IRS Code 408 M3 and Self-Directed IRAs
As with the 401(k), the Internal Revenue Code also sets forth rules for another employer-sponsored retirement savings vehicle known as a simplified employee pension (SEP) IRA. Unfortunately, many investors are unaware that they can purchase alternative investments like real estate and precious metals within an SEP IRA – though IRS Code 408m3 restricts certain types of investments from being eligible.
What is a 408(k) plan?
A 408(k) plan is an employer-sponsored retirement savings account similar to a 401(k). Also known as Simplified Employee Pension or SEP IRA, these savings accounts typically offer by small businesses employing less than 25 employees as well as self-employed individuals. Contribution limits differ each year but follow similar investment, distribution and rollover rules as traditional individual retirement accounts (IRAs).
408(k) plans also allow employees to borrow against their contributions on a loan basis; they must repay it according to an arrangement made with their plan administrator, otherwise any unrepaid amount becomes an early withdrawal distribution and taxed at full rate plus 10% penalty.
Overall, 408(k) plans can be beneficial and useful to workers. With contributions not taxed until pension maturity or retirement occurs, their contributions and savings can help lower annual company tax bills and net income subject to taxes for that year.
What is a SEP IRA?
Similar to 401(k) plans, SEP IRAs provide tax-advantaged retirement savings vehicles for business owners and their employees alike. But unlike 401(k), they’re more flexible than their 401(k) counterparts with minimal paperwork requirements making setup easier for small-business owners.
As an employer, you may contribute up to 25% of each eligible employee’s compensation; the maximum contribution per individual employee will be limited and adjusted annually. Employees must meet certain requirements – generally working for you for at least three of the last five years while earning at least $750 during that year.
Once your plan has been created, you must choose an institution to manage and store SEP accounts for each employee. Additionally, this institution must provide annual statements showing the value of each participant’s account.
What is a self-directed IRA?
An SDIRA provides greater investment freedom beyond stocks and mutual funds; you can use an SDIRA to invest in real estate, private equity investments and more. A custodian must hold your assets and provide annual statements; banks, trust companies or other approved by the IRS can act as custodians of self-directed IRAs. When selecting an SDIRA custodian make sure it supports “go anywhere” structures as many allow you to invest in riskier alternative assets such as promissory notes, tax lien certificates or interests in energy projects (oil or gas).
Make sure that you understand IRA rules regarding prohibited transactions, such as not purchasing property from disqualified people or renting it out to them. Furthermore, no payments should be made either directly to yourself or a disqualified individual to manage or maintain property owned by an IRA account, nor should maintenance work be performed on it directly by yourself.
What is a 401(k) plan?
A 401(k) plan is an employer-sponsored retirement savings account that allows employees to contribute a portion of their paycheck toward an investment account with tax advantages, usually consisting of mutual funds and other types of investments. Employees also often have the option to contribute additional after-tax funds toward their 401(k).
Contributions and earnings within a 401(k) account are tax-deferred until withdrawal time. Employees can withdraw without penalty after age 59 1/2; early withdrawals typically incur income taxes and a 10 percent penalty.
Many large employers provide company matching contributions for employee 401(k) plan contributions, providing free money that should not go unused. Employees over 50 can defer up to $6,500 more in pretax contributions through catch-up contributions – this amount should be reported on Form 1040 as pre-tax deductions. Vesting schedules differ; employees may need to remain employed with their current company for several years before attaining full ownership rights of its contributions in their 401(k).
Categorised in: Blog