize an LLC strategy need to exercise great care in the management of the LLC and need to have a deep understanding of the prohibited transaction rules in order to ensure compliance.

Generating taxable income
If your IRA or LLC invests in things that produce unrelated business income, and the net income from these investments exceeds $1,000 in any given year, your IRA/LLC could be subject to the unrelated business income tax.

The definition of UBI is pretty broad. Basically, if a tax-exempt entity is involved in a business that is unrelated to its primary purpose, any income derived from such business will be subject to UBIT.

For example, if an IRA forms an LLC to buy and operate a fast food franchise or a car wash, businesses unrelated to the primary purpose of an IRA, the net income will be taxed as UBIT at the trust tax rate. In addition, whenever debt is used by an IRA or LLC, tax is applied to that portion of the gain that is debt-financed. Taxes on both are calculated and reported on IRS Form 990-T.

As a result, IRA accountholders should review each transaction inside the LLC closely before investing. Transactions under an LLC that create UBIT would also apply if the investments were made directly inside the IRA.

Distributions
Once an accountholder decides to begin taking withdrawals from the IRA, the distribution amount will have to be returned from the LLC to the IRA custodian, who will then distribute the funds directly to the accountholder. This will ensure that the custodian is able to report the distribution to the IRS on Form 1099-R.

Accountholders should not use the LLC's checkbook to write themselves a distribution check, inasmuch as it might result in a prohibited transaction.

Prohibited transactions
IRC Section 4975 outlines activity that is considered to be prohibited within a retirement account. Generally, a prohibited transaction is any improper use of the IRA by the accountholder, their beneficiary or any disqualified person. A disqualified person includes the IRA accountholder, members of their family or related persons. (Note that in all examples, the terms "family" or "related persons" do not include siblings of the IRA owner.)

Activities that would be considered prohibited would include borrowing money from the IRA, the selling of property between the individual IRA accountholder and the IRA, receiving unreasonable compensation for managing the account, having access to or use of any asset of the IRA, or using the assets of the IRA as collateral for a personal loan. These rules also apply to the LLC, since it is an asset of the IRA. For more information regarding prohibited transactions, go to the IRS Web site at www.irs.gov and download Publication 590.

If the IRA accountholder engages in a prohibited transaction in connection with their retirement account at any time during the year, the account stops being an IRA as of the first day of that year. In such cases, the IRA custodian would issue a 1099-R and report the activity to the IRS. The IRA accountholder would lose the ability to shelter the assets inside the IRA and would be subject to taxes and penalties.

Investments You Can't Hold In An IRA/Qualified Plan

You cannot invest in Collectibles or Life Insurance Contracts. There are also certain transactions in which you cannot participate when using IRA funds. These transactions are referred to as "prohibited transactions". Prohibited Transactions are defined in IRC § 4975(c)(1) and IRS Publication 590. These transactions were established to maintain that everything the IRA engages in is for the exclusive benefit of the retirement plan. Sometimes professionals refer to these as "self-dealing" transactions. Self-dealing happens when an IRA owner uses their individual retirement funds for their personal benefit instead of benefiting the IRA. If you violate these rules, your entire IRA could loose its tax-deferred or tax-free status. It is important that you work with a competent Retirement Account Facilitator to avoid violating these rules.

IRC § 4975(c) (1), identifies prohibited transactions to include any direct or indirect:

  • Selling, exchanging, or leasing, any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
  • Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
  • Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
  • Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intends to use.
  • Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
  • Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.
  • If you participate in a transaction which does not fit SPECIFICALLY within these guidelines, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to decide whether you have engaged in a prohibited transaction. A Retirement Account Facilitator can help educate you regarding how these may apply to investment you are considering.

Asset protection
So where does the asset-protection side of the equation come from? Apparently, if the IRA accountholder is sued and the court awards the plaintiff some or all of the defendant's IRA assets, the accountholder would be compelled to assign the interest in the LLC to the plaintiff. This would require the plaintiff (in the year the assignment was executed) to declare the value of said units as taxable income.

However, the accountholder could continue to manage the assets of the LLC and could not be forced to make any distributions to the plaintiff. Simply stated, the plaintiff would have to pay tax on assets that they never receive.

Conclusion  
An IRA accountholder should fully assess the opportunities and risks associated with this concept. We highly recommend that IRA accountholders work closely with their legal or financial advisor during the creation phase of the LLC, and on an ongoing basis regarding matters pertaining to the daily operations of the LLC.

Paul E. Maxwell, CEBS, CEPP, is with Trust Administration Services Corp. (www.trustlynk.com), a Carlsbad, Calif.-based specialist in the administration of self-directed retirement accounts, custodial accounts and a variety of personal trust services.



"Checkbook IRAs" let you invest retirement funds in real estate
With a "checkbook IRA," you can take a hands-on role in investing your retirement funds in real estate and avoid paying high custodial fees.

Lil Miller-Fox's individual retirement account has three bedrooms, two baths and a two-car garage.

Better yet, the rental house in a gated community in Sebastian, Fla., not far from the Atlantic, isn't run by an advisor that charges exorbitant monthly fees. Rather, Miller-Fox makes all the decisions, and she doesn't have to pay anyone to execute them.

Her IRA is called a "checkbook IRA," an investment vehicle created nearly 20 years ago in a landmark court ruling that essentially said: It's your money, so you can run the show — as long as you follow the rules.

Let's step back a moment: Not many people even know you can invest your retirement savings in real estate. But under Section 408 of the Internal Revenue Code, as long as you don't benefit directly, you are allowed to put some or even all the funds you set aside in a tax-sheltered IRA into real estate.

They're called self-directed IRAs because you can move your funds around. But until a 1996 court case, every step you wanted to make had to be carried out through a costly custodian. You could not take direct control. Every time you wanted to mow the grass or pay the bills, you had to pay a trustee to do it.

In the 1996 case of Swanson vs. Commissioner, the tax court gave its blessing to a new type of self-directed IRA structure — the checkbook IRA — that is much simpler than investing through a regular custodial account.

Under the checkbook format, the IRA is set up as a self-directed account that's capitalized by funds rolled over from your current retirement account. Then, a limited liability company is created in which your new IRA purchases all the membership units. Now, your money is held in an LLC and you are ready to invest at your discretion.

That's what appealed to Miller-Fox. She's a self-proclaimed "real estate nut" who operates PrivateCommunities.com, a website that compiles information about many of the country's master-planned properties.

"I love real estate," she said. "I feel much more comfortable investing in tangible real estate than stock and bonds and that sort of thing. And this puts me absolutely in full control."

Under the rules, savvy real estate investors like Miller-Fox can buy, sell and manage domestic, foreign, commercial, residential and rental properties using money invested in their tax-deferred retirement account. The funds are held in a normal business account, and as the account's manager, you can sign contracts and write checks on the account, just as with any other business.

The speed at which you can move opens up a slew of investment opportunities, such as snapping up foreclosures or tax liens — or even a house that has just come on the market in a prime spot near the ocean or in the mountains. And, said Miller-Fox, "it's a great way for people to finance their retirement homes long before they are ready to use them."

There still are restrictions, of course. You can't use the property as your own residence or vacation home, and that applies not only to you but also to anyone in your family. And you can't take money out of your IRA until you are 59 1/2 without incurring a big tax bite, just as with a regular IRA.

Otherwise, rental income is tax-deferred because it is held in a tax-deferred IRA. And there is no capital gains tax when you sell an IRA-owned property.

A few other ground rules:

  • You can sell a house and purchase another one, and you can buy more than one property at a time. But any property purchased by your IRA is owned by your IRA, not you individually.
  • You can invest in raw land, real estate contracts or the trust deeds that back mortgages. And if you don't have enough money to invest on your own, you can pool your resources with others in the same boat.
  • Any money used to buy a property with your IRA has to come directly from your IRA, not you personally, and you can't be reimbursed by your IRA. This includes earnest money and closing costs, said Lorraine and Richard Walls, a couple from Midlothian, Va., who use their retirement accounts to buy investment properties in southwest Florida.
  • Similarly, costs associated with remodeling and carrying real estate need to be paid directly from your account. And any income from your properties has to flow back to your IRA.
  • You cannot do business with family members, including spouses, parents, children, grandparents, grandchildren and great-grandchildren.

There are fees too. There's a charge to set up the LLC, and you still must have a custodian. But you don't have to pay the custodian to execute each and every move you want to make, or to collect the rent and pay the bills. Consequently, the fees are far less than investing in real estate via a typical self-directed IRA.

How much less? Charges vary, but according to Guidant Financial, a self-directed IRA custodial firm in Bellevue, Wash., you can save thousands of dollars in traditional transaction and asset-based fees by acting as your own IRA broker/custodian.

http://www.latimes.com/business/realestate/la-fi-lew-20130818,0,972689.story

 

Avoid the 10% early withdrawal penalty:
http://traderstatus.com/earlywithdrawal.htm




Colin M. Cody, CPA, CMA
TraderStatus.com LLC
6004 Main Street
Trumbull, Connecticut 06611-2400

(203) 268-7000



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