Understanding Self-Directed Employer Plans and Which One Is Right For MY Business

Estimated reading time: 5 minutes

Self-employment can be a blessing and a curse! On one hand, you control your own hours and you can proudly say that you are your own boss, but the privilege of being in charge also comes with responsibilities and the important matters always fall on your shoulders. The good news is that being self-employed in the world of IRAs is great! As a small business owner, you have plenty of employer plan options! From the common plans like the SEP IRA and the Simple IRA to the powerful Solo 401(k), there are plenty of options to save for retirement that fit each accountholder’s needs.

But how do you know which one is best for you?

As you begin researching all the accounts and their difference and similarities, you’ll want to examine exactly where you stand and what you’re aiming to accomplish. Take a moment and ask yourself…”How many people do I employ?”, “How much am I looking to contribute?”, and “How much management am I willing to put in?” There are no wrong answers, but they are all important factors to take into consideration when reviewing your options.

There are three main self-employed plans: The SEP IRA, the Simple IRA, and the Solo 401(k), all which are offered at Quest Trust Company. Each plan has something special to offer, so below we have listed the important information you should know about each one.


The most common plan for self-employed individuals is the SEP IRA, or Simplified Employee Pension plan. Like the Traditional IRA, the plan allows for tax-deferred benefits for individuals who are self-employed, own a business, employ others, or earn freelance income. SEP IRA contributions are considered employer contributions, so the business makes them to you as the employee. SEP accounts are good accounts for business owners with one or just a few employees. Since you need to treat all employees the same as you, keep in mind that if you end up hiring people, qualified workers will receive the same percentage from your employer contribution as you do. With a 2020 contribution limit of up to $57,000 or up to 25% of your wages, this account is highly sought after for self-employed individuals who want to contribute a large portion to their retirement plan! Additionally, those contributions are tax-deductible, making this a great account for some!


The SIMPLE IRA is another plan, and there are many great similarities, and also differences, that make this another highly sought out self-directed employer plan. The taxes work the same way as a Traditional IRA account would, with the taxes being deferred, but contributions are able to be made by both employer and employee. Usually this plan is great for employers with about 100 or less employees. For contributions, the employer provides matching contributions up to 3% of the employee’s pay, not limited by any annual compensation limit OR make non-elective contributions equal to 2% of the employee’s compensation. One special characteristic that this plan has that the others don’t is it’s portability. When looking to move a SIMPLE IRA, employees must wait two years from the time they open the account before transferring those funds into another retirement plan. There may be a 25% early-distribution penalty if one were to withdraw money from a SIMPLE IRA during the two-year waiting period.

SOLO 401k

Lastly, one of the most powerful self-directed accounts is the Solo 401(k). Many people seek this account because of its many benefits, but it also has some downsides and things to be aware of. Something to note is that these plans are usually best suited to business owners who do not have any w-2 employees. As opposed to the other two plans, the Solo 401(k) boasts exemptions from certain UBIT tax, offers the ability to do loans to yourself, and even allows for checkbook control, arguably the most enticing. Additionally, the owner can make contributions as both employer and employee, allowing up to $57,000 in contributions, with a catch up contribution of $6,500 for those 50 or older. With so many positives, there will be negatives, too. One requirement is that the account holder has sole responsibility when it comes to tax reporting requirements; it’s important to make sure records are kept. Another important thing to note about the Solo 401(k) is that in order for it to be legitimized, the account holder must make a contribution in the year the account is opened. Once you have learned the benefits and dangers, deciding if the Solo 401(k) is right for you will be easy!

The main thing to understand and take away is that there is no one right employer plan. What works best for you may not be the most common, or the most well-known, but each employer plan has it’s unique benefits. And remember, one of the best things about employer plans is that you can use them for investing with your company, but if you want to create personal wealth for retirement, you can also have a Traditional IRA or a Roth IRA at the same time, allowing the best of both worlds! Once you have an idea of what you’re looking for, you’ll be able to measure which plan is the best fit for you, and if you ever need more information or help deciding which employer plan might be best for you, feel free to call a Quest Trust representative at 855-FUN-IRAs (855.386.47.27).

To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Want more information on how to invest with an employer plan? Check out this video about employer plans, who qualifies for them, and what it means for you and your small business.

The “Perfect Time” to Contribute to Your IRA might be TODAY!

Estimated reading time: 6 minutes

A common question you hear in the retirement world is “how can I retire comfortably”, and we are constantly reminded how important it is to save for the future. IRAs (Individual Retirement Accounts) and Solo 401(k)s are some of the best tools created for those who choose to save money and create wealth for retirement through investing. Vehicles like this provide tax advantages for retirement savings, deferring taxes until distribution age or potentially making it to where an individual never has to pay taxes on growth at all!

But what do you do with your IRA when a global epidemic hits and all of your plans shift? More recently, THIS has become the most common question. At first glance, the thought of maximizing your IRA and the contribution limits of IRAs can seem intimidating. Setting aside hefty sums of money for the future may not seem all too appealing when you really need it now! The truth is, contributing to a retirement plan just may not be an option for each and every person right now and that is okay! For those who can take advantage of building their IRA during this time, understanding many different ways and options to maximize it to the highest potential is important.

As a savvy saver and intelligent investor, you know that there will always be benefit to maximizing your IRA contributions every year. In order to better your future, we have broken down how you can max out your contribution limits! In reality, maximizing your contributions now builds a more stable financial future for you and your family, especially when considering compound growth when each new investment makes a profit. The good news is, if you have not made or contributed all of your 2019 contribution limits, you still have ONE MORE DAY to do so.

Normally, Tax Filing deadline falls on April 15th every year, cutting off the ability to make any more contributions for that specific tax year. With the recent CARES Act the normal April 15th deadline has been extended, allowing individuals to make IRA contributions until July 15th 2020 for the 2019 tax year. Utilize the extended deadline! With that extra time, those who may not have been able to contribute or may have forgotten have one more day to contribute until the new deadline. That change could potentially have allowed some people more time to find a new job if they had been laid off, in turn giving them the ability to contribute to their IRA!

It is extremely important to understand how much you are allowed to contribute per year, though! In theory, it would be great to dump thousands of dollars into a tax sheltered retirement vehicle, but Uncle Sam has put some limits on how much we can contribute to our IRAs per year, and if those rules are broken, there could be excess contribution penalties for doing this transaction! Choosing a good custodian that will help you monitor this just like Quest, is very important, too. The table below outlines the contribution limits for 2019 and 2020 for the accounts that Quest offers.

Some of the things you may want to ask yourself are: “Have I maxed out my 2019 contribution?” and “With this extra days I have, could I contribute more and how much?” Understanding that COVID unexpected expenses are occurring for many people right now, considering how that amount can be divided as opposed to a lump sum deposit could be worth thinking about, as well.

Did you know you could have multiple IRA accounts and max them ALL out? Yes, you read that right! Quest and other custodians usually offer many different types of accounts, as well. Just as we mentioned above, just here at Quest we have 7 different types accounts and almost all of these accounts have varying contribution limits. Granted, there are certain limitations that still apply when maxing out different types of accounts. For example, you wouldn’t be allowed to open 20 Roth IRA accounts and contribute the maximum to every account; this would need to be spread across the accounts up to the limit. But as you can see, there are categories that show Personal Plans, Employer Plans, and Specialty Plans. Each of these categories, if you qualify for them, contain plans that can all get a contribution!

You may be wondering what the difference is between Personal Vs Special Vs Employer. When we talk about personal plans, we are referring to retirement plans that one can open as an individual with earned income. Employer 401(k)s often roll over directly into a personal plan like a Traditional or Roth IRA, making them very common retirement vehicles. Another plan category many custodians offer are Employer Plans. Some individuals work for themselves! For the certain ones who are self-employed and pay themselves self-employment income, they can qualify for specific accounts that allow for much higher contribution limits. Lastly, companies may offer Specialty Plans. At Quest, our specialty plans include the Health Savings Account and Coverdell Education Savings Account. These two plans have been deemed “special” due to the fact that individuals can take tax free distributions from these accounts for qualifying expenses! As the names may sound, the Health Savings Account allows for qualified health expenses, and the Coverdell ESA allows for education expenses. If you, your family, or your child qualify for one of these accounts, you may have the ability to open the accounts to max it out and then use it to partner it with your other accounts! Having a clear understanding of the many different types of accounts offered and which ones you can qualify for to contribute to will help you maximize your retirement vehicles to the very top!

The last thing you may want to consider is a Roth Conversion. A Roth Conversion is when a movement of assets from a Traditional, SEP, or SIMPLE IRA occurs and goes into a Roth IRA. This taxable event makes it to where anything else grown in the account thereon becomes tax free, as long as it is left in there for 5 years and the individual doesn’t take it out before retirement age. Is this a good time to do a Roth conversion? For more information about Roth Conversions, we recommend speaking with an educated IRA Specialist either at Quest or another reputable financial institution.

Lastly, you may consider if you have other accounts you can move over from other custodians? Diversifying your investment portfolio right now is a strong consideration many people are having. Public assets may not have as much control as private assets, and those who have had their accounts at more traditional custodians, are finding that Self-Directed IRA custodians can offer the ability for the individual to truly take control and invest in what they are knowledgeable and comfortable with. IRAs can always be transferred between other IRAs, so doing your research to see which custodian meets your specific needs and transferring an existing account to a different or new account may help you maximize your IRAs, too.

Times can be uncertain, but your retirement does not have to fall by the wayside. You still have time to maximize your future, and make the most of the contribution limits. If you don’t have an IRA or made a contribution for 2019, know that it’s not too late for you to get started either! Feel free to call Quest and we can provide more education for you, and see how we can help you get started maximizing your accounts to their full potential! Call us at 855-FUN-IRAs. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

Check out this video to learn more about 2019 and 2020 IRA contributions, and how to contribute to your Quest account.

Effects of Tax Bill on IRAs and Other Accounts

Estimated reading time: 5 minutes

**Please note this article is from 2017 and some information might have been updated since then. Always check the IRS website for latest information.

Many people are wondering what ended up in the final version of the tax bill and how it affects IRAs and other accounts. First, a brief civics lesson is in order. In the United States Constitution, Article I, Section 7, Clause 1 states that “All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as with Amendments as on other Bills.” In this case, the House of Representatives proposed the tax bill, and then the Senate passed amendments to the proposed bill. Since the proposed bills were not identical, a conference committee was established to work out the differences between the two versions of the bill. Once reconciled, the modified version of the bill goes back to the Senate and the House of Representatives to be voted on in its final form. If the final bill is passed by both chambers, the bill goes to the President to be signed into law or vetoed. The reason this is significant is that confusion often arises when one chamber proposes a change which does not match the proposal in the other chamber. Until the final version of the bill is negotiated and passed by both chambers of Congress, there is no way to tell what changes were actually made.

With that bit of background, let’s discuss what changes did, and just as importantly what did not, get passed in the final version of the tax bill. First of all, with regard to the Coverdell Education Savings Account (CESA), no changes ended up being made. The House bill had several proposed changes to the CESA, including provisions to disallow any additional contributions to a CESA after December 31, 2017, and allowing a CESA to be rolled into a qualified tuition program (a Section 529 plan). The Senate amendments had no changes proposed to the CESA. Both the Senate and the House had provisions to modify Section 529 plans. In the final version of the tax bill, the Senate amendment prevailed. For distributions made after December 31, 2017, Section 529 plans may not distribute more than $10,000 in expenses for tuition incurred during the taxable year free of tax. Any excess distributions received by the individual are treated as a distribution subject to tax under the general rules of Section 529. The definition of higher education expenses was expanded to include certain expenses incurred in connection with a homeschool.

Both the House bill and the Senate amendments proposed identical changes to the Roth conversion and recharacterization rules. The proposal was to disallow any recharacterization of a contribution to one type of IRA into the other type of IRA (a Roth IRA contribution to a traditional IRA contribution or the reverse). For example, if you made a contribution to a Roth IRA and later discovered that you made too much money to qualify for a contribution, you would not be permitted to recharacterize that contribution. However, in the conference committee a change was made which allowed the recharacterization of a contribution to one type of IRA into the other type of IRA, but did not allow a recharacterization of a Roth conversion contribution. In other words, the recharacterization rules remain the same except for Roth conversions. Beginning January 1, 2018, once a Roth conversion takes place, it may not be reversed (or recharacterized). As a result, much more thought must go into a Roth conversion decision in 2018 and future years. Significantly, no changes were made to the Roth conversion rules which allow high income earners to contribute to a traditional IRA and immediately convert that contribution into a Roth IRA. This is known colloquially as a ‘back door’ Roth contribution.

Finally, a change was made to the rules for Unrelated Business Income Tax (UBIT). Under the previous regulations, an organization that operates multiple unrelated trades or businesses aggregates income from all such activities and subtracts from the aggregate gross income the aggregate of deductions directly related to the trades or businesses. As a result, an organization was able to use a deduction from one trade or business to offset income from a different unrelated trade or business, thereby reducing unrelated business taxable income. However, the tax bill added a new provision (Section 512(a)(6)), which requires an organization to compute its unrelated business taxable income separately with respect to each trade or business and without regard to the specific $1,000 deduction generally allowed under Section 512(b)(12). The organization’s unrelated business taxable income is the sum total of the amounts (not less than zero) computed for each separate unrelated trade or business, less the specific $1,000 deduction. Beginning in 2018, a net operating loss deduction will only be allowed with respect to the trade or business from which the loss arose. As a result, an organization may not use a deduction from one trade or business to offset income from a different trade or business for the same taxable year. Fortunately, net operating losses from a taxable year beginning prior to January 1, 2018 that are carried forward to a taxable year beginning on or after that date are not subject to the rule, and can be used to offset unrelated business taxable income.

The final bit of good news is that the rules for inherited IRAs did not change in the tax bill. Given the power of an inherited Roth IRA, particularly if that account is self-directed, this is really great for those who have one and know how to work it.

  1. Quincy Long is a Certified IRA Services Professional (CISP), a Texas attorney, and is President of Quest Trust Company, Inc., with offices in Houston, Dallas, and Austin, Texas. He may be reached by email at Quincy.Long@QuestTrust.com or by calling 855-FUN-IRAS (855-386-4727). Nothing in this article is intended as tax, legal or investment advice.

How to Pay for Education Expenses With Tax-Free Dollars

Estimated reading time: 5 minutes

Many people are under the mistaken impression that a Roth IRA is the only type of self-directed account from which tax free distributions can be taken. However, distributions from Health Savings Accounts (HSAs) and Coverdell Education Savings Accounts (ESAs) can be tax free if they are for qualified expenses. In this article we will discuss the benefits of the Coverdell Education Savings Account and, more importantly, what investments you can make with a self-directed ESA.


Contributions. Contributions to a Coverdell ESA may be made until the designated beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. The maximum contribution is $2,000 per year per beneficiary (no matter how many different contributors or accounts) and may be made until the contributor’s tax filing deadline, not including extensions (for individuals, generally April 15 of the following year). The contribution is not tax deductible, but distributions can be tax free, as discussed below. Contributions may be made to both a Coverdell ESA and a Qualified Tuition Program (a 529 plan) in the same year for the same beneficiary without penalty.


There are limits to who may contribute to a Coverdell ESA. Your eligibility is based on your modified adjusted gross income (MAGI) and tax filing status.

Single filers can contribute to a Coverdell account if their MAGI for the year is less than $110,000. For married couples filing a joint return, the MAGI threshold is $220,000. A trust or corporation can also make contributions to a Coverdell account on behalf of an eligible student.


Tax Free Distributions. The good news is that distributions from a Coverdell ESA for “qualified education expenses” are tax free. Qualified education expenses are broadly defined and include qualified elementary and secondary education expenses (K-12) as well as qualified higher education expenses.


Qualified elementary and secondary education expenses can include tuition, fees, books, supplies, equipment, academic tutoring and special needs services for special needs beneficiaries. If required or provided by the school, it can also include room and board, uniforms, transportation and supplementary items and services, including extended day programs. Even the purchase of computer technology, equipment or internet access and related services are included if they are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in elementary or secondary school.


Qualified higher education expenses include required expenses for tuition, fees, books, supplies and equipment and special needs services. If the beneficiary is enrolled at least half-time, some room and board may qualify for tax free reimbursement. Most interestingly, a Qualified Tuition Program (a 529 plan) can be considered a qualified education expense. If you believe that contributing to a 529 plan is a good deal, then contributing that money with pre-tax dollars is a great deal!


One thing to be aware of is that the money must be distributed by the time the beneficiary reaches age 30. If not previously distributed for qualified education expenses, distributions from the account may be both taxable and subject to a 10% additional tax. Fortunately, if it looks like the money will not be used up or if the child does not attend an eligible educational institution, the money may be rolled over to a member of the beneficiary’s family who is under age 30. For this purpose, the beneficiary’s family includes, among others, the beneficiary’s spouse, children, parents, brothers or sisters, aunts or uncles, and even first cousins.


Investment Opportunities. Many people question why a Coverdell ESA is so beneficial when so little can be contributed to it. For one thing, the gift of education is a major improvement over typical gifts given by relatives to children. Over a long period of time, investing a Coverdell ESA in mutual funds or similar investments will certainly help towards paying for the beneficiary’s education. However, clearly the best way to pay for your child’s education is through a self-directed Coverdell ESA.


With a self-directed Coverdell ESA, you choose your ESA’s investments. Common investment choices for self-directed accounts of all types include real estate, both domestic and foreign, options, secured and unsecured notes, including first and second liens against real estate, C corporation stock, limited liability companies, limited partnerships, trusts and much more.


With the small contribution limits for Coverdell ESAs, you might wonder how these investments can be made. Often these accounts are combined with other self-directed accounts, including Traditional, Roth, SEP and SIMPLE IRAs, Health Savings Accounts (HSAs) and Individual 401(k) plans, to make a single investment. For example, I combined my daughters’ Coverdell ESAs with our Roth IRAs to fund a hard money loan with 2 points up front and 12% interest per year.


One client supercharged his daughter’s Coverdell ESA by placing a burned down house under contract in the ESA. The contract price was for $5,500 and the earnest money deposit was $100. Since the ESA was the buyer on the contract, the earnest money came from that account. After depositing the contract with the title company, the client located another investor who specialized in rehabbing burned out houses. The new investor agreed to pay $14,000 for the property. At closing approximately one month later, the ESA received a check for $8,500 on its $100 investment. That is an astounding 8,400% return in only one month! How many people have done that well in the stock market or with a mutual fund?


But the story gets even better. Shortly after closing, the client took a TAX FREE distribution of $3,315 to pay for his 10 year old daughter’s private school tuition. Later that same year he took an additional $4,000 distribution. Assuming a marginal tax rate of 28%, this means that the client saved more than $2,048 in taxes. In effect, this is the same thing as achieving a 28% discount on his daughter’s private school tuition which he had to pay anyway!


The Coverdell ESA may be analogized to a Roth IRA, but for qualified education expenses only, in that you receive no tax deduction for contributing the money but qualified distributions are tax free forever. Investing through a Coverdell ESA can significantly reduce the effective cost of your child or grandchild’s education. As education costs continue to skyrocket, using the Coverdell ESA as part of your overall investment strategy can be a wise move. With a self-directed ESA (or a self-directed IRA, 401(k) or HSA for that matter), you don’t have to “think outside the box” when it comes to your ESA’s investments. You just have to realize that the investment box is much larger than you think!