Fulcrum Self-Directed: Better Options for Your Retirment Savings

Tax Credits for a Self-Directed IRA or 401(k)

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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.

So…

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.

Time Required to Fund Your Self-Directed IRA

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Realistically, how long does it take to fund your plan? You are creating a plan and you should have a very realistic and conservative idea on the time required to fund your self-directed IRA.

I always advise folks to expect a 2 – 3 week time frame for this process. The reason for the delay is not the self-directed company. Typically, their work in establishing IRA LLC plan documents can be done within a couple of days up to a week.

As a quick refresher, the IRA LLC structure will permit you (or your designee) to be the manager of the LLC of which the IRA (and the IRA only) is the sole member of the LLC. As manager, you will have checkbook control of your funds and can invest on behalf of the LLC and the sole-member IRA. As always, you must follow all IRS regulations.

Another Self-Directed Company Says This Can be Done in Days!

First, let’s establish some ground rules. Can an IRA that is not going to have funds transferred or rolled over into the plan be established within a week…possibly. However, let’s assume that funds will be transferred or rolled over into the newly-established IRA.

There is a difference between the time needed to prepare the IRA LLC documents and the actual funding of the IRA LLC. What is humorous are companies that say, suggest or even hint that this can happen within a matter of days. I guess if the sun and moon are in perfect alignment, sure, anything can potentially happen…but, even then, it won’t be a matter of days. Why?

If a self-directed company is being totally honest and frank with you, they will tell you that the following reasons (and there can be more) dictate the expediency of establishing and funding your IRA LLC account. With mailing (or even over night options) requirements, do you think all of the following can be done in a “matter of days” (between two custodians)?

1)  Mailing/Over Night Processing — Applications, forms, transfer requests for funds, receipt of transferred funds

2)  IRA Custodian Opening Account — They don’t just instantly open an account even when they receive your application

3)  “Transferring” IRA Custodian Processing Transfer Funds Back to Self-Directed IRA Custodian — This is not immediate

4)  “Holding” Times — After receipt of transferred funds, most custodians will have a minimum 3-day hold on releasing funds to your IRA LLC

Whew!  As you can see, any suggestion that this process can be fully executed within a matter of days is folly. It just ain’t going to happen…even if you pay for wires and over night mailings. And, this doesn’t take into consideration if you make an error.

I even saw a company that said that they will assist you in the “transfer” of funds. Now, what they may have meant is that they will assist you in completing a “transfer” form for your signature. But, please note, a self-directed company cannot and will not be involved in requesting the transfer of funds. Why? Because they are NOT the custodian and ONLY the IRA custodian can request funds in transfer. Even a suggestion that the self-directed company can, magically, assist you in making sure the transfer of funds is executed expeditiously is…incorrect.

Be excited about establishing your self-directed IRA! You are entering into an exciting venture, and one that can be of great benefit to you. Just expect a bit more time than just a “matter of days” for your self-directed IRA and its IRA LLC to be established and funded.

How Long to Establish a Self-Directed IRA LLC — The Truth!

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There are some self-directed IRA companies that give a somewhat misleading picture of how long it takes for an IRA LLC to be established and funded.  An IRA LLC provides you the ability to have “checkbook control” of your IRA funds, and permits the IRA account owner (or their designee) to serve as manager of a special purpose LLC. The sole member of the LLC is the IRA plan. This arrangement, if structured and operated correctly, is a mechanism in which to secure true control of your IRA account.

No more being limited to investing in the traditional world of stocks, bonds and mutual funds. You will now have the ability to invest in any asset not specifically prohibited by IRS Prohibited Transactions. As the IRA LLC manager, you will have this capability to invest on behalf of the IRA plan.

Enough on that…how long does it (really) take to establish and fund the IRA account? How long to prepare the IRA LLC documents, wait for funding of the IRA, and then the amount of time before you fund your IRA LLC at your local bank?

Typically 2 – 3 weeks!

While the self-directed IRA company will be preparing the IRA plan documents during the following steps, it is fair to say that their responsibilities to you will be done well within and before the time your IRA account actually funds.  Let’s break down a realistic time frame on the entire process.

Step 1 — Contract with a Self-Directed Company

Step 2 — Mail IRA Application (even if you do it online, the custodian will still require the signed application forms to be mailed/over nighted) to them 

Step 3 — Establish IRA Account


Step 4 — IRA Custodian Requests Funds in Transfer

Step 5 — Transferring Custodian Processes Transfer Request

Step 6 — Self-Directed Custodian in Receipt of IRA Transfer Check

Step 7 — Self-Directed IRA Custodian Mails Funding Check for IRA LLC

Step 8 — Open Your IRA LLC Account

Okay, that was a bit dry, but it is provided for some basic education on the process, and to show that the overall process of establishing and funding your IRA LLC is not an over night process.

Bottom line: While document preparation for the plan will not be a timely endeavor, waiting (typical time associated with mailing forms) on the account to be established and funded are the steps that truly delay the process.

During these steps of establishment and funding, FSD will be preparing your plan documents. This will include:

1) securing the LLC Articles of Organization (from the State in which the LLC is domiciled)

2) securing the IRS EIN for the IRA LLC, and

3) preparing the special-purpose LLC Operating Agreement.

The special-purpose Operating Agreement is, quite honestly, the most important document for the plan as it identifies how the LLC must operate to comply with IRS regulations.

When a company says that they can establish and fund your IRA LLC within a matter of days…keep this blog post in mind. While the process can be sped up with over night transmissions of various applications, forms and documents, realistically you should be thinking about a 2 – 3 week process in establishing and funding your account. This information should be useful to you so that you know when you can realistically purchase an investment (e.g., real estate) using your IRA LLC funds.

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 always consult with your respective professional in all such matters.

 

What is a Traditional IRA?

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An individual retirement arrangement is commonly referred to as an Individual Retirement Account (IRA) and is a trust or custodial account established within the boundaries of the United States. It is for the exclusive benefit of the individual and their beneficiaries. The IRS notes that the account is created by a written document and must meet all of the following requirements:

  • The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.
  • The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.
  • Contributions, except for rollover contributions, must be in cash.
  • You must have a nonforfeitable right to the amount at all times.
  • Money in your account cannot be used to buy a life insurance policy.
  • Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund.
  • You must start receiving distributions by April 1 of the year following the year in which you reach age 70½.

Related to self-direction, the IRA is held through a custodian, and it is the custodian who identifies what investments are available to the IRA account owner. It is as simple as if the custodian is a bank, you may only have options like CDs. If at a brokerage firm, you will have stocks, bonds and mutual funds. If, however, the IRA is held through an IRS-approved IRA custodian which permits alternative assets, then your IRA will be able to invest in any non-traditional assets permitted. Typically, a self-directed IRA custodian will permit the IRA to invest in any asset not specifically prohibited by IRS Prohibited Transaction regulations.

Traditional IRA Contributions — What differentiates a Traditional IRA from, for example, a Roth IRA, is the tax treatment of contributions made to the plan. You see, IRS rules on Prohibited Transactions, transfers, rollovers, contribution amounts, etc. are the exact same for both. However, with Traditional IRA contributions, the benefit to the account owner is that the contributions can be tax-deductible; therefore, the contribution is not considered to be taxable income to the IRA account owner. Any and all gains from investments are tax-deferred and no taxes are due on the Traditional IRA until such time when distributions from the plan are taken.