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7740 N. 16th St.
Suite 380
Phoenix, AZ 85020

Phone: (480) 563-9808
Fax: (480) 563-3724



 

Enterprise Pensions, Inc. specializes in the design and administration of Qualified Retirement Plans for small-business owners. Among our services, we will calculate your tax-deductible contributions and keep your plan in compliance. However, we do not sell any financial products, nor do we give investment advice. You’re free to invest on your own, or if you prefer, find a professional financial consultant to invest on your behalf.

Whether you invest on your own or you get help, qualified plan investing has special considerations. The following guidelines are extremely important in ensuring your qualified plan stays out of trouble.

   
 
All contributions must be in cash. So if, for example, you have a stock or a real estate parcel that you want to purchase for your qualified plan, make sure your purchase is with funds already deposited in the plan.
Contributions for a plan year can be deposited as late as 8½ months after the end of the plan year, even if your business is on a cash accounting basis. For instance, if your tax year (and plan year) ends on December 31, 2005, contributions between January 1, 2005 and September 15, 2006 are eligible to be deducted for the 2005 tax year. Stated differently, contributions between January 1, 2006 and September 15, 2006 can be deducted in either 2005 or 2006. Be careful not to over-contribute during the plan year, since excess contributions are subject to a non-deductible excise tax.
  Note: To be deductible, contributions must be deposited by the extended due date of your business’ tax filing. Thus, you’ll need to file extensions if you need extra time to fund your plan.
Avoid the “Prohibited Transaction”. Laws designed to prevent abuse may prohibit you from making a seemingly legitimate investment. As long as you follow the guidelines below, you should be in good shape. Please check with us before investing, however, if there’s any question in your mind. The IRS has procedures in place to detect Prohibited Transactions, and the fines can be hefty.

* Avoid qualified asset transactions involving:
1. Relatives
2. Business partners, or other business entities in which you are (at least) a 10% shareholder or have a 50% ownership interest
3. People providing services to the plan, such as your accountant and financial consultant
4. Any combination of the above, for example, a business in which your father is a 25% shareholder.
* Assets cannot be used to benefit you or your business. For example, your plan cannot own a house that you (or your relatives) pay rent to live in. Or, your plan cannot lend money to your business, even under the same terms and conditions that a bank would require.
* Before any transaction, ask yourself, “Would this be viewed as an independent, arm’s-length transaction?”
Real estate, or other physical property, can be purchased by your qualified plan (but make sure the purchase is not a Prohibited Transaction!) However, the fair market value of the property should be readily determinable. After all, the total value of your plan’s assets figure into how much of a contribution you can deduct. So if the IRS, for example, claims you’ve undervalued your property, they’ll disallow part of your deduction.
Diversify! We recommend this because the IRS requires it. (Remember, we don’t give investment advice!) While this rule is designed to protect employees covered by a qualified plan, there’s no exception for plans with few or no employees. So even though it’s doubtful the IRS would penalize a plan for not diversifying when employee protection is not an issue, we advise against investing all plan assets in, for example, only one stock or only one real estate parcel.
Loans are permissible. However, there are limitations as to how much you can borrow, and the loan must be structured similar to how a bank would structure a loan (including the necessary paperwork). Please contact us before borrowing from your qualified plan.
Withdrawals. The IRS has tried very hard to discourage withdrawals from qualified plans until retirement age (or an employee’s separation from service), and the IRS has been fairly successful. Figure on not having access to your plan’s assets until at least age 55. We recommend consulting with a tax advisor prior to withdrawing any assets.
Unrelated Business Income Tax (UBIT). As you know, the investment earnings on your plan assets are tax-deferred. However, if your plan has non-passive investments that produce income either by selling goods or providing services, that income may be subject to UBIT. Further, if any investments are debt-financed, such as purchases using margin accounts, the resulting income may be subject to UBIT. Check with your accountant to find out if you have plan income subject to UBIT.
   
  In summary, your qualified plan is an excellent vehicle for deferring taxes by making deductible contributions. Further, your tax-deferred investment return will be significantly higher than if your initial investment had been reduced by taxes. In exchange, you must be aware of the restrictions and limitations imposed by the IRS and the Department of Labor regarding how assets can be invested.

These guidelines are not intended to provide a detailed analysis of the laws affecting qualified plan investing. Although we’re available to discuss how the relevant laws impact your particular situation, if there’s any uncertainty as to the legality of your situation, we recommend you contact an ERISA attorney for a second opinion.