Tega Cay, SC · Member since 2014 · 213 posts · 74 votes
Has anyone done an eQRP? I am looking into the company Total Control Financial, but wanted to see if anyone has setup up one with the company before. Seems like it may be better control of your money then SDIRA and less fees. If anyone has setup a eQRP please let me know any Pro's or Con's.
There is no such thing as that type of account. That appears to be a marketing term.
However, there is such a thing as a self-directed solo 401k plan which is very popular for those who are self employed.
Following are the similarities and differences between the solo 401k and the self-directed IRA.
The Self-Directed IRA and Solo 401k Similarities
Both were created by congress for individuals to save for retirement;
Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
Both allow for Roth contributions;
Both are subject to prohibited transaction rules;
Both are subject to federal taxes at time of distribution;
Both allow for checkbook control for placing alternative investments;
Both may be invested in annuities;
Both are protected from creditors;
Both allow for nondeductible contributions;
Both are prohibited from investing in assets listed under I.R.C. 408(m); and
Neither may be invested in your own business.
The Self-Directed IRA and Solo 401k Differences
In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
To open a self-directed IRA, self-employment income is not required;
In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
The solo 401k allows for checkbook control from the onset;
The solo 401k allows for personal loan known as a solo 401k loan;
It is prohibited to borrow from your IRA;
The Solo 401k may be invested in life insurance;
The self-directed IRA may not be invested in life insurance;
The solo 401k allow for high contribution amounts (for 2016, the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
The solo 401k business owner can serve as trustee of the solo 401k;
The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
Pre-tax IRA contributions on reported on line 32 of Form 1040;
Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
Roth solo 401k funds are subject to RMDs;
A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
Roth IRA funds are not subject to requirement minimum distributions (RMDs);
The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
At termination, the self-directed IRA is only required to file a form 1099-R.
If a deal is 70% Debt financed, then 70% of the gross income is taxable as UDFI.
You then apply a $1000 exemption and 70% of allowable deductions like depreciation, interest, etc.
The resulting net taxable income is then subject to trust tax rates, which scale in brackets.
A typical $100K investment in a syndication may produce a net taxable amount of about $1,000 on annual distributions of rental income, which will fall in the 10% bracket. Taxing about 10-15% of gross income at a rate of 10-15% results in an effective tax rate much less than the topline 37% that can apply to UBIT exposed transactions.
Of course, if you are investing $1M in a bunch of syndications, the amount and rate of tax may ramp up a bit. Even then, the leveraged rate of return will outperform most comparable opportunities that do not use leverage.
Most people mistakenly think 37% of total income from a deal is taxed. That is not the case.
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
4y
@Steve C. The determining factor regarding what type of self-directed account to establish is very seldom UBIT. In addition to great info provide by @Brian Eastman, following are some common fallacies encountered and, sometimes, widely disseminated.
Qualified Retirement Plans (abbreviated to QRP and, for purposes of this post, includes "Solo 401k") are exempt from all UBIT. UBIT applies to all tax-sheltered vehicles. QRPs have an important - but limited - exemption for "real estate acquisition indebtedness" and, very importantly, that exemption is not always applicable.
The tax rate on UDFI is 37%+. The effective tax rate will usually be far, far lower due to the way it UBIT is calculated. In fact, in many, many instances UBIT never materializes until the asset sale. If-and-when applicable to a sale, the tax rate that applies is the far lower cap gains rate, not trust rates.
The key factor in selecting a tax-sheltered self-directed retirement account is UBIT. This is erroneous because (a) a non-compliant QRP can result in far more adverse consequences than UBIT liability and (b) UBIT coming from UDFI does not override the financial benefits of using an SDIRA to invest in real estate.
There are a plethora of self-directed retirement account vehicles available, each of which has its place. It's just a matter of making well-informed choices to get the best results for yourself.
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
4y
@Steve C. To provide tax benefits, and not tax penalties, a QRP has to be "Qualified." To be Qualified it must meet the definitions of the Tax Code in formation and operation. Having a set of IRS approved documents is only 1 small part of a plan actually being "qualified." Therefore, those for whom subscribing to get a set of IRS approved QRP documents would not result in a Qualified Retirement Plan may be better served by using an SDIRA. Of course, no tax is better than a little tax... but a little tax is better than a lot of tax.
Rental Property Investor · Member since 2019 · 9 posts · 2 votes
4y
I read in a marketing book on eQRP that Self Directed IRA's are Not subject to the higher taxable rate for real estate investments involving the use of leverage/debt. Conversely, SDIRA's that invest in real estate where debt financing is involved requires the SDIRA account to pay out 37% tax rate on the profits. Is this true?
Investor · Souderton, PA · Member since 2016 · 24 posts · 1 vote
4y
Question about Solo k - I currently have one with 5 properties leverage about 40%. Looking to convert the Solo k assets to a Roth Solo k over the next 2 to 3 years. I'm 52 with the goal of have the income tax free in retirement and then transferring the account after my wife and I are gone to our kids. Thoughts.....
CPA delivering RE Tax Tools: 1031 Exchange, SDIRA, 401(k), Cost Seg · New York City, NY · Member since 2017 · 581 posts · 563 votes
2y
@Dorothy Wulf Do and your husband have separate plans or a single plan in which you both participate? (Spouses can, in most cases, share a 401k plan, thereby reducing fees and paperwork burden.)