Happy New Year to All!
2017 has been an exciting year for checkbook control – from the explosive emergence of Cryptocurrency to Tax Reform – we in the self-directed retirement community have had a stake in the evolution of the investment and tax landscape. In this post we’ll highlight how 2017 regulatory events relate to Checkbook Solo 401k investors and provide year-end tax planning tips.
Solo 401K & Tax Reform
The Tax Cuts and Jobs Act, TCJA, was drafted, implemented, and signed into law with incredible speed. As the new tax law evolved, several proposals affecting tax-advantaged savings accounts were discussed – what made into the final bill and what did not?
What Made It?
Roth Recharacterizations Of Prior Conversions Repealed: Roth reconversions are no longer allowed. Roth reconversions are the reversal of a prior Traditional IRA Roth Conversion in which pre-tax IRA funds were rolled into a Roth IRA. Prior rules allowed for such conversions to be “recharacterized” – effectively, an “undo” button permits a Roth conversion to be reverted back to its source Traditional IRA. The TCJA repeals the rules permitting recharacterizations of Roth conversions, effective as of the start of 2018.
The rule only limits recharacterizations of Roth conversions – and not of Roth contributions – still permitting those who mistakenly make a new Roth contribution and later discover they’re over the Roth contribution income limits to recharacterize it back to a traditional IRA.
UBIT Aggregation and Segregation Changes: Under the new law, tax-exempt entities that are subject to tax on their UBTI will be required to segregate their taxable income and loss for each unrelated trade or business activity for purposes of determining their UBIT. Expenses and losses generated by one business may no longer be used to offset income derived from another. For most self-directed retirement plan investors this change will have no impact. For some, however, additional tax planning may be advisable.
Changes to 529 College Savings Plans: 529 plan distributions can now be used tax-free for private elementary and secondary school expenses (K-12) – up to $10,000 in annual distributions per student for K-12 qualifying expenses.
What Did Not?
401(k) Pretax Contribution Limits Were NOT Limited: As reported in several media outlets in late October 2017, there was talk of limiting employee tax-deductible contributions to 401(k) Plans to $2,400, requiring employee contributions above that threshold to be Roth. This prompted President Trump to tweet, on October 23: There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!
Needless to say, this proposal never made it into any legislation. Thankfully!
Coverdell ESAs/IRAs, Hope Scholarship and Lifetime Learning Credits, American Opportunity Tax Credit Remain Unchanged: The original House GOP tax plan proposed a substantive overhaul of educational tax incentives, including the repeal of the Hope Scholarship and Lifetime Learning Credits, the disallowment of new contributions to Coverdell Education Savings Accounts (also known as Education IRAs). The final version of the Tax Cuts and Jobs Act included none of these provisions.
IRS Updates to Solo 401k Plan Limits (2017-2018)
With the release of IRS Notice 2017-64 the IRS set the retirement plan limits for the 2018.
For Self-Directed Solo 401K investors, the important changes were to the employee deferral amount (increased to $18,500) and the overall plan limit (increased to $55,000). Both, favorable changes.
The chart below details the changes made to retirement plan limits.
|
|
2018 |
2017
|
|
Retirement Plan Limits
|
||
|
Deferral Limit [402(g)(1)]
|
$18,500
|
$18,000
|
|
Catch-up Contribution Limits [415(v)(2)(B)(i)]
|
$6,000
|
$6,000
|
|
DC Annual Addition Limit [415(c)(1)(A)]
|
$55,000
|
$54,000
|
|
Annual Compensation Cap [401(a)(17)]
|
$275,000
|
$270,000
|
|
Taxable Wage Base
|
$128,700
|
$127,200
|
|
DB Annual Limit [415(b)(1)(A)]
|
$220,000
|
$215,000
|
|
457(b) Contribution Limit [457(e)(15)]
|
$18,500
|
$18,000
|
|
HCE Threshold [414(q)(1)(B)]
|
$120,000
|
$120,000
|
|
SIMPLE 401(k) Limit [408(p)(2)(E)]
|
$12,500
|
$12,500
|
|
SIMPLE 401(k) Catch-up [414()2)(B)(ii)]
|
$3,000
|
$3,000
|
|
Maximum ESOP Account Balance [409(o)(1)(C)]
|
$1,105,000
|
$1,080,000
|
|
ESOP 5-year Distribution Period Limit
|
$220,000
|
$215,000
|
|
Key Employee [416(i)(1)(A)(i)]
|
$175,000
|
$175,000
|
|
QLAC [1.401(a)(9)-6]
|
$130,000
|
$125,000
|
IRA Contribution limits are unchanged.
Solo 401K Year-End Maintenance – 2017
Set-Up Deadline is 12/31/17: In order to make 2017 contributions, the Solo 401(k) must be adopted by your business by December 12/31/2017. If you have not yet done so, sign your Adoption Agreement before year-end.
2017 Contributions Can Be Made in 2018: Contributions can be made up until the plan sponsor’s tax filing deadline – including extensions. For Sole Proprietorships (including pass-through Single-member LLCs) and C-Corporations, the business tax return deadline is April 15th, 2018. For S-Corporation and Partnerships (includin LLCs taxed as a partnership), the business tax filing deadline is March 15th, 2018. 2017 contribution deadlines (March 15th and April 15th) may be extended for 6 months by obtaining a tax filing extension. Extensions are especially helpful for those that want to make 2017 contributions, but don’t yet have funds available to do so.
W-2 Coordination: Forms W-2, reflecting wages and related tax-reporting for S-Corps/C-corps are filed by 1/31/2018. Therefore, you should make your employee deferral contributions (up to $18,000 for 2017) ahead of then, so that they be properly reflected on your W-2.
Solo 401k Contribution Calculator: Refer to this Solo K Contribution Calculator when estimating your 2017 Solo 401k Contribution. The ultimate contribution amount will be determined in conjunction with your tax return preparation.
2017 Year-End Tax Planning
Due to (a) the lower income tax brackets taking effect for 2018, (b) the increase in the standard deduction amount, and (c) the limitations on itemized deductions for 2018, overall tax planning should be focused on deferring income to 2018, while accelerating deductions to 2017.
Among the key limitations in the TCJA is the restriction of itemized deductions for state and local taxes (SALT) to $10,000, beginning in 2018. The new law disallows tax deductibility for prepayment of 2018 state income tax liabilities in 2017. However, you may want to ensure that you’ve fully paid 2017 state taxes by December 31 in order to obtain the full deduction this year – otherwise, the deduction may be lost forever. Pre-payment of 2018 property tax can be deductible, depending on the circumstances. See IRS guidance here.
We at ReSure LLC and 401kCheckbook.com look forward to continue to serve all your Solo 401K and financial planning needs.
Wishing all a happy, healthy, and prosperous 2018!