Solo 401(k)s, A to Z on the QRP! With Scott Maurer

Transcript:

Scott Maurer  0:00  

tell them, hey, I want to take the money from this account, I'm rolling it over into a solo 401k that I've established, please make a check payable to me as trustee of, you know, ABC 401k plan, you then take that check and deposit it at your local bank.

Taylor   0:17  

This is passive wealth strategies for busy professionals. I'm your host Taylor load and today our guest is Scott Mauer from Advanta IRA. Today we're going to talk about the solo 401k or the QRP or whatever you want to call it. And the important distinctions between that investment structure that that account type and self directed IRA and who qualifies for a solo 401k or QRP, or whatever you want to call it? Because there's a lot of misinformation out there right now, people pushing the solo 401k or I should say recommending the solo 401k for folks that don't qualify just because the solo 401k has some very important advantages over the self directed IRA. I use a self directed IRA myself, this conversation spurred me to look into starting my own solo 401k. So it's a very informative conversation. I got a lot of actionable information out of this conversation. So I hope you will as well from Scott Mauer with Advanta IRA. Without further ado, here's the interview. Scott, thank you for joining us today.

Scott Maurer  1:32  

No problem Taylor. Happy to be here.

Taylor   1:33  

happy to talk with you. We're going to discuss solo 401k K's are important differences between those and the self directed IRA, which we've talked about on the show before, but before we get into that, can you tell the listeners about your background and what you do?

Scott Maurer  1:48  

Sure. Yeah, my name is Scott mountain with a company called Advanced IRA my background kind of magic occasional perspective. I am a licensed attorney. Although what I do for our retirement planning company really doesn't involve My any legal expertise or legal training that I've had in the past, but what I do with Advanta IRA is really focused on our business development. And our business development strategies are really built around educating people about both self directed IRAs, and self directed 401k is the you know, obviously, we're talking about the difference between those. Certainly we educate people, though, at all aspects of those accounts.

The contribution limits the deadlines, what you can invest in what the rules are, that's really what I spend most of my day doing is you're talking it to general individuals, you know, individuals looking to refer people and just giving them kind of the A to Z of self directed self direction in general. Just you know, again, our business development strategy is really just to inform and educate and figure that'll help them do enough to keep us pretty busy.

Taylor   2:51  

Cool, great. So that is a great way to generate business and that's why we got you on the podcast today. I'm sure so nothing wrong with that. Can you let's get right into it. Can you tell us some a give us a high level overview of the solo 401k in comparison to the self directed IRA?

Scott Maurer  3:11  

So the I mean, the self directed IRA is I mean, they both been around for a long time, I think more people are familiar with a self directed IRA, mainly because, you know, a lot of people have former employers plans, they may still be working for people and it's very easy just to roll into an IRA account, and then in turn make those investments. So for an individual who is working for a business where you have a W two salary, their IRA account is the mechanism by which they invest.

So a lot of people more familiar with that type of vehicle. These solo 401k is something that's big and been around for a while. Just not many people know about it because it is an account sp ecially geared to those who are either self employed who don't have employees, because it allows them to take take full advantage of what a 401k would offer but apply it just simply to their Small Business. So it's a specialized plan. Sometimes it's called a QRP. Who unique, unique, a individual kid, they're all the same thing.

It's a 401k for an individual who owns their own business who doesn't have employees, and it gives you a lot kind of more, you know, different benefits. And the IRA has there a lot of similarities, but there are some key differences between them. So people who are self employed, definitely an account you should be looking at. If you haven't, it's, again, there's some CPA is out there who are up to speed and very knowledgeable about it, and will bring that to a client's attention, but a lot of them that aren't and quite frankly, and then they saw a client can have their business be self employed, their accountant is not thinking about retirement planning for them, or different ways to get money in accounts. But the solo K is is definitely a very powerful tool for those who qualify.

Taylor   4:50  

Awesome. So you know, there are very important differences between what one can do with a solo 401k self directed IRA, at least to my understanding, I'm certainly not an expert on either of these, especially solo 401k. So can you tell us about, you know, the differences between what one can do with a solo 401k and a self directed IRA, because there's a lot of conversation on internet forums like bigger pockets and various Facebook groups about going to QRP get a QRP. But, you know, Why, what's, what's the difference? Really?

Scott Maurer  5:28  

Sure, there's a couple differences in a couple different areas. So between a 401k slash QRP, and an IRA, one of the main differences up front is how much you can contribute to that account. any given year with a lot of the eye or with the traditional or Roth IRA, you're limited to, you know, six or $7,000 a year that you can put in out of pocket to that to that self directed Roth or traditional IRA. So one big difference the solo 401k in for those of you who are self employed, you could actually contribute up to $56,000 a year into this Hello K plan, and you have the ability to designate up to 19,000 of that money as Roth contributions.

So if you're looking to get more money in a tax free vehicle, a solo 401k, where you elect a Roth feature, one of the huge differences is simply you can put in $19,000 a year into the Roth portion of that 401k and then add your employer's match on top of that, again, where you're getting a combined $56,000 a year contribution into that plan. So quite a bit more on the contribution level. That certainly is one. One big difference. I think another key difference, those people who have for one case are probably familiar with this is that you can borrow from it. With the IRA account, you are prohibited absolutely from borrowing against your IRA account. With 401k plans, you can borrow up to $50,000 or 50% of the total account value, whichever is less. So that's again, a huge benefit.

If you ever need a loan you can borrow from that solo 401k And I think the, you know, one of the other the key benefits is a little a little technical road here. But when you are investing with an IRA account into real estate that has leverage as part of the investment if you're buying a single family home with a mortgage, whether you're investing into a syndicated deal where there's there's leverage involved, your IRA is subject something called something called unrelated business income tax or qubit. Tax, that tax does not apply in most cases to a solo 401k plan. So that's again, if you're looking at investing in real estate, with your retirement funds, a solo Kagan if eligible, gives you the ability to do so into those leverage deals or you might have a greater potential for return and not have to worry about that unit tax. So that

Taylor   7:42  

in the context of You bet I in my opinion, that is the most common reason that solo 401k is are brought up is the lack of eligibility for you bed or or in most cases not being subject to you bet so That's why most people talk about it. But the most, I think the most important thing that is not brought up in the same conversation is eligibility for a solo 401k. So who is eligible for a solo 401k?

Scott Maurer  8:17  

So for solo 401k and this is kind of you Yeah, I think you got a great point there, Taylor, not everybody qualifies. And that can be a misnomer. Someone says, Oh, just go get a solo, okay, to have a solo 401k any 401k for that matter, the IRS expects you to really be a sponsoring business, you know, a company or an entity or even an individual who's a sole proprietor that is sponsoring that 401k has its own business entity, but if you are a W two employee of another company, and you want to start a solo 401k for yourself, you need to have some type of business on that can be on the side doesn't have to be your full time gig.

But you do need to have some type of at least a side business or other source of income or you're driving that active business income. Really qualify you to have that solo 401k. Now, it doesn't have to be a situation where you have a certain amount of profits each year, or maybe even that you are profitable each year in your side business, you just want to have that separate businesses, that's legit, you know, it's not your kids lemonade stand, you know, another two Saturdays a year or something like that you want to have some kind of legit business again, it may not be profitable to you year to year, but it needs to be a legit business. And the IRS does expect when you set up a solo 401k that at some point, and again, not necessarily every year that you make contributions, you know, you defer some of your salary on your side business or you contribute a portion of profits each year into that solo 401k if you never make an extra contribution to that solo plan, outside of maybe rolling over an existing IRA and that's okay, if you've never make an out of pocket contribution.

You're opening yourself up to IRS scrutiny that this is not a legit 401k plan and they really expect you you know, they want you to have sponsoring business and at least the ability to and occasionally making contributions to the plant doesn't have to be a lot doesn't have to be every year, but you have to do something.

Taylor   10:09  

Well, that is definitely good to know that they expect you to contribute. That makes a lot of sense, I appreciate the warning. It's notable to me and that if you're a W two employee, and you have a side business, that you can still be eligible for a solo 401k. Can we talk a little bit more about those requirements and what one needs to do to set up a solo 401k? Like what are some of the specific requirements that we have to fulfill to start with this?

Scott Maurer  10:40  

Sure. So I mean, one easy way to to meet that requirement, let's say you have a side business, if you set up an LLC, or a corporation, and you pay yourself a small salary to you have a separate business account, that you're operating this special business out of it again, it can also be a sole proprietorship, but you need to have income or profits. You have to be running This legitimate business on the side. Now one thing to note I kind of you meant, it just reminded me as well if you have a 401k if you have a W two business and you have a 401k through that company, that's fine, you can still have a separate cell, okay, as long as you have that side business.

Keep in mind though, that your contributions to your company's 401k your W two job 401k will impact how much you can actually contribute on the solo side and vice versa. So you can't double dip that 19,000 of salary deferral plus the profit sharing match is across all of your 401k is so if you have a separate soul, okay, just keep that in mind but you can make smaller contributions again, you need to have you know, you're selling your selling widgets, you are getting paid for consulting services, something like that. Having that legitimate business on the side and you should have a separate could have a separate tax ID number for that business a separate again, a separate LLC, and it should be active income. If you own a rental property and you simply receive rental proceeds each year.

That is passive income that is not a business activity to the IRS. So it should be you're selling widgets you're providing some kind of service. In order to legitimize again that side business it's going to then of course legitimize the sale. Okay.

Taylor   12:15  

So that is a very important caveat, because when you say did you have an LLC setup most people most real estate investors might think oh, I hold my properties all in LLC, so no problem but since your properties are probably passive income as far as the IRS is concerned, those do not make you eligible for the solo 401k.

Scott Maurer  12:37  

That is correct, right. And then that goes and be frank that goes for I raise to to make contributions to any type of retirement account. It has to come from an earned income situation and even though you're you're dealing with tenants and toilets and termites and those lovely things as rental properties, the IRS still considers your rental income passive. So you have to get to a situation where you can have a rental portfolio and pay yourself as Small salary as the property manager, so to speak, that would qualify if you long as you take that salary.

And again, that's a situation where your accountant is going to come into play because frankly, sometimes they will say, why would you take a salary? You don't want to do that. And then for some or in some cases, they're they're definitely corrected other situations of you're ultimately looking at, I need to legitimize my 401k so that I can use all that cash to invest in a syndication and not have to worry about you, but it's going to be worth it in the long run to maybe pay yourself a small five or $10,000 salary one year to legitimize your 401k.

Taylor   13:38  

Yeah, I think if it's part of your overall strategy, then don't let your CPA necessarily talk you out of that small salary, if it is for a bigger purpose. Correct? Yeah. Okay. And are there any particular types of business structures like entity structures, you know, S corp, C corpse? I'm certainly Not an expert on these things. How does details play into this kind of eligibility? Can you explain that a bit? It's all kind of, you know, murky to me.

Scott Maurer  14:09  

Yeah, I mean, it's, it's, again, when you're setting up your your side business or small business that's talk to a CPA that as well, most of them most, most of times when you set up a business, you're either doing it as a sole proprietor, if you may be using a spouse as an LLC tax as a partnership that would qualify and certainly a lot of have s corpse as well. Again, it ended right tax structure for you, is going to possibly depend on the right business and also if you have that partner, there's certainly tax saving strategies within within a business whether it's a side business or whether it's your your primary business if you are self employed.

That's a great discussion to have with your CPA because there are a lot of other tax issues that go along into that. But an S corp, a sole proprietor, an LLC tax is a partnership those can all be certainly qualified. We don't see a lot of corporations, a lot of small businesses. We don't want to be taxed as a C Corp. For some obvious reasons, but usually s corpse partnerships and sole proprietors are the entities that are feeling that so okay

Taylor   15:10  

I brought it up I need to get an escort but a C Corp s expert on here to explain the differences to me so I'm going to I'm going to write that down and make that topic

Scott Maurer 15:20  

yeah mean quick just a very quick and because I'm not an expert at it either s corpse allow you to take some salary and also some profits to the business and and treat them a little bit differently a seek and so you as an individual you don't your tax in one way now with a C Corp that's companies like Coca Cola, McDonald's where the corporation pays tax at the corporate level. They then pass all of the earnings of dividends on to the shareholders. Well, if it's you, who owns that business as a C Corp, you're going to pay tax at the corporate level, have that income then pass to you and when you take your salary, you're paying tax again on that income.

That's why a lot of small businesses are not going to be taxed as a sequel or The larger corporations do that because it allows them to encourage people to invest with them and pass on a capital gains tax rate as opposed to ordinary because there's definitely some differences there. But yeah, I would have an expert on for the S corp and C Corp, because that's definitely would be beneficial to, especially those individuals who are looking to start a small business on what the benefits and escort gives them.

Taylor   16:23  

Well, that is definitely good. And now I appreciate the high level overview. I think that has clarified a lot for me as far as actually deploying funds that are in a solo 401k. So as we currently record this, the episode that came out yesterday was about checkbook control IRAs. Now and this is going live, when you're as folks are listening to this, there'll be a few months ago, but if you want to look back to that, if we compare the actual use of funds in a solo 401k to maybe a checkbook control IRA or self, the directed IRA, what does that look like and how to fees compare, and the actual nuts and bolts of actually deploying that money, say into a real estate syndication, or a rental property or things like that.

Scott Maurer 17:13  

Yeah, I think that's a great point. I think this is where you're going to see another huge benefit that the solo k has over the self directed IRA, the self directed IRA, as you mentioned, if you want that type of checkbook control, where you the money's in an account that you can simply write a check out of you're not having to go back to your IRA custodian. It requires you to set up an LLC, so you're going to have to set up an LLC and a state pay a fee to get it set up pay an annual fee going forward to keep that LLC active. So for a self directed IRA, you cannot be your own trustee or custodian, you have to have a company and that's something we do for clients at advanta.

But to get that direct control, you have to then you sort of set up basically an LLC Some people use trust here and there, to get that checkbook control know the solo k You are the trustee of the plan. And as you can open up a bank account, you can go down to your local bank where you have all your other accounts that and open up a bank account in the name of the solo 401k that you establish, you can roll your funds into that bank account and simply do all your investing in and out of that that one account. So we call that an advantage. We call it a do your own 401k we can provide you with the 401k plan document, you take that plan document, we help get a tax ID number, those are the two items you would need them to get a bank account established. And by doing that, that's when you're going to get the checkbook control without even without needing the LLC.

So when you go to make investments syndication or property down the street, you're running everything in and out of that 401k bank account. So it does bypass the requirement of having that LLC Now, some people use LLC for the legal reasons for protection, but if you're solely looking for that checkbook control, you can get it with a solo 401k just a bank account at your local bank interest. I think that's a huge, that's a huge benefit. Obviously, you have much more control, you get that degree of control right in that 401k.

Taylor   19:06  

That's fascinating. That's a great advantage. Another question that I have is so a lot of people, a lot of our listeners, passive, well, strategies for busy professionals, we're busy professionals, we got the W two or we had it at one point. So we have either a standard 401k or some kind of rollover IRA right now, if we want to go down this road of the solo 401k How can we become eligible to roll those funds in the rollover IRA? or what have you into a solo 401k? Or can we do that at all? What are our options?

Scott Maurer 19:47  

You can so if you if you as long as you're eligible to have the solo 401k then you get it set up. Your next step then is either to fund it, you know with new contributions that you make from your business or if you have an old 401k or a role Ira, you simply contact the administrator or custodian of those other accounts and and tell them, hey, I want to take the money from this account, I'm rolling it over into a solo 401k that I've established, please make a check payable to me as trustee of, you know, ABC 401k plan, you then take that check and deposit at your local bank. So they're going to issue you 1099 form showing that they distributed that but they're going to coat it, they distributed it to a qualified plan, basically your 401k so no taxes are withheld. The IRS is not going to expect any income tax to be paid, because it was rolled over to a qualified plan.

Taylor   20:41  

So going back to the limits on contributions and what have you, how does that play into rollovers? Is there any limitation or how does that work?

Scott Maurer  20:55  

It does not actually doesn't play into it. Also, the IRS only limits retirement accounts. IRAs and 401k is each year to how much you can contribute out of your pocket. So that for the solo k that $56,000 number, that's only for a new money going into the plan from your own pocket, if you have money in an old 401k or an IRA account, that is money that's already been contributed, so there is no limitation on rolling that money into the soul. Okay? Okay. So your contributions are not affected at all, by other monies you're moving in from IRAs or 401k is

Taylor   21:31  

interesting. So now I'm I'm formulating some plans in my head for you know, what I need to do for you know, because my my syndication business will make me I believe will make me eligible, so, we might need to have a conversation about this later. So you know, while we've got you what are some other misconceptions that you've noticed about solo 401k is that you'd like to clear the air on what we've got our our listeners tuning in.

Scott Maurer  21:58  

Again, I believe We've mentioned already I mean, I think the idea that just everyone can have one just sign up for one is definitely a misnomer that you need to make sure you're still following the rules. The UBTI tax issue, you've attacked the 401k is it doesn't apply an acquisition indebtedness. So if you were buying into a syndication that's acquiring new debt, or you're buying a rental property that you're getting a new mortgage to acquire the property, that's where the 401k doesn't pay you bit tax. And if your 401k was buying into something where there was already debt financing in place, your 401k may still be subject to you bit tax, and that's a very tricky area that I think the IRS hasn't fully flushed out.

So that's something to be careful on. As well as if your 401k was invested into an actual business. That's where you bit tax applies to IRAs as well, not just in the leverage real estate arena. But if your 401k was invested as a partner at a local restaurant, or your 401k is getting business profits back each month, your 401k is still going to be subject It's that you get taxed. So again, that's something else that you gotta keep in mind. I don't know, it's a misnomer, or misconception. But one thing to remember about 401k is we're just talking about the rollovers and the transfers from IRAs and old 401k is due to a mistake made when they set the Roth 401k up, you cannot move a Roth IRA into a 401k. Even if you have that Roth 401k set up just one little thing that they they messed up on doing. They've never corrected it. So your Roth IRA funds do have to remain separate from the from your 401k That's some that's the one account that cannot be rolled into that so okay.

Taylor   23:39  

Dang it.

Scott Maurer 23:42  

Yeah, so unfortunately, that's the rules. Okay,

Taylor   23:46  

okay. Well, that that answered one of my questions I had for you later offline. So that is, that is definitely good to know. And it was it was interesting to hear about the different conditions in which solo 401k Might be subject to paying you bet if you're investing in a syndication that's already leveraged.

Unknown Speaker  24:07  

Correct it's possible again, that's where that it's less clear than I wrestled. I'm not saying it definitely applies, but I don't I'm definitely saying it doesn't automatically clear your your fine. Be careful on that. Because again, that's just the IRS. The exception to you bet is for Acquisition indebtedness, which means you're investing into a project and then there's debt being acquired.

But if you were coming in late to the game or something's been going on for a few years, years, you could be subject to that that tax. I will say one other one other quick thing about the solo K to that people could recognize if solo 401k is everything solo that would mean one well, solo 401k is can cover say both a husband and wife or business partners as long as you don't have any common law employees, you know, people who are working, you're paying on a W two who are working more than 1000 hours a year for you. You don't have any of those individuals and all of the Quote employees are business owners or spouses of the business owner. They can also participate as well. So we've seen businesses with husband and wives, both being able to contribute to that solo, that same solo 401k plan. Interesting. Those are

Taylor   25:14  

interesting stipulations that will need to keep an eye on as we set up our solo 401k case. Right now we're going to take a quick break for our sponsor. Okay, Scott, I've got three questions. I asked every guest on the show.

Scott Maurer  25:30  

Are you ready? I'm ready.

Taylor   25:32  

All right, great. First one, what is the best investment

Scott Maurer 25:37

that you ever made? The best investment actually took some Roth IRA funds and caught wind of a small startup company that was showing some stock they were still private and taking that company public, but you're able to get in at a obviously very low stock price up front of a private investor Of course, very speculative. But it was a good investment. I knew some of the other people that were getting involved who are savvy investors as well figured that's that's a good sign as well. I was able to get on that get on that stock and very low price stock, went public on IPO and then made a nice little profit on it. So it's kind of taking that little bit of a gamble, obviously, will speculative, but I did it inside the Roth account, so I didn't have any tax consequences. Nice. Are we able to ask you, if we would know what that company is? And who is the company? You wouldn't? It was a very small company. So I don't won't share that detail necessarily. Yeah, it's Yeah, it was it was a smaller company. There's thousand around the US to get started up like that. Some of them one of them have the same success stories. And of course, some of them don't. But it was it wasn't like Google or anything like that. I was got it on it wasn't it wasn't Amazon. All right. Go. It's not Amazon. I'm not best friends with business.

Taylor   26:57  

On the other side of that, what is the Worst investment you've ever made.

Scott Maurer  27:02  

Well, I was much younger at the time. I spent a lot of I used to cut grass for, you know, earn my chore money per week growing up and I would spend a lot of that money at the local baseball card store buying and buying different baseball cards football cards, because at the time, those stories were coming out of the people who were discovering those old cards in the attic that were worth 1500 grand at the time, and so I spent a lot a lot of money growing up on baseball cards with the hopes that I would already have that collection that was going to be $50,000 card and turns out I guess that's not the case. They're not really in demand anymore, and I still have them all.

Taylor   27:43  

Well, man, well, at least you have the memory and and the important lesson, so yep,

Unknown Speaker  27:48  

yes.

Taylor   27:50  

You know, what you gonna do? My favorite question at the end of the show is what is the most important lesson that you've learned in business and investing

Unknown Speaker  28:00  

I think it's surrounding yourself with the right people. When you go to make any investment, you're investing in real estate, you need to have the right team to value the real estate property. If you're investing in private equity, you need to know how to evaluate and if you can't, you need to know who to ask. And I think that's probably the most important thing is really surrounding yourself with the right people who can answer those questions that you don't know the answer to that you can trust them to give you that that right answer.

Taylor   28:26  

Nice. I like that. So Scott, thank you for everything today. This is a great topic that I was really looking forward to covering on the show. if folks want to learn more about Trello 401k is more about your services, where can they get in touch with you?

Scott Maurer  28:41  

Sure, they can just they can reach out to me My number is 727-581-9853 my direct extension is 1123 so you're calling the company hit 1123 you get me directly. You can also go to Advanced IRA com they're all under we have a meet the team page. You can See my face and you can email me directly from there as well.

Taylor   29:03  

Nice. Great. Well, once again, thank you for everything today. This is a very interesting topic and I feel like there's a lot of murky information out there. So I'm glad you you cleared the waters for us today.

Scott Maurer  29:16  

Sure, no problem anytime.

Taylor   29:18  

All right, thank you everyone for tuning in. If you're enjoying the show, please leave us a rating or review on iTunes. Very big help, you know anyone that could use a little bit more passive wealth in their lives, please share the show with them and bring them into the fold. I hope you have a great day and a great rest of your week and we will talk to you on the next episode of passive ball strategies busy professionals. Take care bye bye