Adam Bergman

Is my Solo 401(k) Plan Subject to the Corporate Transparency Act (CTA)?

The Corporate Transparency Act (CTA), which was established in 2021 and is set to become law on January 1, 2024, is the most far reaching set of reporting rules impacting small business owners, maybe ever. It is expected to impact millions of individuals each year who will be required to report certain personal information to the United States Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). However, the good news is that the CTA will not impact your Solo 401(k) plan. Nevertheless, it may impact other entities you own or have some management capacity in. Thus, it is important that everyone fully understands the impact the CTA will have on small business owners and managers.

FinCEN is a bureau of the U.S. Department of the Treasury. It estimates 32.6 million Reporting Companies will be subject to these reporting rules when they go into effect and an additional five million entities will become Reporting Companies each year thereafter.

What is the Corporate Transparency Act?

The Corporate Transparency Act will require certain companies (each, a “Reporting Company”) to (1) report specific beneficial ownership information (“BOI”) to FinCEN, (2) disclose information about who created the entity or registered it to do business in the United States, and (3) report any change to previously reported information within a specified time-period.

What is the Reason Behind the CTA?

The primary purpose behind the CTA is to help the US Treasury combat money laundering, as well as stop bad actors from using the US to fund their criminal activities, both inside and outside the US.

Is my Entity a Reporting Company?

There are two types of Reporting Companies, domestic and foreign. An entity created by the filing of a document with a secretary of state or similar office under the laws of a US state is a “domestic reporting company,” unless it is exempt (see below). A “foreign reporting company” is an entity formed under the laws of a country other than the US but registered to do business with a secretary of state or similar office under the laws of a US state, unless it is exempt. The CTA rules encompasses nearly all entities (e.g. C corporations, S corporations, LLCs, LLPs, etc.) unless an exemption applies.

https://youtu.be/PAVDBMnDf_c

Is My Entity Exempt from the CTA?

Most entities operating in the US will be subject to the reporting requirements under the CTA. However, certain types of entities will be exempt from reporting requirements under the Act. Below is a list of the most common entity types that will be exempt from the CTA:

Tax-exempt nonprofit entities
tax-exempt trusts
Trusts
Certain entities already subject to regulatory oversight such as public companies, registered investment companies, and registered investment advisors.
Large Operating Companies,” which are companies with more than twenty (20) full-time employees in the US, an operating presence at a physical office within the US, and more than $5 million in gross receipts or sales from sources inside the United States on its prior year federal tax return.

Who is a Beneficial Owner?

Under the CTA, the determination of whether one is a beneficial owner and, thus, subject to completing a beneficial ownership interest report under the CTA is based on one’s ownership percentage and level of control.

25% or More Ownership

A beneficial owner is an individual who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over an entity or owns or controls, directly or indirectly, 25% or more of the ownership interests in an entity. Rights to convert into an ownership interest, such as options, warrants, and convertible notes are treated as if exercised when calculating ownership.

“Substantial Control”

Any “senior officer,” defined as a person “exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer, regardless of official title, who performs a similar function:

any member of the board of directors
any individual with authority to appoint or remove a majority of board of directors.
any individual who “directs, determines, or has substantial influence over important decisions.
any individual who exercises “any other form of substantial control.
any individual exercising indirect control through ownership or control of a majority of the voting power; control over “one or more intermediary entities that … exercise substantial control over” the company; and “arrangements or financial or business relationships, whether formal or informal.

This list is not exhaustive and additional persons may be deemed to exercise “substantial control” depending on the circumstances.

What BOI must be Reported?

A Reporting Company must disclose the following information with regard to each individual beneficial owner to FinCEN via the BOI report:

full name.
date of birth.
complete current residential street address.
ID number and jurisdiction of issuance for one of the following:
- US passport,
- state, local, or Indian tribal identification document, or
- state-issued driver’s license; and
an image of the document from which the ID number was obtained. If the individual has none of the above listed documents, a passport issued to them by a foreign government will suffice.

When must a Report be Filed?

Any entity that was formed before January 1, 2024 and deemed a “Reporting Company” under the CTA must file a report with FinCEN not later than January 1, 2025. However, any “Reporting Company” under the CTA created after January 1, 2024 must be filed within thirty (30) calendar days after receipt of notice of creation (domestic Reporting Companies) or registration to do business in the U.S. (foreign Reporting Companies).

In the case of a “Reporting Company” that previously reported to FinCEN but has been subject to a change, such a change in ownership above 25%, replaced the LLC manager with a new individual, or changed its address, an updated report must be filed within thirty (30) days.

How Will the CTA Impact my Solo 401(k)?

Because a Solo 401(k) plan is deemed a “tax-exempt” trust, a 401(k) plan is exempt from the reporting requirements under the CTA. However, if a Solo 401(k) plan uses a “checkbook control” LLC to make an investment, the LLC will be deemed a “Reporting Company” under the CTA and a BOI report would be required to be filed with FinCEN. In the case of a Self-Directed Solo 401(k) LLC, the LLC is generally wholly owned by the Solo 401(k) and managed by the Solo 401(k) plan trustee. As a result, the BOI report will need to include the personal information of the Solo 401(k) plan individual trustee since the individual would be deemed to have “substantial control” over the LLC.

Penalties

FinCEN is not playing around with the requirements under the CTA. The CTA provides for civil and criminal penalties for such violations, including a civil penalty of up to $500 per day and, a fine of not more than $10,000 and/or imprisonment for up to two years.

Conclusion

The CTA will have an enormous impact on most American business owners and managers. The good news is that a Solo 401(k) plan will generally be exempt from the reach of the CTA. However, it is important to note that the CTA would apply to a plan that wholly owns an LLC. In such a case, the BOI report would be required to be filed with FinCEN and the personal information of the LLC manager, the Solo 401(k) plan participant, would need to be reported. If you have any questions, feel free to contact us.

by Adam Bergman

Self-Directed IRA for Investment Funds

IRA Financial’s Self-Directed IRA allows you to use your retirement funds to invest in all types of investment funds, such as private equity, hedge funds, venture capital, real estate, silver and much more directly from your mobile device or PC securely, and cost effectively. You no longer need a third-party IRA custodian involved in every aspect of your investment transaction. Make private investment fund investments on your own directly from a mobile device or PC with IRA Financial’s mobile app. Additionally, rollover, deposit, or transfer funds between your investment and IRA seamlessly and without delay.

Why Investment Funds?

An investment fund is a source of capital that belongs to several investors who used it to purchase interests in an entity with a specific investment purpose of strategy. The idea behind investing in an investment funds is that the investment fund provides a broader selection of investment opportunities, greater management expertise and lower investment fees than investors might be able to obtain on their own. Some examples of common investment funds for self-directed IRA investors are:

Hedge Funds
Private Equity Funds
Venture Capital Funds
Real Estate Investment Funds

With a Self-Directed IRA, you have the ability to invest in alternative investments. Although some Self-Directed IRA custodians limit you to precious metals and cryptos, IRA Financials Self-Directed IRA allows you to diversify your retirement portfolio for a low annual fee. Furthermore, IRA Financial does not charge an asset evaluation fee.

Learn More: Beginners Guide to Alternative Investments

Hedge Fund

A hedge fund is a limited partnership of investors who use high risk methods (i.e., investing with borrowed money) to yield large gains. Hedge funds also tend to invest in riskier assets in addition to stocks, bonds, ETFs, commodities and alternative assets. These include derivatives such as futures and options that may also be purchased with leverage or borrowed money.

Private Equity Fund

A private equity fund is a type of investment fund that makes capital available to private companies or investors. The funds raised might be used to develop new products and technologies, expand working capital, make acquisitions, or strengthen a company's balance sheet.

Certain individuals, often accredited investors, are attracted to private equity investments as well as large university endowments, pension plans and family offices. Private equity focuses on investing in early-stage, high-risk ventures and plays a major role in the economy.

Often, private equity will go into new companies believed to have significant growth possibilities. Private equity firms try to add value to the companies they buy and make them more profitable. For example, they might bring in a new management team, add complementary companies and aggressively cut costs, then sell for big profits.

Venture Capital

Venture capital is financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, such as accredited investors, investment banks and any other financial institutions.

Though venture capital investments can be risky, the potential for strong returns is one of the reasons venture capital investors are so popular with self-directed retirement accounts. Venture capital funding is increasingly becoming a popular – even essential – source for raising capital for many start-ups, especially in the technology of biotech space. This is due to the difficulty of raising capital via capital markets or a bank loan.

Real Estate Investment

Real estate funds open the doors for investors, including Self-Directed IRA investors to invest in various types of properties without applying the same amount of capital they would as an individual investor. By pooling investor money, real estate funds also give investors the opportunity to explore various types of properties or real estate projects across the country. For example, some funds might focus on purchasing large residential properties, while others may focus on buying commercial properties in certain states. Real estate generally offers investors the opportunity to more readily liquidate their shares, and thus receive the funds when they need them most.

Tax Advantages

The advantage of using retirement funds to invest into investment funds is that, in general, all the income and gains the investment generates will not be subject to tax or penalty. Instead of paying tax on the returns associated with the investment fund, tax is paid later, leaving the investment to grow unhindered. Using a self-directed IRA to make a fund investment is tax advantageous because the tax on the interest payments can be deferred in the case of a pretax IRA or exempted permanently in the case of a Roth IRA.

In addition, Self-Directed IRA investments are made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.

Learn More: Tax Deferral vs. Tax Free

Unrelated Business Taxable Income

In general, almost all retirement account investments that generate passive income will not be subject to Unrelated Business Taxable Income (UBTI or UBIT) or Unrelated Debt Finance Income (UDFI) Tax.

The UBTI tax is only triggered if:

Retirement account uses margin to buy stock
Retirement account invests in an active business through a pass-through entity, such as an LLC

The UDFI tax is triggered if:

An IRA uses a nonrecourse loan (real estate acquisition financing to purchase real estate)
Exemption for 401(k) plans
- IRC 514(c)(9)

The UBTI & UDFI trigger the Same Tax Rate

UBTI and UDFI trigger the same tax rate, which is a maximum of 37% for 2024. Therefore, if you plan to invest in investment funds with a self-directed IRA and the underlying investment involves investing in a business operated via a pass-through entity, such as an LLC, has a debt or margin, the UBTI tax rules will likely not be triggered.

At IRA Financial, you will be assigned to a specialist who will help you understand the potential application of the UBTI/UDFI tax rules and potentially reduce or eliminate it.

With a Self-Directed IRA, you gain the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your IRA funds, as manager of the Checkbook IRA LLC, simply write a check or wire the funds straight from your Self-Directed IRA LLC bank account.

The Self-Directed IRA allows you to eliminate IRA custodian delays, enabling you to act quickly when the right investment opportunity presents itself. In addition, with the Self-Directed IRA structure, all income and gains from IRA investments will generally flow back to your IRA LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the IRA, as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the IRA LLC will flow-through to the IRA tax-free!

Why Use a Self-Directed IRA to Invest in Investment Funds?

Unfortunately, none of the major financial institutions will allow you to use IRA or 401(k) plan funds to invest in investment funds or essentially anything outside of Wall Street. The reason for this is simple: banks do not make money when you invest in non-traditional equities, such as private equity or venture capital investments. They make money when you buy stock, mutual funds, and other financial products they market. As a result, a large number of individuals are turning to a Self-Directed IRA to invest in private investment funds.

Getting Started

We’re here to help. If you want to establish a Self-Directed IRA to make investment fund investments, contact IRA Financial directly at 800-472-0646. You can also schedule a consultation to speak with a specialist.

by Adam Bergman

Does UBTI Apply to Margin Use for Option Trading?

In general, almost all retirement account investments generating passive income will not be subject to Unrelated Business Taxable Income (UBTI), such as capital gains, interest, dividends, royalties, and rental income. However, in the case of option trading involving puts, calls, and other securities lending transactions, a question arises as to whether those type of transactions will trigger the UBTI tax.

Key Points

UBTI tax is triggered for specific retirement account investments
In determining if the tax applies, you must distinguish between the purchase of securities using margin, and options and other lending transactions
The borrowing of cash to make a stock investment will trigger UBTI

What is UBTI?

There are essentially only three types of transactions that could trigger the UBTI tax. Because the maximum UBTI tax rate is 37%, it is important to determine whether your self-directed investment will trigger the tax before making the investment.

UBTI is triggered when one:

uses margin or a nonrecourse loan to buy stock or an investment asset;
invests in an active business through a pass-through entity, such as an LLC; and
uses a recourse loan to purchase real estate (exemption for 401(k) plans). This is known as Unrelated Debt Financed Income (UDFI), which triggers the same UBTI tax

Calculating UBTI

Internal Revenue Code Section 511 taxes UBTI at the rates applicable to corporations or trusts, depending on the organization’s legal characteristics:

For 2023, a retirement plan subject to UBTI is taxed at the following rates:

10%: $0 – $2,900
24%: $2,901 – $10,550
35%: $10,551 – $14,450
37%: $14,451 and higher

If one triggers the UBTI tax, the IRA must file IRS Form 990-T by April 15 and pay the tax due from the retirement plan.

Security Lending Transactions

It is well established that the purchase of securities on margin gives rise to UDFI income (Henry E. & Nancy Horton Bartels Trust for the Benefit of the University of New Haven v. United States, 209 F.3d 147, 156 (2d Cir. 2000)). However, in Rev. Rul. 95-8, 1995-1 C.B. 107, the IRS has stated that neither the gain attributable to the decline in the price of the stock sold short nor the income earned on the proceeds of the short sale held as collateral by the brokerage firm constituted debt-financed income.

In addition, section 514(c)(8) provides that payments with respect to securities loans are deemed to be derived from the securities loaned, not from collateral security or the investment of collateral security from such loans and would not constitute debt-financed income. Furthermore, an obligation to return collateral security is not treated as acquisition indebtedness.

Short Sales

In GCM 39615 (March 12, 1987), the IRS reviewed purchases and sales of stock index futures and the underlying stock pursuant to a stock arbitrage investment program. The IRS held that the futures contracts, some of which constituted short sales, were "themselves property, albeit intangible." Hence, the IRS concluded that the trading gains and losses from the stock index futures would be excluded from UBIT under Section 512(b)(5). In addition to the potential for gain from short sales, institutional short sellers are often entitled to interest income earned on the investment of short sale proceeds. This interest income, however, is unambiguously excluded from UBTI under Section 512(b)(1).

The IRS also held that income or gain connected with short sales does not become subject to tax by virtue of the "acquisition indebtedness" rules contained in Section 514. The IRS ruled that the borrowing of securities by the short seller does not create an indebtedness for federal income tax purposes. Similarly, the cash sale proceeds arising from the short sale are treated as sales proceeds and do not arise from an indebtedness. Hence, the short seller has borrowed securities and engaged in a property transaction and has not created an indebtedness for Federal income tax purposes.

Option Terminations

In the case of a lapse of termination of an option, Section 512(b)(5) excludes from UBTI all gains or losses recognized from the lapse or termination of options to buy or sell securities.

Commodity Futures

In G.C.M. 39620 (Apr. 3, 1987), the IRS ruled that gains and losses from commodity futures contracts are excluded from UBTI under Section 512(b)(5). The IRS held that the obligation of a holder of a long position to pay for the commodity on delivery did not constitute indebtedness because neither the seller for the buyer held the property at the time of entering into the contract. In essence, the purchase of a long futures contract entailed no borrowing of money in the traditional sense.

Interest Rate Swaps

Pursuant to Treas. Reg. § 1.512(b)-1(a)(1), the IRS has held that interest rate swap transactions, known as notional principal contracts, shall not be subject to the UBTI tax rules.

Conclusion

When it comes to determining whether the UBTI tax would apply to a securities lending transaction, it is important to distinguish between a transaction involving the purchase of securities, such as stocks, on margin, versus options and various other lending transactions. The borrowing of cash to purchase stock will be deemed margin and will trigger the tax. Whereas Section 512(b)(5) excludes from UBTI all gains or losses recognized, in connection with the lapse or termination of options to buy or sell securities. This includes transactions involving short sales and commodity futures contracts.

by Adam Bergman

What is Unrelated Business Taxable Income (UBTI)?

The tax advantage of an IRA is that income is tax-free until distributed. In general, an exempt organization is not taxed on its income from an activity that is substantially related to the charitable, educational, or other purpose that is the basis for the organization's exemption. Such income is exempt even if the activity is a trade or business. However, to prevent tax-exempt entities from competing unfairly with taxable entities, tax-exempt entities are subject to unrelated business taxable income (UBTI) when their income is derived from any trade or business that is unrelated to its tax-exempt status.

What is UBTI?

UBTI is defined as “gross income derived by any organization from any unrelated trade or business regularly carried on by it” reduced by deductions directly connected with the business. An exempt organization that is a limited partner, member of a LLC, or member of another non-corporate entity will have attributed to it the UBTI of the enterprise as if it were the direct recipient of its share of the entity's income which would be UBTI had it carried on the business of the entity.

Debt-Financed Property

UBTI also applies to unrelated debt-financed income (UDFI). “Debt-financed property” refers to borrowing money to purchase the real estate (i.e., a leveraged asset that is held to produce income). In such cases, only the income attributable to the financed portion of the property is taxed; gain on the profit from the sale of the leveraged assets is also UDFI (unless the debt is paid off more than 12 months before the property is sold).

There are some important exceptions from UBTI: those exclusions relate to the central importance of investment in real estate - dividends, interest, annuities, royalties, most rentals from real estate, and gains/losses from the sale of real estate. However, rental income generated from real estate that is “debt financed” loses the exclusion, and that portion of the income becomes subject to UBTI. Thus, if the IRA borrows money to finance the purchase of real estate, the portion of the rental income attributable to that debt will be taxable as UBTI.

Related: UBTI and Real Estate Investing

Regularly Carried on Business

For an IRA, any business regularly carried on or by a partnership or LLC of which it is a member is an unrelated business. For example, the operation of a shoe factory, the operation of a gas station, or the operation of a computer rental business by an LLC or partnership owned by the Self-Directed IRA LLC would likely be treated as an unrelated business and subject to UBTI.

Although there is little formal guidance on UBTI implications for self-directed real estate IRAs, there is a great deal of guidance on UBTI implications for real estate transactions by tax-exempt entities. In general, Gains and losses on dispositions of property (including casualties and other involuntary dispositions) are excluded from UBTI unless the property is inventory or property held primarily for sale to customers in the ordinary course of an unrelated trade or business. This exclusion covers gains and losses on dispositions of property used in an unrelated trade or business, as long as the property was not held for sale to customers.

In addition, subject to a number of conditions, if an exempt organization acquires real property or mortgages held by a financial institution in conservatorship or receivership, gains on dispositions of the property are excluded from UBTI, even if the property is held for sale to customers in the ordinary course of business. The purpose of the provision seems to be to allow an exempt organization to acquire a package of assets of an insolvent financial institution with assurance that parts of the package can be sold off without risk of the re-sales tainting the organization as a dealer and thus subjecting gains on re-sales to the UBIT.

Learn More: UBIT and House Flipping

IRA Unrelated Business Taxable Income Rules

When it comes to using a Self-Directed IRA to make investments, most investments are exempt from federal income tax. This is because an IRA (individual retirement account) is exempt from tax pursuant to Internal Revenue Code 408 and Section 512. However, you should be aware of the UBTI rules.

The Internal Revenue Codes exempt most forms of investment income an IRA generates from taxation. Some examples of exempt income include:

Interest from loans
Dividends
Annuities
Royalties
Most rentals from real estate
Gains/losses from the sale of real estate

However, the IRS set forth rules in the 1950s to prevent charities, and later IRAs, from engaging in an active trade or business. Charities and IRAs had an unfair advantage due to their tax-exempt status.

IRA investors can find the UBIT rules under Internal Revenue Code Sections 511-514. These rules are classified as the Unrelated Business Taxable Income rules.

If you trigger the UBIT rules, the income you generate from activities will generally be subject to close to a 40% tax for 2024. Note – an IRA investing in an active trade or business using a C Corporation will not trigger the UBIT tax.

UBTI Rules (Unrelated Business Taxable Income Rules)

UBIT rules generally apply to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words. “Trade or business,” “regularly carried on,” and “unrelated.”

Trade or Business

In defining “unrelated trade or business,” the regulations start with the concept of “trade or business” by Internal Revenue Code Section 162. This allows deductions for expenses paid or incurred “in carrying on any trade or business.”

Although Internal Revenue Code Section 162 is a natural starting point, the case law under that provision does little to clarify the issues. Expenses that individuals incur in profit-oriented activities not amounting to a trade or business are deductible under Internal Revenue Code Section 212. Therefore, it is rarely necessary to decide whether an activity conducted for profit is a trade or business.

The few cases on the issue under Internal Revenue Code Section 162 generally limit the term “trade or business” to profit-oriented endeavors involving regular activity by the taxpayer.

“Regularly Carried On”

The UBIT rules in connection with an IRA only apply to income of an unrelated trade or business that is “regularly carried on” by an organization. Whether a trade or business is regularly carried on is determined in light of the underlying objective to reach activities competitive with taxable businesses.

The requirement is then met by activities that “manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.”

Short-term activities are exempt if comparable commercial activities of private enterprises are usually conducted on a year-round basis. For example, a sandwich stand that an exempt organization operates at a state fair would be exempt.

However, a seasonal activity is regularly carried on if its commercial counterparts also operate seasonally. For example, a horse racing track.

Intermittent activities are similarly compared with their commercial rivals and are ordinarily exempt if they don’t have promotional efforts typical of commercial endeavors.

Moreover, if an enterprise is conducted primarily for beneficiaries of an organization’s exempt activities (i.e., a student bookstore), casual sales to outsiders are ordinarily not a “regular” trade or business.

Before determining whether an activity is seasonal or intermittent, the relevant activity must be identified and quantified, a step that is often troublesome.

The type of income that generally could subject a Self Directed IRA to UBTI or UBIT is income from the following sources:

Income from the operations of an active trade or business – i.e. a restaurant, gas station, store, etc.
Business income generated via a pass-through entity, such as an LLC or partnership
Using a non-recourse loan to purchase a property
Using margin on a stock purchase

Contact IRA Financial

Do you still have questions regarding UBTI/UBIT rules in an IRA that were not covered in this article? We can answer your questions directly at 800-472-0646.

by Adam Bergman

401(k) Rollovers & Possible Tax Consequences

One of the major differences between an IRA and a 401(k) plan, from the perspective of the individual retirement account holder, is that an IRA owner can take a distribution at any time, whereas a 401(k)-plan participant is limited. Under certain circumstances, a 401(k) rollover can be performed. Are there any tax consequences that you should be aware of? It depends on the situation. This article will discuss situations that allow you to rollover your 401(k) plan to a new IRA provider and the potential tax consequences of failing to follow the plan triggering event rule.

Key Points

To perform a 401(k) rollover, first, you must satisfy a plan triggering event
401(k) funds can be rolled over to another retirement plan once this happens
Depending on how you roll over the funds, there may be tax consequences you should be aware of

401(k) Plan Triggering Event Requirement & Rollovers

In general, for a 401(k) plan participant to transfer his or her 401(k) funds to an IRA or another retirement plan, a plan-triggering event would need to be satisfied. It is hard for many 401(k) plan participants to believe that they do not have control over their current employer plan funds. The following are the most common triggering events:

Reach the age of 59 1/2
Leave your job
Plan is terminated
Rolled funds into 401(k) plan
Hardship distribution

In sum, if a 401(k) plan participant is under the age of 59 1/2 and continues to be employed by the employer that sponsored the 401(k) plan, the individual will likely not be able to perform a rollover.

401(k) Plan Rollover to a Traditional IRA

If a plan participant satisfies a plan triggering event, the individual will have the ability to rollover funds to an IRA tax-free. A direct rollover means the funds are transferred directly from the 401(k) plan to an IRA. A direct rollover can be done in cash or in-kind, by rolling over the asset directly, such as stock or real estate.

A direct rollover to an IRA is not subject to any withholding tax. However, once every twelve months, a 401(k) plan participant who can satisfy a plan-triggering event, may engage in an indirect rollover.

Unlike a direct rollover, with an indirect rollover, the funds are transferred from the 401(k) plan to the retirement account owner, who will have sixty days to use the funds for any purpose without tax or penalty. The funds must then be rolled into an IRA or another retirement plan within that period. If the retirement account holder misses the deadline, the entire amount of the indirect rollover will be deemed subject to tax, and a 10% penalty if the individual is under the age of 59 1/2.

https://youtu.be/-iI4YcZrX-g

One thing to consider, in the case of an indirect rollover, a 20% withholding tax would apply even if you intended to roll it over later to another retirement plan. If you do roll it over and want to defer tax on the entire taxable portion, you'll have to add funds from other sources equal to the amount withheld. Note – the 20% withholding tax does not apply to direct rollovers.

401(k) Plan Rollover to a Roth IRA

A 401(k) plan participant that has satisfied a triggering event can rollover funds to a Roth IRA. There are two scenarios in which this can occur.

First, a 401(k) plan participant that has pretax funds can elect to roll the funds to a traditional IRA, and then convert the Traditional IRA to a Roth. A conversion is subject to income tax on the fair market value of the assets converted.

Secondly, a plan participant who has Roth 401(k) funds can rollover those funds tax-free to a Roth IRA. The rollover can be direct or indirect. However, an indirect Roth IRA rollover can only be done once every 12 months and is subject to the aforementioned sixty-day rule.

Conclusion

The most common way to move funds from a 401(k) plan to an IRA or Roth IRA is via a direct rollover. Almost $500 billion each year is rolled over from 401(k) plans to IRAs. For those with pretax 401(k) funds that want to do a direct rollover to a Roth IRA, the rollover must first technically go to a traditional IRA and then can be converted to a Roth. Most companies, such as IRA Financial, will only charge for the Roth IRA, in the case of a conversion scenario.

There are two instances where you should be aware of tax consequences. The Roth conversion, and the indirect rollover route. You should plan accordingly before moving your funds from one plan to another.

by Adam Bergman

How Much Do I Need to Start a Self-Directed IRA?

Over the last several years, as a result of technology and more industry efficiency, opening a Self-Directed IRA is now easier and more cost-effective than ever. Thanks to new digital investment options, such as cryptocurrencies, fractional real estate, crowdfunding, and private placements, millions of retirement investors are establishing Self-Directed IRA structures with far less money than you would think. So how much do you need to start a Self-Directed IRA account?

Key Points

Starting a Self-Directed IRA is easier than ever with the IRA Financial app
We offer a low annual fee and no hidden charges
Investment options are available for every budget in today’s marketplace

What is a Self-Directed IRA?

A Self-Directed IRA is essentially an IRA that allows for alternative asset investments, typically assets you cannot invest in with a regular IRA. Since the creation of IRAs in 1974, the Internal Revenue Code does not prohibit IRAs from investing in alternative assets. However, just because an investment is allowed, doesn’t mean it is offered by your IRA custodian.

The only investments you cannot make are life insurance, collectibles, and a transaction involving a disqualified person. But since you don’t have the freedom to invest with a regular financial institution, you must look for the right Self-Directed IRA provider, such as IRA Financial.

How Much do I Need to Start a Self-Directed IRA?

With IRA Financial, you can open a Self-Directed IRA with no setup fee and a flat $495 annual custodian fee. There are no asset-based or standard transaction fees, so you keep more of your returns as your account grows.

You can get started for free on our app, and the annual fee can be paid with IRA funds or by credit card once your account is funded.

Why Should You Set Up a Self-Directed IRA?

The primary advantage of a Self-Directed IRA is that one can use retirement funds to better diversify his or her retirement portfolio, as well as invest in an asset you better understand. A mounting number of IRA owners are concerned with the fact that most of their personal and retirement savings are tied into equities, such as stocks, and want the opportunity to diversify into other asset classes.

Of course, the tax advantages of the plan are numerous. All assets, both traditional and alternative, held inside an IRA are not taxable. Taxes are deferred until you withdraw from the plan. Alternatively, if you have a Roth IRA, all qualified distributions are tax-free at retirement.

How to Fund a Self-Directed IRA

There are three primary ways to establish and fund a Self-Directed IRA: (i) contributions, (ii) transfers, and (iii) rollovers. Depending on your situation, you may able to choose one, or multiple options.

Contributions

In 2026, one can contribute up to $7,500, plus an additional $1,100 if you are at least age 50 to a Self-Directed IRA. One must have sufficient earned income to be eligible to make contributions. Passive income, such as capital gains or rental income, are not treated as earned income and cannot be considered for contributions.

Traditional, or pretax, IRAs are funded with, you guessed it, pretax money. For most people, the money contributed to the plan are not treated as taxable income. However, if you earn too much during the year, you will not receive that deduction.

On the other hand, Roth IRAs are funded with after-tax money. There is no immediate tax benefit, but as we mentioned earlier, distributions are tax free. In order to receive tax-free Roth funds, you must be at least 59 1/2 years of age and have any Roth opened for at least five years.

Transfers

A transfer is essentially moving funds from one type of plan to the same type (like IRA to IRA). One can transfer fund or assets, such as stocks or real estate, from an IRA to a Self-Directed IRA anytime without limitations. IRA to IRA transfers are tax-free and can be done anytime.

However, an indirect transfer, where IRA funds are first transferred to the IRA holder before being re-transferred to a Self-Directed IRA can only occur once every twelve months. In addition, the IRA owner has only 60 days to use the funds before they must be returned to a retirement plan. Any funds not moved into a plan are treated as a taxable distribution.

Rollovers

The Self-Directed IRA rollover rules are very similar to the IRA transfer rules. The main difference between an IRA transfer and a rollover is that a rollover is between and IRA and non-IRA retirement account, such as a 401(k) plan.

Keep in mind, you can only roll over “old” retirement funds. Plan funds you have at a current job generally need a triggering event to be moved. The most popular ones are reaching the age of 59 1/2, separating from your employer, or if the plan gets terminated. Once one of these events happens, you are free to move your funds wherever you want, including rolling them over to a Self-Directed IRA.

Starting a Self-Directed IRA

Setting up a Self-Directed IRA is now easier than ever with the use of the IRA Financial app. No longer do you need to visit a bank or other financial institution. You can now do it right from your smart device or personal computer.

How Long Does it Take to Open an Account?

After logging into the app, you start the process of opening the account.

The application will go into a queue to be reviewed. A new account specialist will call you within 3-5 business days if items are missing, filled out incorrectly, or need further follow-up.
Once the application is complete and correct, an account number will be assigned within an additional 3-5 business days. The account number will be emailed to you by newaccounts@irafinancial.com.
The transfer form will be submitted to the Transfer Department, or instructions to complete a rollover or contribution will be emailed to you with your account number.
Once we receive the funds they will be ready for investing.
An investment authorization form is to be completed and required investment documentation must be provided/uploaded so that IRA Financial can fund the investment.

Conclusion

Starting a Self-Directed IRA with IRA Financial is now simpler and more cost effective than ever. Our industry leading app makes opening an account super quick and easy. The ability to gain investment diversification and generate tax-advantaged gains is the primary reason the Self-Directed IRA has become so popular with retirement savers. Our flat annual fee model allows you to invest with the confidence that as your account goes up in value, you will still pay the same annual fee. Plus, with no hidden fees, investing is efficient and worthwhile.

by Adam Bergman

What is the Rollover Business Startup Solution?

ROBS Solution, or the Rollover Business Start-up (aka Rollover as Business Startups), is an IRS and ERISA approved structure. It allows you to invest funds from your retirement account into a new business/franchise. You can remove funds from a Traditional 401(k) or IRA Plan to purchase a new or existing business or franchise tax-free and penalty-free.

The ROBS arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsors. You then invest the rollover funds in the stock of the new C Corporation.

If you’re an entrepreneur, you’ll benefit in many ways by using the Rollover Business Startup Solution retirement option. With the Rollover Business Startup Solution, you:

Won’t take on debt: You can always invest more money into your business which is crucial for start-ups. Remember, a ROBS isn’t a loan, therefore there’s no debt to repay.

Won’t pay penalties or taxes: With the Rollover Business Startup Solution, you can withdraw funds from your retirement plan before 59 ½ without incurring taxes or penalties.

Receive Funding: Your credit score doesn’t matter, and typically other factors that may go against you aren’t considered. Your business receives funding when it needs funding. If you’re passionate about starting your business and you have a significant retirement “nest egg”, turn this into capital for your new business venture. The ROBS solution allows you to kick-start your new business by accessing the money in your retirement account.

Benefits of The Rollover Business Startup Solution

With the ROBS Solution at IRA Financial, you can do the following:

Use your retirement funds to invest in a new business tax-free!
Use your retirement funds to purchase a business or franchise tax-free!
Use your retirement funds to finance a new or existing business tax-free!
Earn a reasonable salary from your new or existing business.
Help grow your business.
Recapitalize and/or expand your business.
Maintain a qualified retirement plan and help save for the future.
Diversify your retirement investment portfolio by investing in your own business as well as stocks and mutual funds.
Attract and retain quality employees by offering a benefit not commonly found in small business.
Take advantage of high contribution limits under a 401(k) Plan.
Enjoy tax benefits generated by using a 401(k) Plan.
Private Business Funding without consent
Work directly with our tax and ERISA professionals to establish an IRS and ERISA compliant structure that works best for you and your business.

https://youtu.be/fXZGRezvhcc

How Does the Rollover Business Startup Solution Work?

The structure typically involves the following steps:

1. An entrepreneur or existing business owner establishes a new C Corporation.

2. The C Corporation adopts a prototype 401(k) plan that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options. This includes employer stock, also known as “qualifying employer securities.”

3. Next, the entrepreneur elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan.

4. Then, the entrepreneur directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value. In other words, the amount that the entrepreneur wishes to invest in the new business.

5. Finally, the C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.

What are the Requirements for Rollover Business Startups?

In order to establish a ROBS solution, there are three main requirements:

There needs to be a U.S. based business.
The U.S. business needs to be established as a C Corporation.
The C Corporation must establish a 401(k) plan.

Only a U.S. business can establish a 401(k) plan. The reason a C Corporation and a 401(k) plan must be used and not an LLC or an IRA, is that pursuant to IRC 4975(d)(13), a 401(k) plan must purchase “qualifying employer securities” or C Corporation stock in order to satisfy the exception to the prohibited transaction rules under IRC 4975(d)(13).

The advantages of using a ROBS solution to finance an existing business is that you can use IRA rollover or 401(k) funds to finance an existing business without seeking outside capital or debt.

In addition, establishing a 401(k) plan for your business will allow you to make high tax-deductible contributions – $69,000 ($76,500 if you are at least age 50) for 2024 and even borrow up to $50,000 for any purpose. Moreover, below are some great reasons to establish a 401(k) plan for your business, in addition to using the ROBS solution:

Advantages of Establishing a 401(k) Plan:

Up to a $5,000 Tax Credit!
Current tax deduction for business owner
Shelter earnings from tax
Grow assets through the power of tax deferral
Asset and creditor protection
Retain key employees
Help employees save for retirement

Read More: Top Businesses Using ROBS Solution

5 Advantages of the Rollover Business Startup Solution

Save Money

The primary advantage of establishing a ROBS solution is the ability to use your retirement funds to invest in a business you have a personal involvement with. You're able to invest retirement funds into the business without having to take a taxable distribution and a 10% early distribution penalty if under 59 1/2. As a result, the ROBS solution can save you close to 45% of the distribution amount.

For example, if you're under 59 1/2 and you want to use $100,000 of retirement funds to fund a business, you have the option to take a taxable distribution of that amount. But you will likely pay approximately 45% of the 100,000 in tax to the IRS when declaring the distribution on their tax return. That's a whopping $45,000.

Of course, the tax rate can lower depending on whether you're in a lower income tax bracket. It can also decrease if the retirement funds you need are insignificant.

Nevertheless, a ROBS solution saves you from paying tax and potentially a 10% penalty on that amount.

Invest in Yourself

The ROBS solution allows you to invest your retirement funds in yourself rather than Wall Street. Of course, not all businesses are successful. According to Bloomberg, close to 80% of new businesses fail in the first 18 months. Therefore, investing your retirement funds in a new business is certainly risky. However, it is a risk that you are legally permissible to take as per the Internal Revenue Code.

Using retirement funds to invest in your business is not for everyone. However, for those entrepreneurs who prefer to invest in themselves rather than Wall Street, the ROBS solution is an option.

Diversification

There is a growing sentiment among financial advisors that in order to protect your retirement funds from a market downturn, you must diversify your retirement funds. This belief grew after the 2008 financial crisis.

You cannot eliminate investment risk completely, but you can manage your level of risk. If you invest your retirement funds in different types of investments, such as stocks, real estate, and even private businesses, you can better protect your retirement funds.

Also, diversification may enable a retirement portfolio to grow both when markets boom and returns crumble in one sector. Work with a financial planner and tax professional when looking at investment options. This is especially important when using your retirement funds to buy a business.

Earn a Salary

In order to participate in a 401(k) plan, you must be an employee of a business that adopted the plan. This is why, if you own Apple or IBM stock yet do not work for these companies, you can’t participate in their 401(k) plan.

In order to be eligible to participate in the corporation 401(k) Plan, you must become a W-2 employee of the C corporation. It’s important for many entrepreneurs to earn a salary and be involved in a business. For these individuals, the ROBS solution is the better option in comparison to the Self-Directed IRA.

Benefit from having a 401(k) Retirement Plan

One of the best ways for you to save toward your own retirement and ensure your future security is through an employer-sponsored 401(k) plan. Below are some advantages of offering and participating in a 401(k) Plan.

Matching Contributions: Many employers will match a portion of your savings. It's like passing up free money if you don't participate. A safe harbor 401(k) Plan is a popular type of 401(k) plan for small businesses. It offers employees who participate in the plan a 3% matching contribution by the employer. Thus, if the employee earns $40,000 in salary during the year and contributes 3% of the salary of $1,200 to the 401(k) plan, the employer contributes an additional $1,200 (3% of the salary) to the individual 401(k) plan account.
Retaining employees: For most businesses offering retirement benefits, it is worthwhile for small businesses to compete for talented workers by implementing 401(k) benefits. Offering 401(k) plan benefits is a great way to retain key employees. In general, when potential hires are considering multiple job offers, they'll compare those offers on corporate culture, growth opportunities, and benefits packages.
Easy Administration: 401(k) Plan administration is now easier and more cost-effective than ever with Internet options available to small employers. In addition, IRA Financial Group offers record-keeping and third-party administration services for your plan. This allows you to spend more time focusing on your business and less on your plan.
You Can Participate: You are eligible to participate in the company 401(k) plan if you are an owner or an employee of the company that sponsors the 401(k) plan. Current regulations allow plan participants to contribute up to $23,000 of their income on a pretax basis each year, or $30,500 if at least age 50 in 2024. Therefore, in addition to your tax savings for offering the plan and providing matching contributions, you'll receive tax savings for participating in the plan.

How to Remain IRS Compliant with Rollover Business Startup (ROBS)

When you make the choice to employ the structure for a business/franchise, there are criteria you must adhere to and things you should never do with the structure. Below is a list of what you should do to stay IRS compliant and benefit most from the Rollover for Business Startup.

1. Maintain an Active Business

Ensure that you run an active operating business/company. It cannot be a passive business, such as certain real estate ventures, nor can it shift into one. Additionally, your business must be legal on a federal level in order to employ the ROBS solution. For example, marijuana is not legal on a federal level, therefore you may not be able to fund your business with the Rollover for Business Startup Solution. ROBS providers are not likely to move forward with such a business, because the IRS has not yet approved it.

2. Be an Active Employee

In order to stay IRS compliant, your business must provide a legitimate service, and you must be an employee of that business. You can earn a salary, but not before the business derives compensation. At that point, you can earn a “reasonable” salary for your position. You can work with a ROBS provider, such as IRA Financial, to determine what a “reasonable” salary is, or you can perform a basic market salary comparison. It does not matter what role you choose in the company, but it must be active. For example, you cannot be a passive investor in your brother’s company. The amount of hours you work annually is not set, but 1,000 hours is a good baseline.

3. Offer 401(k) Plan to Employees

It’s important to give your employees the option of participating in an employer-sponsored 401(k) plan, and you should never make it difficult for them. Plus, all employees must have the same investment options. If it is available to owners, it must be available to all employees.

When you offer a 401(k) plan, you increase your chance of hiring individuals best equipped for the job, and you better retain key employees. Additionally, you receive tax benefits by offering a 401(k) plan, and participating in one.

4. Be Aware of ROBS Audit Risk

Though the ROBS structure is completely legal, they are quite complicated to set up on your own. If you don’t set it up properly, or fail to maintain the allowed structure, you can face an IRS audit. If the IRS deems that the rules were broken, then the entire amount of the transaction may be taxed. Note that there is less than a one percent chance that your ROBS will be audited. IRA Financial ensures that you’re ROBS structure will be completed. and maintained properly.

5. File Your Rollover for Business Startup Documents Annually

One thing you must remember to do is file all the necessary documents and tax returns for your business every year. Generally, you must file your corporate taxes on your own. Other forms, such as the 5500, will be completed and returned by your plan administration service. Failure to file these documents annually will lead to unnecessary tax consequences.

To be clear, all the responsibilities you have as a business owner will be there. In addition, when using the Rollover for Business Startup to invest in a business, you must make sure all rules are followed. The tax bill may be hefty if you don’t. IRA Financial will always make sure this doesn’t happen to you!

Watch this – How Long Does the ROBS Process Take?

6. What Happens When You Close or Sell the Business?

In the unfortunate event that you have to close the business, or if you decide to sell it, you must take appropriate measures to close out your Rollover for Business Startup. As mentioned above, all taxes (including State if they are owed) must be submitted for the final year of operating the business. Further, you must now close the 401(k) plan set up for the business.

There are basically two ways to close the 401(k): 1) insolvency and 2) stock buy back. When your stocks become valued at $0, they are insolvent. You must distribute the plan assets to those who participated and thus dissolves the plan. If you buy back the stock that the 401(k) has in the business, you then must deposit the funds from the sale back into the plan. You can then distribute those funds to the plan participants.

There are a few other maintenance issues to resolve, but the final thing you must do is file the last Form 5500 for the business. Again, this is generally prepared and submitted by your administration team. 1099 forms may also be needed to report all distributions from the plan. IRA Financial will prepare and/or help you submit all the required paperwork so that you are not hit with any penalties.

Why Use IRA Financial for the Rollover Start Up Solution

IRA Financial was founded by a group of top law firm tax and ERISA professionals who have worked at some of the largest law firms in the country, including White & Case LLP and Dewey & LeBoeuf LLP. The legality of using retirement funds to purchase employer corporate stock as your Business Funding Solution is firmly established in the Internal Revenue Code and under ERISA law. Although codified under law, the IRS has been concerned that a number of promoters marketing this type of structure have not had the expertise to develop a structure that is fully compliant with IRS and ERISA rules and regulations. With this in mind, the IRA Financial’s in-house retirement tax professionals spent the last two years carefully studying IRS materials and guidance in order to design an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free!

The Rollover for Business Startups (ROBS) Solution was developed to specifically address and solve each of the non-compliant areas addressed by the IRS creating a business acquisition and funding solution that is in full compliance with IRS and ERISA rules and procedures. Unlike our competitors who have been offering this type of structure for many years, which according to the IRS, a significant portion have been found to be non-compliant, the IRA Financial has patiently waited for clear IRS guidance before offering a business acquisition structure that would be fully compliant with IRS and ERISA rules and procedures. Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals to ensure the structure satisfies IRS and ERISA rules and procedures.

We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will typically be ready for investment into your new or existing business within 14-21 days.

Rollover Business Startup Solution Funding Services

The services we offer to get you started with the ROBS solution include the following:

Establishment of “C” Corporation
- Articles of Incorporation
- By-Laws
- Organizational Meeting Minutes
Stock Certificates
Employment Agreement
Federal Tax Identification Number
Provide corporate record book and stock certificates. Draft Stock subscription agreement and stock purchase agreement.
Establishment of 401(k) Plan
- The Adoption Agreement Plan
- Basic Plan Document Agreement
- The Summary Plan Description
- IRS Opinion Letter
- Notice to Employees
- Resolution Adopting Plan
Retain third-party administrator (when needed)
Process ERISA Fidelity Bond (when needed)
Retain independent Appraisal for corporate stock valuation
Completion of IRS Form 5500
Direct access to our on-site tax and ERISA professionals

Rollover for Business Startup Conclusion

Getting started with ROBS is only the beginning. Whether you used your retirement funds to start a new business or invest in an existing one, you must make sure to follow all IRS rules. Failure to do so will lead to unnecessary taxes and penalties. Here at IRA Financial, we will guarantee that this does not happen to you. If a question arises, our experts will work diligently to get you the correct answer and keep you IRS-compliant.

Do not hesitate to get in touch with us via our contact page or by calling 800.4720646. We are here every weekday from 9am-7pm. We are always available for all of our clients’ needs, big or small.

Did You Know?

A C Corporation is a legal entity where the owners, shareholders, or stakeholders are taxed separately from the entity. C corporations offer shareholders limited liability protection (LLP).

by Adam Bergman

Top 10 Startups Using ROBS

Recently, IRA Financial's Adam Bergman published an article on Forbes about the Gig Economy and the Solo 401(k). This got me thinking about another retirement strategy called "ROBS," or Rollover for Business Startups. ROBS allows you to use retirement funds to start your own business. This strategy is generally used when you don't have the capital on-hand for your business venture. It is also a viable strategy for individuals who want to avoid debt financing to pursue their business ambitions. Further, it's a way to invest in yourself instead of making outside investments, such as stocks and mutual funds.

After some research, I've come up with what I feel are the Top 10 Startups you can fund using ROBS. These business ideas, or "gig" jobs, have little to no startup costs and can be done by just about everyone. The great thing about ROBS, is that you can also use it to expand your business, once it's off the ground. Therefore, you might not need your 401(k) or IRA money to start a business, but it might come in handy as you expand.

Top 10 Startups Using ROBS

Landscaper

'Tis the season to mow lawns, pull weeds, and prune flowers. If working outdoors in the summer heat is where you're happiest, why don't you make a job of it? You get to pick and choose the services you offer and design a business plan accordingly. Depending on what you choose, there will be equipment costs. This can range from gloves and clippers, to riding mowers and trailers.

Further, as many landscapers do in the off-season, you can switch to snow removal with a plow attachment and some shovels. You can even hire more workers as you see fit.

Handyman

In a similar vein, a handyman is a great side job if you have just a bit of knowledge. It offers loads of options - painting, plumbing, woodworking, general maintenance. This list goes on and on. There's always someone in need of small repairs that don't require larger construction companies.

Startup costs can also vary depending on the route you choose. If you already tinker around your own home, you might already have the tools you need to get started. The key here is to get your name out there so you build a solid reputation. You can go big with your own company or keep it small performing odd jobs as you can.

Housecleaning Services

While housework isn't for everyone, it certainly can be if you make money doing it! There's a lot more people that don't want to do, so there's lots of opportunities out there for someone willing. If you want to keep it small, overhead is really low. Again, you just need to get your name out there.

However, if you want to go bigger and start your own company, there will be more costs for supplies and employee wages. The sky's the limit for what you can make if you're willing to get your hands dirty.

Meal Kit Delivery

In today's age, everyone wants to eat healthy, but might not have to do so. Meal Kit delivery services have been around for awhile and it's booming. If you enjoy coming up with interesting and healthy recipes, this is a great way for you to earn some money.

This can be a perfect self-employed business venture, or you can look to hire others for grocery runs and delivery. It's probably best to start out local and develop relationships with local farms. As your business expands, so can your reach.

Food Truck

Speaking of food, why not invest in a food truck? Meal kits are all about prep work, food trucks are all about the finished product. There almost no limit to where you can take your truck. Parks, business complexes, functions, farmer's markets, etc. Just be sure to check with your local health department and town officials to see where you can and can't go and what types of standards must be adhered to.

While, investing in a food truck is not the cheapest option on this list, it's a fraction of the cost of operating a restaurant. Break out grandma's recipes and find a unique menu that will cater to different crowds. Then, hit the road!

Bed & Breakfast

Continuing with the food theme (partially), a B&B is perfect if you already have the space for it. Maybe, you're an empty-nester with some spare rooms, or you have a guest house on your property. If you live in a quaint town or outside of popular destinations, you can quickly fill up the calendar.

It's easier than ever to get your B&B on the map with apps like airBnB and VRBO. There's a lot of flexibility for you as well. You can cater to the crowd you want. Setup activities/itineraries for your guests And even plan for a sit-down meal. On the other hand, you can simply provide lodging and a continental breakfast and be done. It all depends on the time you want to invest and the rates you want to charge.

Tutor

Math Whiz? Writer? Teacher? Why not put your brain to use by helping our youth. This is the ideal "Work Harder Not Smarter" startup. There's always a demand for tutors as parents want their children to excel in school. On top of that, there are not many startup costs in being a tutor. You can advertise on local website message boards, supermarkets and anywhere else fliers are accepted.

You can work from home and get the added bonus of helping people out. If you're bilingual, you can teach ESL (English as a Second Language) as well. There are so many opportunities to teach, you just have to get out there and find them.

I can relate to this as I do a little of both for IRA Financial. There are plenty of companies, both large and small, that can benefit from bloggers and social media managers. Generally, you can work from home and choose your own hours. You can freelance with multiple businesses, or get lucky and get a long-term gig with one.

Many companies under-value the importance of an online presence. Whether it's Facebook, LinkedIn or Twitter, everyone has some sort of social media account. If you don't have someone to manage yours, you're missing out on potential business. Plus, blogs are great way to promote a business. All you need is a knack for writing and the ability to learn everything about the businesses you'll be writing for.

Amazon

No, I'm not suggesting you go get a job from Amazon, however, you can utilize their Fulfillment by Amazon (FBA) service to sell goods. Nowadays, you don't need a brick and mortar store to sell something. Amazon is tops in the world for e-commerce. eBay is the largest auction site and you can set up a store there as well. Like to design things? Check out Etsy. The great thing about FBA, is Amazon will do most of the work for you. You just have to get your product to them.

Another Amazon opportunity is to deliver for them. Recently, Amazon offered employees $10,000 to quit their job so they could deliver packages. The Amazon Flex program allows you to earn a decent living working flexible hours. You don't have to deliver packages; deliver people too! At least, sign up for a ride share program like Uber or Lyft and earn some extra cash.

Photographer/Event Planner

The last business on the list take a certain type of person. You need a keen eye to details and the ability to adapt to customer needs. Photographers are always in demand for events, such as weddings and parties, family photo shoots, including birth announcements and news stories. Cameras and equipment can be very expensive, but there's not a lot of other costs involved.

Event planning has always been a part of society. Whether it's for a new bride or mother-to-be, or a corporate retreat, there's lots of logistics that can overwhelm people. This is where you, as an event planner, can step right in. Hitting a home run with one client can really allow your business to grow.

The Basics of Using ROBS for Startups

To use the Rollover for Business Startups structure, you take existing 401(k) or IRA funds and invest in a new 401(k) plan. A C Corporation is then created and sponsors the plan. You take your new 401(k) and invest the funds into the C Corp stock. These funds are deposited into the C Corp bank account and are then available to invest in your business.

There are a ton of benefits to utilizing the ROBS structure. You can invest in yourself, have startup capital for your new business or money to enhance a current business. Your portfolio becomes more diverse as it's not all invested in one place. Plus, you can earn a salary as you need to be an employee of the business...something you cannot do with other retirement plans.

Learn More:

What is the Rollover as Business Startup Solution?

Rollover as Business Startup Compliance

The IRA Financial Difference

Conclusion

Deciding to start your own business is a scary thought. What if it fails and you're left with nothing? The first step is getting out there and assessing the landscape. Research everything you can on a business you might want to pursue. Then, take a stab at a gig job while still having your main job as a cushion. The ROBS solution allows your retirement money to work for you and lets you take responsibility if it gains or not, instead of Wall Street.

For more information and to see how ROBS can work for you, please contact us anytime at 800-472-1043.

by Adam Bergman

Using a Solo 401(k) to Avoid UBIT for a Real Estate Investment Fund

Internal Revenue Code (IRC) Section 514 requires debt-financed income to be included in Unrelated Business Taxable Income, also known as UBIT or UDFI. For Self-Directed IRA or 401(k) investors seeking to use retirement funds to invest in real estate investment funds, the tax becomes a major investment hurdle. However, an exemption to the tax exists under IRC Section 514(c)(9) for 401(k) plans, but not IRAs. However, there are several rules surrounding the application of the rule for exempting income attributable to the use of debt financed income for 401(k) investors.

Key Points

UBIT is a tax that applies to certain retirement account investments
UDFI, a type of UBIT, is the most common and occurs when using leverage in a real estate investment
Internal Revenue Code Section 514(c)(9) offers a UBIT exemption for 401(k) plans

Why was IRC Section 514 Enacted?

In the years immediately following World War II, many charitable foundations purchased commercial real estate under sale-leaseback arrangements, borrowing the necessary funds from institutional lenders and leasing the property back to the seller for a period approximating the estimated economic life of the structure. Under pre-1950 law, the charity received the rent tax-free and could therefore pay off the acquisition debt more rapidly than a taxable competitor. From the seller's standpoint, a sale-leaseback was similar to a mortgage, but under the accounting practices prevailing at the time, the obligation to the lessor did not have to be recognized on the lessee's balance sheet. If the sales price was less than its adjusted basis for the property, the seller claimed a loss deduction.

The Treasury argued before Congress that the charities, which ordinarily made only nominal down payments and borrowed the funds for the acquisition without recourse, were effectively trading on their tax exemptions. Congress responded in 1950 with the enactment of the statutory predecessor of § 514, which treated the rent under certain “business leases” as unrelated business income if the charity effected the acquisition with borrowed funds.

What is UBTI and UDFI?

Almost all retirement account investments generating passive income will not be subject to UBIT or Unrelated Debt Finance Income (UDFI) tax. The UDFI is part of the UBTI family and triggers the same UBTI tax. However, since a retirement account is treated as tax-exempt, such as a charity pursuant to IRC Section 501, the UBIT tax rules will apply to retirement accounts in certain instances.

In summary, UBTI is triggered if:

Retirement account uses a nonrecourse loan to buy an asset, such as stock
Retirement account invests in an active business through a pass-through entity, such as an LLC

Whereas UDFI is triggered if:

An IRA uses a nonrecourse loan (real estate acquisition financing) to purchase real estate.

For 2023, the UBIT maximum tax rate is 37%, however, this does not apply if a retirement account generates less than $1,000 of net UBIT income during the year. The UBIT tax rate is subject to the trust and estate income tax rates:

In 2023 the trust income tax rates are as follows:

10%: $0 – $2,900
24%: $2,901 – $10,550
35%: $10,551 – $14,450
37%: $14,451 and higher

Hence, the 37% maximum tax rate makes UBIT a major issue for certain investors.

The 514(c)(9) UDFI Exemption

Under IRC Section 514, if an exempt organization, such as a charity or a retirement account, owns “debt-financed property,” some portion of each item of gross income from the property, and a like portion of all related deductions, are included in unrelated business taxable income. Property is debt-financed if it is held to produce income, its use is not substantially related to the organization's exempt purposes, and there is acquisition indebtedness with respect to the property. Because a retirement account does not have an exempt purpose like a charity, all debt-financed income generated by the IRA or 401(k) investment would be potentially subject to the UDFI rules.

The term “acquisition indebtedness” generally includes any liability incurred before, contemporaneously with, or after the acquisition or improvement of the property if it arose because of the acquisition or improvement or if the need for the indebtedness was foreseeable at the time of the acquisition or improvement.

However, under IRC Section 514(c)(9), an exemption to the UDFI rules exist for a 401(K) plan that satisfies the following conditions:

Except as provided in subparagraph (B) of Code Section 514, as per Code Section 514(c)(9)(A), the term “acquisition indebtedness” does not include indebtedness incurred by a qualified organization (a charity or a retirement account) in acquiring or improving any real property. For purposes of this paragraph, an interest in a mortgage shall in no event be treated as real property.

Code Section 514(c)(9)(B) holds that the exception to the UDFI would not apply if:

(i) the price for the acquisition or improvement is not a fixed amount determined as of the date of the acquisition or the completion of the improvement.
(ii) the amount of any indebtedness or any other amount payable with respect to such indebtedness, or the time for making any payment of any such amount, is dependent, in whole or in part, upon any revenue, income, or profits derived from such real property.
(iii) the real property is at any time after the acquisition leased by the qualified organization to the person selling such property to such organization or to any person who bears a family relationship.
the real property is acquired by a qualified trust from, or is at any time after the acquisition leased by such trust to, any person who—
(I) bears a relationship which is described in subparagraph (C), (E), or (G) of section 4975(e)(2) to any plan with respect to which such trust was formed, or
(II) bears a relationship which is described in subparagraph (F) or (H) of section 4975(e)(2) to any person described in sub-clause (I);
any person described in clause (iii) or (iv) provides the qualified organization with financing in connection with the acquisition or improvement; or

(vi) the real property is held by a partnership unless the partnership meets the requirements of clauses (i) through (v) and unless—

(I) all of the partners of the partnership are qualified organizations,
(II) each allocation to a partner of the partnership, which is a qualified organization, is a qualified allocation (within the meaning of section 168(h)(6)), or
(III) such partnership meets the requirements of subparagraph (E).

The above portion of IRC Section 514(c)(9) that was put in bold was done for the purpose of illustrating that a 401(k) that invests in a real estate partnership that has acquisition indebtedness would be able to avail themselves of the exemption under 514(c)(9) so long as the partnership allocation is a qualified allocation. As per IRC Section 168(h), the term “qualified allocation” means any allocation to a tax-exempt entity which— (i) is consistent with such entity’s being allocated the same distributive share of each item of income, gain, loss, deduction, credit, and basis and such share remains the same during the entire period the entity is a partner in the partnership, and (ii) has substantial economic effect within the meaning of section 704(b)(2).

Therefore, a 401(k) can be a partner in a partnership with non-retirement account owners and still qualify for the UBTI exemption under Code Section 514(c)(9) so long as the allocation of income, gains, or losses is qualified. Note – Code Section 514(c)(9)(vi), which is bolded above, uses the term “or” versus "and” when identifying the three requirements for a partnership holding real estate to be covered by the UBTI exemption under 514(c)(9). It is for this reason, why using a 401(k) to invest in a real estate partnership using leverage is so tax beneficial. If the same investment was done with an IRA, the IRA could be subject to up to a 37% tax on a portion of the income or gains from the real estate partnership.

Who is Eligible for a Solo 401(k)?

Unfortunately, not everyone is eligible to establish a Solo 401(k), which can be adopted by a sole proprietor or any type of business entity. In general, to be eligible to benefit from the Solo 401(k) plan, one must meet just two eligibility requirements:

The presence of self-employment activity
The absence of full-time employees

A Solo 401(k) plan can be established with “self-directed” features, allowing it the opportunity to invest in alternative assets, such as a real estate investment fund. In addition, the plan has high annual contribution limits, a $50,000 tax-free loan option, powerful Roth options, and strong asset and creditor protection.

Hence, if one has a full-time or part-time business that has no full-time employees other than their business partner or spouse, the entity would be eligible to establish a Solo 401(k) plan and take advantage of the UBIT exception under IRC Section 514(c)(9).

If one is eligible to establish a Solo 401(k) plan, one can rollover pretax IRA or former employer 401(k) funds into the plan tax-free to fund the real estate investment and also make direct contributions up to the annual limits.

Conclusion

The UBIT exemption under IRC Section 514(c)(9) is one the major reasons why the Solo 401(k) plan has become such a popular retirement plan for self-employed real estate investors. Whether one is using a nonrecourse loan to buy real estate directly or via a real estate investment fund, gaining the ability to invest retirement funds using leverage without triggering UBIT is a powerful tax planning tool for many real estate investors.

by Adam Bergman

Year-End Tax Planning for ROBS Users

If you utilize the ROBS structure for your business, there are several things you need to do before the end of the year. ROBS tax planning is an essential part of your business so that you remain IRS-compliant. In the following, we will discuss all the items you need to take care of before December 31.

ROBS Refresher

For those considering ROBS, let's take a brief look at exactly what it is. ROBS stands for Rollover for Business Startups. Basically, you can use your existing retirement funds to start a new business or bring in more capital for an existing one. Though it is IRS-approved, ROBS arrangements are generally more scrutinized. It's important that you work with a qualified provider, such as IRA Financial, when employing the structure.

How Does it Work?

First, you need to to ensure your business is set up as a C Corporation. This is because to use ROBS, you must be able to sell stock in the company, which a C Corp allows. Next, a new 401(k) plan is set up for this business. A custodian is chosen to manage the plan investments. Now it's time to rollover your existing retirement funds into the new 401(k). Stock in your company is then purchased by the retirement plan. Finally, your company can now use those funds to invest in your business.

Why Use ROBS?

There are many reasons to us the ROBS structure to fund your business. Here are the Top Three:

You are in control - Instead of guessing on the stock market, you can use your retirement funds to invest in yourself.
No debt - Since you are using your own money, there's no need to take out a loan and make high interest payments.
401(k) plan - The ability to offer prospective employees a retirement plan option will give you a larger pool of qualified workers.

Of course there are risks when using ROBS. The biggest one is the risk of failure. If your business fails, you risk putting your retirement in jeopardy. It's important to work with a financial planner to ensure the risk of your new business is mitigated.

ROBS Tax Planning

Just with any business, there are items that must be checked off at the end of the year. It's doubly important when using ROBS so that you stay within the rules set forth by the IRS. Don't forget these important steps, especially if this is the first year of your new business. It can be quite to forget about the reporting requirements while getting your business off the ground.

First thing's first, it's essential to work with your ROBS provider. They will take care much of the items needed for your ROBS tax planning. However, there are things you need to take care of personally. IRA Financial can help guide you every step of the way. You, as the business owner, are the plan administrator. IRA Financial (or another administrator if you have one) handles the plan administration. Only working in tandem will ensure you stay within the IRS and Department of Labor (DOL) rules.

The most important is IRS Form 5500. The size of your business will decide on which form you need to file. Assuming you have less than 100 employees, you can generally file Form 5500 SF, while others may have to file the general 5500 form. Usually, your provider will file this form on your behalf. You will need to provide them with the details of your 401(k) plan. These may include (but not limited to) employee information/number of participants, profit and loss, and balance sheets, and 401(k) contributions. Your provider will assist you in correcting and mistakes they may find with the form.

ROBS Tax Planning You Need to Take Care Of

Every year there are certain requirements for your 401(k) and C Corporation. First, your 401(k) is considered an Eligible Individual Account Plan. The plan must show that all eligible employees can share the benefits of the 401(k). For example, if you offer a match to employee contributions, every employee who contributes must receive this match.

As mentioned previously, the Form 5500 must be submitted to the IRS. This is an informational form to determine the value of the plan assets. This includes the stocks you purchased to start the business, in addition to any assets the corporation owns. Further, each participant of the plan must have a value of the assets he or she holds.

You, as the business owner using the ROBS structure, must take an annual salary. You must begin doing so as soon as the business can afford it. Also, you should work at least 1,000 hours per year and be paid at least minimum wage in your state. It's also wise to contribute at least one percent to your 401(k) plan. This serves as a "best interest" for the plan.

Next, you need to ensure you have an ERISA Fidelity Bond at all times. This provides insurance to losses to the retirement plan used with ROBS. Your bond, which is required by ERISA, must be the lesser of $500,000 or ten percent of your plan assets. This is an important ROBS tax planning requirement to ensure compliance.

C Corporation Requirements

In addition to the 401(k) plan requirements, there are certain things you must do with your C Corporation as well. Most importantly, you need to file taxes for your business. This is different than the Form 5500. Failure to file your taxes on time will lead to penalties from the IRS. Further, it's important to check your state laws in regards to your corporation. States require different rules for maintaining your C Corporation. Don't forget to sign all documents as well! Your provider cannot do this for you.

Next, you must ensure your business is an operating company. Essentially, you need to sell goods or a service to meet the definition. Day traders, investment advisors and some real estate investment companies are not examples of operating companies. It's crucial that the company you use your retirement funds to invest in fits the criteria.

Lastly, your ROBS business must always be a C Corporation. If you try to create another type of company, such as an LLC or S Corporation, you run the risk of a prohibited transaction which may disqualify the plan. Further, it could lead to stiff tax penalties. Always work with legal professionals, such as a lawyer and CPA, to make sure you are abiding all rules and laws.

ROBS Tax Planning - a Review

While many things do not have to be done by the end of the year (such as filing taxes), many items outlined should be done as quickly as possible. The rules of navigating the ROBS structure is quite complicated. You, as the owner of the business, have a lot of responsibilities. Neglecting any of these may lead to severe financial consequences. If you are working with IRA Financial, know that we are there every step of the way and are just a phone call away!

Please contact us @ 800.472.0646 if you any questions about your ROBS tax planning for the end of the year. We will help ensure that you stay within the rules and help your business thrive.

by Adam Bergman

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What is the Corporate Transparency Act?

What is the Reason Behind the CTA?

Is my Entity a Reporting Company?

Is My Entity Exempt from the CTA?

Who is a Beneficial Owner?

What BOI must be Reported?

When must a Report be Filed?

How Will the CTA Impact my Solo 401(k)?

Penalties

Conclusion

Why Investment Funds?

Hedge Fund

Private Equity Fund

Venture Capital

Real Estate Investment

Tax Advantages

Unrelated Business Taxable Income

The UBTI & UDFI trigger the Same Tax Rate

Why Use a Self-Directed IRA to Invest in Investment Funds?

Most Popular Investment Fund Investments

Getting Started

What is UBTI?

Calculating UBTI

Security Lending Transactions

Short Sales

Option Terminations

Commodity Futures

Interest Rate Swaps

Conclusion

What is UBTI?

Debt-Financed Property

Regularly Carried on Business

IRA Unrelated Business Taxable Income Rules

UBTI Rules (Unrelated Business Taxable Income Rules)

Trade or Business

“Regularly Carried On”

Contact IRA Financial

401(k) Plan Triggering Event Requirement & Rollovers

401(k) Plan Rollover to a Traditional IRA

401(k) Plan Rollover to a Roth IRA

Conclusion

What is a Self-Directed IRA?

How Much do I Need to Start a Self-Directed IRA?

Why Should You Set Up a Self-Directed IRA?

How to Fund a Self-Directed IRA

Contributions

Transfers

Rollovers

Starting a Self-Directed IRA

How Long Does it Take to Open an Account?

Conclusion

Benefits of The Rollover Business Startup Solution

How Does the Rollover Business Startup Solution Work?

What are the Requirements for Rollover Business Startups?

Advantages of Establishing a 401(k) Plan:

5 Advantages of the Rollover Business Startup Solution

Save Money

Invest in Yourself

Diversification

Earn a Salary

Benefit from having a 401(k) Retirement Plan

How to Remain IRS Compliant with Rollover Business Startup (ROBS)

1. Maintain an Active Business

2. Be an Active Employee

3. Offer 401(k) Plan to Employees

4. Be Aware of ROBS Audit Risk

5. File Your Rollover for Business Startup Documents Annually

6. What Happens When You Close or Sell the Business?

Why Use IRA Financial for the Rollover Start Up Solution

Rollover Business Startup Solution Funding Services

Rollover for Business Startup Conclusion

Did You Know?

Top 10 Startups Using ROBS

Landscaper

Handyman

Housecleaning Services

Meal Kit Delivery

Food Truck

Bed & Breakfast