Are you aware of what self administered plan attributes are? IRAs and 401Ks are definitely NOT equal. It’s much mo betta to know.
Transcript: Hi this is John Park with PGI Self-Directed and contributor to BawldGuy Talking. Today, we’re going to talk about five things that just may change your life. What are these five things? There are five minimum reasons why you would want to probably consider a self-administered 401 (k) plan over an IRA. Self-directed or not, it doesn’t matter. What are these five things? By the way, there’s more than five, but I’m going to keep it simple and keep it just to this five. Number one is the contribution limits to what you can put into a 401 (k) plan when fully maximized versus an IRA is substantially different. First of all, with the 401 (k) plan, if you’re under the age of fifty, you can put in employee deferrals, basically contributions from your self-employment earnings of up to $17, 500. You can do that raw, traditional, or a combination thereof. If you’re over the age of fifty, it gets better. You can put in $23,000 of employee deferrals. That also doesn’t even reference what else you can do with profit share. If you have profits in your business you can actually go up to a total of $56,500 if you’re over the age of fifty. Now, compare that to the ugly sister, the IRA. You’re going to be limited to $55,000 if you’re under the age of fifty, $65,000 if you’re over the age of fifty. Now, for those really smart folks of you out there who are familiar with simplified employee pensions or SEPs, you may say, “Well, the contribution limits … yeah, they’re a little bit more on the 401 (k), but they’re practically the same between the SEP and the 401 (k).” You would be absolutely correct. That takes us into point two. Number two, you can take loan provisions from your 401 (k). You cannot take a loan provision from any IRA. It doesn’t exist. Now, my job is just to educate you on what you can and cannot do within that 401 (k) structure. Think of this, how would you like the opportunity to be able to exercise a loan from your 401 (k) plan of up to $50,000 or 50% of the account balance, whichever is less? Quick math lesson: If you had at least $100,000 or more in your 401 (k) plan, and if you wanted to, you could exercise a loan of up to $50,000. Number two, you have five years in which to repay the loan. It does have to be paid back on nothing more or nothing less than a quarterly return of amortized principal and interest. Again, there’s no prepayment penalties as long as you follow those terms in repaying the loan back. The final step is what is the interest rate? It’s generally accepted is that long as you’re charging yourself at least 1% over prime at the time in which you take out the loan, that is acceptable to the IRS. Who are you paying back? Yourself. Could you possibly use the benefits of that loan? Possibly. Huge benefit in that you can take out that loan. Number three, and this is a pat on the back to this guy’s company, PGI. Most self-directed companies out there that are setting up these self-administered 401 (k) plans charge annual fees. They call things such as amendments, updates, custodian services, and administrative services. At the end of the day, PGI does not charge any annual fees for that role. Now, we’re still responsible to you for providing you amendments and updates to plan documents, but in comparison with other companies, one pat on the back to PGI is we’re not charging those annual fees. Number four is the whole concept of prohibited transactions within an IRA and a 401 (k). I’m not going to delve on this real long because it can get quite lengthy, but just know that with the death … I mean with the IRA, if you have a prohibited transaction within that account, it’s literally a death sentence. It’s full distribution of the plan, which to you means full taxation. If the event occurred prior to fifty-nine and a half, you also have a 10% excise tax. 401 (k) has much softer penalties, not nearly as stringent, and you still keep 401 (k). Finally, number five, is a term that’s called UDFI for unrelated debt financed income. Again, this can get somewhat detailed, but I’m going to keep it simple for now. Unrelated debt financed income simply means that if your IRA borrows funds, whether from an individual or a financial institution, and it uses those borrowed funds and leverages that with an investment, that secures profits. You will have to pay taxes on the gains secured by the leveraged or borrowed funds. If properly structured, there are no UDFI taxes with regard to a 401 (k). This is a huge benefit to the 401 (k) plan and one that anyone should strongly consider if they’re planning on borrowing funds. Now, at the end of the day, the bottom line is you still have to decide whether or not you’re doing the IRA or the 401 (k), and it’s more than just you deciding. You have to qualify for the 401 (k). That is a separate topic that we’re going to talk about. The bottom line is, if you do qualify for the 401 (k), I think you can maybe see that these five reasons are substantially beneficial to you as to why you might want to consider a self-administered 401 (k) versus a self-directed IRA. Again, this is John Park, PGI Self-Directed. I hope you found this information to be helpful to you. See you next time.