PENSCO Trust - Self Directed IRA | PLANS: Learn about the Solo(k)

PENSCO Trust Solo(k)

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Solo(k) Adoption and Contribution Deadlines

The following explains the deadlines for adopting and contributing to your Solo(k) for 2009. Some of these deadlines for incorporated businesses (S corporations and C corporations) are different from those for unincorporated businesses (sole proprietorships, single member LLCs or husband-wife LLCs).

For incorporated sponsors:

Plan agreements:

The deadline for the completion of the salary deferral election form, plan adoption and PENSCO Trust agreements is December 31, 2009.
The date of receipt by PENSCO Trust does not have to be by December 31, 2009; however, the forms must indicate that they were signed by that date.
While the postmark for mailing to PENSCO Trust does not have to be by December 31, 2009, it is suggested that it should be documented that the forms were signed by that date.

The 401(k) deferral component:

The check for this component does not have to be dated or received by PENSCO Trust by December 31, 2009, but the amount has to be associated with your salary (compensation) in 2009 that WAS NOT already paid when the deferral election was signed. For example, if the salary earned for the last two weeks of the year is not physically paid or received when the deferral election form was signed, that salary may still be a 401(k) deferral (Roth or non-Roth) for 2009, up to the annual dollar limits. PENSCO Trust can accept it as a 2009 401(k) deferral even in 2010, provided the plan agreements were adopted in 2009, as discussed above. However, salary paid to you before plan agreements were signed cannot be part of this component (e.g., if the plan agreements were adopted on December 24, 2009), then no portion of the salary paid before that date may be part of your 401(k) deferral for 2009.

Profit sharing contribution component:

The profit sharing contribution for 2009 does not have to be received by PENSCO Trust until the tax filing deadline, including extensions actually granted, for the company. (For a company whose tax year is the calendar year, the deadline will be March 15, 2010, plus extensions actually granted.)

For unincorporated sponsors:

Plan agreements:

The deadline for the completion of the salary deferral election form, plan adoption and PENSCO Trust agreements is December 31, 2009.
The date of receipt by PENSCO Trust does not have to be by December 31, 2009; however, the forms must indicate that they were signed by that date.
While the postmark for mailing to PENSCO Trust does not have to be by December 31, 2009, it is suggested that it should be documented that the forms were signed by that date.

The 401(k) deferral component:

Self-employment income (not passive investment earnings such rents, dividends, interest) PAID (not necessarily earned) at any time during 2009 can be part of this component (up to applicable dollar limits) as long as the check for it is received by PENSCO Trust by the tax filing deadline for the participant (April 15, 2010 plus extensions actually granted), as long as the salary deferral election form was completed in 2009.

Profit sharing contribution component:

The profit sharing contribution for 2009 does not have to be received by PENSCO Trust until the tax filing deadline, including extensions actually granted, for the participant (April 15, 2010 plus extensions actually granted.) This contribution must relate to self-employment income (not passive investment earnings such rents, dividends, interest) PAID (not necessarily earned) during 2009.

What is the PENSCO Trust Solo(k)?

The PENSCO Trust Solo(k) is a tax-qualified retirement plan that enables you (and your spouse) to contribute the maximum amount on a tax-favored basis if you (and your spouse) are the only owner(s) and employee(s) of your business.

Who may adopt the PENSCO Trust Solo(k)?

The PENSCO Trust Solo(k) is generally available to any business whose only owner(s) and employee(s) are one individual or a married couple. The business can be any service business (e.g., electrician, attorney, writer, counselor, therapist, director) or business that makes or sells products.

The PENSCO Trust Solo(k) may be available to your business even if it has other employees, as long as they are of a type that that the tax laws permit you to exclude from plan participation. These generally are employees who are under age 21, are not credited with 1,000 hours of service in any year, are union employees or are non-resident aliens with no U.S. income.

Even if you (and your spouse) are the sole owner(s) and employees of your business, the pension tax rules may treat your business as combined with other "commonly controlled" or "affiliated" businesses for purposes of applying those rules. If your business is so combined with one that has other owners or employees, you may not adopt the PENSCO Trust Solo(k). Consult an experienced pension professional to determine if these special rules apply to you.

How do I contribute to my PENSCO Trust Solo(k)?

Once you have established your PENSCO Trust Solo(k), you may make contributions in several ways. However, contributions, other than rollover contributions, should not be made before you have earned (and would otherwise be paid) the compensation upon which the contributions are based.

First, you can make ongoing 401(k) (also called "elective deferral" or "salary reduction") contributions from your regular pay. To do so, follow the instructions for completing the Enrollment and Salary Reduction Election Form in your PENSCO Trust Solo(k) Plan Establishment Kit. You can stop, restart, increase or decrease you deferral rate at any time with this same form.

401(k) deferrals may be either with pre-tax dollars or through "Roth 401(k) deferrals," i.e., with already-taxed dollars. You may choose to have all your deferrals be of only one type, or you may have some of one type and the rest of the other. However, you may not change your choice for any contributions already made. 401(k) contributions, whether pre-tax or Roth, are withheld from your regular paycheck and contributed to your PENSCO Trust Solo(k).

Your maximum 401(k) deferrals for 2009, whether all pre-tax, all Roth 401(k), or some combination, is $16,500, plus a $5,500 "catch-up" amount if you will be at least age 50 in 2009. Second, your business may also make profit sharing contributions. These are made in your discretion, and are always pre-tax contributions. They must be made no later than the due date, including extensions, for filing your business's tax return for the year, although you may make them earlier.

Your maximum profit sharing contribution for any year is the lesser of:

$49,000,000 (the IRS may increase this amount for years after 2009), reduced by your total Roth and non-Roth 401(k) deferrals actually made, other than your "catch up" contributions described above, to your PENSCO Trust 401 Solo(k)
Twenty-five percent of your "compensation," or, if your business is unincorporated, of your "earned income" from your business.

Note: Because "earned income" is calculated by first subtracting out your plan contribution and is adjusted for your self-employment tax payments, the percentage limit for an unincorporated business will end up being slightly less than 20% of your pre-contribution earnings.

For example, suppose that in 2009, you were at least age 50, your compensation from your incorporated business was $200,000, and you made the maximum regular 401(k) deferrals of $16,500 and catch-up contributions of $5,500. Your "A" limit for your profit sharing contribution would be $49,000 minus $16,500, or $32,500; your "B" limit would be 25% of $200,000 or $40,000. Thus, youR maximum profit sharing contribution for 2009 would be $32,500, bringing your total contributions for that year to $54,500. If instead your 401(k) deferrals for 2009 totaled $10,000, and you made no "catch-up" contributions, then your "A" profit sharing contribution limit would be $49,000 minus $10,000, or $39,000.

The IRS may increase the $49,000 limit for years after 2009 based on changes in the cost of living.

Example: 2009 Max Contributions - Incorporated Business
2009 Salary:	$50,000	$100,000	$118,000	$245,000
401(k) Contribution	$16,500	$16,500	$16,500	$16,500
Catch-up (if eligible)	$5,500	$5,500	$5,500	$5,500
Profit Sharing Contribution	$12,500	$25,500	$29,500	$32,500
Total:	$34,500	$47,000	$51,500	$54,500

In addition to 401(k) and discretionary contributions, you may "roll over" amounts you have in the tax-qualified plan of a previous employer, a governmental 457(b) plan, or an IRA (other than a Roth IRA) into your PENSCO Trust Solo(k). Refer to the Solo(k) Asset Consolidation Guide for instructions, and then complete the Solo(k) Rollover Form in your PENSCO Trust Solo(k) Plan Establishment Kit. The amount you may roll over into your PENSCO Trust Solo(k) is unlimited.

What is "compensation" or "earned income"?

In general, "compensation" or "earned income" is what you are paid for your work. It does not include passive income, such as rents, capital gains, dividends or interest. "Compensation" or "earned income" includes directors' fees and some royalties.

What if I also participate in another plan or SEP IRA?

If in any year you make 401(k) deferrals under any other plan (even one of an unrelated employer), those deferrals will reduce the amount of 401(k) deferrals you may make under your PENSCO Trust Solo(k) in the same year. This is because your annual 401(k) limit ($15,000 or $20,000 if you will be at least age 50, in 2006) is an aggregate limit for all 401(k) plans in which you participate.

401(k) deferrals, matching or other contributions made under the plan of an unrelated employer will not affect the profit sharing contribution limit for your PENSCO Trust Solo(k) plan. However, if your business or a related one maintains another qualified plan or SEP-IRA, contributions made to it may reduce your PENSCO Trust Solo(k) profit sharing contribution limit. Consult your third party plan administrator or other pension professional to determine how the reduction rules may apply in your case.

What are "Roth 401(k)" deferrals?

Roth 401(k) deferrals are 401(k) deferrals that are taxed when made. There is no income tax on Roth 401(k) deferrals and their earnings when they are paid out to you or your beneficiary as a "qualified distribution." A "qualified distribution" is a payment that is made (1) at least five years after the beginning of the first year you made a Roth 401(k) contribution and (2) after you attain age 59½, die, or become disabled.

Unlike the case with Roth IRA contributions, there are no income limits on your eligibility to make Roth 401(k) deferrals.

May I roll over or transfer amounts from my Roth IRA to my solo(k) plan deferrals?

The tax laws do not allow any Roth IRA amounts to be rolled over to the Solo(k) plan (or to any other tax-qualified plan). Non-Roth IRA amounts may be rolled over to the Solo(k) plan.

What advantages does my PENSCO Trust Solo(k) plan have over a SEP-IRA?

There are many. Because 401(k) deferrals may not be made to a SEP-IRA, there can never be contributions to a SEP-IRA in excess of 25% of your compensation or earned income. Roth (after-tax) 401(k) contributions cannot be made to a SEP-IRA.

PENSCO Trust Solo(k) contributions may be invested in life insurance or S corporations, which are not permissible SEP-IRA investments. You may be able to take a loan from your PENSCO Trust Solo(k) plan (special rules will apply), but not from a SEP-IRA. Also, debt-financed real estate investments by your PENSCO Trust Solo(k) plan may qualify for an exception to the tax on unrelated-debt financed income, but the same investments by a SEP-IRA cannot.

Does FICA or self-employment tax apply to my contributions?

If your business is incorporated, FICA tax applies to your 401(k) deferrals (whether Roth or non-Roth), but not your profit sharing contributions. If your business is unincorporated, check with your tax adviser on how the self-employment tax applies to you.

How may I invest my PENSCO Trust Solo(k) funds?

The range of investments is virtually unlimited. Your plan may invest in any real estate; loans to unrelated persons; private placements; foreign stocks; life insurance, and many, many other investment types. Impermissible exceptions are few in number. If your plan invests in a "collectible," (such as a stamp, antique, or work of art), it will be treated as distributed to you, resulting in taxes and potential penalties. Also, self-dealing transactions, or "prohibited transactions" as they are called in the tax laws, will result in excise (penalty) taxes.

How are Roth 401(k) deferrals under my PENSCO Trust Solo(k) different from Roth IRA contributions?

Both Roth 401(k) deferrals and Roth IRA contributions are already-taxed dollars, and payment to you or your beneficiary will be free of income tax, as long as the payment is a "qualifying distribution," explained above.

Roth 401(k) contributions and Roth IRAs differ in several ways. Key differences are:

You may contribute to a Roth IRA only in years that your "adjusted gross income" does not exceed the limits under the tax laws. Roth 401(k) deferrals may be made regardless of the amount of your "adjusted gross income."
The maximum amount you can contribute to a Roth IRA for 2009 is $5,000 ($6,000 if you will be age 50 or older). The maximum 2009 Roth 401(k) contribution is $16,500 ($22,000 if you will be age 50 or older).
You are not required to take lifetime distributions from your Roth IRA, regardless of your age. You are required to take minimum distributions of your Roth 401(k) amounts and earning when you reach age 70½. However, you may be able to roll over your Roth 401(k) amounts to your Roth IRA so that you will no longer be required to take minimum distributions at any age.
Your Roth IRA may not invest in S corporations or life insurance, as may your Roth 401(k) amounts. You may take a loan from Roth 401(k) contributions and their earnings, but not from a Roth IRA.
Debt-financed real estate investments by Roth 401(k) contributions can qualify for an exception to the tax on unrelated-debt financed income, but the same investments by a Roth IRA cannot.

May I make both Roth 401(k) deferrals to my PENSCO Trust Solo(k) and Roth IRA contributions in the same year?

Yes, as long as you meet the requirements for both.

What does PENSCO Trust do for my Solo(k)?

PENSCO Trust serves as the custodian of your PENSCO Trust Solo(k), will invest your contributions as you direct, and account for your plan holdings. PENSCO Trust will provide you with a plan document that complies with applicable tax law requirements and plan document updates necessary to keep it in compliance with tax laws as they change, and provide you with the forms necessary to make contributions to your PENSCO Trust Solo(k) plan, direct investments, choose or change your plan beneficiaries should you die before you receive your plan benefits, and receive distributions from your PENSCO Trust Solo(k) Plan.

When may I take funds out of my PENSCO Trust Solo(k) plan?

The tax laws place restrictions out when funds may be taken out of a tax-qualified plan, even if you plan to roll over those funds tax-free to another plan or IRA.

Your 401(k) deferrals and their earnings generally may be paid to you or your beneficiary only after you attain age 59½, become disabled within the meaning of the tax laws, or die. You may also receive payments of them if you terminate your PENSCO Trust Solo(k) plan and do not establish another 401(k) plan, other defined contribution plan (except for an employee stock ownership plan, SIMPLE IRA, or SEP IRA) within the times specified in the tax laws. In addition, you may elect in your adoption agreement to receive payment of these amounts on account of hardship or through a loan, under conditions described in your plan document and the tax laws. Special distribution rules may apply if you stop working for your incorporated business, or if your business is sold or acquired.

Profit sharing and rollover contributions to your PENSCO Trust Solo 401(k) plan may also be paid out if they have been in the plan for at least two years, or if you have participated in the plan for at least five years. Future changes to your plan will permit you to receive payment of your rollover contributions at any time.

You must begin taking minimum payments from your PENSCO Trust Solo(k) by April 1 of the year after you attain age 70½.

As the rules and restrictions on plan payments can be complex, consult your third party administrator or other pension professional to determine if you are eligible for a payment.

Payments you receive before age 59½ are subject to a 10% penalty tax (in addition to regular tax), unless an exception applies.

What happens if I do not follow the rules or the terms of my Solo(k) plan?

If the applicable tax rules or plan terms are not followed, your Solo(k) will be "disqualified," i.e., it will lose its tax-favored status. This means that plan contributions will be included in your income and/or deductions will be disallowed for the year there were made, your plan will be treated as a taxable trust (earnings will be taxed when they are realized), and you can never roll over your Solo(k) plan amounts to another plan, an IRA or a Roth IRA. However, the IRS has a program called the Employee Plans Compliance Resolution System (EPCRS) through which most inadvertent violations can be corrected and a plan's tax-qualified status can be preserved. Some violations can be "self-corrected," i.e., without applying to the IRS for approval of the correction or even informing the IRS that an error occurred; other violations can be corrected only with IRS approval. If your plan did not comply with an applicable rule, consult with your advisor regarding whether and how the violation can be corrected under EPCRS.

I contributed too much to my Solo(k) plan last year. What should I do?

If you contributed too much to your Solo(k) plan for any year (for example, you made a 401(k)contribution early in the year but, at the end of the year, determined you had no income for the year), the plan will lose its tax-favored status unless correction is made under EPCRS (see previous question). Whether you can "self-correct" in this situation will depend on whether you meet the self-correction eligibility conditions under EPCRS. In any event, correction will be acceptable to the IRS only if the plan refunds all contributions in excess of the limits, plus all earnings on those contributions, and your business pays applicable taxes on the returned contributions (unless they were Roth 401(k) contributions) and on the earnings.

Does ERISA apply to my PENSCO Trust Solo(k) plan?

ERISA does not apply to plans, such as the PENSCO Trust Solo(k), that cover only a sole individual owner of a business and the owner's spouse, or a married couple who are the sole owners of a business.

If your business hires employees after you adopt the PENSCO Trust Solo(k) plan, or if you and your spouse divorce after you become participants in the PENSCO Trust Solo) plan, please notify PENSCO Trust right away.

What else do I need to do in maintaining my PENSCO Trust Solo(k)?

Although the PENSCO Trust Solo(k) simplifies how you can save and invest on a tax-favored basis, it is still governed by the tax laws applicable to other tax-qualified retirement plans. These rules are technical and detailed, and violating any of them can result in taxes, penalties, and even loss of your plan's tax-qualified status. For example, your contribution limit for a particular year will depend on factors such as the amount and nature of your income, whether your business is incorporated, your participation and other plans, and other factors. Also, certain investments or transaction involving your plan might raise "prohibited transaction" or other issues for which expert advice is required. For these reasons, you should engage your third party plan administrator or other pension professional to ensure you comply with applicable limits and rules.

Your PENSCO Trust Solo(k) Plan Establishment Kit includes an agreement with Pension Benefit Consultants (PBC) to act as your plan's third party plan administrator and provide the customary services your plan may need.

The foregoing is a general discussion. It is not intended, and should not be relied upon, as an opinion or advice on any legal, tax or investment aspects of IRAs. An IRA owner considering an IRA investment in real property should consult with their own advisor.