Here’s the challenge.

Please, start askin’ around. Talk with friends, neighbors, family, folks at work, the innocent bystander behind you in line at Starbucks. Search everywhere ’til you find someone who has firsthand knowledge, no hearsay allowed, of a retiree, or retired couple who’re takin’ home at least $36,000 a year from their 401K. The next one I meet’ll be the first.

Look, I know they’re out there, but my point is that they’re the exceptions proving the rule. The rule? Yeah, the rule. Normal for folks who relied on their employer’s 401K isn’t anywhere near that sort of income. Imagine what it must feel like. You’re almost ready to retire. You call the guy who’s been guiding you for years. He says the ‘safe rate’, the yield at which he judges your principle to be relatively safe from market erosion, will take your half million bucks and give you back about $15-20,000 a year if you’re lucky.

That’s another question you might wanna ask. Find out how many folks have managed to hit the half a million dollar level in their 401Ks.

Given today’s rate for the 10 year Treasury — an eye-popping 1.9% — how you even get that much income becomes a pretty good question. I wonder if the advisor has a pretty good answer.

One of the most disturbing facts I’ve uncovered over the years, is that the average American man with a 401K, has less than $70,000 in it at age 58.

The second part of this challenge is to ask yourself a question.

Forget that financial advisors say to expect a conservative 4% yield on your principle at retirement. Forget that the highest, most conservative Treasury note is less than half that. Most of all, forget that the poor retirees who’re livin’ off that pitiful yield, are doin’ so — what for it — after they pay taxes on it. Oops. Talk about adding insult to injury. First you hit retirement after surviving the roller coaster of stocks ‘n bonds for 20-30 years. You’re proud of what your hard work and stick-to-it-iveness has produced — $500,000. At the current 1.9% 10 year Treasury yield, that’s not even $800 a month — and that piddlin’ amount is before taxes. Can you say, “Welcome to Wal-Mart’?

So, here’s the question.

Given the current balance in your own 401K, what’s a reasonable prediction of your end game retirement principle?

Bonus Question

Combined with your (muffled giggling in background) Social Security check, imagine what quality of retirement you’ll have — OR — IF you’ll be able to retire at all.

If the concept of 401Ks/IRAs had proven to have been a rockin’ success, heck, even a kinda sorta, maybe success, I couldn’t pose this challenge. But we all know it’s a losing proposition for the vast majority of Americans who keep havin’ those pesky birthdays every year. Yet, year in and year out, they contribute. Why?

Let me know about all those happy campers you find who’re livin’ the retirement of their dreams, thanks to their 401Ks.

You can also call me, to let me know your retirement isn’t lookin’ so hot about now. Together, we’ll check out the lay of the land and figure out a plan to vastly improve your end game. Call me at 619 889-7100. Or simply click on the Contact BawldGuy button up top, and start writin’. Have a good one.

As it relates to contributions, one great advantage to the 401K is that the employee (you) can make contributions in both a pre-tax, traditional or after-tax, Roth format. With both the SEP and 401K plan where pre-tax (deductible) contributions are being made, your contributions are tax-deductible and grow tax-deferred until you start taking distributions in retirement years.
However, let’s break down the contribution limits for both.

SEP

With your SEP, you make contributions up to 20% of your net self-employment income. So, what is NET income? Net income would be your self-employment income minus half of your required self-employment tax. This 20% threshold allows you up to a total of $50,000 in contributions for 2012.

401K

As with the SEP, you are allowed the same maximum contribution limits…which should lead you to the question of why is the 401K probably better? Well, all contributions to the SEP are based on a percentage of net income, where the 401K allows you to contribute up to 100% of self-employment income through employee deferrals up to $17,000 (2012). Further, the 401K has a “catch-up” provision which allows individuals 50 years and old to contribute (potentially) up to an additional $5,500 for a maximum contribution of $55,500 in 2012. What I said may sound confusing, so let’s use an example.

Let’s use a simple example. Let’s say, just for giggles, that you earned only $10,000 in net income in your business. With your SEP, you would be limited to contributions of $2,000 whereas, if you chose, you could contribute the entire $10,000 into your 401K….also assuming there are no other factors (e.g., W-2 401K employee deferral contributions).

Now, you noticed that I just mentioned the concept of making 401K contributions to both a W-2 and solo (self-directed or not) 401K plan. Most individuals do not know this is permissible, but as long as the individual, employee deferral contributions with both plans does not exceed both under 50 ($17,000/2012) and over 50 ($17,000 + $5,500 catch-up = $22,500/2012) limitations, this is permissible.

Again, as another example:

If you are under 50 and you made contributions to your employer’s plan totaling $10,000 (2012), you could contribute up to an additional $7,000 in employee deferral contributions, as the total contributions between the two plans did not exceed $17,000 (2012). Even under this scenario, one could still contribute up to 20% of their net self-employment income to the 401K plan as long as the total contributions did not exceed your total self-employment earnings for the year.

NOW, ALSO KEEP IN MIND THAT WE HAVE ONLY BEEN TALKING ABOUT CONTRIBUTIONS. WHEN YOU ADD IN FEATURES SUCH AS LOAN PROVISIONS FROM THE 401k THAT THE EMPLOYEE CAN TAKE, THE 401k BECOMES EVEN A MORE POWERFUL TOOL.

One potential drawback to the 401K…since we are past January 1, 2012. If you absolutely want to set up a plan for 2011 contributions, the 401K plan must’ve been established by December 31, 2011. Even though you still have up to April 16, 2012 (regular filing) or September 15, 2012 (late filing) for the accounting of contributions to the plan, the “plan” itself has to be established by December 31 of the year in which you want to make your contributions. The SEP, in comparison, can be open and funded up to April 16, 2012. However, that is probably the only area where the SEP has a true advantage over the 401K.

Please note….and you now know my bias…that I haven’t spoken much regarding self-directed 401Ks and SEPs. While I always preach the benefits of the self-directed model, this post is to compare and contrast 401Ks and SEPs…generally. Just know that with either a SEP or a 401K, you can either make contributions into a “traditional model” SEP or 401K which will only allow you to invest in stocks, bonds and mutual funds OR a “self-directed model” which will allow you to invest in ANY asset that is not excluded by the IRS (which, by the way, allows you to invest in a much, much, wider array of assets….including real estate…with plan assets). The choice is yours.

Remember, as always, this post is to educate and create conversation. It is never intended to replace the assistance you need to secure from your professionals. Bottom line, it is not providing or intending to provide any tax, legal, financial or investment advice.

Now for some real estate investment info to dazzle ya.

Charles Perkins is workin’ on some killer posts, some of which were by my request. ‘Course, I’ve learned to keep my topic suggestions with him as narrowly defined as possible. He tends to research the livin’ crud out of it, which makes me feel guilty sometimes. This is especially true the last month of the year — which, unfortunately is merely the precursor to ‘tax season’. For CPAs, tax season is that ugly stretch of roughly 105 days, when they sleep at least 3-5 hours a day, no matter what.

• He’s got some killer info on various aspects of depreciation.
• He’ll be listing some of the brand new surprises the IRS has for us — most if not all of which went into effect last Sunday.
• I’m makin’ a topic list for him. (Hope he doesn’t read this.)

John Park will be providing his usual stellar posts on self-directed IRAs/401Ks. The guy is always comin’ up with solid info. The clients who’ve used him, now swear by him. He’s the real deal.

David Shafer is by far the most knowledgeable pro I’ve ever met, when it comes to EIULs. He’s a wizard when it comes to EIUL structuring, which is the most crucial factor. I’m big time OldSchool, but Dave sometimes makes even me roll my eyes.

My first post this year will be on the topic of tax deferred exchanges. In fact, I may do a series on all the different strategies for which it can be incorporated into a well thought out Purposeful Plan.

Meanwhile, back at BawldGuy Ranch, operators are waiting to hear from you. Seriously, I need a fix. Call me at 619 889-7100 — OR — click the Contact BawldGuy button up top and gimme your story. I wanna hear it. Have a good one.

However, besides client testimonials, one of the best sounds in the world to me is someone from “the other side” calling and inquiring about self-directed services. Who are these people from the “other side”? Well, in this case, a broker. And, by the way, when I say they are from the “other side” it is not because I consider them from “the other side,” (as I have no selfish interest in where people choose to invest their assets), but rather they typically place themselves on that island as they never encourage their clients to establish a self-directed IRA or 401K. These are typically fine folks…they just believe in self-preservation….of their commissions.

But you know that self-direction is a powerful and effective tool when a broker calls and inquires about establishing a plan for themselves. In this case, the broker advised they wanted to invest in real estate and, of course, their retirement plan would not allow them to invest in such assets (what a shocker!!). The broker had NO problem kindly stating, “no offense, but you know that I can’t recommend these types of plans to my clients. But it is kind of funny that I am setting up one.” I told the broker that I fully understood the concept of “self-preservation” and took no offense to the comment whatsoever. They have their commissions to make.

Now, this story should be prefaced by the fact that there are brokers out there who will recommend to their clients that they consider investing in non-traditional assets….unfortunately, in this world of “all about me”, those brokers are getting harder and harder to find.

Without getting into a long dissertation on the other, more salient differences, in comparing whether you should establish a self-directed plan using any of the aforementioned formats, typically the final decision by the individual will boil down to those two primary issues (fees and control of the account). All models have their potential pros and cons, but the choice is clearly yours as the consumer.

Fee Schedules

In making a decision based in part on fee schedules, individuals must always compare “apples to apples”. The custodian/administrator model will always (initially, anyways) have lower fee structures as compared to a facilitator model; however, those fees charged by the custodian and administrator are annual fees, not a one-time fee, and they DO add up over a relatively short period of time. Not to mention as well that they do not give you full control of the account. Oh, finally, they also do not assume any responsibility for your plan’s compliance with IRS regulations. Custodians and administrators will not only charge you annual transactional and account balance fees, there are many other “additional” fees that they can and typically do charge the client.

Interestingly enough, without identifying the custodian, let’s look at a self-directed custodian and the kinds of fees they charge for. These are ALL transactions you, the account holder can do yourself and, in most cases, for no fee — and you control the account, as well. Be prepared, the list isn’t necessarily short:

Transfer Funds Within IRA
Termination of IRA, Partial
Termination of IRA, Complete
Roth Conversion/Re-characterization
Roth Re-characterization for conversions done at different custodian
Contributions/Dividends/Payment
Distribution / Withdrawal / Investments / Asset Acquisition / Miscellaneous
Distribution, Regular Retirement Stream, Each
Quarterly paper account statements
Mail forwarding

….think we are done…..uh, no

Overnight Courier Delivery, Letter Envelope
Cashiers Check
Returned Check/Insufficient Funds
Stop Payment
Copy of sent or canceled checks
Change of account type
Reversal of fees for alternate payment method
Re-producing tax documents
Document Research or Production
Deposit Research

….do you think we can stop the list at 20 potential fees? Would like to, but….uh, no

Rush Fee For 24 Hour Expedite Requests
Hourly Rate For Extraordinary Services
Wire Transfers – Outbound
Wire Transfers – Inbound
Document Review
Storage Fees

….now, I think this is it, unless of course you want to review the “fine print” (e.g., keeping the interest or majority of the interest on your non-invested funds)…didn’t think so.

So,

this isn’t to say that these fees shouldn’t be charged by a custodian/administrator, but the bigger question is why would you want to pay those fees if you don’t have to?

Ultimately, if you are considering a self-directed IRA or 401K, you have to elect the format that makes the most sense to you. What you want to do is to execute an “apples to apples” comparison and, ultimately, elect the model and format that makes the most sense to you.

I fall for what seems to be the daily ritual of “is the market up or down?” and “wow, it is really up today” or, unfortunately, “boy the market really stinks today.” And, let’s be honest….don’t most of us walk around and think there is nothing we can do about it?!

With the ever so recent stories of banks borrowing 7.7 TRILLION dollars from the Federal government during the height of the financial meltdown (yep, you read that one in the last day or so?) to stories about how employee retirement plans are being plundered by the companies they work for (in fact, a good read is Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers), it is easy to become very jaded on who and what to believe and who and what to trust. It seems like our very core has been violated because of this. And, by the way, it is always easier (or harder to fathom) to really show what 7.7 TRILLION dollars looks like:

$7,700,000,000,000 (now someone figure up if $1 bills were put end to end, how many times would that take us around the world).

While the Wall Street Fat Cat is still making his money, fees and bonuses, while investing differently himself, I am a huge proponent of people like US retaining as much control as possible, taking it from the Fat Cats. And, what is nice about the message of taking control back is that I am not trying to sell you an investment. But, I do know that there is one very meaningful, impactful, and strong statement we can all deliver to Wall Street that will, over time, give them pause for thought. And, it has everything to do with controlling OUR retirement funds. When we control our own retirement funds, we take “ownership” of our life and don’t just bury our heads in the sand. If all of us who were able to take control of our retirement funds did so, think of the significant impact this would have. While it is an old adage, it is ever so true….NOBODY cares more about your money than you do.

Let’s be a bit philosophical…..if you could control your own retirement funds and invest in anything that is permitted under IRS regulations…..from real estate to hard money loans to businesses to precious metals….why WOULDN’T you want this freedom? Why wouldn’t you want the ability to invest in any asset class YOU want from one account? I think we all need to break ourselves from the “well, whatever it (their 401K) grows to is whatever it grows to” mindset, to exploring how we can take those dollars and be good stewards of that money. Not only is it the right thing to do, it is incumbent upon us to do so.

I think most people would agree that one should have the ability to have true diversification within their retirement accounts….however, why is it that brokers rarely suggest investing in ANY asset outside the stock market?! You know the answer to that question, which should tell you one thing….don’t put all your eggs in one basket (brokerage account)….consider the advantages of self-directing your retirement account through a self-directed IRA or 401K. You will view your retirement account in a whole new light.

So, the other morning I am at the gym working out hard (in the dry sauna) and I come across this article (“Don’t Let Inflation Scare You Off”) in the USA Today from October 31, 2011. As I started reading and soaking in how the author bemoans the stock market and raises dismal statistics of what it has done recently and historically, I get confused that he comes back at the end of the article and tells people that they will be “richly rewarded by stocks even after the hit of inflation.”

Well, it is amazing that I NEVER read anyone in such outlets tout anything other than the market….it is like they think it is against the law or a violation of some “secret handshake” to educate anyone on the fact that, if structured correctly, they CAN use their retirement assets to invest in non-traditional assets outside of the market. After reading some parts of this article, tell me if you agree with me OR am I the moron who doesn’t get it.

The article starts off with this question: “Experts often say stocks do great, in the long term. But, since the great stock crash in the 1920’s, how much has the stock market actually gained if adjusted for inflation?” Fair enough question and let’s break down the guts of the article.

The response to that question is: “Stocks have underperformed for such a long time that some investors are wondering if they’re even worth the trouble.

The article continued by stating that over the last 10 years, investors have come nowhere close to the 9 – 10% investment return they expected. In fact, when measured by the S & P 500, in the 10 year period ending September 30, 2011, stocks returned an average of 2.8%….this, according to Morningstar. Further, if that wasn’t enough of a punch in the stomach, investors had to endure the market roller coaster ride….watching the stock ticker became one of the most highly-rated TV shows each week….or felt like it anyways.

From there the article suggests that over an 80 year history of the market that annual returns when measured against inflation returned 6.7%. But, that is not what makes me confused or mad or whatever term you want to throw at it….what bugs and confuses me is this:

“But, before you throw up your hands and look at the 6.7% average annual return as proof investing isn’t worth your time, consider the alternatives.” The article in contrast to MAYBE suggesting non-traditional asset investing as a consideration, compares the stock market to other investment options…..like…..are you ready for the excitement…..YES, GOVERNMENT DEBT INVESTMENTS. Since 1928, such investments have returned an average annual return of 1.8%. Wow, let’s all dump all of our funds into the market!! I mean, if you can get 6.7% vs. 1.8%, who wouldn’t do that?! If you are catching my sarcasm, congratulations.

Look, again, I am not here to suggest how you invest your funds, but I guess it is frustrating that no one in “intelligentsia” ever speaks about non-traditional asset investing. Does such investing have risks? Of course. Does anyone, however, think the market doesn’t have risk (especially after 2008)? I would hope not. Sometimes I feel like these folks are like the hamsters that keep running on their hamster wheel….they keep talking up the same investments over and over.

The article ends with what I think is going to be an uplifting statement to really provide a “punch” to what, I believe, was an otherwise honest, frustrating and truly dismal reflection on the historical performance of the stock market…but it didn’t come. And, the following ending literally left me saying, “huh?”:

Can stocks be frustrating in the short term? Absolutely. Can they even be disappointing over a decade or more? Yes, although that’s less common. Even so, investors with balanced portfolios have, historically, been richly rewarded by stocks even after the hit of inflation.”

My common sense question….when “experts” talk about “balanced portfolios”, why do they never seem to talk about a truly balanced portfolio….one that may, possibly, include investments outside the market?

Now I know why I said “huh.”

With doing blogs on the BawldGuy site, it is nice that the website owner is a person who, like many of us, cringes when stories come out related to scams and frauds. Besides the obvious pain that it causes to those who have been negatively affected by such schemes, it also makes no sense. True, many of these schemes tend to be Ponzi schemes (NOTE: if none of you are familiar with how term term “Ponzi Scheme” came to be….it is an interesting story that everyone should read) whereby investment dollars always need to come in to pay those individuals who are due money. But, what is really sad, is that there are so many good, solid investment options out there, a fraudulent promoter need not try to prey and take advantage of others.

In fact, for anyone who is reading this and who has also spoken to me, you know that one of my mantras in working with clients in establishing self-directed IRAs and 401Ks is that I do not give tax, legal, financial or investment advice, and painstakingly refrain from the conversation. As I tell many, “my job is to establish your plan so that you can self-direct….but, I will never sell you anything.”

So, with the 2008 crash and an ever-evidenced weak if not abysmal market, it is only more prevalent that self-directed plans are gaining more and more popularity. In fact, they would be even more popular except for the fact that, statistically speaking, very few people are aware they can even self-direct their retirement assets.

Well . . .

With all the good that a self-directed plan can provide to the owner/trustee of their retirement plan, a few bad apples out there have found a way to prey on individuals. Recently, the SEC Office of Investor Education and Advocacy (www.investor.gov) sent out an Investor Alert related to recent fraud cases whereby the funding for the investment made by the investor came from self-directed plans. They noted a recent increase in reports or complaints of fraudulent investment schemes that utilized a self-directed IRA as its main feature. Why? Well, simple. Especially in these uncertain economic times where people have lost jobs, etc., many people have retirement plans that they can use for investment purposes. It is a relatively attractive platform by which these people can secure investment funds vs. writing out a check from their local bank account.

The SEC continued by stating, “While self-directed IRAs can be a safe way to invest retirement funds, investors should be mindful of potential fraudulent schemes”. You see, self-directed plans carry the responsibility that individuals be responsible for their funds and invest them wisely but also within IRS regulations. This gets back to a blog I did before and the contents of which the SEC echoed…..IRA custodians do not, generally, review your potential investment for either its perceived success, its compliance with IRS regulations OR that one is not being defrauded. Thus, the warning.

Unfortunately, and the SEC has cited many in a recent report, there are unsavory folks out there who defrauded individuals. In many cases, these unsavory folks specifically “pitched” the self-directed IRA as the vehicle of choice to make the investment. Besides the ease of “pitching” self-directed plans because of their relative ease in establishing, etc., illicit promoters know that a “boatload” (that’s my official term) of accessible funds are tied up in retirement plans. As evidence, the SEC has noted that as of 2011, it is estimated that US investors held approximately 4.7 trillion in IRAs…..and, folks, this is not counting other retirement plans (e.g., 401Ks, 403Bs). And, by the way, it is further estimated that investors only hold approximately 2% of this money, or 94 billion, in self-directed IRAs.

Not surprisingly, fraud promoters who engage in fraudulent and Ponzi-based schemes want to exploit such plans as the plans allow individuals to hold within their IRA any permissible asset class investment, which includes unregistered securities. This coupled with the fact that IRA custodians rarely, if ever, are responsible for investigating such investments on behalf of the IRA owner….remember, it IS self-directed. And, remember, such a wide array of investment options is totally permissible as the IRS only restricts investments in life insurance contracts and collectibles as non-permitted asset investments using such plans.

So, according to the SEC, what are some basic ways that fraud promoters misrepresent potential investors into investing into their offerings? Well, here are a few:

Misrepresentations Regarding Custodial Responsibilities – Boy, this is an easy one. A promoter says something to the effect of, “hey, your IRA custodian wouldn’t let you invest in this if it wasn’t on the up-and-up, right?” Or, “we totally understand your interest and concern that this investment is permissible under all IRS rules”….they proceed to advise that someone at their “company” has checked it out with all the national IRA custodians and received “clearance” that this type of investment is permissible. They even suggest that the custodians “believe” this is an outstanding investment opportunity. Another will be an outright lie where the promoter says that the client’s IRA is protected up to $250,000 by the FDIC. This, by the way, may very well be true on CASH assets HELD by the IRA custodian, but it certainly isn’t true if the investor invests in any other asset class investment….legitimate or not (e.g., Ponzi-based or other fraudulent scheme by the promoter)

Again, buyer beware.

Exploitation of Tax-Deferred Account Characteristics – Self-directed plans are, generally speaking, tax-deferred plans that carry significant penalties for prematurely withdrawing (not investing…withdrawing) monies and fraud promoters may know this and use it to their advantage and, possibly, your detriment. Want a couple of examples? Well, first, most people know that since the gains in the plan are tax-deferred and they will not be taking out distributions until, generally speaking, retirement years, that they can “wait.” Let’s break this down further…..let’s say you were 50 years of age and you invested into an investment that promised a higher return the longer your funds are in the investment. Well, you might be thinking that since you don’t need these monies….immediately….that you can wait and get a higher return. Some have done this and have found that their investments disappeared somewhere along the line by a fraudulent promoter. This is not to say that such investments (e.g., higher returns for long hold times) are fraud-based, you just need to do your full diligence as this is being used as an example.

A second example is what I call WISH….the individual fears that their investment may be in trouble for a variety of reasons….and the promoter of the investment tells them to be patient. The IRA account holder may fear…and they shouldn’t by the way….that if they contact the SEC, IRS, etc., that the call they make may also trigger an early withdrawal “tax” or audit of some type. As a result, they kind of bury their head in the sand and “wish” that things will get better.

Lack of Information for Alternative Assets – As has been evidenced over the last several years, it is fair to say that your investment funds are not necessarily “safe” by any means in the market. And, alternative assets can be a safe, sound, “sleep well at night” investment that YOU feel comfortable making. As an example, I recently did a hard money loan where the loan I was giving out was “secured” by a PAID OFF property that had no liens of any kind against it. The borrower put up their home as security. In my mind, that was extremely secure….and certainly much more secure than Wall Street.

But, that being said, it is true that such investments may not have significant and comprehensive information related to the investment in order for the investor to make a decision based on historical performance and conditions, etc. And, where GE stock has been around for a long time, the alternative asset may not have that kind of history or track record of performance. And, even if such information is available for the investment, one should ask whether the investment (or fund) has been audited by an independent party? Something to think about.

What to Do? – Pull in your professionals. Ask questions and lots of questions. And, then ask some more. As the SEC says, be mindful of “guaranteed” returns and avoid unsolicited investment offers from people who may not have your best interests at heart. If someone is telling you about a 16% return on your investment, you might want to ask “what’s in it for you?” Not only is that a legitimate question, you may also receive a very legitimate response….but, you should still ask the question.

The SEC cited some recent cases if you want to do some more reading. Check out:

SEC v. United American Ventures
SEC v. Stinson
SEC v. Durmaz
State v. Smith (24C02-1102-FB-00044) and State vs. Snelling (24C02-1102-FB-00046) (Indiana)
In re: Stephen Edward Gwin, et. al. (Missouri)
Texas v. Warr Investment Group, LLC, et. al (Texas)

For more information, go directly to the source. Please visit http://www.investor.gov/news-alerts/investor-alerts/investor-alert-self-directed-iras-risk-fraud for the alert from the SEC.

None of the aforementioned designations indicate you can truly control how you invest your funds. They’re merely 401K plans for self-employed individuals. What you really need to ask yourself…and there is not necessarily a wrong answer….is: 1) Do I only want to invest in stocks, bonds and mutual funds, etc. as part of my plan? OR 2) Do I want to have the option to invest in any asset class not prohibited by the IRS? Folks, there is no wrong answer….that’s what makes this country great…you have options and choices. But, I am guessing if you are a regular reader of this site, your preference is probably not to be limited in your investment options.

But, self-directed or not, all 401K plans for self-employed individuals must meet certain requirements. Let’s review some of the basics:

1) “Is this new?” – I hear this all the time and, no, 401K plan for individuals are not new. Nor, by the way, is your ability to self-direct an individual plan…again, as long as you follow all IRS and, if applicable, Department of Labor regulations.

2) Participants – An individual plan covers a business owner with no employees, or that person and his/her spouse. Please note, individual plans (generally) have the same requirements of any other 401K plan.

3) Contributions – One interesting facet of an individual 401K plan is that the owner is both the owner and employee as it relates to the plan. Contributions can be made by both elective deferrals and employer non-elective contributions. For 2011, elective deferrals can be made up to 100% of compensation (i.e., earned income) up to an annual contribution limit of $16,500 (under the age of 50) or $22,000 (over the age of 50), or
a. Employer Non-Elective Contributions up to 25% of compensation as defined by the plan, or total contributions, not counting “catch up” contributions, cannot exceed $49,000.

You will always want to review with your CPA the exact, maximum contribution you can make. If you are wanting to maximize your contributions (up to $49,000), you must make a special computation to figure that amount for both elective deferrals and non-elective contributions you can make for yourself. When figuring this contribution amount, compensation is your “earned income” which is defined as net earnings from self-employment after deducting both: 1) one-half of your self-employment tax, and 2) contributions to yourself.

Let’s use an example. Let’s say that Sam is 52 and earned $50,000 from self-employment earnings. He deferred $16,500 in regular elective deferrals plus the $5,500 in catch-up contributions…totaling $22,000. His business contributed 25% of his compensation to the plan….or $12,500. Total contributions to his plan for 2011 total $34,500. This is the maximum that can be contributed to the plan for Sam for 2011.

Finally

Testing in a one-participant plan – A business owner with no employees (other than possibly a spouse) does not need to perform non-discrimination testing for the plan as there are no employees in which to discriminate against. However, if the business owner hires even just one employee, you can throw everything out the window. If employees are hired and they meet the eligibility requirements of the plan, they must be included in the plan and their elective deferrals will be subject to annual compliance testing, etc. This doesn’t mean that when a self-employed individual has a 401K plan…and, let’s say it is self-directed as well….and adds employees that he cannot self-direct or have the plan. It just means that there will be new and different requirements as it relates to annual testing.

Also, keep in mind that under current regulations, if an individual plan has assets of under $250,000, there is no reporting requirement for the plan until assets either surpass $250,000 or the plan is in its last year of being a plan. Once surpassing $250,000, the plan can have its assets reported via the 5500EZ form or 5500-SF form.

As always, this piece is to be educational in nature. What’s important to keep in mind is that you always have options…make sure you know them….it is your money, your plan and your future. Specifically, as it relates to contributions made to the plan…..and you know what I am about to say is coming…you should always review annual contributions to your plan with your tax or accounting professional.

Many people believe if their funds are in an old 401K, then they have to roll it over into a new 401K, and if their funds came from an IRA, then have to move their funds to a new IRA.

Is any part of the previous statement true? Well, yes, but not for the reason many think. It is true that Roth IRA funds cannot be transferred into a 401K plan unless it is a designated Roth 401K. Otherwise, however, there is no truth in the statement.

Simply speaking, other than the aforementioned example with the Roth IRA, most funds from other retirement plans can be transferred or rolled over into a new IRA or 401K. Where the funds “go” (transfer or rollover) is more contingent upon the employment status of the account holder and really has nothing to do with what type of account it is coming from.

For example, if the individual is self-employed, that individual qualifies for the 401K plan and, as a result, both IRA (non-Roth as mentioned earlier) and old 401K funds can be brought into the newly-established 401K. Conversely, if the individual is not self-employed (typically a W-2 employee or retired), both IRA and old 401K plan funds can be transferred/rolled over into the IRA, not the 401K. So, it makes no difference (generally) what type of funds are going into the new plan, but what entity “type” the new plan is.

Let’s break this down a bit further and examine the permissibility and restrictions in rolling over other retirement fund accounts into either IRAs or 401Ks.

Roll to a 401K? — Roll to an IRA?

Roth IRA NO NO

IRA (Traditional) YES YES
SIMPLE IRA Yes, after 2 years Yes, after 2 years
SEP-IRA YES YES
457 (government) YES YES
401K (pre-tax) YES YES
403B (pre-tax) YES YES

BawldGuy Here: I apologize for the helter-skelter appearance of the data above. I was unable to correct it adequately. Why, you may ask? Cuz I’m a TechTard when it comes to that stuff.

As you can see, just because someone has an IRA doesn’t mean they can only roll it to another IRA. And, the same applies to the 401K plan as well. It depends on how and what “entity” is established and what the person qualifies for.

Obviously, this is a brief breakdown on rolling over funds into an IRA or 401K . . . as these are the types of accounts that people typically utilize for their self-directed accounts. If you are interested in learning how other retirement accounts can or cannot be rolled over into other retirement account entities (whether self-directed or not), please feel free to ask OR also visit www.irs.gov and search for Tax Information for Retirement Plans Community.