The Not-So-Well-Known Benefits of Roth IRAs

Many investors and financial professionals are familiar with the primary benefits of a Roth IRA: that after you pay taxes on the money going into the Roth IRA that the plans investments grow tax free and come out tax free.  That being said, there are so many more benefits to the Roth IRA that need to be noted. I’ll note just three.

Benefit #1: Roth IRAs are not subject to RMD.

Traditional retirement plan owners are subject to regulations known as Required Minimum Distribution rules which require the account owner to start taking distributions and paying tax on the distributions (since traditional plan) when the account owner reaches the age of 70 ½. Not being subject to RMD rules allows the Roth IRA to keep accumulating tax free income (free of capital gain or other taxes on its investment returns) and allows the account to continue to accumulate tax free income during the account owner’s life time.

Benefit #1: Your Roth IRA Can Outlive You

A surviving spouse who is the beneficiary of a Roth IRA can continue contributing to that Roth IRA or combine that Roth IRA into their own Roth IRA.  Allowing the spouse beneficiary to take over the account allows additional tax free growth on investments in the Roth IRA account. A traditional IRA on the other had cannot be merged into an IRA of the surviving spouse nor can the surviving beneficiary spouse make additional contributions to this account.
Non spouse beneficiaries (e.g. children of Roth IRA owner) cannot make additional contributions to the inherited Roth IRA and cannot combine it with their own Roth IRA account. The non-spouse beneficiary becomes subject to required minimum distribution rules but can delay out required distributions up to 5 years from the year of the Roth IRA account owner’s death and is able to continue to keep the tax free return treatment of the retirement account for 5 years after the death of the owner. The second option for non-spouse beneficiaries is to take withdrawals of the account over the life time expectancy of the beneficiary (the younger the beneficiary the longer they can delay taking money out of the Roth IRA). The lifetime expectancy option is usually the best option for a non-spouse beneficiary to keep as much money in the Roth IRA for tax free returns and growth.

Benefit #3: Roth IRAs Don't Have Early Withdrawal Penalties

Roth IRA owners are not subject to the 10% early withdrawal penalty for distributions they take before age 59 ½ on amounts that are comprised of contributions or conversions. Growth and earning are subject to the early withdrawal penalty and to taxes too but you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted without paying taxes or penalties (note that conversions have a 5 year wait period before you can take out funds penalty and tax free).
Roth IRAs are a great tool for many investors. Keep in mind that there are qualification rules to being eligible for a Roth IRA that leave out many high income individuals. However, you can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a backdoor Roth IRA) as the conversion rules do not have an income qualification level requirement on converted amounts to Roth IRAs. This conversion option has in essence made Roth IRAs available to everyone regardless of income.
 

Are You Swimming In Liability? Lessons Pool Owners Can Learn From Demi Moore's Asset Protection Fail

Do you remember a couple years ago (2015ish) when some guy drowned in actress Demi Moore's pool? The incident caught the media's attention and made me think of the pool safety and liability issues that my clients deal with.
As a lawyer with many clients who own real estate from California to Louisiana where pools are common, I thought it would be both helpful & fun (yes, lawyers can be fun) to address the issues of pool liability and safety.

Your Pool Is a Liability

Let's start this fun discussion with pools. Do you own a pool? In most states, you're responsible for keeping your pool "reasonably safe".
What happened at Demo Moore's pool is something that could happen to anyone, including you. Someone else (her assistant) held a party at her house while she was away and a man ended up drowning in the pool at this party.
Since Demi’s assistant is an employee, that means that Demi is also liable for her employee’s actions. So her assistant’s failure to keep the pool safe during the party becomes a liability issue for Demi, which naturally, sucks for Demi.
Let's go over a few tips so that you don't end up like Demi Moore, who at the time of this writing, is still in court regarding that unfortunate incident 2 years ago.

How to Protect Yourself From Lawsuits and Liability as a Pool Owner

What You Should Know About Strict Liability and Local Laws

There are two ways you can be liable for accidents that occur at your pool. First, if you violate a local law (city or state) that relates to pool safety you can be held solely liable. In most instances, there are laws that say what safety precautions should be present at your home or property. These requirements of these laws vary by state and include things fences, pool covers, and rails.
If your property and pool do not comply with these requirements and an accident occurs at your pool, you can be held “strictly” liable for the accident that occurs on your property. Just like Demi Moore.
Make sure you understand the laws in your city and state so that you are in compliance. Please don't end up in a situation like Demi Moore!

Pool Accidents and How to Avoid Them

The second way you can be held liable for a pool accident, is if your property and pool is deemed "unsafe". Indicators of an unsafe pool are broken fences, rusty rails, and lack of markings that tell people how deep your pool is. The biggest one by far however, is lack of supervision while children or other persons who may need supervision are around.

If you are aware of a dangerous pool condition and don't fix it, you are liable for any accidents. In the case of Demi Moore, the argument is that the pool was unsafe because it was not properly supervised while there was a party where alcohol was served.
You should know whether or not alcohol is being served around a pool that you own. And if alcohol is being served around your pool, you better make sure the pool is properly supervised. Hire some kid to be your life guard, and make sure he or she doesn't drink alcohol. (That's right, lifeguards are liabilities too!)
Are you a landlord?
Let's say you own an apartment complex with a pool. As a landlord, you have a duty to your tenants to guarantee that the pool includes the necessary safety features required by law. You can also be liable for damages and accidents to the guests of your tenants. And sometimes, even trespassers can hold you liable for damages incurred from the pool while trespassing.  If you haven't realized it yet by now, owning a pool or a property with a pool is potentially a high liability factor.

The Pool Owner's Guide to Preventing Liability and Expensive Lawsuits

Here’s a short summary of things you can do to limit your liability from pool accidents.

  1. Comply with all safety requirements for your city/state (fences, markings, etc.)
  2. Include a clause or separate pool disclosure and waiver. (These are similar to the signs you see at hotel pools & trust me they're there)

This document will include the following:

  1. The tenants use the property at their own risk.
  2. Have your tenant(s) specify if all of the occupants of your property can swim. If any occupant cannot swim, (infants for example) then additional caution should be taken and indicate in the waiver that the pool must be supervised at all times the child is at home. You may be better off not renting property to someone with an infant if you feel that they're irresponsible, as your liability will increase.
  3. State that your tenant is responsible for maintenance of the pool safety equipment, such as fences, and that the tenant must immediately notify you, the landlord, of any safety feature or pool equipment repairs that are needed.
  4. State that the Tenant agrees to supervise the pool at all times that guests are at the property. This would have saved Demi's rear end.
  5. Make sure that your property/landlord insurance includes protection for the swimming pool and that your insurance agent knows there is a swimming pool on your property. Keep in mind that your insurance company can deny you coverage if you do not have the "adequate" pool safety features as required by law. (This is why you need to know local/state laws).
  6. Own your property with an LLC! This way if something occurs on the property your LLC is liable for any damages as opposed to exposing all of your personal assets. In general, when the LLC owns the property the LLC is liable for anything that occurs on the property and a plaintiff tenant cannot reach your personal assets held outside the LLC.

Nobody enjoys going through a lawsuit, they can drag on for years and cost you big time. Hopefully this article helps all the landlords and real estate investors out there understand the implications of having a pool on their property. While pools can add a lot of value to a home, they do increase liability. Make sure you're in compliance with local/state laws so that someone can't slip, fall, and then sue you for everything! Don't end up like Demi Moore. When in doubt about the legal status of your pool, contact a competent attorney.
 

Estate Planning 101: Who Will Carry On Your Legacy?

Estate planning 101 starts with understanding that a trust is more than an opportunity to guarantee that your assets are distributed the way you see fit upon your death. A trust is also a great way to pass your legacy on to the next generation, whether they be your family, friends or someone else deserving of the privilege.

Your trustee will have an immense responsibility thrust upon their shoulders following your death. But finding a trustee is easier said than done. How do you know how someone will act once you're not around anymore? If you appoint the wrong person as trustee, they might just end up making you "roll over" in your grave.

The Purpose of a Trust in Estate Planning

When establishing a trust you will be outlining your assets and who will receive those assets upon your death. You will also outline certain conditions that may be placed on your assets.

For example, you may state that your children will receive an equal share of your estate upon your death. But you can also add that your children shall not receive a distribution if they have a drug or alcohol addiction or if they have a creditor who would seize the funds. The trust may also set up distributions to minor children so that they don’t receive a large inheritance when they turn 18.

How Do I Pick My Trustee?

As stated earlier, appointing a trustee to your trust is an important part of estate planning. In most situations, you will be the trustee during your lifetime and if you have a spouse your spouse will be trustee if they survive you.

However, you will need to select a successor Trustee of your Trust who will manage your estate following your death. (Even if you have a spouse, you may not want them to be the trustee). This successor Trustee may be a family member, friend, company, etc.

Factors To Consider When Picking Your Trustee

What Will My Trustee Do?

  1. Your Trustee will make funeral and burial arrangements along with family members.
  2. Inform your family members and heirs of the estate plans of the deceased. (This is the part you see in movies).
  3. Your Trustee will pay off creditors and hire professional as needed to assist with the estate. (Lawyers, real estate agents, etc.).
  4. Your Trustee will determine what exactly your assets are to make sure they are distributed to the heirs/beneficiaries of your Trust.
  5. Your Trustee will organize your assets for distribution. This may include listing and selling property, transferring ownership of businesses, jewelry, art, bank accounts, etc.

How Large is Your Estate?

If your trust is only worth a couple million dollars or less, listing a family member as the trustee is probably your best option. However, if your estate is worth over $4 million you may want to consider listing a lawyer as the successor trustee of your estate.

And if you've been fortunate enough to accumulate an estate worth over $10 million you may want to consider listing a trust company or bank as the trustee of your estate. "Absolute power corrupts." Need I say more?

Note: If you appoint a trust company to manage your trust it will cost tens of thousands of dollars, so this option is only viable for large estates.

When Should You Appoint a Non-Relative Trustee?

If you have heirs who are likely to disagree and cause problems, you may want to list a non-family member or a friend as the Trustee so that a third party can make decisions. This way you can avoid potential contention and litigation over your estate.

Does Your Trustee Have Good Financial Skills?

If you are selecting a family member, choose one who has shown good financial skills over their life. If you’re selecting a child over another, consider their financial skills, work background, and family dynamics.

Note: Choose someone who is well organized and who can get things done. You want a responsible person to be your trustee.

What Are The Dynamics of Your Family?

Every family is different, some have gold diggers or feuds, others have delinquents. Maybe your children are too young to be trustees, or you don't have a spouse. In any case, just think long and hard on this one!

Will You Compensate Your Trustee For Managing Your Estate?

You may compensate them or give them something extra from the estate for taking on the responsibility but generally family members are appointed to serve without compensation. Those with large estates may want to hire a professional instead. At any rate, you can do your trustee a favor and supply them with our article on the duties of a trustee.

Can Your Heir/Beneficiary Be a Trustee?

Yes, you may have your beneficiary/heir serve as Trustee. Most people who have adult children will list a child as the successor Trustee and this person will typically be a beneficiary/heir.
 Note: While there is some conflict of interest in this arrangement, the Trustee is bound to the terms of the Trust and can’t abuse that discretion for their own personal benefit.

Should You Appoint Co-Trustees?

Some people will consider listing co-beneficiaries as successor Trustees. This can be a way to involve more than one family member in the distribution of the estate so that one person doesn’t feel left out.
While there can be some benefits to involving another person as Trustee it can cause tension and confusion as to who is doing what. Make sure you're specific about their authority and responsibility if you are listing multiple trustees.

Who is Most Commonly Listed as Trustee?

Most persons with adult children will list one of their children as successor Trustee. Most persons with younger children will list a sibling or close friend as their successor Trustee.

 

11 Crucial Questions You Should Be Asking Before Investing

You probably already know that investing can be a risky business. Some people make it big. Others lose everything. There's always going to be those wanna-be Bernie Madoffs to watch out for.

So before you invest your hard-earned savings or your self-directed IRA into someone's business or real estate, you need to ask questions either to yourself or the person/business receiving your money.

We're here to encourage you to have a healthy level of skepticism. Anyone asking for your money should be comfortable answering questions. Let's go over 11 tips & questions to help you avoid legal trouble and bad investments.

Top 11 Questions You Should Ask About New Investments

  1. How does this investment fit into your portfolio?

    It's important that you diversify your income to maximize your returns and protect yourself against any unforeseen economic shocks.

  2. Are you being pressured to invest?

    If you are told that this opportunity will pass if you don’t invest now, then let the opportunity pass. Most scams use this technique.

  3. Have you been given documentation?

    If you aren’t given documents outlining what has been explained to you in conversation or what has been put into a presentation then don’t invest.

  4. Do you understand how you will make your money back?

    If you don't understand how the business or investment makes the returns being promised, then don't invest.

  5. Have you been offered commissions?

    If you’re told that you can get a commission for bringing others to invest into the same company, be skeptical. Especially if you don’t have a license to receive such commissions then don’t invest. If they're willing to break the law, they're willing to screw you over.

  6. What's going to happen to the money you loan them?

    If you are loaning money for a real estate venture, then get a deed of trust or mortgage on the title to the property protecting your investment. Also, make sure that you get a copy of the title report or commitment showing what position your loan is being placed into when the deed of trust or mortgage is recorded.

Lenders: Do What the Bank Does.

Create lending instructions to the title company closing the real estate transaction. Tell the title company to only use the funds being loaned when the borrower signs the note/loan documents and when all other defects to title have been cleared or disclosed.

  1. Have they filed with the SEC?

    If you’re investing into a PPM (Private Placement Memorandum) or offering you should receive lots of documents outlining the investment, the use of funds, the background of those managing the company, and also documents regarding your rights as an investor.

Also, check to see if the PPM or offering was properly filed with the SEC by going to SEC.gov and checking the company name in the SEC database. If no filing record exists for the PPM or offering with the SEC, then the person raising the funds has possibly disregarded the law. They'll probably "disregard" your money next!

  1. Are they credible?

    Investigate the background of the person you are entrusting your money with. When you are investing with others, you need to think like the bank and do what the bank does.

What is this person’s credit history, employment or prior business experience? What's their plan? What are the terms of the investment? Is there a realistic rate of return that fairly recognizes the risk being taken? Remember, the person who has your best interest at heart is you, so be vigilant.

  1. Have you looked closely at the documents provided to you, if any?

    Make sure a lawyer representing your interests reviews the documents. A second pair of eyes always helps. If a lawyer drafted the documents already it is still important to have a lawyer look at the documents as they relate to your interests and with an eye towards protecting you.

The "small print" in investing can be tricky. Many investments have clauses that can impact your ability to get your money back. Some even give the company raising the money the ability to pay whatever compensation to themselves they desire, which will eat into the bottom line of your profits. If you don't know what you're looking for, find someone who does. More on that in a moment.

  1. Have you sought a second opinion?

    Seek the opinion of another investor, business owner, or friend whose opinion you trust. Sometimes when you explain the investment to someone else they can help you find issues to consider and questions you should be asking.

  2. Are you willing to lose the money you're thinking about investing?

    Be comfortable saying no and only invest what you are willing to lose. Just like you would in Vegas.

Sometimes you may need to get out of your comfort zone by asking lots of questions, by demanding additional documentation, or by simply saying no. Remember, you are the only authority on what types of investments are best for you.

Of course, you're also human and flawed. It's best to seek professional advice if you're uncertain about an investment for any reason. At Royal Legal Solutions, our attorneys are investors themselves. If you need a second opinion, an extra pair of eyes, or assistance managing your investments in a corporate structure, start with our investor quiz and we'll take it from there.

LLC or Corporation Vs. Umbrella Policy: Which Is Better For Real Estate Investors?

Are you a real estate investor? Chances are you either use an umbrella insurance policy or an LLC to protect yourself from liabilities concerning your property. There are, however, certain situations one can be more beneficial than the other.

To understand fully, you need to understand the different protection that each one provides. Many real estate investors don't fully understand the implications of using an LLC/Corporation, but this is especially true when it comes to umbrella policies.

What Is An Umbrella Policy And What Can It Do For You?

Umbrella insurance is a policy that adds extra protection beyond the existing limits of current in-force policies. Umbrella policies usually provide extra coverage for things like injuries, property damage, and certain lawsuits. Depending on the type of umbrella, it may cover different types of liability situations.  

Let's say you have pool insurance under your homeowners or landlord policy with $100,000 of liability coverage and business general liability insurance of $500,000. Then, you also have a $1 million umbrella policy that could give you $1.1M of pool liability coverage and $1.5 million of general business liability coverage.

An umbrella policy doesn't cover any additional areas of liability or risk. It only adds more coverage to your existing coverage. The umbrella policy isn't as great of an asset protection tool as its name implies after all.

Example: A Typical Umbrella Policy Situation

Hypothetically speaking, let's say you own a business that provides home appliance services to residential customers. One day a claim is made against you by a customer against your LLC for damages from a failed, and expensive, appliance repair.

Now, this customer is going to file a lawsuit against your LLC. But that doesn't matter, because you're covered! You don't just have liability insurance, you also have an umbrella insurance policy, that's two layers of protection! But when you go to the insurance company with the claim, you get denied on both policies.

Why? Because your general liability policy didn't provide coverage for failed repairs. But it gets worse … Because your primary General Liability policy denied the claim your umbrella policy is also not going to pay out. This is why it is imperative to have a thorough understanding of your insurance coverages and to make sure that you take the necessary steps to protect yourself and your assets.

The good news is, you are here. You have learned the fundamentals of asset protection that we teach through Royal Legal Solutions. After identifying your vulnerabilities, you may even have gotten an LLC set up. Because of that action, your personal assets are not at risk, but your business could still end up having to pay a large settlement.

An umbrella policy is a great tool when you have your defense wall set up properly. However, keep in mind, that umbrella policies only cover above existing levels of the underlying policies. They are not a catch-all. That said, if you have them set up properly, they are a cost-effective way to achieve the extra security you may want and need.

LLCs & Corporations: Always Reliable

Think of the LLC or corporate structure as Old Faithful. Insurance can and will drop you the minute you actually need it. An LLC (or other corporation), on the other hand, protects you from liabilities that arise in the LLC and prevents a plaintiff from being able to go after you personally.

What is at risk in a lawsuit against the business entity (LLC or corporation) however, is the assets of that business itself. A creditor could collect against the assets of that business. So, for example, if you have an LLC with multiple rental properties with equity, then those properties and their equity would be at risk in a lawsuit.

Next, let's go over the cost of both LLCs & Umbrella policies.

The Cost of an LLC

The cost of an LLC, depending on how you go about getting one, will cost you a few hundred dollars. You can also expect about $50-$200 in fees per year to keep your LLC active with the state (each state is different, Arizona is $0 and California is about $900 annually, for example).

If you have a partnership LLC or a corporation then you also have the cost of an LLC partnership tax return or a corporate partnership tax return.

The Cost Of An Umbrella Policy

Umbrella policies typically cost between $150 and $300 dollars for the first $1,000,000, and then on average, another $100 dollars per additional million dollars per year.

Umbrella policy benefits include access to attorneys who your insurance company will appoint and pay to defend you in order to get the lowest possible settlement payout. There may be certain exclusions to your coverage that leave you without coverage for your risk. (You might have some costly holes in your umbrella). This is why it is critical to work with a knowledgeable insurance agent who is going to do everything in their power to ensure that you have the appropriate coverage you need to protect yourself.

Now we can finally get to the part you've been waiting for!

Which Is Best For You, An LLC Or An Umbrella Policy?

What it comes down to is what kind of property you own. If you own a multi-unit property or commercial property you should consider having both an LLC and an umbrella policy because you have more liability exposure when you have more tenants.

On the other hand, if you have a single-family rental in an otherwise good neighborhood where you feel you are less likely to be sued, then you could consider having just one, an LLC or an umbrella policy.

You should always consider both an LLC and an umbrella policy. But most of all get all the information you need to make an informed decision. That way you are protecting your assets in the most efficient and cost-effective way possible. Royal Legal Solutions can assist you in forming the best structure for your situation. Schedule your asset protection consultation today and let the professionals worry about your liability instead.

Defamation and Bad Reviews: How To Protect Your Business & Personal Reputation Online

You've no doubt seen negative reviews and comments about someone or a business online, maybe even one about you or your own business. A single 1 star Yelp review can quickly spiral into every business owner's worst nightmare. Today, we're going to discuss the current digtal climate and how to manage your reputation in the face of negative reviews. Specifically, we'll talk about when it rises to the level of something you can sue for: defamation.

Can You Sue Over False Bad Reviews?

As review platforms such as Yelp become more and more popular, many businesses are experiencing false claims and defamation on a scale they've ever seen before. The good news is that you can do something about it to protect your business.
You may or may not know, but there's no shortage of lawsuits about posts people make about businesses. There have been hundreds of lawsuits over online reviews or comments about businesses that have resulted in legal action. Let's talk about how this happens and what to keep in mind.

  1. Was the Statement False?

The 1st amendment guarantees only the truth, not lies. Most people in the United States think they can say anything they want, but that simply isn't true. Especially on a website like Yelp, LinkedIn, or Google+. When it comes to a customer review, if it's negative AND untruthful, then you can sue for damages.
Any case brought to remove or silence a negative comment or review must allege and prove that the comment is not truthful. If the comment or review was the truth, then there is nothing legally that you can do to force the other person to remove or correct the comment.
I would add that, the easiest way to deal with an "unsatisfied customer" is to approach and calm them down. Don't ever NOT respond to negative feedback, that makes it look even worse.

  1. Is It Really Defamation?

If the information posted about you or your business online is untruthful, then the legal action you may bring against the fraudster is called defamation.

There are two types of defamation:

What Do you Have to Do To Win a Defamation Lawsuit?

In order to win a defamation lawsuit you must show the following:

  1.  That a statement was made.
  2.  That it was published for others to see (comments, reviews, etc).
  3.  That the statement caused you injury ( emotional distress, loss of business, etc).
  4.  That the statement was false.

Awards in a defamation suit generally consist of the removal of the false statement(s) and damages for the amount of lost profits or injury that was caused. While lawsuits can remedy harm caused to you or your business, they are also costly and take a long time to conclude.

The Smart Way to Handle Bad or False Reviews

If someone does post an untruthful or negative review, respond to it once and only once. Never argue with someone in the comments or reviews section. There's no way someone reading that will be able to tell who is lying and who isn't.
As long as you reply once, that shows that you as a business owner care, and that's what's important. If you can, reach out to that disgruntled customer via phone or email.
If you’re unable to resolve a negative comment or review and if that comment or review is false AND is causing you or your business injury, you can bring a lawsuit against the perpetrator.
Just remember, a lawsuit can be a long and costly process, so don't go down that road unless it's worth it. If only your feelings were hurt, or if the statements were mostly true, then don’t waste your time with a lawsuit as it won’t be worth the legal fees.
Most lawsuits are just not worth it. But if you think yours might be, there's only one smart thing to do. Schedule a consultation with an experienced and knowledgeable attorney.
 

How To Pocket Your Retirement Distributions Tax Free

You've worked hard all your life, and now it's time to retire, or you're getting ready to retire. When that time comes, depending on what state you live in, you may end up having to say good bye to some of your hard earned money.
When you begin taking distributions from your IRA, 401k, or pension plan, those distributions are taxable under federal income tax and any applicable state income tax rules. While federal taxation cannot be avoided, state taxation may be avoided depending on your state of residence.
That's right! The good news is that there are a few states that have no income tax and don’t tax retirement plan distributions. On the other hand, some states that have special exemptions for retirement plan distributions, and other states that do in fact tax retirement plan distributions.
Let's discuss how to avoid paying taxes. (We do that a lot around here folks!)

States with No Income Tax.

Naturally, the easiest way you can avoid state income tax on retirement plan distributions is by living in a state that has no state income tax. Have you ever heard of "the villages" in Florida? It isn’t just the sunny beaches of Florida that helps attract all of those retirees. It’s the tax free state income treatment!
The 8 other states with no tax on retirement plan distributions are New Hampshire, Nevada, South Dakota, Texas, Washington, Tennessee, Wyoming and Alaska.

States Income Tax Exceptions for Retirement Distributions.

There are many states who are willing to make an exception for your retirement distribution. There are 36 states that have some sort of exemption for retirement plan distributions. Since each of these states are different, so too are their exemptions. The type of retirement account you have is what decides the exemptions available to you. Here’s a quick summary of the common exemptions found throughout the states:

Most of the 36 states that have an exemption for retirement plan income provide an exemption for public employee pensions and retirement plans.

Tennessee and New Hampshire are states that do not tax wage income and therefore they do not tax retirement plan distributions of any kind. There are also numerous states that exclude a certain limit of retirement plan income from taxation. For example, Maine exempts the first $10,000 of income from any retirement plan, including IRAs.
I hope this article has helped you. Oh, and just in case you were thinking about going to the villages, they were raided for drugs recently.
Just kidding, of course. We like to have fun at Royal Legal Solutions. Ideally, while helping you plan your retirement.
 

RMD Penalty Waiver: Using The 5329 Form For a Missed IRA Required Minimum Distribution

With all due respect to any financial masochists in the audience, nobody derives pleasure from paying taxes. But it's kind of part of the deal of living and working in the United States.

You have to pay Uncle Sam, and he's not about to start making exceptions for the money from your IRA. One of the requirements of IRA accounts is that you will have to take a Required Minimum Distribution eventually. Failure to do so  is something Uncle Sam frowns upon. In fact, he dislikes it so much that he'll send his minions to hit you with a massive 50% penalty.

The penalty is 50% on the amount you should have distributed from your IRA to yourself. This is tremendously annoying to a person who has otherwise been fiscally responsible, because they are essentially being punished for failure to pay themselves. From their own IRA. You know, the kind of account most of us save into for all of our working lives.

The irony of this situation is lost on nobody, but with that massive of a threat hanging over your head, you should know how to avoid it.

So, if you've been hit with the 50% penalty, don't throw yourself a pity party just yet. There’s some good news about how you can possibly get a RMD penalty waiver.

Steps To Getting the RMD Penalty Waived

In the event that you failed to take RMD for your IRA, you may be able to get a waiver for the penalty if you admit the mistake to the IRS by submitting the forms we'll talk about below (See Steps 2 and 3).  We all know Uncle Sam loves his paperwork, and yes, I'm telling you that you can possibly get back in his good graces with his favorite thing: more paperwork!

Fortunately, it's not an overwhelming amount of paperwork, especially for what you stand to gain (or more accurately, not lose). I'll describe the process in two simple steps, laid out in plain English.

Step #1: Take The RMD

Even if you know fully well that you intended to dodge the RMD, you're going to have to correct the "error" to get any sympathy from Uncle Sam. Better late than never. But you want to get this first step knocked out as expeditiously as you can, so you can move on to the super fun forms in Step #2.

Step #2: Complete Section IX Of Form 5329.

First, you'll need to say what you should have taken as an RMD. Using this number, you will calculate the penalty tax due. It's okay if you're not a math whiz—use a calculator

Now scroll down to Line 52. Here, you will need to put the letters "RC" next to the exact dollar amount you are requesting to have waived.

Step #3:  Attach a Missed RMD Letter of Explanation

Your statement of explanation will need to hit on two key points. The first thing you need to explain is the “reasonable error” that caused you not to take RMD. The IRS does not provide a precise definition or clear-cut circumstances for “reasonable error."  However, one expert I consulted with the IRS told me the IRS does respond well to oversights in a broad variety of situations where they can be persuaded the error was unintentional or otherwise not your fault.

Since these categories are vague, let's look at circumstances or situations that have worked for other taxpayers in this situation.  

Examples include suffering from a mental illness or falling victim to a damaging health situation or equally legitimate reason that may have stopped you from filing accurately.  If you've reached the age of 70 ½ years, or are new to taking RMDs, or fail to understand the requirement, these can also serve you. Other clients have succeeded in receiving waivers based on taking bad recommendations from a professional they had entrusted to help them, such as an advisor, custodian or accountant.

If one or more of these situations apply to you, list any and all of them. The IRS, despite its hawkish reputation, does certainly respond to logic and, if you're lucky, with empathy.

The second thing you need to explain is the reasonable steps you took or intend to take in the immediate future to remedy the mistake you made.

Showing Good Faith Gets You The Waiver

By the time you’re filing the exemption request, you want to have already contacted your IRA custodian. If you haven't by this point, be sure to do so before you file. This way, you can take the late RMD (see: Step 1). This means that as soon as you submit the RMD penalty tax waiver, you would be caught up and would have already remedied the error. Showing good faith is more likely to get you the waiver you need.

You can contact the IRS's Taxpayer Advocate Office as well for assistance following these steps, as well as more specific advice regarding your individual situation.

Keep in mind that RMD failures won’t go away. Uncle Sam is like an elephant: he never forgets. Sooner or later you’ll start getting collection letters from the IRS requesting the 50% penalty tax. The best way out of it is to get as ahead of it as you possibly can. You should correct your RMD failure, request the waiver, and fill out all of the necessary paperwork as soon as you learn of the looming problem.

This is especially if you have an inherited Roth IRA, as those withdrawals would ordinarily be totally tax-free! 

Conclusion

If you’ve been hit with a 50% penalty don’t panic. You may be able to get a waiver for the penalty if you admit the mistake to the IRS by filing a 5329. Come clean. Throw yourself at the mercy of the court.

You’re going to have to write a Statement of Explanation that outlines:

  1. What makes your error “reasonable,” such as mental health issues or bad advice from a bad advisor. The IRS is, at times, capable of compassion.
  2. The process you are planning to take, or have taken, to correct the error. If you’re on top of things, you’ve already taken the missed RMD. This makes everything clean, from your explanation for the error, to the enemy’s acceptance of your reasonable explanation.

Keep in mind that RMD failures don’t disappear. The IRS is a relentless, greedy machine. They WILL get their money. Get your error fixed!

Hopefully your panic level has dropped by now. The above is a simple, clear explanation of what steps you’re going to take. Essentially, your explanation will be that you already corrected the RMD failure as quickly as you could upon learning of the error.

If you are the beneficiary of an inherited IRA, check out our article, Calculating RMD For An Inherited IRA.

 

 

Law in Every Day Life: Pet Law Fundamentals

Do you have a pet, or are you thinking of adding one to the family? If so, have you ever wondered what would happen to your pet if you got divorced or if you died? I have, so I figured you might have too.
I know this isn't something I usually write about, but we all encounter these everyday legal issues and I thought it would be fun. (Yes, reading about law can indeed be fun.)
There are four common situations where familiarity with pet law can save you a lot of time, and potentially, heartache.


Four Fundamentals of Pet Law

1. Buying a Pet.

According to the American Veterinary Medicine Association, 21 states have so called “pet lemon laws” that allow a buyer of a pet to return the pet to the seller for a full refund in the event that the pet has an illness or disease.
In most states, you will have between 15 to 60 days to return the poor little guy. It depends.

2. Owning a Pet

There are a number of laws that outline what kind of care you should be giving your pet. They vary from state to state. In most states, you can't leave your pet outside in extreme weather conditions, such as hot, cold, or hurricane weather.
And interestingly enough, while you always see something in the news about a baby being left in a hot car, rarely are the hot car deaths of animals mentioned. It's also illegal if you leave a pet in a hot car. Not that we think YOU would do such a thing, of course.

3. Divorce of the Owners

Let’s address divorce briefly. By law, pets are personal property. Like your clothes, shoes, or jewelry. Although there is much more meaningful attachment to our pets than to personal effects, the law treats them the same.
As a result, in the event of divorce where the ownership of a pet is in dispute, the court will analyze certain factors to determine who should receive the pet. These factors are different from the factors a court will consider when determining custody of children. In those cases, custody is determined by considering the best interests of the child.
In determining ownership of a pet following divorce, the court would look to see who took care of the pet, paid for it, and spent time with it.
Note: If the pet is a family pet and if children are involved, the pet will probably go to the person who receives custody of the children.

4. Death of the Owner

We all want our pet(s) to be loved and cared for after our passing. As a result, if you have a pet, consider listing in your will or trust a provision that states who will receive your pet and how money you will leave for its care.
While you may create a "pet trust" to outline the care of your pet,  there's definitely someone out there who will gladly "adopt" your pet for free. But if  that's what you want to do, go ahead. You won't be the first or the last!
Fun fact: Leona Helmsley left millions of dollars to her dog. (Most of which was never spent in the interest of her dog either, might I add.)
I hope you enjoyed this post and learned something new. If you still have questions, keep the conversation going in the comments below.

How The IRS Can Take Your IRA Money: Taxes and Distributions

You're probably already aware of some of the countless ways the IRS tries to get your money. Here in the land of the free and the IRS, we all are. Let's talk about how you can give them less and pocket more using your IRA.

How Uncle Sam Gets Your IRA Money: Taxes and Distributions

Consider the main ways the IRS gets its hands on your IRA's dollars.

As a result, any money distributed from your 401k to you will be reduced by 20%. That 20% will be sent to the IRS in expectation of the taxes that will be due from you come time for distribution.

However, any money distributed from an IRA is not subject to the 20% withholding as you can opt-out of withholding. This legit loophole is just one of the advantages of using an IRA in retirement instead of a 401k. What this means is the money distributed from an IRA can be received by you in full.

Remember, the tax owed on a distribution from an IRA or 401k is identical. The difference between the two is when you are required to pay the IRS. Regardless of which you use, you will receive a 1099-R from your custodian/administrator. But in the 401k distribution, you are required to set aside and effectively pre-pay the taxes owed.

Example of Bypassing Withholding Tax on your IRA/401k

Okay so, what is the use of information if you never learn how to apply it. (College anyone?) Let’s walk through a common situation to illustrate the above information you just learned.

John is 65 years old and has successfully grown his 401k to a nice amount. He's decided to retire (finally) and enjoy his life the way it was meant to be, on a beach somewhere. He wants to take $500,000 from his 401k. He contacts his 401k administrator and is told that on a $500,000 distribution they will send him $400,000 and that $100,000 will have to be sent to the IRS for him to cover the 20% withholding requirement.

But wait. John just read this article, he knows that the 20% withholding requirement does not apply to IRAs. John decides to rollover/transfer the $500,000 from his 401k directly to an IRA.

Once the funds arrive at his IRA, John takes the $500,000 distribution from the IRA.  There is no 20% withholding tax so he actually receives $500,000 in total. John will still owe taxes on the $500,000 distribution from the IRA and he will receive a 1099-R to include on his tax return.

All in all, John has given himself the ability to access all of the money distributed for his retirement account without the need for sending money to the IRS at the time of distribution.

There you have it, folks. Don’t take distributions from a 401k and then voluntarily donate money to the IRS when you can roll over/transfer those 401k funds to an IRA and receive all of your money without a 20% withholding.

For more information on making your retirement dollars work harder for you, contact us with any questions. Feel free to look around at our many other articles on 401ks, IRAs, the self-directed IRA LLC, and of course, the mighty Roth IRA. Which choices will be best for you depends on many factors, but you can save a lot of time and money by getting advice from our legal and tax experts. Take our tax discovery quiz and schedule your personal retirement consultation today, and live large in the long run.

How To Disinherit Someone Legally Using a Will Or Trust

Have you become estranged one of your heirs? Sometimes, the apple falls far far away from the tree. I hate to sound satirical, but the good news is that you can easily disinherit the heir from receiving anything in your estate.

Disinheriting an Heir: The Right Way vs. The Wrong Way

You certainly shouldn't just leave their name out of things and think that this will accomplish your goals of disinheriting them. The laws in most states will presume you intended to have them be an heir unless you specifically state otherwise.
Following your spouse, your children are the presumed heirs to your estate by law in the absence of an estate plan. As a result, it is important to complete an entire list of your children in the estate plan and to specifically mention any child who will not be an heir to your estate by stating something like, “I do not want *child's name here* to receive anything from my estate."

Other Ways to Provide for a Disinherited Heir

Perhaps you have a heart, and you still want to provide for that "bad apple". But you also want to attach some "strings" to their inheritance. While you generally have freedom in deciding how to pass on your estate, there are some things you can't do with a trust.

Limits on Trust Clauses

For example, a trust or will cannot be created and enforced to go against public policy, promote illegal activities or tortuous acts. One of the more popular clauses is one which requires a child to divorce their spouse in order for them to receive their inheritance.
For example, you can’t say, “Brad doesn’t get anything from the estate so long as he is married to Angelina.” Many courts view this as a violation of public policy as it promotes divorce.
Avoid clauses such as these and seek the guidance of an attorney when adding clauses which disinherit or significantly restrict a child’s inheritance.
Whatever you do, don't ever state why you've disinherited someone in your will or trust. If you do, chances are that they'll use hired guns to prove that you were "mentally unstable" when you wrote that.
Details like this are why you should form an estate plan with an experienced attorney. If you don't have one, schedule your estate planning consultation today.
 
 

How To Buy Your Retirement Home Ahead Of Time Using A Self Directed IRA

Chances are you've been steadily growing your IRA for quite some time. Did you know that you can buy a retirement home with a Self Directed IRA (SDIRA)?

Yep, it's true. But there are a few things you need to know first.

If you have any other IRA besides a SDIRA, you can only hold investments. You can't just go buy a home with your IRA and live there. However, with a SDIRA, you can buy an "investment property", which you can later distribute and use personally.

Let's break this strategy down.

Steps To Using a Self-Directed IRA to Buy a Retirement Home

If you are seriously interested in using your SDIRA to purchase a retirement home, then know that it works in two phases.

First, your IRA purchases the property and owns it as an investment until you decide to retire. (You need an SDIRA for this.) Second, upon your retirement (after age 59 ½), you can distribute the property via a title transfer from your SDIRA a regular IRA. This allows you to personally use the home and benefit from it personally. Before you go out and buy your future retirement home, you should consider a couple of factors.

Avoid Prohibited Transactions

Be careful to avoid those dreadful "prohibited transactions". The rules in place currently do not allow you, the IRA owner, or certain family members to have any use or benefit from the property while it is owned by the IRA.

The IRA must hold the property strictly for investment. The property may be leased to unrelated third parties, but it cannot be leased or used by the IRA owner or prohibited family members (kids, siblings, parents, etc). Only after the property has been distributed from the self-directed IRA to the IRA owner may the IRA owner or family members reside at or benefit from the property.

You Must Distribute The Property Fully Before Personal Use

The property must be distributed from the IRA to the IRA owner before the IRA owner or his/her family may use the property. Distribution of the property from the IRA to the IRA owner is called an “in kind” distribution, and results in taxes due for traditional IRAs.

For traditional IRAs, the custodian of the IRA will require a professional appraisal of the property before allowing the property to be distributed to the IRA owner. The fair market value of the property is then used to set the value of the distribution.

For example, if your IRA owned a future retirement home that was appraised at $250,000, upon distribution of this property from your IRA (after age 59 ½) You would receive a 1099-R for $250,000 issued from your IRA custodian to you.

One of the drawbacks of this strategy is that distribution taxes can be high. You might prefer to take partial distributions of the property over time, holding a portion of the property personally and a portion still in the IRA to spread out the tax consequences of distribution.

However, that would be a tiresome process, as you would have to appraisals each year to set the fair market valuation. While this can lessen the tax burden by keeping you in lower tax brackets, you and your family still cannot personally use or benefit from the property until it is entirely distributed from your IRA.

Bottom Line: Play By The Rules With Your Self-Directed IRA

Remember that you should wait until after you turn 59 ½ before taking the property as a distribution, as there is an early withdrawal penalty of 10% for distributions before age 59 ½.

While this strategy is possible, it is not for everyone and certainly is not easy to accomplish. Few things worth doing in life are. SDIRA investments come with rules, and self-directed IRA investors should make sure they understand those rules. Remember, you can't use your retirement home for personal use until after its been distributed and you may or may not end up paying lots of taxes.

How To Get Out Of The Annuity You Bought With Your IRA

Did your adviser tell you how great annuities are, and how they can guarantee a life time of income for you and your spouse? Yep, they tell everyone that. But the truth is, most people eventually want to learn how to get out of an annuity.

Ways to Get Out of an Annuity

After you've retired and decided your annuity isn't as great as you thought it would be, there is a good chance you will ask these three questions:

  1. What's an annuity? (It's okay, most people don't know.)
  2. Can I cancel it and get my money back to invest in something else?
  3. Are there any penalties if I cancel? If so, how do I get around them?

Most people who own an annuity with an IRA are seeking to use those retirement plan dollars in a new investment opportunity with the goal of increasing returns. However, getting rid of an annuity owned by your IRA isn’t as easy as selling a mutual fund or stock investment.
Let's begin with the big questions here, the ones you already asked by being interested in this article. But first thing's first. Let's define annuities.

What is an Annuity?

The annuity you own is a contract with an insurance company. By signing this contract you agreed to either invest a lump sum or a series of payments with an insurance company.
In doing so, the insurance company agrees to pay a specific amount of money to you over your life. There are many variations of annuities. But the simple explanation is you give up money now to an insurance company and they promise to pay you money later. The longer you wait to get paid the more they will pay you later.

Can I Cancel My Annuity and Get My Money Back?

You can cancel your annuity, but you may be subject to a surrender penalty. Unfortunately there is usually no way around this penalty. Most annuities have a surrender penalty where you, the owner of the annuity, get penalized for requesting a return of the investment within a certain period of years of the initial investment.
This time period is known as the "surrender period". The surrender penalty on a 10 year surrender time period is usually 10% and decreases by 1% each year thereafter until it goes to zero after 10 years.
For example, if you invested a lump sum of $150,000 into an annuity and one year later (in year 2) you wanted to get your entire $150,000 back, you would be subject to a 9% surrender penalty of $13,500.
You would get back $136,500, but would forfeit the rest. Some penalty schedules are worse than others and they all vary. The surrender schedule is in your annuity contract documents and can also be requested at any time from the company holding your annuity.

How Do I Avoid Paying Taxes When Cancelling My Annuity?

Once you cancel an annuity owned by your IRA, the funds need to stay within your IRA in order to avoid taxes and penalties from your friends at the IRS. You can request the annuity company to transfer the IRA annuity cash balance over to a new IRA custodian of your choosing. Most investors find self-directed IRA the best method for this.
Once you’ve taken these steps, you’re retirement plan funds will be in an IRA and available to invest in stock, cryptocurrency, (link to cryptocurrency article here, "internal" links improve SEO) real estate, mutual funds, bonds and all other investments available to IRA holders.
If you have any questions about your annuity, please don't hesitate to ask me personally. You can reach out in the comments or contact me directly. I'd love to help! If you're ready to get out of your annuity, learn more about your retirement planning options, or take your retirement investments to the next level, schedule your consultation today.
 
 
 

Everything You Need To Know About College Savings Accounts

Is it almost time for your son or daughter to go off to college and finally stop mooching off of your hard earned money make you proud? Planning financially for college can be tricky, especially when it comes to taxes.
There are two types of accounts you can open to save for those  college expenses further down the road. These two types of accounts are Coverdell Education Savings Accounts and 529 Plan accounts.

The Coverdell Education Savings Account

A Coverdell account is typically set up for the higher education expenses of a child.  The funds you contribute grow in the account tax deferred and the money comes out for education expenses tax free.
There is no tax deduction for the amounts you contribute to a Coverdell. But you do have significant investment options including self-directed investment options (similar to IRA rules). A Coverdell has the following rules and benefits:

Coverdell Rules

Coverdell Benefits

The 529 Plan Account

Your contributions to a 529 Plan account can be eligible for a state income tax deduction (depending on your state). Money contributed to your 529 Plan account is invested into a state managed fund. A 529 has the following rules and benefits:

529 Rules

529 Benefits

College Savings Account Recap

As you can see, the main difference between the two accounts is that Coverdell accounts have the benefit of allowing you to decide how your contributions will be invested, but the money is not tax deductible.
On the other hand, contributions to a 529 Plan account must go to a state run fund, but that money is usually eligible for tax deductions.
If you still need help making decisions about how to best save for your little angel's college education, Royal Legal Solutions can help. If you have questions or want to discuss other ways to save, schedule your consultation today. Happy college planning!

Joint Venture Agreements For Real Estate Investors

If you've been in the real estate business for awhile now, the chances are extremely high that you've entered a Joint Venture Agreement at least once.
Right after the recession hit, Joint Venture Agreements became all the rage. Mainly because lenders began imposing loan-to-value ratios as high as 70%. Not many real estate investors are willing to put that much on the line, not by themselves anyway!
But maybe you don't know what a Joint Venture Agreement is? Whether you do or don't this article might can teach you something new. Let's begin.

What Is a Joint Venture Agreement?

A JV Agreement is a contract between two or more parties. It outlines who is providing what. (Money, services, credit, etc.). It also outlines 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 companies or individuals (like real estate investors) who are entering into a onetime project, investment, or business opportunity.
Usually the two parties will form a new company such as an LLC to conduct operations or to own the investment. This is usually the recommended path if the parties intend to cooperate over the long term.
However, if the opportunity between the parties is a one-time 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.

Typical Joint Venture Scenario For Investors

For example, consider a common joint venture agreement scenario used by real estate investors, and let's say you're the real estate investor. You purchase a property in your LLC or s-corporation and intend to rehab and then sell the property for a profit.
Then you, the real estate investor, finds a contractor to conduct the rehab. Your 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 joint venture agreement works well as both you and the contractor 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 your s-corporation or LLC in order to share in profits. But that could be bad for you.
If you did add the contractor to your s-corporation or LLC, that contractor would permanently be an owner of your company. Which is bad because you will likely use that company for other properties and investments where the contractor is not involved.
As a result, a JV Agreement  between your company that owns the property and the contractors construction company that will complete the construction work is preferred.
A JV agreement lets each party keep control and ownership of their own company while they divide profits and responsibility on the project being completed together.

Why You Should Use a Joint Venture Specific LLC For My Assets

While a new company is not required when entering into a joint venture agreement, many joint venture Agreements benefit from having a joint venture-specific LLC that is created just for the purpose of the joint venture agreement.
This venture-specific LLC is great in situations such as:

A $1M deal or venture could be done with a joint venture Agreement alone, however, you would be well advised to create 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.

Enter Agreements With Joint Ventures Wisely

Joint venture Agreements are great when you need cash now or can't qualify for financing. They also enable you to work with someone who can bring something to the table you can't. But in any case, always make sure you carefully consider everything before entering into one.
As always, if you have any questions about this article please do not hesitate to ask. If you're wondering whether a joint venture arrangement is right for you or have questions about setting up a venture-specific LLC, contact us today.

Your Quick Fix: Self-Directed IRA Benefits & 2017 Contribution Limits

 For 2017, the IRA contribution limits will remain the same as 2016.  This means the following is true for individuals:

Let's look at some quick tips about the Self-Directed IRA LLC and contributions.

Take Control of Your Retirement Account: The Self-Directed IRA LLC

A Self-Directed IRA LLC will offer you the ability to make tax free investments without custodian consent.
Think of a Self-Directed IRA LLC as a special purpose limited liability company that is created, owned and managed 100% by you. Or someone else, if you choose.
The advantage of using an LLC to make the investment is that an LLC is treated as a pass-through entity for tax purposes, meaning you, the owner of the LLC, would be subject to the tax and not the LLC itself.
In most cases, all income and gains generated by the IRA LLC would flow back to the IRA tax free. Also, the LLC allows you to keep IRA funds in your LLC bank account, instead of with a far away custodian. For you that means greater flexibility and less delays when it comes to investing.

You Can Invest in Anything

With a Self-Directed IRA LLC, you will be able to invest in almost any type of investment opportunity that you discover, including: domestic or foreign real estate (rentals, foreclosures, raw land, tax liens etc.), private businesses, precious metals (i.e. gold or silver), hard money & peer to peer lending, as well as stock and mutual funds.
Your only limit is your imagination. The income and gains from these investments will flow back into your IRA tax free.

Quick List of Self-Directed IRA LLC Benefits

When you get a Self-Directed IRA LLC:

If you have any questions about Self-Directed IRA LLCs, you can always ask in the comments below, or contact us directly. We're here to help you.
 

Who Can Help You Establish Your Solo 401k Retirement Savings Plan?

Yes, it's true. There are plenty of other legal firms and experts that can help you set up your self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k).

So what separates Royal Legal Solutions from the competition? In short, our experience as actual tax attorneys with the credentials you want from experts.

Warning Signs: Things to Watch Out For in a 401k Provider

Of course, we don't expect you to simply take our word for it. Here are some things to be wary of when you're shopping around for a solo 401k provider:

Unfortunately, many of our clients come to us after another one botches the job. Royal Legal Solutions has had to help many individuals who worked with a number of these companies. Why? Because these individuals made their "friends at the IRS" unhappy due to their improper plan contributions or with their prohibited transactions.

Royal Legal Solutions Ensures Tax Compliance

 The Solo 401k Plan is based on the rules found in the Internal Revenue Code, which can be complicated to someone without a tax professional background. This is why it's strongly advisable to work with a Solo 401k Plan provider like Royal Legal Solutions.

When you come to Royal Legal Solutions, you will be working directly with a 401k Plan tax professional that has been specifically trained on the special tax aspects of the solo 401k Plan.

We can guarantee your plan will remain in full IRS compliance and that you will not be engaging in any plan activities not approved by the plan or the IRS.

We can help you retire earlier & richer.

Most solo 401k Plan providers have already forgot about you once your plan has been established. But not us. As you begin administering your solo 401k Plan, you'll be able to consult with our trained 401k plan tax professionals.

Royal Legal Solutions can also take care of the annual maintenance of your solo 401k Plan. Proper maintenance is crucial in making sure your solo 401k Plan remains in IRS compliance. We'll also ensure that the IRS respects all your plan contributions and investment gains.

Is Your Individual 401k Compliant? Here's What You Should Know

Many investors prefer the individual 401k because it's specifically designed for small businesses with no employees. Individual 401ks offer cost effective and tax efficient investment benefits. Think of it as a Self Directed IRA made just for investors & the self employed.

It's like a dream come true right? However, a lot of individual 401ks are not correctly managed, which leads to costly penalties or even plan termination. If you have an individual 401k, you want to make sure it is managed correctly. Here's 5 things you need to ask yourself to make sure your 401(k) is compliant and keep it that way.

Has Your Individual 401k Plan Been Updated?

Your friends at the IRS require your individual 401k plan to be updated at least once every 6 years. If you’ve had your plan over 6 years and you’ve never updated it according to new IRS guidelines, it's not compliant and when that audit comes in the mail you will be subject to costly fines and even plan termination.

If your plan is out of date, the smartest thing you can do get it updated to guarantee its compliance with new IRS guidelines.

Are You Keeping Track of Your Plan Funds?

Your individual 401k plan funds must be accounted for and identify the different income sources for each member of the plan. Let's say two spouses are contributing Roth 401k employee contributions and the company is matching the contributions. In this situation, you need to be tracking these four different sources of funds, and you must have a written record documenting these different types of funds.

Are Your Plan Funds Being Separated by Both Source and Participant?

You must use separate bank accounts for the different participants’ funds and also separate traditional funds from Roth funds. You must properly track and document investments from these different fund sources so that returns to the individual 401k are properly credited to the proper investing account. Yep, there's a lot to keep track of!

Do You Need to File a Form 5500? 

Yea that's right, another form. There are two situations where you usually have to file a Form 5500 for your individual 401k. First, if your individual 401k has more than $250,000 in assets. And second, if the individual 401k plan is terminated (regardless of total assets). If either of these instances occur, then you will need to file a Form 5500 to the IRS annually.
Individual 401ks can file what is known as a 5500-EZ. The 5500-EZ is an easy to file version of the standard Form 5500. Unfortunately, the Form 5500-EZ cannot be filed electronically and must be filed by mail. Individual 401k owners have the option of filing a Form 5500-SF online through the Department of Labor (DOL).

The online filing is a preferred method as it can immediately be filed and tracked by the plan owner. Actually, if you qualify to file a 5500-EZ, the IRS/DOL allow you to file the Form 5500-SF online but you can skip certain questions so that you only end up answering what is on the shorter Form 5500-EZ.

Are You Correctly Accounting for Contributions and Rollovers? 

If you’ve rolled over funds from an IRA or other 401k to your individual 401k, you should’ve indicated that the rollover or transfer was to another retirement account. So long as you did this, the company rolling over the funds will issue a 1099-R to you, but will include a code on the 1099-R indicating that the funds were transferred to another retirement account, and that the amount on the 1099-R is not subject to tax.  If you’re making new contributions to the individual 401k, those contributions should be properly tracked on your personal and business tax returns. If you are an S-corp, your employee contributions should show up on your W-2, and your employer contributions will show up on your 1120S S-corp tax return. If you are a sole proprietor your contributions will typically show up on your personal 1040 on line 28.

Keep Your Friends at the IRS Happy

It's important to make sure you are updating your plan and complying with these rules on an annual basis. If you suspect that your individual 401k retirement plan is out of compliance, meet with your attorney or CPA immediately to make sure everything is okay. The penalty for not properly filing Form 5500 is $25 a day up to a maximum penalty of $15,000 per return not properly filed. Don’t lose your hard earned retirement dollars over a simple form folks!

What you should know about moving yourself or your money outside of the U.S.

If you're an American citizen, it doesn't matter where you go in the world. You can't outrun, or out-fly, the Taxman.

Beware the Wrath of Uncle Sam

There are many advantages to moving overseas, especially for U.S. citizens (cha-ching!). But before you or your money leave the USA and say goodbye to Uncle Sam, there are a few tax and legal consequences you need to be aware of.

If you're a U.S Citizen, Uncle Sam wants to know about your foreign assets, investments, or bank accounts. In fact, Uncle Sam says that you have 2 legal obligations that you must adhere to, or else!

Let's go over these 2 legal obligations, shall we?

Obligation #1: Disclosure of Bank Accounts and Assets

You must disclose any foreign bank account whose value is over $10,000 (all foreign accounts are combined to reach the $10,000 threshold) and you must report any foreign asset (e.g. foreign stock, company ownership, etc.) whose value is $50,000 or greater.
The form required to be filed annually to disclose foreign bank accounts in excess of $10,000 is known as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The form filed annually to disclose foreign assets with a value in excess of $50,000, is IRS Form 8938, Statement of Specified Financial Assets. The first obligation U.S. citizens have to their home country is the disclosure of foreign bank accounts and foreign assets.

Obligation #2: Pay Your Federal Income Taxes

As a U.S. citizen, you are required to pay U.S. federal income tax on the foreign income you receive. The U.S. taxes its citizens on income no matter whether it was earned in the U.S. or abroad. That's one of several reasons our GNP is so high.
So, even if you make money outside the U.S., as a U.S. citizen, Uncle Sam says that you are still required to pay federal tax on that income. If you paid foreign income taxes to the country where the income was derived and if that country has a tax treaty with the U.S., then you’ll typically receive a credit in the U.S. for the foreign taxes paid, which reduces the amount of federal taxes owed in the U.S. You can look online for a current list of countries who have a tax treaty with the U.S.
Some U.S. citizens presume that if they leave the U.S. that they are no longer subject to federal income tax in the U.S. But this is not the case. Uncle Sam wants your (his) money. Failure to comply could result in a nasty tax dispute. And who has the time or energy for that?
Even if you relocate to a foreign country and no longer earn income from the U.S. you are still subject to U.S. tax your foreign income (and potential state income tax depending on your state of residence).  There's one last question on this topic some rebels or activists in the crowd may be wondering about.

How Can I Avoid Paying Taxes While Living Abroad?

The only way to keep Uncle Sam out of your pockets, (AKA the tax jurisdiction of the United States), is to renounce your U.S. citizenship. However, this is a costly and expensive process with numerous tax repercussions. Not to mention, Trump probably won't be inviting you to anymore future Whitehouse dinners!
Here's a common example that demonstrates how the disclosure and income tax reporting requirements work:
Say you have a bank account in Luxembourg with a balance of $99,999. That account generates income of $10,000 this year. Let's say that the $10,000 in income resulted in taxes owed to Luxembourg of $1000 and that you reported and paid the tax to Luxembourg.
In addition to compliance with Luxembourg law, you would need to file FinCEN Form 114 (FBAR) to disclose the foreign bank account. The FBAR form filing is due by June 30th for the prior year’s accounts. You would also need to file IRS Form 8938, since the account was at or over $50,000.
Form 8938 is due with the filing of your federal tax return. In addition to the two disclosure forms that are filed in the U.S., the $10,000 of income from your Luxembourg account must be reported as taxable income on your income tax return (form 1040).
The $1000 paid in tax to Luxembourg will be credited to you as the tax owed to Uncle Sam because Uncle Sam and Luxembourg have a tax treaty. Woo, that was a lot of information right?
These are just the basics, but every country has their own tax dilemmas. There are many special rules and numerous exceptions to the filing you read about here, please don't take this example too seriously. If you plan on leaving the U.S. or sending money outside the U.S., you should seek out experienced professionals to assist you with U.S. tax reporting obligations. Avoid the wrath of Uncle Sam. If you're living abroad or planning to move, schedule your personal tax and business consultation today.

7 Benefits Of The Self-Directed IRA

The benefits of the self-directed IRA include absolute freedom & control to decide how you invest and what you invest in. When you think about it, this is a privilege the average investor lacks.

IRA stands for Individual Retirement Account, and it's a great way to save for your retirement. A lot of people think an IRA itself is an investment - but it's just the vehicle in which you keep stocks, bonds, mutual funds and other assets. A self-directed individual retirement account (SDIRA) is a special IRA that can hold a variety of investments types normally prohibited from regular IRAs.

While there are many advantages to this powerful investment tool, we've taken the time to list some of our favorites. Below you can read about the top seven exclusive & cost effective benefits of the self-directed IRA LLC.

Benefit #1: Tax Advantages

With a self-directed IRA LLC, you have all the tax advantages of traditional IRAs, as well as tax deferral and tax free gains. All income and gains generated by your IRA investment will flow back to your IRA tax free.
What this means is that you'll experience tax free growth.

Instead of paying tax on the returns from your investments, tax is paid only at a later date when a distribution is taken, leaving your investment to grow tax free.

Benefit #2: Investment & Diversification Benefits

What about self-directed IRA real estate? Your choices include real estate & private business entities. Once again, you can do this tax free.This will also enable you to build a solid portfolio that'll generate beefy returns in both good times and bad times.

Benefit #3: Access

The benefits of the self-directed IRA LLC include having direct access to your IRA funds. This  allows you to make an investment quickly and efficiently. There is no need to obtain approvals or send money to an IRA custodian.

Benefit #4: Speed 

With a self-directed IRA LLC, whenever you find an investment that you want to make with your IRA funds, simply write a check or wire the funds straight from your LLC bank account to make the investment. Other retirement accounts usually have to talk with their custodian first, which can cause a delay.

Benefit #5: Lower Fees

Another advantage to a self-directed IRA LLC account is that you can save a lot of money on custodian fees.
You will not be required to pay custodian transaction fees and account valuation fees. (Which can add up to be thousands of dollars over the years.)

Benefit #6: Limited Liability

By using a self-directed IRA LLC, your IRA will benefit from the limited liability protection afforded by using an LLC. With an LLC, all your IRA assets held outside the LLC will be "shielded" from attack.

This is especially important in the case of IRA real estate investments. This is an area where many state statutes impose an extended statute of limitation for claims arising from defects in the design or construction of improvements to real estate.

Benefit #7: Asset & Creditor Protection

By using this distinct category of retirement account, you will be protected for up to $1 million in the case of personal bankruptcy. Most states will also protect a SDIRA from creditors.

The Bottom Line: The Self-Directed IRA Makes Sense

The self-directed IRA LLC is like an IRA on steroids. If you want to take control of your finances, consider this legal entity for your real estate investments (or other assets).
 

Can Your IRA Invest In & Own Bitcoin and Other Cryptocurrencies?

Yes, your IRA can invest in and own bitcoin and other cryptocurrencies. Bitcoin is a form of virtual currency using blockchain technology. Bitcoin can be exchanged between people for goods, services and of course, dollars.
From 2011 to September 2017, the value of Bitcoin has risen from $0.30 per Bitcoin to a shocking $3,772 per Bitcoin. As a result, investors are beginning to seriously consider whether their retirement account can invest in and own actual Bitcoin or other forms of cryptocurrency. Maybe you are too, now that you just read that. I can't blame you.

Can Your IRA Own Bitcoin?

Yes! Your IRA can own Bitcoin and other forms of cryptocurrencies, such as Ethereum and Litecoin. The only items your IRA cannot invest in is life insurance, S-Corp stock and collectibles.

How Are Bitcoin Gains Taxed?

The IRS has stated that Bitcoin and other forms of virtual currency are property. The sale of property by an IRA is generally treated as capital gain, so the buying and selling of cryptocurrency for investment purposes wouldn’t trigger unrelated business income tax (UBIT) or other adverse tax consequences that can occasionally arise in an IRA.

3 Steps To Owning Cryptocurrency With Your IRA.

  1. First, you will need a self directed IRA with a custodian who allows for alternative assets, such as LLC's.
  2. Second, you will invest funds from the IRA into the LLC. Your IRA will own an LLC 100%, and that LLC will have a business checking account.
  3. And third, the IRA/LLC will use its LLC business checking account to establish a "wallet" to invest and own Bitcoin through the wallet. The most widely used Bitcoin wallet is through a company called Coinbase. You can use a wallet on Coinbase to buy, sell and digitally store your cryptocurrency.

There are already publicly traded funds and other avenues (Bitcoin Trusts) where you can own shares of a fund that in turn owns Bitcoin. But, if you want to own Bitcoin directly with your IRA, you’d need to follow the steps above.
Don't underestimate Bitcoin and other forms of cryptocurrency. You're living in the digital age now. Cryptocurrencies have great potential, as of this writing one Bitcoin is worth $3,772 , almost triple that of an ounce of gold. Times change.
However, as with any new investment, make sure you proceed with caution. Who knows, by the time you read this article, Bitcoin could be worth nothing, or it could be well on its way to being the "currency of the future". Just to give you an idea, the value of Bitcoin is about as volatile as a Dutch Tulip...(pictured below, click the link if you don't know about "tulip mania")
 
 

Attorney-Client Privilege & You: How to Talk to Your Lawyer

 "So then I says to the guy, 'leave the gun, take the Canolli."

Yes, we've all seen that movie. When it comes to going over your business plans and tax structure with your lawyer, you need to understand what is privileged and what is not. Knowing the difference will help your lawyer just as much as it will help you.
We've all "left the gun and took the Canolli" at least once in our lives, right? Or more likely, something less extreme but nonetheless unflattering. The point is, you don't want to that client who tells crucial information to his or her lawyer and then ends up wondering whether that information is “attorney client privileged” or not.

What is Attorney-Client Privilege?

Attorney client privilege is a fundamental legal protection offered to individuals, companies, and organizations who provide confidential information and who seek counsel from their lawyer or law firm.
Under law, an attorney cannot be required to provide attorney client privileged information to a plaintiff in a law suit, such as a creditor, or to a government agency (our friends at the IRS) except in certain scenarios.
Below are a couple of common situations where you may lose attorney client privileges and a few tips on how to make sure your confidential information which you provided to your lawyers doesn’t run into the exceptions.

Exceptions to the Attorney-Client Privilege Rules

Third Party Exception: Anyone But Your Lawyer Being Present Waives Privilege.

Was a third party present with your lawyer when the information you wanted to be privileged was discussed? For example, was your accountant or financial adviser present when discussing information you wanted to remain confidential and to remain privileged?
Keep in mind that if a third party is present in a meeting or on a conference call, then that third party may be required to provide information or documents from the meeting. That person can’t raise the attorney-client privileged defense for you unless they are actually your attorney.
If a third party professional does need to be hired, such as an accountant, that third party can be hired or brought into the matter by the attorney and the privilege may remain intact.
Fun fact: This is known as a “Kovel” hiring of the accountant and comes from a landmark case where a lawyer got an accountant for a  client and the accountants work was covered under the lawyer’s attorney client privilege.
TIP: For sensitive matters where you want information to remain confidential and privileged, do not involve outside parties as those outside parties or non attorney advisers cannot raise the attorney client privileged defense.

Only Legal Advice Is Attorney Client Privileged.

This is especially tricky for companies who have their own “in house” legal counsel who also offers business advice.
Only the information exchanged that pertains to legal advice would be privileged. For example, was an organization chart of the companies holdings “privileged” when provided to the company lawyer also manages those assets for the business?
Also, what if that lawyer shared that organization chart to accountants, property managers, or other non lawyers? If they did, then that information is no longer attorney-client privileged.
TIP: If you have sensitive documents or information you want to keep in communication only with your lawyer, ask your attorney to identify the document as “Attorney Client Privileged” and do not provide it to non lawyers.
Not all information with your lawyer needs to be attorney client privileged. But keep these tips in mind when communicating sensitive information to your attorney.
You should always let your attorney know before you provide the confidential information that you intend it to be privileged. This way your lawyer can make sure that your information is properly "handled."
If you still have questions about attorney-client privilege, contact us directly. Or as always, you can leave them in the comments section below.

Solo 401k Plan Roth Contributions: Frequently Asked Questions

The short answer is yes. Your Solo 401k does allow for Roth contributions.

You can choose to treat contributions under your plan which would otherwise be "elective deferrals" as designated Roth contributions. In this context, an “elective deferral” is an employer contribution to your 401k plan which is excluded from your gross income.

An elective deferral is instead a designated Roth contribution if you “designate” it as not being excludable. Your designated Roth contributions for any year may not exceed the maximum amount of elective deferrals that could be excluded from gross income.

All About the Roth IRA: A Hybrid Account

The Roth "sub-account" of the Solo 401K Plan is a hybrid of sorts. Although it is technically a type of 401k plan, it has some of the features of a Roth IRA. Only after-tax salary deferral contributions may be deposited in the Roth 401k sub-account.

No employer contributions and no pretax employee contributions are permitted. The entire account will contain only after-tax contributions from your salary plus pretax earnings on those contributions.

Note: Because the Roth 401k is actually just part of a regular 401k plan, most of the rules that apply to a regular 401k plan also apply to a Roth 401k plan, including the contribution limits.

Can a Roth 401k Plan Exist On Its Own?

We wish! Unfortunately, the answer is no. A Roth 401k plan is only available as an option that can be added to a traditional 401k.

When Are Roth 401k Distributions Taxable?

Distributions from a designated Roth account are excluded from gross income if they are:

However, the exclusion is denied if the distribution takes place within five years after your first designated Roth contribution to the account from which the distribution is received. Or if the account contains a rollover from another designated Roth account, to the other account.

Other distributions from a designated Roth account are excluded from gross income under Internal Revenue Code 72 only to the extent they consist of designated Roth contributions and are taxable to the extent they consist of trust earnings credited to the account.

Can I Convert a Traditional 401k Plan to a Roth 401k Plan?

Yes, you can. The Small Business Jobs Act of 2010, signed by then-President Obama contains a provision, which went to effect on Sept. 27, 2010. This provision allows for the conversion of a traditional 401k or 403b account to a Roth in the same plan if their employer offers one.

However, you must pay income tax on the amount converted. Let's take a look at 3 important criteria below that need to be satisfied in order for you to reap all the benefits of a Roth 401k:

All income and gains from your Roth 401k plan investment would be tax free!

Can I Rollover the Roth 401k Plan to a Roth IRA?

Yes. You are permitted to roll over your Roth 401k plan assets into a Roth IRA. Your assets can be transferred via a direct rollover, which will avoid mandatory income tax withholdings.

Can I Rollover a Roth IRA to a Roth 401k Plan?

No. But you can rollover assets from a Roth 401k to a Roth IRA. (Basically, you can't do the reverse.)

How Are Distributions From Roth 401ks Taxed?

 All distributions from Roth 401k's are either qualified distributions or non-qualified distributions.

Also, because all qualified distributions from Roth 401ks are tax-free, they are also exempt from the early distribution tax as well.

What is a "Qualified Distribution?"

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

Are You Required to Take Distributions From Your Roth 401k?

Yes, the required distribution rules that force you to begin taking money out of your retirement plans and Traditional IRAs during your lifetime also apply to Roth 401k.
If you have leftover money in your Roth 401k after your death, the distributions will be directed to your beneficiaries.
Note: The rules for a Roth 401k plan are different from those for a Roth IRA. If you have a Roth 401k, you must begin taking distributions from the account when you reach age 70 and 1/2, or after you retire, whichever comes first.

How Should a Solo 401k Plan Trustee Administer a Plan With Roth Contributions?

A trustee of a Solo 401k plan with a qualified Roth contribution program must establish separate accounts including only designated Roth contributions and “earnings properly [allocated] to the contributions”.

Also, the plan administrator must maintain separate records for these accounts.

Since distributions from accounts containing elective deferrals are included in the distributees' gross income, while distributions from accounts containing designated Roth contributions are generally excluded from gross income, an employee's designated Roth contributions cannot be grouped with elective deferrals.

Note: Forfeitures may not be allocated to Roth accounts.

That's all for our FAQ on the Roth option. If you have any questions about your Solo 401k plan, take our financial freedom quiz now. We're happy to help with any concerns you may have.