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hi there do you own a small business do you have earned income as a self-employed individual are you looking to make higher contributions to a retirement account on an annual basis are you looking for additional tax deductions so if you've answered yes to one or more of these questions a small-business retirement account can be a good fit for you in this brief training we will review three business retirement accounts that you could potentially take advantage of and keep in mind as we progress through the training that all of these accounts can be self directed into alternative assets this means that you can use these accounts to invest in real estate mortgages trustees private lending private equity real estate investment partnerships precious metals in a wide array of alternative assets so let's get started let's get to the whiteboard and break down these three plans for you okay so we're gonna dive into each one of these plans and I'm gonna show you the pros and cons of each individual account the object of this video training is that you have a better understanding when you leave here today on what business retirement account is gonna make the most sense for you I would then encourage you to team up with your CPA your accountant your tax attorney whoever that professional might be that works to help you and consults with you on your business in your personal finances to make sure that they're on the same page in terms of what plan is most attractive to you you can then team with equity Trust Company as one member your financial team to put the plan in place to set up and fund the account so let's start with the first business retirement account which is the solo 401k so to start it's important to understand with any of these business retirement accounts that you are wearing both hats as a business owner you may have heard of this before as a business owner you are an employer hat so you're wearing an employer cap and then you are also an employee so it's important to understand that analogy as we progress through the training you're wearing both hats as a business owner an employer hat and an employee hat so let's dive into the solo 401k there is both an employee contribution and then also an employer deferral a lot of people think of this like a match when you go and work for a company and they give you a 401k option you make contributions and then they might match you up to a certain amount as a business owner you can have a solo 401k providing you meet all the requirements and you can make an employee contribution just like you can't with a company you work for and then there's also what they call an employer deferral component so we'll talk through that now a couple of items to talk about before we get into the contribution limits or how much you can put into this account to be eligible for a solo 401k you have to have established earned income all right so what does establish earned income well think of it this way it's income that you are paying ordinary income taxes on so federal state if applicable and local income taxes and then also payroll taxes so think self-employment taxes Medicare and Social Security so a lot of business owners might be familiar with filing a Schedule C and a Schedule se self-employment so ultimately it's not your gross but it's your net income if you will that's gonna be applied to these figures I will dissection just a moment and give you an example a real world example okay so let's talk about how much money you can put into one of these business retirement plans particularly a solo 401k with a solo 401k if you are under the age of 50 under the age of 50 you can contribute up to 19 thousand five hundred dollars keep in mind it's up to 100 percent of your earned income not to exceed nineteen thousand five hundred dollars which means let's say you're only paying yourself twenty thousand dollars as a Realtor for example well you can put the full 19 thousand five hundred dollars into the plan because it's up to a hundred percent of your earning income not to exceed 19 thousand five hundred and you'll see here that when you're 50 years old or older you have what's called a catch-up provision so the government says as you get older you can put more money into a retirement plan that goes for I raise as well as solo 401ks or 401 k's in general so $26,000 on the contribution limit if you're 50 year older again in recap wearing our employee hat we can contribute up to 19 thousand 501 under 50 and up to 26,000 when we are 50 and older all right now we move the employee contribution aside and now we have our employer deferral so we put our employer cap on as an employer we can defer up to thirty seven thousand five hundred dollars of our income not to exceed 20% of our self-employment income or 25% of our w2 income all right so I'll write that down that's 20% of self-employment or 25% of if you are paying yourself via w-2 for example if you're an S corporation you're filing as such and you have consistent w2 income that you're paying yourself through like payroll deferral you're gonna use a 25% calculation there's a calculation that goes into play you can look on the IRS website for this on why if you're self-employed and paying yourself as such it's 20 percent compared to 25% of its w2 okay so you're limited by 20 to 25 or 25 percent not to exceed 30 $7,500 between the employer deferral and the employee contribution when you are under the age of 50 your maximum allowable contribution to a solo 401k is fifty-seven thousand dollars when you're 50 and over it's sixty three thousand five hundred dollars all right in other words how much money can you get into a solo 401k well if you're paying yourself enough you could potentially get upwards of fifty seven thousand dollars when under the age of 50 and up to sixty three thousand five hundred dollars when you are 50 and over so for those of you that are claiming a significant amount of earned income through business you can see that you can defer a significant amount of money into one of these plans that goes well above in IRA contribution in another video training we talked about IRA contributions with an IRA you can contribute up to six thousand dollars when you're under the age of fifty when you're 50 and over you can contribute up to seven thousand dollars with a solo 401k for your business as you can see you could potentially defer higher amounts into one of these programs so that moves us right into some of the pros and cons of the solo 401k obviously as we were talking about contribution limits right you can contribute significantly larger amounts compared to an IRA do keep in mind that if you are contributing to an IRA that is completely separate from this solo 401k so you can max out your solo 401k and you can also max out your IRA on an annual basis number two tax deductions so this 19 thousand five hundred or twenty six thousand and then your employer deferral combined up to fifty seven or sixty three five can be entirely tax deductible if you choose to which means if you maxed out being under the age of fifty and you got the full fifty seven thousand dollars in there you would get a fifty seven thousand dollar tax deduction with a solo 401k you can elect to make tax deductible contributions or you can elect to make tax-free Roth contributions now that's an interesting concept and leads us to the next pro of a solo 401k is the Roth component so this 19 thousand five hundred or 26 thousand you can contribute into the Roth component of the solo 401k here at equity trust as we provide the administrative and custodial services for a solo 401k built within our plan document you have the Roth component all you got to do is cut the check or send the wire and make the contribution to nineteen five or 26,000 depending on your age and that's all after-tax dollars the beauty of it is those after-tax dollars are gonna create more active after tax dollars and you're gonna be late to leverage what we call compounding interest in the absence of taxation and I'll pause there for a moment and say that a lot of our real estate investors that come to us they're very attracted to that Roth component because they understand the opportunity of being able to create wealth tax-free and when they start taking distributions from this account after the age of 59 and a half they have zero percent tax on those distributions providing that they run everything properly so there can be a lot of advantages with this Roth component all right with the Roth component note that there are no Maggi limits so with a Roth IRA if you make too much money you may not be able to contribute directly to the Roth IRA you might have to do what's called a backdoor Roth IRA with a Roth component to a solo 401k there are no income restrictions you just have to have earned income in order to make the contribution the next one is you can potentially avoid unrelated business income tax on leveraged real estate so some of you might be familiar and we have other training videos about the you--but concept if you buy real estate in an IRA and you take on a loan you will likely pay unrelated business income tax on your net rental proceeds or the net profits from the sale of the property while there's leverage and it's based on a percentage of the property that is leveraged so for example if you buy a property for a hundred thousand and you get a loan for fifty thousand you have 50 percent debt on the property in an IRA environment you're gonna have to pay taxes on 50 percent of your net profits because you have that leverage in a solo 401k environment providing that the loan is structured properly you are exempt from that Ubud so that's an important that's an important takeaway for those of you that are real estate investors keep in mind that that you bit mitigation does not apply if you're gonna run your solo 401k like a business like a trader business the Ubud only applies to debt leverage real estate last but not least if you have a spouse that is working for you in your business even if they're not a partner in the business as long as you are paying them a salary or paying them a wage and they are claiming that they can also take advantage of the solo 401k as a participant of the plan now that leads me to requirement number two we talked about requirement number one of a solo 401k is that you must have earned income requirement two is that you cannot have any w-2 employees with the exception of a spouse so for those of you that don't have any employees you don't plan on having employees a solo 401k could certainly be a good fit for you all right on the con side which you can see are less than a lot of the advantages I mentioned you can't have any employees so if you do have employees or you want to eventually have employees you're gonna have to look at a multi participant 401k it can be a little bit more administrative liebhard and some than a solo 401k but if you need to take advantage of that you could still self direct it into alternatives the next is there is a requirement with a solo 401k if you have over 250,000 dollars you have to file what's called a 5500 with an IRA you're not required to file a 5500 if the plan breaches $250,000 it's not overly difficult but administrative Lea it will be a cost for you on an annual basis once the plan breaches $250,000 next substantial and recurring contributions so I've heard of a lot of investors in the self-directed IRA real estate space in particular that will say hey I have a solo 401k John and I've never had any active earned income through a business the company that I set up the solo 401k with told me that I didn't have to have any active earned income in the business I just have to have the intent to make contributions to the solo 401k from the earnings that I've generated in the business directly from the IRS website it states that contributions must be substantial and recurring now yes it's the facts in circumstances situation right check with your CPA or tax attorney on this but the argument right is that if you set up a solo 401k and you never make a contribution maybe you don't have earned - even earned income through that business that you have not met the substantial and purring contribution requirement that the government sets forth when they've created these plans in the legislation and in the IRS necessary publications so it's important to understand that if you are looking to set up a solo 401k you want to self-direct it into real estate that you meet the minimum of eligibility requirements and most importantly you're gonna take full advantage of the features of the solo 401k the higher contribution limits the potential tax deductions the advantages of the Roth component the solo 401k can be a far superior retirement plan compared to many other retirement accounts but ultimately you have to understand how it works and you have to set it up properly equity trust company can facilitate establishing the solo 401k for you in providing the necessary record-keeping in administrative in custody services that go along with that after this video is over with you'll be able to get direction on how to get started okay last but not least on the solo 401k and this is sort of a 301 in 401 type strategy you could actually take your employer deferral this 37 5 and you can do what's called an in plan conversion into the Roth component of the solo 401k so the key takeaway for all of our viewers is guess what if you're making enough money if you're paying yourself enough you could potentially get up to fifty seven thousand dollars into a Roth component of a solo 401k in one year when you're 50 and over up to 63 five and imagine what you could do with that those after-tax dollars investing in real estate notes and all these other alternative assets creating tax-free profit in leveraging compounding interest in the absence of taxation so really exciting plan let me go ahead and jump over now to the SEP IRA okay the SEP IRA stands for simplified employee pension plan simplified employee pension plan the SEP IRA came about in the late 70s as a sort of healthy alternative to a company sponsored pension plan which as we all know could be potentially more burdensome could be more cloth we could be a little bit more difficult to manage and run the SEP IRA gives you the characteristics of a pension plan but in an IRA system so easy to set up a little bit lower cost in many cases the way a SEP IRA works is you're really only contributing wearing one hat so when we talked about the solo 401k you were making a contribution as an employee and then there was that employer deferral so you're wearing both hats and you were making contributions as such with the SEP IRA you're only making an employer contribution employer contribution so you put on your employer hat and you can contribute up to 25% of your salary if your w-2 okay this is if your w-2 if you are an LLC disregarded and you're filing a Schedule C and schedule SC you're gonna use 20% as the figure okay so you can contribute up to 25 or 20% depending on your situation of your income that would be after all of your expenses the income that ultimately you're paying Medicare and Social Security tax on an ordinary income taxes alright not to exceed fifty seven thousand dollars this is for tax year 2020 okay now with the SEP IRA you could potentially still make a contribution up to your tax filing deadline so for 2019 it's fifty six thousand dollars that's an important piece to note so up to fifty seven thousand dollars let me give you an example let's say you're paying yourself a hundred thousand dollars and when I say you're paying yourself a hundred thousand dollars I'm saying that you're paying self-employment taxes on that $100,000 so that's your Medicare that's your Social Security tax all right you have a hundred thousand dollars in earned income and let's say you're an LLC disregarded pass-through income you're filing a Schedule C in a Schedule se one hundred thousand post to your schedule SC and we're gonna take 20% of that a hundred thousand dollars which is twenty thousand dollars so your $100,000 income you defer $20,000 into the SEP IRA which is a significantly higher contribution than an IRA which again is six or seven thousand and the Ceph IRA is a tax-deductible account so you're gonna get a deduction for that $20,000 contribution all right now let me go back to the solo 401k for a moment so you can see the example in the contrast between a SEP IRA and a solo 401k so with a solo 401k let's take the same business owner and they make $100,000 that's earned income and let's assume that this business owner is 50 or older so they can contribute $26,000 okay as an employee and then put our employer hat on and we take 20% of that a hundred thousand which is twenty thousand dollars okay so that gives us a total of forty six thousand dollars so you see here comparing and contrasting with a SEP IRA if I'm paying myself a hundred thousand I'm limited to only contributing twenty thousand dollars and it's only a tax-deductible contribution with my solo 401k over here I pay mell set myself a hundred thousand I put twenty six thousand as an employee contribution I do my twenty thousand dollar deferral I get a total of forty six thousand dollars and guess what even though this 20 thousand has to take a pit-stop if you will in the tax-deductible portion of the plan I can do that in plan conversion get it all into the Roth component and now I've just created forty six thousand dollars in tax-free dollars that are gonna grow tax-free for the rest of my life and I can leave them to my children grandchildren my spouse or whomever else I want to in a tax-free environment as well all right so now you start to see the the pros and cons of these plans pros on the SEP 10 shillings for the business right maybe that's important to you maybe the Roth isn't as important but tax deductions are important that's okay admin is typically easier as I mentioned compared to like a defined benefit plan pension plan employer-sponsored plan higher contribution limits of course compared to an IRA some of the drawbacks to this which you've already started to see is that if you have employees imagine having to contribute not just 20% to your plan but also 20% for any eligible employees so with a SEP IRA if you have employees you are actually writing a check from your business to their plan if they meet the minimum eligibility requirements you can check out the minimum eligibility requirements on the IRS website generally its employees that have worked for you 3 out of the last 5 years who are 21 years of age or older and have made over a certain amount in the current year in previous year you have to contribute to theirs if you're also contributing to theirs contributing to yours so you do want to make sure if you have employees that you do the math on does it make sense for you to have a SEP IRA no Roth component so with the solo 401k you have the Roth component with a SEP IRA you don't have that and again you're limited by 20% or 25% so you could see the difference between the two examples you can get significantly higher amounts in the solo 401k compared to the SEP IRA alright let's go ahead and jump into the last business retirement account the simple IRA so this is the savings incentive match plan for employees SIMPLE IRA came about a ways after the SEP IRA but a little bit before the solo 401k I like to refer to the simple IRA is a hybrid between an IRA and a 401k if you do have employees for a business and therefore you don't qualify for a solo 401k or you don't qualify for a SEP IRA in the sense that you be running a much more costly plan for the business a simple IRA might be a good fit for you it can be a lower-cost way to have a retirement plan for you and your employees that are eligible so let's talk about contribution limits how much can you contribute to a simple IRA 13500 as an employee contribution when you under the age of 50 16500 when you're 50 and over again this is our for 2020 alright these are the limits for 2020 if you're watching this in a future year just check out the IRS website for the updated contribution limits they generally do change year over year so thirteen five or sixteen five just like the solo 401k this is up to a hundred percent of your earned income your establish earned income so if you're only paying yourself let's say fourteen thousand you're under 50 you can get the full thirteen thousand five hundred in the plan whereas with the SEP IRA you're limited to that twenty percent or 25 percent figure now with a simple IRA like the solo 401k you're wearing two hats an employer hat in an employee hat as an employee you can contribute these amounts and then as the employer you can match one two three percent of your income so let's go ahead and give you another example just like we did before let's say you're paying yourself a hundred thousand okay and you are 50 or older you can put sixteen five into the plan and then you can match one two three percent so let's say you do the maximum match of three percent three percent of a hundred thousand is three thousand dollars that gets you a total of 19 thousand five hundred dollars into your simple IRA so there's some advantages as you can see there with the simple ira especially if you have employees you can contribute higher amounts than an IRA which is six or seven thousand this is a tax-deductible plan so you get a tax deduction for it right but on the con side as you can see the 19 five is less than what you could contribute here to a SAP not by a large margin but by $500 margin and certainly a lot less than the solo 401k all right but again the advantage that you pick up on the simple Irey that you don't have with the solo 401k is you can have employees for this plan right and they could take advantage of the benefit as well and the match that you make as an employer is a tax-deductible match for the business so you see the the pros there obviously you avoid added maintenance potentially higher compared to an IRA and then you have the benefit to the employees on the con side you'll see no Roth component with the simple ira unfortunately I know also with the simple IRA you have to have it for two years or more before you can roll it over or convert it to a Roth IRA or transfer it to another type of IRA so the SEP IRA I could take that money and convert it right away to a Roth whereas the simple IRA I have what's called a two-year seasoning period so now that you've seen an example of if I pay myself a hundred thousand in each one of these categories and you've seen the pros and cons you can make a decision on what business retirement account is going to make the most sense for me or make sense for you so what I would encourage and challenge you to do is team up with your CPA or your tax accountant and verify what's what business retirement plan is gonna be a good fit for you they'll be able to instruct you on how to max out that contribution on an annual basis and then from there it's all about using that money and investing in what you see best fit for your retirement for a lot of our clients here at equity trust it's investing in alternative assets such as real estate real estate flipping buy and holds rentals vacant lots raw land lending money secured by real estate mortgage notes and trustees investing in real estate partnerships and syndications and crowdfunding and all of these other alternative assets outside of just traditional stocks bonds and mutual funds for more information you can check us out further on our website make sure to subscribe to our youtube channel as well for all of our new and upcoming updated videos we look forward to seeing you on the next video training