A listing of retirement plan rules, limits
and links for additional information

• 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

New Tax Free Roth 401(k) coming January 1, 2006:  (but as of 2008, they are still scarce!!)
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 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


Generally for 2004 through 2009 the maximum annual contribution available for:

• a self-employed §401(k) or single-participant §401(k) / Profit Sharing plan is usually $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 $11,500/$14,000 by the business.
• a SAR-SEP §408(k) is $15,500/$18,000.
• a Keogh defined contribution $49,000/%54,500 in a paired plan.
• a §415(b)(1)(A) Keogh defined benefit plan is $195,000 ($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: $34,500 estimated + $17,500estimated + $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 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, 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, 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)

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 f/k/a Fiserv

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.

Custodians:
PENSCO Trust Company
Sterling Trust Co.
Equity Trust Company
Lincoln Trust Company f/k/a Fiserv Trust Company
Trust Administration Services Corporation
Millennium Trust Company

Administrators:
Entrust
Polycomp
Sunwest Trust Company

IRA LLC Facilitators:
Guidant Financial Group
IRA Resource Associates
Asset Exchange Strategies - $3,500 to $5,000 "nearly turnkey" package
Ideal Tax Strategies, LLC

Rules, rules and more rules...

Retirement Savings and Planning Calculators available...

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.

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.

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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