If you are an individual (or business) who qualifies to establish a SEP-IRA, SIMPLE IRA or 401(k) qualified plan, such as a multi-participant or Solo 401(k) plans, you can qualify for tax credits for certain types of self-directed IRAs and a Solo 401(k) plan.
Yes, you read that correctly! The IRS will permit your business to qualify for tax credits for a self-directed SEP-IRA, SIMPLE IRA or 401(k) plan if you qualify for any of these plans. This benefit, amongst many others, is just another reason for one to consider this type of plan. The Solo 401(k) plan, which many also refer to as a self-directed 401(k) or Uni-K has many benefits that surpass the benefits of an IRA.
We all know the usual benefits of self-direction, and the receipt of tax credits for a self-directed IRA or 401(k) creation can just be added to the list. But, any time the IRS is “giving” us something there are rules to be followed and requirements to be met. And I won’t disappoint you…while the requirements are not burdensome, there are some rules.
How Does a Business Qualify for the Tax Credit?
1) If you have 100 or fewer employees who received at least $5,000 in compensation;
2) You had at least one participant who was a non-highly compensated employee; and
3) In the 3 tax years before the first year you are eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you…a member or a controlled group that includes you, or a predecessor of either.
How do I File for the Tax Credit?
As business owner you will file Form 8881 to request the tax credit.
Amount of the Tax Credit
The amount of the tax credit is 50% of the expenses (e.g., start up costs) up to a maximum of $500 per year.
What Expenses and Services?
1) Set up and administration of the plan, and
2) Educate your employees about the plan
What Tax Years are Covered?
A credit can be claimed for each of the first three years of the plan. You may also choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.
Obviously, you can’t deduct the start-up costs and claim the credit for the same expenses…but, you knew that.
For more information feel free to review IRS Publication 560 (Retirement Plans for small Business (SEP, SIMPLE, and Qualified Plans).
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must consult with your respective professional in all such matters.