If you are receiving a fee for assisting someone else’s company in raising money, then you must operate within the confines of securities laws. These laws provide three different ways in which one may legally raise money for another company for a fee. You can’t get a “commission” or “bonus” or anything of value for bringing an investor to another company or person unless you fit into one of these three categories:
Broker Dealer License
First, if you are licensed and are registered with an SEC registered broker dealer, you may receive commissions and other forms of compensation for raising money in public or private offerings (e.g. private placements). The newest form of registration from FINRA is designed to license and regulate those who operate as “investment bankers,” called a “Series 79 license.” This license allows a holder to collect commissions and other fees for raising funds for an offering of equity (e.g. stock) or debt (e.g. notes or bonds). In addition to passing the licensing test, you’ll need to associate with a broker dealer.
Second, if you take a limited role in the raising of funds and are paid a flat or hourly fee, as opposed to commissions based on funds raised, you may be able to be paid a finder’s fee for introducing investors to others. A finder’s fee can only be paid to a finder so long as:
- The finder isn’t involved in negotiations of the securities being sold.
- The finder doesn’t discuss the details of the securities.
- The finder isn’t paid based on money raised (e.g. no commission).
- The finder doesn’t perform “finding” services on a regular basis.
In sum, a finder’s fee may be paid but only to someone who makes introductions of potential investors, and the fee amount must be based on some factor other than compensation relating the persons or amount of securities sold to those introduced by the finder.
Director or Officer of Offering Company
Third, you may be able to assist in raising funds for another if you are an Officer or Director of the company whom you are raising money for. The SEC promulgated Rule 3a4-1 which is a Safe Harbor from enforcement and allows someone who serves as a paid Director or Officer to assist in selling the company’s securities. There are many ways to qualify under this Rule but the most common is to meet the following criteria:
- Be paid as a Director or Officer by salary or other criteria that is not linked to sales of securities made (e.g. be the CFO or Treasurer and offer financial consulting advice in addition to working with potential investors).
- Can’t be associated with a Broker Dealer and cannot have a prior SEC disciplinary history.
- Should stay on with the company following closing of the offering so as to show your purpose as a Director or Officer was not just for raising funds.
- Takes a passive and restrictive role in selling the securities and refers to the CEO or President for details and negotiations.
Failure to comply with the securities laws can result in civil and criminal action. In addition, investors who can claim a failure to comply with the laws outlined above are able to rescind their investment and can subject the company’s founders and the person soliciting the investment with personal liability for any losses.
As 2017 comes to an end, it is critical that Solo 401(k) owners understand when and how to make their 2017 contributions. There are three important deadlines you must know if you have a Solo 401(k) or if you plan to set one up still in 2017. A Solo 401(k) is a retirement plan for small business owners or self-employed persons who have no other full time employees other than owners and spouses. It’s a great plan that can be self-directed into real estate, LLCs, or other alternative investments, and allows the owner/participants to contribute up to $54,000 per year (far faster than any IRA).
New Solo 401(k) Set-Up Deadline is 12/31/17
First, in order to make 2017 contributions, the Solo 401(k) must be adopted by your business by December 31st, 2017. If you haven’t already adopted a Solo 401(k) plan, you should start now so that documents can be completed and filed in time. If the 401(k) is established on January 1st, 2018 or later, you cannot make 2017 contributions.
2017 Contributions Can Be Made in 2018
Both employee and employer contributions can be made up until the company’s tax return deadline including extensions. If you have a sole proprietorship (e.g. single member LLC or schedule C income) or C-Corporation, then the company tax return deadline is April 15th, 2017. If you have an S-Corporation or partnership LLC, the deadline for 2017 contributions is March 15th, 2018. Both of these deadlines (March 15th and April 15th) to make 2017 contributions may be extended another six months by filing an extension. This a huge benefit for those that want to make 2017 contributions, but won’t have funds until later in the year to do so.
W-2’s Force You to Plan Now
While employee and employer contributions may be extended until the company tax return deadline, you will typically need to file a W-2 for your wages (e.g. an S-Corporation) by January 31st, 2018. The W-2 will include your wage income and any deduction for employee retirement plan contributions will be reduced on the W-2 in box 12. As a result, you should make your employee contributions (up to $18,000 for 2017) by January 31st, 2018 or you should at least determine the amount you plan to contribute so that you can file an accurate W-2 by January 31st, 2018. If you don’t have all or a portion of the funds you plan to contribute available by the time your W-2 is due, you can set the amount you plan to contribute to the 401(k) as an employee contribution, and will then need to make said contribution by the tax return deadline (including extensions).
Now let’s bring this all together and take an example to outline how this may work. Sally is 44 years old and has an S-Corporation as an online business. She is the only owner and only employee, and had a Solo 401(k) established in 2017. She has $120,000 in net income for the year and will have taken $50,000 of that in wage income that will go on her W-2 for the year. That will leave $70,000 of profit that is taxable to her and that will come through to her personally via a K-1 from the business. Sally has not yet made any 2017 401(k) contributions, but plans to do so in order to reduce her taxable income for the year and to build a nest egg for retirement. If she decided to max-out her 2017 Solo 401(k) contributions, it would look like this:
- Employee Contributions – The 2017 maximum employee contribution is $18,000. This is dollar for dollar on wages so you can contribute $18,000 as long as you have made $18,000. Since Sally has $50,000 in wages from her S-Corp, she can easily make an $18,000 employee contribution. Let’s say that Sally doesn’t have the $18,000 to contribute, but will have it available by the tax return deadline (including extensions). What Sally will need to do is let her accountant or payroll company know what she plans to contribute as an employee contribution so that they can properly report the contributions on her payroll and W-2 reporting. By making an $18,000 employee contribution, Sally has reduced her taxable income on her W-2 from $50,000 to $32,000. At even a 20% tax bracket for federal taxes and a 5% tax bracket for state taxes that comes to a tax savings of $4,500.
- Employer Contributions – The 2017 maximum employer contribution is 25% of wage compensation. For Sally: Up to a maximum employer contribution of $36,000. Since Sally has taken a W-2 wage of $50,000, the company may make an employer contribution of $12,500 (25% of $50,000). This contribution is an expense to the company and is included as an employee benefit expense on the S-Corporation’s tax return (form 1120S). In the stated example, Sally would’ve had $70,000 in net profit/income from the company before making the Solo 401(k) contribution. After making the employer matching contribution of $12,500 in this example, Sally would then only receive a K-1 and net income/profit from the S-Corporation of $57,500. Again, if she were in a 20% federal and a 5% state tax bracket, that would create a tax savings of $3,125. This employer contribution would need to be made by March 15th, 2018 (the company return deadline) or by September 15th, 2018 if the company were to file an extension.
In the end, Sally would have contributed and saved $30,500 for retirement ($18,000 employee contribution, $12,500 employer contribution). And she would have saved $7,625 in federal and state taxes. That’s a win-win.
Keep in mind, you need to start making plans now and you want to begin coordinating with your accountant or payroll company as your yearly wage information on your W-2 (self employment income for sole props) is critical in determining what you can contribute to your Solo 401(k). Also, make certain you have the plan set-up in 2017 if you plan to make 2017 contributions. While IRAs can be established until April 15th, 2018 for 2017 contributions, a Solo K must be established by December 31st, 2017. Don’t get the two confused, and make sure you’ve got a plan for your specific business.
Note: If you’ve got a single member LLC taxed as a sole proprietorship, or just an old-fashioned sole prop, or even or an LLC taxed as a partnership (where you don’t have a W-2), then please refer to our prior article here on how to calculate your Solo K contributions as they differ slightly from the s-corp example above.
A Joint Venture Agreement (aka, “JV Agreement”) is a document many business owners and investors should become familiar with. In short, a JV Agreement is a contract between two or more parties where the parties outline the venture, who is providing what (money, services, credit, etc.), what the parties responsibility and authority are, how decisions will be made, how profits/losses are to be shared, and other venture specific terms.
A joint venture agreement is typically used by two parties (companies or individuals) who are entering into a “one-off” project, investment, or business opportunity. In many instances, the two parties will form a new company such as an LLC to conduct operations or to own the investment and this is usually the recommended path if the parties intend to operate together over the long term. However, if the opportunity between the parties is a “one-off” venture where the parties intend to cease working together once the agreement or deal is completed, a joint venture agreement may be an excellent option.
For example, consider a common JV Agreement scenario used by real estate investors. A real estate investor purchases a property in their LLC or s-corporation and intends to rehab and then sell the property for a profit. The real estate investors finds a contractor to conduct the rehab and the arrangement with the contractor is that the contractor will be reimbursed their expenses and costs and is then paid a share of the profits from the sale of the property following the rehab. In this scenario, the JV Agreement works well as the parties can outline the responsibilities and how profits/losses will be shared following the sale of the property. It is possible to have the contractor added to the real estate investors s-corporation or LLC in order to share in profits, but that typically wouldn’t be advisable as that contractor would permanently be an owner of the real estate investor’s company and the real estate investor will likely use that company for other properties and investments where the contractor is not involved. As a result, a JV Agreement between the real estate investors company that owns the property and the contractors construction company that will complete the construction work is preferred as each party keeps control and ownership of their own company and they divide profits and responsibility on the project being completed together.
While a new company is not required when entering into a JV Agreement, many JV Agreements benefit from having a joint venture specific LLC that is created just for the purpose of the JV Agreement. This venture specific LLC is advisable in a couple of situations. First, where the parties do not have an entity under which to conduct business and which will provide liability protection. In this instance, a new company should be formed anyways for liability purposes and depending on the parties future intentions a new LLC between the parties may work well. Second, where the arrangement carries significant liability, capital, or other resources. The more money, time, and liability involved in the venture will give more reason to having a separate new LLC to own the new venture and to isolate liability, capital, and other resources. A $1M deal or venture could be done with a JV Agreement alone, however, the parties would be well advised to establish a new entity as part of the JV Agreement. On the other hand, if the venture is only a matter of tens of thousands of dollars, the costs of a new entity may outweigh the benefits of a separate LLC for the venture.
There are numerous scenarios where JV Agreements are used in real estate investments, business start-ups, and in other business situations. Careful consideration should be made when entering into a JV Agreement and each Agreement is always unique and requires some special tailoring.
IRAs are the most commonly held retirement account and annuities are one of the most popular investments for retirees. Despite the popularity of each, the two concepts shouldn’t ordinarily be combined together. On the topic of IRAs and annuities, I am routinely asked the following questions.
- Can I buy an annuity with my IRA?
- Should I buy an annuity with my IRA?
- How do I get out of an annuity I bought with my IRA?
- Can I roll-over my annuity IRA to a self-directed IRA?
In this article I’ll answer each question, but before I do, let me first explain how an annuity works as it is essential to understanding the questions and your options. IRS Publication 939 is helpful in explaining the annuity tax rules and can be found here.
An annuity is an insurance product you can purchase whereby you invest funds with the annuity insurance company and they agree to make payments to you for the rest of your life or for a set period of years. The typical candidates of annuities are retirees seeking a guaranteed steady stream of income. The retiree gives up their cash now in exchange for payments back from the insurance company over time. There are many different types of annuities but the two most common are fixed annuities and variable annuities. In a fixed annuity, the insurance company agrees to pay you back based on a fixed payment schedule. Under a variable annuity, the insurance company agrees to pay you back based on the performance of the annuity investment (you have some limited choices in how those funds are invested in a variable annuity).
An annuity can begin paying you back immediately or it can be invested over a period of time and grow tax deferred and then later pay you out at retirement age. The income from an annuity is taxed as it is received by the annuity owner. Typically, when you receive payments from an annuity you personally own (outside a retirement account), a portion of the payment is taxable (the income/growth part) and the portion that is a return of your investment or premium is not taxable. The portion of the annuity payment that is taxable is subject to ordinary income tax rates.
One of the benefits of an annuity is that the funds grow in the annuity tax deferred with the funds compounding and without having to pay tax on any income the IRS. When you start receiving payments from the annuity, the funds you invested into the annuity are not taxed but the earnings are taxed.
No Contribution Limits
When you purchase an annuity outside of a retirement account such as an IRA, you can invest as much money as you want and you are not limited to annual contribution limits like you are with IRAs or 401(k)s. So, for example, if you want to buy a $250,000 annuity with $250,000 of cash, then you can make that investment all in one-year. You are not subject to $5,500 annual contribution limits.
If you take funds from an annuity before you’re 59 ½, you’re subject to a 10% early withdrawal penalty on any taxable earnings. Any investment gains (above your initial investment) are also subject to tax and must be included as regular income on your personal tax return.
When you own an annuity you will typically have an account value for that annuity and if you decide to “cash-out” the annuity, instead of receiving the scheduled payments, you will likely be subject to a surrender charge. The surrender charge differs amongst annuity products and companies but the most common penalty is a 7% surrender charge during your first couple of years and then it goes down 1% each year until it is removed. So, if you have only had an annuity for a few years it is likely that you will have to pay the insurance company a surrender charge in order to “cash-out” the annuity. If you have had an annuity for ten years or longer, you are likely able to “cash-out” the annuity without penalty.
IRAs and Annuities
Now that we have the basics of annuities out of the way, let’s get to the questions about annuities and IRAs.
1. Can I buy an annuity with my IRA?
Yes, you can purchase an annuity with your IRA. However, just because you can doesn’t mean that you should. In my opinion, annuities can be part of a well structured financial plan but should be purchased with non- retirement plan (e.g. IRA) funds.
2. Should I buy an annuity with my IRA?
Probably not. One of the benefits of an annuity is that it gives you tax-deferral on the income that is being generated and as a result, using an IRA where you already obtain tax-deferral just doesn’t seem to make sense. If you like the annuity concept of fixed and guaranteed payments, albeit with modest gains from your principal, then you should consider an annuity with your non-retirement plan funds as those dollars aren;t getting any special treatment under the tax code when they are invested. If you already have a large nest-egg of retirement plan funds, why use that set of tax favorable funds to buy an investment product that you could buy with non-retirement plan funds and receive the same tax-treatment. Some say that buying an annuity with an IRA is like wearing a belt and suspenders since your money is already tax-deferred in a traditional IRA. Secondly, annuities are subject to surrender charges and as a result you are locked into that investment and face surrender penalties at the investment level (let alone the account level) if you want to get money out of the annuity to invest in something else or for personal use.
3. How do I get out of an annuity bought with my IRA?
You can usually “cash-out” your annuity owned by your IRA, however, cashing out the annuity to the account value will typically cause a surrender charge. Most annuities have a surrender charge during the first 7 years or so, whereby the penalty is 7% for the first year or two and then decreases 1 percent each year until it is removed. Check with you annuity company or financial advisor in your specific situation though as the products and surrender charges do vary. If you “cash-out” an annuity owned with IRA funds and if those funds are returned to an IRA, then there is no taxable distribution or tax penalty. The only “penalty” would be the surrender penalty by the annuity insurance company. If you take the cash personally though, instead of sending it to your IRA, then those funds are subject to the regular IRA distribution rules and as a result you could be subject to taxes and early withdrawal penalties on the amounts received.
4. Can I roll-over my annuity IRA to a self-directed IRA?
Yes. You can roll-over your annuity IRA to a self-directed IRA. You’ll need to “cash-out” the IRA, pay any applicable surrender charges, and then instruct the annuity company to process a direct roll-over of the funds to your self-directed IRA custodian as a direct rollover. This rollover will NOT be subject to taxes or penalties. Keep in mind though, there may be a surrender penalty though with the annuity company. If there is a surrender penalty, you’ll want to determine whether the benefit and payments owed under the annuity are worth hanging on to the annuity investment or if you are better off simply paying the penalty and moving on to other investment options.
Unfortunately, the annuity and IRA rules can be a little tricky, but once understood you can make informed decisions about how to best use and invest your retirement dollars.
Retirement account/plan contributions are one of the most powerful tax strategies you can implement but you’ve got to make them by the deadline so that they can reduce this years tax liability. With the end of the year fast approaching, now is the time to make certain you are maximizing this important tax strategy for your 2014 tax planning. Please find below a table outlining the deadlines for 2014 retirement plan contributions according to your type of retirement account. If you are self-employed, you’ll notice the deadline also may depend on the type of company you own (e.g. s-corp or LLC) but also whether you are making contributions as an employee of your company and/or as the employer. First, let’s summarize the IRA contribution deadlines.
IRA Contribution Deadlines
|Type of IRA
||April 15, 2015, Due Date for Individual Tax Return Filing (not including extensions). IRC § 219(f)(3); You can file your return claiming a contribution before the contribution is actually made. Rev. Rul. 84-18.
||Roth, Not Deductible
||April 15, 2015, Due Date for Individual Tax Return Filing (not including extensions). IRC § 408A(c)(7).
||N/A; employee contributions cannot be made to a SEP IRA plan.
||March 15/April 15th, Due Date for Company Tax Return Filing (including extensions). IRC § 404(h)(1)(B).
||Employee Elective Deferral
||January 30, 2015. IRC § 408(p)(5)(A)(i).
||March 15/April 15, Due Date for Company Tax Return Filing (including extensions). IRC § 408(p)(5)(A)(ii).
In summary, for traditional and roth IRA contributions you have until the individual tax return deadline of April 15, 2015 to make 2014 contributions. SEP and SIMPLE IRA contribution deadlines are based on the company tax return deadline which could be March 15th if the company is a corporation and April 15th if it is a sole proprietorship or partnership. Keep in mind that this deadline does NOT include extensions so even if you extend your personal tax return filing to September 15, 2015, you still have a April 15, 2015, contribution deadline for Roth and Traditional IRAs.
401(k) Contribution Deadlines
||Type of Cont.
|401(k), including self-directed Solo 401(k) (plan must be adopted by 12/31/14)
||Employee Elective DeferralContribution
||April 15, 2015, contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105.
|Employer Profit Sharing Contribution
||April 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105.
||Employee Elective Deferral contribution
||March 15, 2015 (corporation filing deadline), contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105.
|Employer Profit Sharing Contribution
||March 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105
|Partnership (e.g. partnership LLC)
||Employee Elective Deferral Contribution
||April 15, 2015 (partnership return filing deadline), contribution deadline is Due Date for Employer Tax Return (including extensions) but compensation must have been earned by December 31, 2014 and Election should be made by December 31, 2014; IRS Publication 560. Rev. Rul. 76-28; 90-105.
|Employer Profit Sharing Contribution
||April 15, 2015, Due Date for Company Tax Return Filing, including extensions, however employee compensation must have been earned by December 31, 2014. IRC § 404(a)(6). Rev. Rul. 76-28; 90-105.
There are a few important things to keep in mind regarding 401(k) contributions.
401(k) Contribution Deadlines Can Be Extended
First, the contribution deadline for employer and employee contributions is the company tax return deadline INCUDLING extensions. So, if you have a solo 401(k) you can extend your company tax return and your contribution deadline is also automatically extended. For example, if you have a solo 401(k) plan adopted by your s-corporation, then your s-corporation tax return deadline is March 15, 2015, but that can be extended 6 months until September 15, 2015, upon filing an extension to extend the company tax return with the IRS. If you do this, you’d have until September 15, 2015, to make the 2014 employee and employer contributions. That being said, the employee contributions are taken from your salary/wages and if you make traditional 401(k) employee contributions those amounts are reported on your personal W-2 and reduce your taxable wages. The W-2 is effectively where your tax deduction for traditional employee contribution arises is it reduces your taxable wages on your W-2. As a result, you’ll need to make or at least know the amount you intend to make for employee contributions by January 31, 2015 as that is the W-2 filing deadline for 2014.
New 401(k)s Must Be Adopted by December 31st
Second, if you are establishing a new Roth or Traditional IRA, you can create that new account at the time of the IRA contribution deadline. However, if you are establishing a new solo 401(k) plan, you must have the plan established by December 31, 2014. Because there are a number of documents and procedures required to create a new 401(k) plan, this is not something that can be left to the last minute and you should start immediately if you intend to open a 401(k) this year.
Make 2014 Contributions in 2014
And lastly, while the deadlines for most 2014 retirement plan contributions for IRAs and 401(k)s runs into 2015, to keep things simple and stress-free we recommend making 2014 contributions by December 31, 2014, when possible.
As you can see, the contribution deadlines vary depending on the type of account/plan but also on the type of contribution. With respect to contributions to a self-directed solo 401(k), the contribution deadline also varies depending on the type of company you own that has adopted the plan. Therefore, it is important that you understand these deadlines and don’t miss out on an opportunity to maximize your tax deductions. For guidance on the contribution limits in 2014, please click here.
As previously stated, it is not too late to setup a retirement account/plan if you have not done so already. The deadline to set up a 401(k) and to make contributions for 2014 is typically the last day of the year, although I wouldn’t wait until the last day or even the last week of the year to do so. If you are interested in setting up a self-directed solo 401(k), please contact us immediately as we are helping clients establish these and so that we can get it set up before the end of the year.