QRPs have generated incredible excitement and interest within the self-directed investor community – from crypto-enthusiasts to real estate syndicators. But, there appears to be extensive misinformation about QRPs, so we’re here to set the record straight for you. For expert analysis and FAQ about QRP & SDIRA, read on.
What does QRP stand for?
QRP stands for Qualified Retirement Plan.
What is a Qualified Retirement Plan?
A QRP, or Qualified Retirement Plan, is a retirement plan that is tax-favored under Section 401 of the Internal Revenue Code, also referred to as the Tax Code or the IRS Code. The title of the Section is: Qualified pension, profit-sharing, and stock bonus plans.
Some of the most powerful tax strategies exist within this section of the tax code, which covers many types of tax-sheltered plans.
What are some examples of Qualified Retirement Plans?
Who can create a QRP?
A QRP can be created by an employer for the exclusive benefit of his employees or by a self-employed individual. If there’s no employer or self-employment, the retirement plan is not a QRP.
Is a QRP better than an SDIRA?
A QRP does offer many advantages over an SDIRA, for those that meet the IRS guidelines for creating a QRP. However, for businesses that have full-time employees, operating a QRP costs a lot more than operating an SDIRA.
What are some of the advantages of a QRP over an SDIRA for self-directed investing?
A QRP has the following features, which make it more attractive than a self-directed IRA:
- Much higher contribution limits. For example, 401k contribution limits are about $60,000 – far higher than IRA contribution limits.
- No financial institution custodian is required for a QRP. In contrast, an SDIRA must have a financial institution custodian.
- QRP participants can take personal loans from the plan, of up to $50,000 – to be used for any purpose.
- Prohibited Transactions do not disqualify a QRP. Of course, QRP prohibited transactions do have adverse tax consequences and must be corrected, but those are not nearly as harsh as the repercussions of a prohibited transaction in a Self-Directed IRA.
- Roth 401k & Traditional 401k within a single-plan, as opposed to SDIRAs that require totally separate accounts for Traditional and Roth.
- QRPs do not generate UDFI from real estate acquisition indebtedness, which can be valuable to retirement account real estate investors and help them avoid UBIT taxation issues.
What are some QRP cons?
A QRP, especially one that’s required to cover non-owner employees of a business is extremely complex and costly to run. The IRS and DOL compliance requirements are incredibly complex, and if those rules are not followed it gets 10x more costly. A QRP that covers non-owner employees is an “ERISA Plan.”
- You can click here for an IRS overview of some of the requirements that apply to QRPs.
- You can click here to view the IRS 401(k) resource guide.
Does a QRP provide better asset-protection than an SDIRA?
A QRP that covers non-owner employees is an ERISA Plan – a plan that is subject to all the rules of the federal Employee Retirement Income Security Act of 1974. ERISA federal law provides extremely powerful asset-protection of QRP assets for plans that are subject to ERISA.
QRPs that cover only the business owner(s) and/or their spouses are exempt from many provisions of ERISA and, therefore, don’t have full ERISA asset-protection. The asset-protection of such plans is still robust, but not as strong as that of an ERISA Plan. From an asset-protection perspective, they are similar to Self Directed IRAs.
When does it make sense to establish a QRP vs an SDIRA?
For those qualify for a QRP by having a trade or business and don’t have full-time employees, a QRP is clearly the preferred choice. However, those that do have full-time non-owner employees must do a cost-benefit analysis to determine if the additional cost and complexity of a QRP is worthwhile, based on their objectives.
What is a Solo 401k? Compare Solo 401(k) to QRP
A Solo 401k is just a QRP that does not cover non-owner employees. There are some plan providers that have simplified QRP documents for such owner-only plans, which are not compatible for a business with full-time employees, and call those a “Solo 401k Plan.”
Of course, what really determines whether a plan is a Solo plan or “full QRP” is the existence or absence of non-owner employees, not the nature of the plan document.
Can the asset-protection features of a Solo QRP be enhanced with an LLC?
Whether-or-not QRP asset-protection is enhanced by creating a QRP-owned LLC, will depend on 2 factors:
- The jurisdiction in which the LLC is formed
- The nature of the QRP investments
This requires knowledge of LLC nuances in all LLC domiciles, of which there are 51 in the US. Be wary of anyone that advocates for all investors to implement identical structures, as one-size-fits-all fits nobody. At ReSure, we have intimate knowledge regarding the LLC’s of all US jurisdictions and aim to provide you with services tailored to your needs.
Through our extensive industry interactions, we continue to come across investors that are misinformed about QRP, QRP-LLC and Solo 401k. The misinformation appears to be pervasive and this blog post is an attempt to correct misconceptions and protect well-meaning self-directed investors that perform due diligence.
At ReSure, we can assist self-directed investors with every form of checkbook control self-directed retirement account structure – whether it be SDIRA or QRP – and are committed to serving you with integrity.