October 9th, 2014 Amanda Han CPA (Taxloopholes.com Tax Strategist)
There has been a lot of buzz in the community about some of the benefits of QRPs. What exactly are QRPs? Do these benefits really exist? Or is it another scam of the month that we should all be weary of as real estate investors? The good news is…QRPs do actually offer a lot of the tax benefits that a traditional IRA does not. In this article, we will discuss some of the key differences and what you need to know as we approach the end of the 2014 year.
To start off, there are a handful different “types” of QRPs (qualified retirement plans). Some of the most commonly seen are 401(k)s, Simple 401(k)s, Safe-Harbor 401(k)s, and Self-Directed Solo(k)s. Each of these types of qualified retirement plans have different attributes in terms of contribution amounts, limits, and investment options. Of the above, the most commonly used vehicle for real estate investors is the Self-directed Solo(k).
There are several key differences to note when comparing the Solo(k) to the traditional IRA. One is the difference in contribution limits. While a traditional IRA generally has an annual contribution limit of up to $5,500 per person per year, the Solo (k) can allow for retirement contributions of $52,000 or more per person per year. Businesses with a spouse on the payroll can also contribute to the Solo(k). This means potentially being able to have retirement contributions of $100,000 or more each year that can reduce your taxes and be used for real estate investing. As you can see, this is significantly higher in dollar amount as compared with an IRA or a Roth IRA. This is a very significant difference especially if you are someone who is looking to maximize your tax deferred investing potential.
Another advantage that a Solo(k) has over the IRA is with respect to tax free Roth money. You may be familiar with the current income limitation that is in place to disallow higher income taxpayers to make contributions to Roth IRAs. The Solo (k) on the other hand, typically comes built-in with a Roth bucket. Taxpayers generally can contribute to the Roth bucket of their Solo(k) without any income limitations. Essentially, the Roth Solo K allows businesses owners, regardless of their income level, to contribute and participate in Roth Solo K contributions. Depending on your age, income, and investment preference, the ability for a high income taxpayer to have a Roth Solo(k) growing tax free may be one of the best gifts from the IRS.
On the topic of investment preferences, those of you who have self-directed IRAs may be familiar with its restriction from investing funds in S Corporations. Fortunately for a loophole in the tax law, you can use your Solo (k) money to invest in S Corporations. In addition to the traditionally off-limit S Corporation, Solo (k) funds can also invest in most other types of legal entities such as LLCs, Partnerships, and C Corporations. On top of the seemingly endless types of investments offered by the ability to self-direct, Solo(k) plans also allow for an almost limitless opportunity to invest in most types of legal entities.
Now that we’ve talked about some of the benefits of the Solo(k), let’s discuss “who” can have a Solo(k). The Solo(k) is a retirement plan designed for the small business owner. How small is small you may be wondering? You qualify if you are a business owner or self-employed individual with no full time employees other than you and your spouse. One thing to note is that employing independent contractors in your business does not disqualify you from establishing a Solo 401k. Sole proprietors, independent contractors, C corporations, S corporations, partnerships and LLCs can qualify for this plan if the above requirement is met.
If you feel that a Solo(k) is a great investment vehicle for you, then you must be mindful of the two following deadlines:
Keep in mind, you may also be able to make employer contributions to further decrease your tax bill for 2014. The good news is that these contributions may be made as late as September or October of 2015 to still count as a tax deduction for 2014….the main thing is that the account itself must be set-up by December 31, 2014.
Here are a few key take-away points:
If you do not qualify for the Solo (k), don’t be discouraged. As we discussed earlier, there are a handful of other Qualified Retirement Plans (QRPs) that offer similar benefits which you may be able to take advantage of.
Retirement investing is one of the most powerful tools when it comes to tax savings. Having the right type of retirement account could be the key to supercharging your wealth building.
If you have questions regarding how to put your retirement funds to work for you, please call us at (877) 975-0975 and speak with one of our self-directed investing experts.