Self Employed Individual 401K Plan Loans

Who said you can’t have your cake and eat it too?

Self employed small business owners have an opportunity to not only save maximally through retirement plans but also build a safety-net through their ability to borrow from their individual 401K accounts.  Properly structured they can borrow from their retirement plan when the need arises without incurring the usual 10% penalty for early withdrawal.

In addition, 401k Loans for the Self employed business owners provides a loan, while allowing them to pay back interest to their own 401K rather than a financial institution.

An Individual 401k loan is permitted using the accumulated balance of the Individual 401k as collateral for the loan. Individual 401k loans are permitted up to 1/2 of the total balance of the 401k (but not exceed $50,000). A loan from an Individual 401k is received tax free and penalty free. There are no penalties or taxes if loan payments are paid on time.

Individual 401K Loans

  1. Can be used for any purpose.
  2. There are no income or credit qualifications to receive the loan.
  3. The monthly loan payments of principal and interest are repaid back into your own Individual 401k – you borrow and grow your retirement at the same time.

In addition, the assets can be from prior employer or IRA accounts that are rolled over to your individual 401K account.

Individual 401k are available to self employed individuals and small business owners with no full time employees other than a spouse. Your business can be a Sole proprietorships, LLC, S and C corporations,

The terms are set by the employer (yourself) but the 401k usually has a 5 year maximum repayment term for most loans, except it can be longer, for home purchase. There are no income or credit qualifications although you must charge yourself a competitive interest rate.

Although simple and fast to execute you  should remember that you are borrowing on your retirement nest egg.  It is only a valid action when you know you will have the ability to pay it back – default results in a withdrawal that can carry a 10% penalty.  The loan facilitates borrowing when it might be too difficult or too expensive to go through banks and lending institutions.

As good as it sounds consider that unlike a mortgage or a home-equity loan, if you use a 401(k) loan to buy or improve your home, you won’t get a tax deduction on the interest you pay. You may have to pay a one-time fee to the plan administrator for the cost of originating a loan; the fee is usually $50-100. Your retirement plan will also miss future targets if you don’t continue making annual contributions while you have this outstanding loan.  Though most self-employed who borrow from their 401K often pay their loans early it is important not to misuse your hard-earned retirement assets.

As can be seen the 401K Loan, like all tools, has advantages in disadvantages.  The advantages for the self employed should  encourage anyone who is or is planning to have their own business to begin saving in a tax deferred manner maximally.  By using an individual 401K account you can have your tax deferred savings and simultaneously build a safety net.

Edi Alvarez, CFP®

IRS reports: Payroll Tax Extended into 2012

Payroll Tax Cut Temporarily Extended into 2012
reprinted from IRS Newswire IR-2011-124

The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

Edi Alvarez, CFP®

Shapiro on Small Business and our Economy

Excerpt from Chair Mary Schapiro’s Nov 17, 2011 Review on how the SEC works to Support Small Businesses – U.S. S.E.C

As you know, studies suggest that small businesses have created 60-to-80 percent of net new American jobs over the last ten years.

But there is a footnote to that statistic: the most vigorous small business job creation comes from small businesses determined to get much larger. Job growth comes from emerging enterprises trying to grow out of their warehouse space and into a corporate campus or to jump from single downtown location into retail sites nationwide. It comes from companies that need access to capital to make that jump.

Today’s focus is on creating an environment in which those small businesses have that access, one in which they can compete successfully for a share of our country’s investment capital.

Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and we believe that companies seeking access to capital should not be overburdened by unnecessary or superfluous regulations.

As we examine ways that the regulatory structure might better facilitate small business capital formation, though, it’s important to keep in mind another critical facet of the SEC’s mission: investor protection. We must balance the instinct to ease the rules governing capital access with our obligation to protect investors and markets.

This can be a challenge. Even necessary regulation can impose burdens that are disproportionately large for small businesses with limited resources.

As the daughter of a small businessperson, I am familiar with the unique challenges small businesses face. I know that instead of planning year-to-year or quarter-to-quarter, that sometimes it’s day-to-day. And I recognize that challenges that a larger business would barely even notice can be significant drains on resources and time to an enterprise that needs to focus everything on making its place in a competitive market.

It’s also important to note that investor protection shouldn’t just be a priority for investors and their advocates. Confidence in the fairness and honesty of our markets is critical to capital formation. Investors who understand that financial market participants are honest, that disclosures are accurate, and that markets offer a fair chance to earn a reasonable return are more likely to make needed capital available, and demand less in return for doing so.

And so, in this forum and through other efforts, the SEC is seeking strategies for meeting regulatory goals while reducing the weight borne by small businesses.

That is why I have instructed our staff to take a fresh look at some of our offering rules, and to develop ideas for the Commission to consider that would — in a manner consistent with investor protection — reduce undue regulatory constraints on small business capital formation. Among the issues that we are considering are:

  • The restrictions on communications in initial public offerings;
  • Whether the general solicitation ban should be revisited in light of current technologies, and capital-raising trends;
  • The number of shareholders that trigger public reporting, including questions surrounding the use of special purpose vehicles that hold securities for groups of investors; and
  • The regulatory questions posed by new capital raising strategies, including crowdfunding.

In conducting this review, we are gathering data and seeking input from many sources, including small businesses, investor groups and the public at large.

In addition, two weeks ago, we convened the first meeting of the SEC’s new Advisory Committee on Small and Emerging Companies. This initial meeting has produced a number of insights on these and other relevant issues, from committee members representing businesses, investors, academia and regulators.

The re-examination of existing regulations is also of a piece with a goal I set when I returned to the SEC as Chairman: to make sure that the agency was up to date, that the regulations we enforce reflect the current realities of the financial markets.

For 77 years, the SEC has contributed to small business growth by supporting a capital marketplace in which confident investors invested money in growing businesses. We worked to create a culture of compliance that supported transparent markets marked by high liquidity, strong secondary market trading and investor protection.

Full transcript at

Edi Alvarez, CFP®

Net Worth “Accredited Investor” – much ado about nothing

Is this something or nothing?

Today the SEC adopted the new Net Worth Standard that excludes the value of someone’s home from a calculation that allows individuals to be categorized as accredited investors.  Is this much to do about nothing? Should we want to be labelled an accredit investor?  (see for details on the new standard announced today December 21st, 2011).

What is an ‘accredited investor’?  Someone who no longer needs the protections provided by the SEC as provided through the process of registration and regulation.  It implies that you will take all necessary steps to evaluate these investments and do not need the basic protection provided through the registration process.

The real question is not if a home value should be included but whether having a $1M in assets (with or without a home) truly qualifies you as able to evaluate unregistered/unregulated investments.  In my experience, many full time advisers and investors with several million are not qualified to evaluate and invest in unregulated/unregistered investments.

The changes were made to conform the SEC’s definition of an “accredited investor” to the requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (final rule No. 33-9287).  See below for pertinent details:

Under the amended rule, the value of an individual’s primary residence will not count as an asset when calculating net worth to determine “accredited investor” status. The amendments also clarify the treatment of borrowing secured by a primary residence for purposes of the net worth calculation. Under certain circumstances, they also permit individuals who qualified as accredited investors under the pre-Dodd-Frank Act definition of net worth to use that prior net worth standard for certain follow-on investments.

SEC rules permit certain private and limited offerings to be made without registration, and without requiring specified disclosures, if sales are made only to “accredited investors.”

The amended net worth standard will take effect 60 days after publication in the Federal Register. Beginning in 2014, and every four years thereafter, the Dodd-Frank Act requires the Commission to review the “accredited investor” definition in its entirety and to engage in further rulemaking to the extent it deems appropriate.

Edi Alvarez, CFP®

What do you do if your mortgage is denied?

How do you prepare for a mortgage application? What do you do if your mortgage application is denied?

As of August of 2011 lenders rejected about 50% of received applications for mortgage refinance (according to the Mortgage Bankers Association).

We recommend to always know and improve your credit history before you apply for a mortgage or refi. – the key is to improve your credit score.  If the mortgage is still rejected then we look at the lender – was this because they are the wrong type of lender or is there something else going on?

Why might you not qualify for a mortgage?

If your mortgage application is denied, always find out exactly why the lender turned you down.  The law states that you have the right to receive a disclosure letter – but you want more than those general letters – so use the fact that you have the right of disclosure to find out the ‘real’ reason from the front person you worked with.

The best way is to take the disclosure letter to your loan officer and ask for an explanation that makes sense to you, something that you can do something about.  The front person is a great source of answers as to how your loan is perceived at that institution.

What reasons are there for rejecting a mortgage application:

1) Appraisal was too low to back the amount of loan requested – declined due to LTV (loan-to-value). Lowball appraisals kill many purchases and refinances, but if you are certain that it is a low appraisal it is worth reapplying with a different lender.  Try to find a mortgage lender that is local and uses local appraisals to ensure that they know the market value for your home.  One of our clients had an appraisal at $1.2M and yet it came in at $2.1M with a local appraisal – not a small discrepancy between appraisals!

2) Credit history problems should always be resolved before you apply because some credit fixes can take time (6-12 months).  If your credit score is slightly lower there may be quick fixes like paying off credit card balances but even they will take 3 months before they show up in all three credit scores.

Some lenders will do a rapid rescore to get a new score soon after you know that the three credit history companies receive your changes – but this can still take time.

3) A too high Debt-to-income ratio will require that you pay off debt so that your monthly payment obligations are low enough compared to the income you earn.  Although unusual some times we find that clients have not included all of their income. In most cases, we help clients select the best assets that will be sold to pay off debt and lower their monthly debt payments.

Most lenders follow Fannie Mae (45%) and Freddie Mac guidelines some have more stringent requirements (35-38%).  Forty-five percent is a very high DTI and we recommend that despite the allowed DTI you not exceed 35% DTI.  If you are trying to get a mortgage with a DTI above 35% consider carefully if you have the capacity to maintain this debt load if  you have an emergency or unexpected financial shortfall.

4) When selecting your mortgage consider the size of the lending institution.  Often we find that community banks and credit unions have more flexible underwriting standards.  This is particularly important for those who are self-employed.

5) Do not take mortgage rejection personally.  At times it is not ‘the right time for you’ to refinance or purchase a home.  It will be the right time for you if you take the opportunity to manage your finances, pay off debt responsibly and keep adding to your earning history.  Always get your finances in order 6 to 12 months ahead if you are planning to buy a home.  For many, this is their largest debt they will obtain in their lives.

Edi Alvarez, CFP®

Taxes – Unintended Consequence of Trust on Home Sale

No Capital Gain Exclusion for Residence that is Held in Family Trust

IRS recent ruling shows unintended consequence of trusts used to hold personal assets. This ruling reminds us that tax rules change after a trust can’t be changed, making trusts sometimes inflexible in dealing with changing tax opportunities.

In this case the sale of a home, in which an individual resided for many years but to which title was legally held by a family trust, did not qualify for the Tax Code’s new capital gains exclusion on the sale of the house. The exclusion would for most home owners provide a $250K per person tax free gain.  The IRS concluded that the individual’s inability to control the assets of the trust prevented her from being deemed an owner of the trust for tax purposes.  The intention was that her largest asset held in a revocable trust would give her ultimate tax advantage while protecting her on the downside – the reality is that if her trust converts to a irrevocable trust she is no longer able to sell her property and obtain the $250K tax free gain.

Family trusts are a common estate planning tool and often place assets, such as a home, into a trust. The income beneficiary has rights to any income from the trust and may even have use of the assets but has no control to sell, mortgage or dispose of the assets of the trust. Since only the trust’s designated trustees have the power to make decisions related to the encumbrance or disposal of the trust’s assets then the IRS deems that the beneficiary has preferential estate tax treatment only if they have the ability to continue living in the home.

Planning for the smooth transition of your assets to your family upon death can be complicated and can have serious tax ramifications. ALWAYS review all tax documents with financial advisor, estate planner and tax advisor.

Edi Alvarez, CFP®

What to do about debit card fraud

What is debit card fraud?

Debit card fraud usually begins when a thief swipes the magnetic strip on the back of your card and create a duplicate of your card.  The thief is said to ‘skim’ your card. To be able to steal money from your account, they also must capture your PIN.  The most efficient do this all at one time – either at a fake ATM or at a vendor’s checkout.

How do you avoid debit card fraud?

Your debit card is the key to your account(s) – it’s for your personal use only. Employ safe debit card use habits:

  • Keep your card in a safe place and never lend it to anyone.
  • Do not type your PIN at Gas station or unattended Debit machines – it is better to use the debit card as a credit card for these transactions
  • Protect your PIN – it’s your electronic signature. Don’t write it down – memorize it. Change it.
  • When selecting a PIN, always avoid the obvious: your name, telephone number, date of birth, and address. Make sure your PIN cannot be easily guessed.
  • Never disclose your PIN to anyone. No one needs to know it. Change it often.
  • If you are uncomfortable about using the machine for any reason, do it later or go to another location. If anything seems unusual about don’t use it.
  • To ensure privacy, use your hand or body as a shield to  enter your PIN.
  • After completing a transaction, remember to take your card and your transaction record.
  • If your card is lost, stolen or retained by the ATM notify your financial institution immediately.
  • Regularly review transaction history online and report unusual transactions immediately.
  • Beware of all e-mail messages claiming to be from your financial institution. In many reported cases of fraud, individuals will receive e-mail from what appears to be their bank asking them to click on a link included in the message. If you click on the link, you are brought to a fraudulent web site that looks just like your bank’s website. This is known as ‘phising’.

Once it happens – what should you do?

1. Report it to the financial institution immediately. They will take several steps to ensure that your account is protected.  Immediately changing your PIN would be a good place to start.

2. Contact the credit bureau and have a fraud alert placed on your reports – if the financial institution does not do that immediately.  The three are equifax, transunion, and experian.

3. Contact the police, if you’ve not done so already.

4. Make a formal debit card fraud report with the anti-fraud group at the Office of the Controller of the Currency at

Edi Alvarez, CFP®

Dec 15th deadline: Kaiser Permanente Make-Up Payment

Your Kaiser Retirement: TPMG’s Physician Benefits and Compensation Plan 2 November Make-Up Payment Letter

December 15th is the due date for responding to this letter but the decision is usually reached in late October anticipating the November Plan 2 direct deposit.  This letter addresses an over funding that occurs for some Plan 2 deferred compensation participants.  Kaiser refunds this amount to you and gives you until December 15th to contribute up to this amount in additional Plan 3 contribution.

To help our clients make this annual decision we review their family tax profile, current retirement savings, family goals, family financial exposures, and available cash flow.

It is our experience that the majority our clients select to make a voluntary contribution to Plan 3 of at least some of their Plan 2 make-up payment.

Although this is true for most clients it is not always the right choice for all.  When cash flow is tight, there is low tax liability, or their retirement goal is fully funded we find that clients tend to choose to apply the Plan 2 make-up payment to other wealth building purpose.

If you would like to prepare for next year’s voluntary payment decision reach out to your Wealth Planner.  If you are working with a professional Wealth Planner they should understand your specific situation before they provide advice – only accept fiduciary advice.  Finally, give yourself enough time to evaluate your tradeoffs so that you prioritize and fund all of your family goals.

Edi Alvarez, CFP®

Debit Card Scam in the Bay Area

Debit Card Scam in the Bay Area – monitor your finances regularly

The latest high profile debit card scam is a reminder of ‘buyer beware’.  We’ve always been concerned about debit cards because they provide direct access to your accounts.  The latest scam is specifically on self check counters at Lucky’s but it could have occurred at other locations.

We all know the advantages and speed of using the latest and greatest technological tool but we need to but some automatic roadblocks between our cash flow (and our financial information) and vendors or we must be prepared for nasty surprises.

Why have we been recommending the use of credit cards rather than debit cards?  Aren’t credit cards evil and to blame for much of America’s debt?  Tools are neither to blame nor inherently evil but improper use can make a tool dangerous.  Without financial awareness, credit cards can lull consumers into using them to meet emergencies or fulfill life long dreams/goals.  We recognize that credit and debit card transactions are electronic and are therefore quite different from cash. Each electronic transaction carries your electronic imprint and you need to be very careful who has access to that information.

So how do you protect yourself?
We recommend that clients use credit cards rather than debit cards because with credit cards (if you monitor them monthly) consumers have the time to work through the process and reject a fraudulent charge.  Such is not the case with debit cards where money is drawn directly out of your account.
In combination with use of credit cards we recommend that consumers establish a simple process to monitor their expenses regularly. We also encourage clients to setup credit card web email alerts on unusual credit card charges.
Overall, we recommend that consumers know their finances well enough so that they at any time have a good idea if their ongoing balances are aligned with their financial plan.

The latest debit crime wave on Lucky self checkout stores ...

More than 300 people have reported unauthorized withdrawals from bank accounts following Lucky’s first identifying the problem on Nov. 11 of account ‘skimming’ at their self checkout cashiers.

Hackers installed ‘skimming’ devices on selected self-checkout aisles, allowing them to collect personal data, like debit card numbers and PINs, remotely. The fraudulent withdrawals are being made from ATMs in Southern California and the San Francisco Peninsula.

The crimes are being investigated by the US Secret Service.

In the meantime, Lucky’s is asking anyone who used a self-checkout lane at an affected store to close out their accounts and change card numbers. Here’s a partial list of affected stores, courtesy of the Contra Costa Times.


1515 Sloat Blvd.

Daly City
Foster City
Redwood City
San Carlos

Union City
Fremont: 5000 Mowry Ave.; 35820 Fremont Blvd.
Hayward: 25151 Santa Clara St.

El Cerrito

San Jose: 5510 Monterey Highway; 200 El Paseo de Saratoga; 844 Blossom Hill Road; 3270 S. White Road.
Santa Clara: 234 Saratoga Ave.
Mountain View

Petaluma: 939 Lakeville Highway


Edi Alvarez, CFP®

Buffett or Buffet – an extra ‘t’ does matter

Buffet or Buffett which one would you choose to invest with? Does an additional T in your name matter?*

A firm that bears no relationship to Berkshire Hathaway filed offering with the SEC last month.

Warren Buffet is getting into the high-risk business of Regulation D private placements. This is Warren Buffet, with one T, not Warren E. Buffett.

The Buffet that’s short one ‘t’ is the moniker of a new private placement connected to a stockbroker and investment adviser based in Boca Raton, Fla., named Peter Bruno.

According to Mr. Bruno’s website, he is chief executive of Wall Street Money Management Group Inc., a registered investment advisory firm. According to filings with the SEC, the firm has $17.1 million in assets under management and 122 client accounts. At the end of September, Berkshire Hathaway reported assets of $385.5 billion.

It would seem clear that the Buffet name is being used to cash in on the Buffett record and confuse consumers. Could there be any other explanation?

*Original article by Bruce Kelly, December 2, 2011.

Edi Alvarez, CFP®