8 Creative Ways to Fund a Real Estate Investing Startup

If you're considering a real estate investing startup, you may be wondering where you can get the capital to fund your first deal. Read below to find out about some of the many options available to you.

1. Conventional Loan

The most frequent type of mortgage is a conventional loan. You make a down payment, and the bank gives you the rest of the money in exchange for a lien on the property secured by a mortgage.

Investors who put down at least a 20% payment are not required to carry private mortgage insurance (PMI). PMI is a form of mortgage insurance that you may be required to pay for if you have a regular loan. PMI protects the lender if you stop making payments on your loan.

Not every real estate investing startup has the capital to go this route for their first deal.

2. Federal Housing Authority Loans

The Federal Housing Authority loan is a government-sponsored loan that encourages individuals to buy houses by allowing borrowers to make a down payment of 3.5%.

Because the FHA assumes some of the financial risks by ensuring the cost of the loan if the borrower fails to make payments, more borrowers can qualify for an FHA loan than a standard loan, and the lender can offer a competitive interest rate.

FHA loans come with some drawbacks for funding your real estate investing startup:

3. Private Lenders

A private lender is a person or entity that uses its own money to finance investments such as real estate and earns interest payments on the loan. Private lenders operate independently of banks or other financial institutions, and they deal directly with the borrower.

Here are some tips for finding private money lenders:

4. Venture Capital

Look for venture capital, aka angel investors. A real estate angel investor may help you finance the purchase of a property.

If an angel investor has faith in the proposed investment property's chances of success, they will supply the money required to finalize the transaction. Sometimes, angel investors will join forces to form angel groups to participate in more significant transactions.

Where can you find real estate angel investors?

Most people who have secured private investor angel capital claim that networking is the most effective method for locating real estate angel investors.

You'll need a polished presentation to approach potential investors. It doesn't matter how excellent you are or how helpful your services are if you can't communicate them effectively through a good pitch. A successful and effective sales pitch demonstrates your enthusiasm, proves that you know what you're doing, and answers questions. Practice your presentation to improve your public speaking and sales skills so that when the opportunity arises, you're prepared.

5. Crowdfunding A Real Estate Investing Startup

Real estate crowdfunding is a relatively new approach to investing in real estate.

Real estate investment platforms (also known as crowdfunding sites) link individual investors with real estate developers and other real estate professionals who want exposure to the sector without dealing with buying, funding, and managing properties.

Here is a list of real estate crowdfunding sites that may be suitable for your needs:

6. Hard Money

Hard money is similar to private capital, but it comes from a hard-money lender instead of a person. The term "hard money" is appropriate because the lenders secure the loan using the hard asset (the property).

Individuals use hard-money, short-term loans to purchase a property they intend on renovating and re-selling.

Typically, you'll get hard money to cover 70–80% of the property's purchase price before rehabilitation. So the lenders must be confident that the property is worth more than the loan and their cost to sell it if you default.

Hard-money lenders usually charge high-interest rates and include other expenses such as loan origination fees.

7. Home Equity Line of Credit (HELOC)

If you already own a house and have some equity tied up in it, you may use a home equity line of credit or HELOC.

Let's assume that you've spent ten years in your primary home paying down the mortgage and reaping the benefits of appreciation.

Your home appraises for $300,000, and your mortgage payoff amount is $150,000. Your equity in the property is $150,00 ($300,00 appraisal - $150,000 mortgage payoff).

You may use a HELOC to borrow against the equity in your home and use the $150,000 to purchase an investment property.

8. Fund Your Real Estate Investing Startup With a Self-Directed IRA

Many of our clients invest in real estate through their Self-Directed IRAs because there are several advantages, tax perks, and little-known secrets that only real estate investors with a Self-Directed IRA can utilize.

Do you want to learn more about Self-Directed IRAs and how they help you earn more from your real estate investment? Read our comprehensive guide on Self-Directed IRAs.

Critical Takeaways For Funding Your Real Estate Investing Startup

Royal Legal Solutions is here to help you along your real estate investing journey.

Alternative Investments: The Hidden Path to Huge Tax Savings

For decades, many people have thought they could only invest their retirement accounts on Wall Street.

Most Wall Street IRA custodians only allow you to invest in stocks, bonds, annuities, mutual funds, and CDs. The problem is that these traditional investments only make up a fraction of the profitable assets you can purchase for investment purposes.

But with a Self-Directed IRA, you can move beyond Wall Street and use your IRA funds to make self-directed investments in the “alternative investments” of your choice. Real estate is the most popular alternative investment people make with self-directed IRA funds.

You can use IRA funds to buy commercial and residential real estate, including houses, duplexes, condos, office buildings, shopping centers, mobile home parks, factories, and raw land. This article will explain alternative investments, their different types, and how they can provide you with significant savings at tax time.

What are alternative investments?

An alternative investment is an asset that falls outside the traditional categories of stocks, bonds, and currencies.

Since they are not tied to Wall Street, alternative investments can help diversify your portfolio and enhance your returns. Since many types of these investments are connected with the stock market, they can help investors achieve their long-term financial objectives, even during times of uncertainty in the market.

Alternative investments typically cover a wide range of strategies. However, most of these assets have the following characteristics:

Alternative investments are not for everyone. For instance, they usually offer less liquidity than traditional investments. Many of these non-traditional assets require buyers to lock up their money for five or even 10 years. 

What are the types of alternative investments?

Alternative investments can include both public and private assets. Here are some of the categories an investor may consider:

Real estate -- Real estate is the most common type of alternative investment. In addition to office buildings and farmland, however, the real estate category can include intellectual property, including inventions and artwork. The goal for the investor is to understand the long-term value of the asset.

Private equity -- This broad category includes investments in companies not listed on a public exchange. These assets can involve the following:

Private debt -- Private debt involves investments that are not financed by banks or traded on the open market. It’s important to understand that the term “private” in this case refers to the investment instrument itself since both public and private companies can borrow funds via private debt.

Hedge funds – A hedge fund is an investment partnership. Hedge fund managers use a range of techniques – including leverage, short selling, and derivatives -- with the goal of generating a consistent level of return, regardless of what is happening on Wall Street.

Commodities and futures -- These assets include natural resources (such as oil and gas), agricultural products (such as corn and soybeans), and precious and industrial metals (such as gold and silver). The value of these assets follows changes with supply and demand.

Structured products -- Structured products are financial instruments with a value linked to that of an underlying asset, product, or index. Examples include:

Collectibles – Although this type of investing may sound fun, it can be quite risky. Many experts warn that only true experts in the collected item, which can range from wine to action figures, should expect a sizable return on their investment.

What are the Tax Implications for Alternative Investments?

In addition to the diversity they offer your portfolio, alternative investments can also provide tax advantages.

The primary tax benefits of these assets are pass-through depreciation and long-term capital gains treatment. For example, many real estate funds deduct depreciation expenses from your net income, thereby reducing your taxable income.

Also, as longer-term investments, alternative assets may hedge against short-term capital gains taxes. 

How to Use Your IRA or 401(k) to Invest in Real Estate

Did you know that you can invest in private alternative investments with qualified retirement funds, such as a 401(k) or IRA?  

Most Wall Street IRA custodians allow you to invest only in traditional structures, such as stocks, bonds, mutual funds, annuities, and CDs. However, there are many reasons to form a Self-Directed IRA. Primary among them is that the structure allows you to use your IRA funds to invest in the alternative assets of your choice.

A Self-Directed IRA gives you complete control over your retirement assets. You can use a Self-Directed IRA LLC to make almost any type of investment. For example, the IRS permits using your Self-Directed IRA bank account to buy raw land real estate.

The advantage here is that taxes are deferred on all gains until a distribution takes place. (Before tax 401k distributions are not required until you reach the age of 70 and a half). And, with a Roth Self-Directed IRA, your gains become tax-exempt.

Be aware that the IRS has strict rules on these investments. It’s essential to keep good records of all income and expenses generated by your real estate investments. All income, gains, or losses from the investment needs to be allocated to the IRA.

To get the most out of your investment and avoid any tax issues, you should consider a Self-Directed IRA custodian. An IRA custodian is a financial institution that holds your account and makes sure that it adheres to all IRS and government regulations.

Finally, while most investors access alternative assets through their financial advisor or financial institution, there is a growing number of digital platforms that offer ways to buy them directly. If you are new to investing, we recommend working with a professional who understands the benefits and challenges of these non-traditional purchases.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Is My Roth IRA Protected in a Bankruptcy?

Although relief available through the Paycheck Protection Program (PPP) and the CARES Act may have kept them afloat for a while, many businesses and individual investors continue to experience the economic fallout caused by the pandemic.

Chapter 11 filings were up about 20 percent in February 2021 over the same month in 2020, and because bankruptcy filings lag behind other signs of economic distress, experts predict the worst may be yet to come.

If you’re considering filing for bankruptcy, it’s natural to be concerned about your retirement accounts. In particular, you may be wondering about your Roth IRA bankruptcy protection.

Before 2005, certain retirement assets—including traditional and Roth IRAs—had some protections at the state level, but these protections varied from state to state. However, after President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, the federal government now protects the IRA assets of all U.S. citizens.

Under BAPCPA, the following retirement savings accounts are generally excluded from bankruptcy:

As you can see, only IRA assets have a dollar limit for their bankruptcy protection. This amount, which applies to traditional and Roth IRAs, was set in April 2019 and will be adjusted for inflation in 2022 and beyond.

roth ira bankruptcy protection: protekt yo'self before ya wreck yo' selfDo Roth IRAs Have Additional Bankruptcy Protections?

Both types of IRAs (traditional and Roth) offer tax advantages. The key difference between a Roth IRA and a traditional IRA is the timing of when you claim those advantages. With a traditional IRA, you take out contributions now and then pay taxes later. With a Roth IRA, you pay taxes on contributions now and then take out tax-free withdrawals later.

If you have rollover assets combined with your IRA contributory assets, and your IRA account balances are approaching the $1,362,800 limit, you may need to provide documentation showing how much of your IRA balances come from employer retirement plan savings.

Each state can still create additional laws regarding the types of property that may be protected from creditors, such as a home or a vehicle. And, in some states, people filing for bankruptcy have the option to choose between following the federal laws or the state laws regarding exclusions of personal property, depending on which one is more favorable.

To read more, check out our other resources:

What if your account is over the limit?

While BAPCPA does not offer creditor protection for Roth and traditional IRAs accounts above the current $1,362,800 limit, a bankruptcy judge has the authority to extend the protection if they believe your situation warrants it.

How to protect rollover IRAs

Under the terms of BAPCPA, a rollover IRA is either a Roth IRA or a traditional IRA that was funded initially by a qualified retirement plan. These “qualified” plans, including traditional pension plans, standard 401(k) plans, and some employee profit-sharing plans, are shielded from creditors in a bankruptcy.

To make sure that a rollover IRA from an employer-sponsored retirement plan has full protection, it’s a wise idea to create a separate account just for those assets. With separate accounts, the origin of the assets is easy to document in a bankruptcy proceeding.

What About Inherited Roth IRA Assets?

In a 2014 decision -- Clark v. Rameker -- the Supreme Court unanimously ruled that inherited IRAs should not have the same level of creditor protection as retirement plans under federal bankruptcy law.

The Supreme Court’s decision seems to be limited to IRAs inherited by someone other than a spouse. There are special tax code rules for spousal beneficiaries, including the ability for a surviving spouse to roll over the inherited IRA into their own IRA.

However, Clark v Rameker applies to Self-Directed IRAs (both the Roth and traditional varieties). A Self-Directed IRA is an account that does not have a “custodian,” meaning account holders are able to invest in “non-traditional” assets, such as real estate, precious metals, and renewable energy.

The court gave the following as reasons for the ruling:

It’s important to note that after an IRA is inherited by a beneficiary other than a spouse, the law sees the account in the same way as all other assets when it comes to creditor protection. That means that a creditor may be able to may obtain a judgment and a court order to seize a Self-Directed Inherited IRA.

However, as we noted earlier, some states give debtors a choice between handling their bankruptcies under federal or state guidelines. It’s worth finding out how your state stands on the issue since some states offer exemptions that are more favorable for Self-Directed Inherited IRAs and account holders with IRA balances over the dollar limit.

Parents of adult children who are spendthrifts or who are facing legal issues may want to set up a trust rather than passing their IRAs directly on to their children where, depending on their state, they may be seized by creditors.

To Wrap It Up ...

No one wants to think about bankruptcy, but this past year has thrown us some challenging circumstances. While many employer-sponsored retirement accounts are protected from creditors, it will put your mind at each to know for sure.

If you still have questions, speak with your plan administrator or your financial advisor.

 

 

 

Photo by Jason Dent on Unsplash

 

 

 

What Is the Roth IRA 5-Year Rule?

The Roth IRA 5-year rule sounds like it is far from the sexiest topic in the world.

However, if you invest in a Roth IRA, it’s crucial that you understand it unless you’re cool with paying extra taxes. You’re not? We didn’t think so.

Following the 5-year rule when taking funds out of your Roth IRA can help you avoid taxes and substantial penalties.

This article seems a little sexier now, doesn’t it?

Keep on reading if you want to learn more about how understanding the 5-year rule can save you serious cash.

What Is the Roth IRA 5-Year Rule? sexy man and woman

Self-Directed IRAs: The Sexiest of All Retirement Accounts?

What Is An IRA?

An IRA (short for Individual Retirement Account) is a retirement savings account you can open and manage without going through an employer. Traditional IRAs are “tax-deferred,” which means that you can invest pre-tax funds in the account. With a traditional IRA, you can contribute up to $6K of pre-tax income each year. Once you hit 50, that annual limit jumps to $7K. 

While you can invest in a traditional IRA with pre-tax money, you know Uncle Sam isn’t going to let you avoid taxes forever. Once you turn 72, or 70½ if you hit 70½ before January 1, 2020, the IRS is done waiting for its tax money. You’ll have to start taking required minimum distributions (RMDs) each year, and, unsurprisingly, you have to pay income taxes on them. 

What Is A Roth IRA?

While you use pre-tax income to invest in a traditional IRA, Roth IRAs are the exact opposite. With a Roth IRA, you are only allowed to invest post-tax income. However, for many people, Roth IRAs actually offer more significant tax benefits and more flexibility.

First, since you already paid taxes on the money you invest, the IRS won’t make you take RMDs from a Roth IRA. You can keep your money invested and keep earning more and more income. And the kicker is, you don’t have to pay taxes on your earnings. Unlike traditional IRAs, you pay income tax on the amount you invest, not the amount you take out, so any money you make with your Roth IRA investments is almost always tax-free! 

Income and Contribution Limits 

Of course, the feds have to put SOME restrictions on the awesomeness of Roth IRAs. As with Traditional IRAs, you can only contribute $6K each year ($7K for our 50+ friends). There are also income requirements for who is allowed to use a Roth account. As of 2021, phase-out amounts for married couples who file jointly are $198,000 to $208,000 and $125,000 to $140,000 for single people and heads of households.

What Is The Roth IRA 5-Year Rule?

Now that we’ve given you way more information about Roth IRAs than you probably needed let’s move on to what we’re actually supposed to be talking about: The 5-year rule. While you can always withdraw contributions you have made to your Roth IRA without taxes or penalties, the Roth IRA 5-year rule refers to the five-year waiting period imposed on some withdrawals from a Roth IRA account. There are three circumstances where the 5-year rule applies: earnings withdrawals, conversions from a traditional IRA to a Roth IRA, and inherited Roth IRAs.

Withdrawing Earnings

The most commonly encountered situation involving the Roth IRA five-year rule is when attempting to withdraw money that you earned from account interest rather than money that you contributed to the account. 

For earnings withdrawals to be tax-free, you must withdraw the earnings at least five tax years after the date you made your first contribution to any Roth IRA you own. You must also be at least 59½ years old. This means that even if you are over the age limit, you have to wait until it has been five years since your first contribution to take out your earnings without taxes or penalties.

Converting A Traditional IRA To A Roth IRA 

The second way the five-year rule applies to Roth IRA withdrawals is when you convert a traditional IRA or a traditional 401(k) to a Roth IRA. Since traditional IRAs and 401(k)s are funded with pre-tax money, you have to pay taxes on any funds you convert from a traditional account to a Roth IRA. 

Once you convert to a Roth IRA, you’ll have to wait five years to withdrawal any converted funds. This can get confusing because each conversion has its own five-year waiting period before you can withdraw the funds tax- and penalty-free.

However, IRS rules state that when you take money out of a Roth IRA, the oldest conversions are considered to be withdrawn first. When the IRS decides whether your distribution should be subject to early-withdraw penalties, the order of withdrawals are contributions first, followed by conversions, and then earnings. 

Say, for example, that you have $100K in a Roth IRA - $75K in contributions; $20K in conversions; and $5K in earnings. If you were to withdraw $80K from the account, the IRS would consider you to have depleted your contributions before moving to converted funds, so only $5K of your balance of conversions would need to comply with the 5-year rule. 

Inheriting A Roth IRA

The rules surrounding inherited IRAs can be incredibly confusing, but fortunately, applying the 5-year rule to inherited Roth IRAs is relatively straightforward. When the owner of a Roth IRA passes away, a beneficiary who inherits the account can withdraw contributions or earnings without penalty as long as the Roth IRA has been open for five years. If not, you’ll need to wait until you hit the five-year mark before withdrawing any earnings if you want to avoid a penalty. However, you can still take out all of the contributed funds regardless of the age of the account.

Never Hurts To Double-Check

We’ve covered the basic principles about the 5-year rule in this article, but many other factors must be considered before withdrawing funds from a Roth IRA. We recommend consulting with your lawyer or CPA before taking an unscheduled distribution from your Roth IRA to ensure you won’t suffer penalties or have to pay taxes.

Especially when it comes to your money, a second opinion is very sexy indeed!

How You Can Bypass The 20% Withholding Tax On 401(K) Distributions Using Your IRA

You have to think of the IRS like they’re pirates out to steal your money. They want to get into your home. They want to carry off your daughter. They are the barbarians at the gate.

Our clients are wealthy investors who will pay their fair share when and where they are obligated.

But there are ethical and legal means to keeping more of their money, and it's our job to help them find those means.

Here’s one way to keep the government’s greasy fingers off of your retirement savings by bypassing the withholding tax on 401(k) distributions. 

Tax Advantage of Retirement Tax Savings

Your 401k is subject to a 20% withholding tax when you cash in. IRA distributions, however, aren’t subject to taxation at the time of distribution.

That means you have a head start against the pirates.

This is the easiest switch in the world. Dump your 401(k) into an IRA. To get started, check out our article, IRA Rollovers: Yes, Rolling Over Your 401(k) Into An IRA Is Smart!

Everything in your 401(k) is going to take this hit. But your IRA is all yours.

Now, this isn’t a complete get-out-of-jail free card. The real world isn’t Monopoly and you’re going to look like an idiot if you start wearing a monocle.

The tax owed on the distribution of an IRA or 401(k) is identical. You will still receive a 1099-R.

The difference is when you have to pay the piper. If you keep your 401(k), you pay the Man up front. 

The Difference 20 Percent Can Make

You may not think 20 percent is a big deal, but with a little creativity, 20 percent is going to add up. There’s nothing wrong with retiring on the beach. My buddy (we'll call him John) took $500,000 from his 401(k) and he went got himself a fine little spot with plenty of sun and plenty of surf.

My buddy Sam, on the other hand, talked to me first. So, when he pulled his half a million bucks out of his IRA, we figured out how to get him a beach house like John. We also figured out how to put a little boat at the end of the pier for him. Sam loves to fish, so we invested a little in a fishing business too. Sam doesn’t care if the fishing business makes any money, but he got to keep enough money to buy a boat and make it a business expense. He also got to retire with a nice expensive Dunhill cigar in his hand.

John only gets a nice smoke when Sam is feeling generous.

It’s no contest folks. IRA or give your money away.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Everything You Need To Know About IRA & 401k Distributions

Are you ready for the next phase of life? One that leaves the daily grind behind? If you're nearing retirement age, you've been saving for a long time, and now you're getting close to the point where you can start taking distributions (finally).

Let's review everything you need to know about taking a distribution from an IRA or 401(k).

Options For IRA or 401(k) Distributions

When you receive a distribution from a 401(k) or IRA you should weigh the following tax options:

What Happens When You Take Money Out of Your IRA or 401(k)?

You'd think this would be a no brainer, wouldn't you? You saved up for retirement, now it's time to start receiving it. But it's never simple when the IRS is involved. When you take money out of your IRA or 401(k), the following income tax rules apply.

How Are Distributions From a Traditional IRA Taxed?

Distributions from a traditional IRA are taxed as ordinary income, but if you made non-deductible contributions, not all of the distributions will be taxable.

Internal Revenue Code Section 72(t) imposes a tax equal to 10 percent of certain early distributions from IRAs (exclusive of portions considered a return of non-deductible contributions).

The 10% tax, which must be paid in addition to the regular income tax on the distribution, applies to all IRA distributions except the following:

 

Options For Receiving Distributions Before Retiring

The current retirement plan rules discourage taking distributions before retirement. The following are the options you have when receiving a distribution prior to retirement:

As I mentioned above, you can also choose to do forward averaging. But your best bet is to just wait until you reach retirement age.

Calculating RMD For An Inherited IRA

If a loved one passes away and you are the beneficiary of their IRA, you might not know what you need to do next. The IRS has a lot of complicated rules about inherited IRAs, and you can be subject to large penalties if you don’t follow them.

While it’s always a good idea to get tax advice from an attorney or accountant, we’ve put together a handy guide to help you figure out what you need to do to stay on the IRS’s good side when calculating RMD an inherited IRA. That's the "required minimum distribution," and it can get confusing!

Note: The information here pertains to Charles Schwab, eTrade and Ameritrade IRAs .... or even an inherited self-directed IRA (SDIRA) ... But, as always, you should check with someone on our team for the solution that will apply to you and your situation.  

What Is An IRA?

Let’s start from the beginning. An IRA, which is short for Individual Retirement Account, is a retirement savings account that is not provided by your employer. You open the account yourself and can contribute up to $6,000 a year of pre-tax income, or $7,000 a year if you're 50 or older. Yes, that means you don't get taxed on the money you invest in your IRA.

But since Uncle Sam is involved, of course you know there must be a catch. A traditional IRA allows you to make pre-tax contributions, but you will be subject to required minimum distributions after you turn 72, and any withdrawals you take will be taxed as ordinary income after age 59½. Since you're skipping taxes now and paying them later, traditional IRAs are called "tax-deferred retirement accounts".

Another type of popular retirement account, the Roth IRA, is NOT a tax-deferred account. With Roth IRAs, you pay your taxes up-front by investing post-tax dollars, so you aren't subject to required minimum distributions later in life.

How Do Required Minimum Distributions Work?

While you can invest pre-tax funds in an IRA, you'll eventually have to pay taxes on that income. For this reason, the IRS is going to start making you take money out of your account once you turn 72, so that they can tax you on your distributions. However, if you're still working, you can get out of taking distributions until you retire.

These mandatory annual withdrawals are fittingly called required minimum distributions, or RMDs for short. Your RMD requirement is calculated based on your age and the amount of money in your account.

Before 2020, the RMD age for IRAs was 70½, but when the SECURE Act passed in 2019, they raised the age to 72. If you turned 70½ before January 1, 2020, you may be subject to RMDs. A tax advisor can tell you if you are required to take RMDs now or when you turn 72.

If you try to skip an RMD, you can receive a whopping 50% tax penalty from the IRS. However, you may be able to receive an RMD Penalty Waiver to avoid IRS penalties under certain circumstances.

Inheriting IRAs

Upon an IRA owner's death, the remaining balance of the account will be inherited by their designated account beneficiary. The rules are different for spouse beneficiaries and non-spouse beneficiaries, so we'll talk about them separately.

A quick note before we get into the nitty-gritty of calculating these things. These rules apply to BOTH traditional IRAs and Roth IRAs. While the original account owner was not required to take RMDs from their Roth IRAs, if you inherit a Roth IRA and transfer the assets into an Inherited Roth IRA, you will be required to take RMDs. However, as long as the funds have been invested in the Roth IRA for at least five years, your RMDs will not be taxed.

Spouse Beneficiaries

If you inherit an IRA from your spouse, you have three options:

If you decide to treat the IRA as your own or roll over the balance into your own IRA, you would simply follow the regular RMD rules for your IRA. If you choose to transfer the balance into an inherited IRA, your RMD amount will be based on your age and be recalculated each year.

Non-Spouse Beneficiaries

If you inherit an IRA from someone who is not a spouse, you cannot roll the inherited balance into your own IRA and must transfer the balance to an Inherited IRA. 

If The Original Account Owner Died Before January 1, 2020

If the original account owner died before January 1, 2020 and was younger than 70½, you have two options:

However, if the original account owner was 70½ or older at the time of death, then you must receive RMDs over your lifetime.

If The Original Account Owner Died On January 1, 2020 Or Later

If the original account owner died on January 1, 2020, or later and you are not an eligible designated beneficiary, under the 10-year rule instituted by the SECURE Act, you must deplete the account within 10 years.

Eligible designated beneficiaries include:

Under the SECURE Act, eligible designated beneficiaries still have the option to take RMDs based on their life expectancy.

How To Calculate RMD For Inherited IRAs

RMDs for Inherited IRAs are calculated based on two factors:

Your life expectancy factor will be recalculated each year based on the IRS Single Life Expectancy Table. This table provides a life expectancy factor based on your current age. The older you are, the lower your life expectancy factor will be.

Once you determine the life expectancy factor for your age, you can do the following calculation:

Account Balance ÷ Life Expectancy Factor = RMD

You can also use an online RMD calculator to determine annual RMDs for you. We've linked a few good ones below:

The Real Threats to Your Self-Directed IRA & How to Defend Against Them

One of the many reasons real estate investors love the self-directed IRA (SDIRA)  is the control they have over both their assets and participation with traditional custodians. But many investors are also aware of the SDIRA’s relative security as an asset protection tool. If you weren’t aware of this benefit before, you are now. 

Don’t make the same mistakes other investors make. Watch out for threats to your SDIRA’s security. If you establish an SDIRA, it’s smart to do what you can to protect it; read on to learn how.

How Safe Is Your Self-Directed IRA?

When pros like attorneys discuss self-directed IRAs being “safer” than other investment vehicles, they’re referring to safety in two senses of the word. Your SDIRA isn’t “safe” from any type of attack, but it does protect you legally:

So, this article isn’t intended to suggest IRAs are inherently risky, just to remind you how not undermine its protections. The sticky reality is that for real estate investors, self-directed IRAs can be riskier when they own assets (including REI property) that have liabilities attached.

Your Biggest Threat: Prohibited Transactions Explained

The biggest way you can be a danger to yourself and your self-directed IRA is by performing prohibited transactions. The prohibited transaction rules are a gift from our buddies at the Department of Labor. Basically, there are things you can’t do in a business context with your SDIRA:

  1. Self-dealing is the term for doing business with yourself via your self-directed IRA or other qualified retirement plan (QRP). You can’t do this, frankly, because of too many opportunities for corruption.
  2. Disqualified People.The DOL isn’t dumb. They disqualify certain individuals, namely relatives, spouses, and other types of people you might form “sweetheart deals” with like business partners. So to keep everyone playing fair, plan participants can’t allow their plan to make transactions with anyone the DOL labels a “disqualified person.” Expect to pay hefty penalties if you do.

For your convenience, we’ve compiled an educational resource about avoiding prohibited transactions, complete with examples. Our prohibited transaction resources can help you educate yourself to the point you avoid engaging in such transactions with your self-directed IRA. The only downside to the SDIRA’s freedom from custodians is such freedom means you are responsible for dodging prohibited transactions.

How to Protect Your Self-Directed IRA

You have additional options for protecting your IRAs. For those of us concerned about our real estate assets, the liability-limiting powers of the SDIRA LLC offer an elegant fix.

Consider a Self-Directed IRA LLC for Liability Protection

The ideal legal tool for a long-term SDIRA owning REI is the SDIRA LLC. This variation of the retirement plan is hybridized into an entity, a more secure option for investors.

The SDIRA LLC is an alternative to the IRA Business trust, another option for IRA-owned entities. Real estate investors are attracted to the LLC option because of its strong liability protections. Using an SDIRA LLC gets investors the flexibility to buy real estate with IRA funds and the protection of an LLC, or the best of both worlds.

Living Trust Versus A Will: What’s the Benefits For REI?

Many investors don’t even know how crucial it is to have an estate plan. While planning for the unexpected is uncomfortable at times, it is essential for all of us. Yet the real estate investor has even more reason to be vigilant about estate planning. Whether you own a single investment property or an impressive and costly portfolio, surely you want your real estate assets to be passed onto your loved ones and chosen heirs.

Today we will focus on some common FAQs about two of the most well-known estate planning documents: wills and living trusts. Read on to learn about what these legal documents have in common, what they do differently, and what these tools really look like in action.

If you don’t pick out your heirs, the U.S. government is all too happy to hang on to your hard-earned assets and find a use of their choosing for your valuables. Even investors with no family can likely think of a cause closer to their heart than Uncle Sam. Still, brilliant people with legal access die without estate plans often. Why? We have a pretty good working theory.

Death isn’t fun to acknowledge or look at, let alone admit will happen to us. But we can’t change its inevitability. That part is beyond our control. So, we turn our focus to what we can control. What we can do is take control of our legacy today and ensure our desires will be carried out no matter what.

The benefits of estate planning include giving you power now, while you are alive. Planning gives you the peace of mind of knowing that even if misfortune strikes, your business will live on and your chosen heirs will be taken care of. It takes some of the fear, and the sense of “forever,” out of death. 

The Basics: Wills Vs. Trusts

Let’s start at the very beginning. For our purposes, that means making sure we are clear on what these estate planning tools are and what they do.

Breaking Down Wills

There are many different types of wills. We raise the issue to make the point that when most people think of a will, they are usually referring to the most common and easiest type of will for the average person to draft, a variation on the Simple Will.  The requirements for and components of these wills are straightforward:

Wills aren’t bad, but they can cause problems when relied upon alone. These criteria may seem basic, but every single one can go awry. Even the first can be challenged after your death. So, let’s look at the living trust to see what it has to offer.

Breaking Down Living Trusts

Living trusts are established by private trust agreements. This type of revocable trust is one you can form today, but deed property titles into for years to come. In this sense, it’s also an asset protection tool. Living trusts also allow you to name a trusted confidant to manage your real estate assets if you ever can’t while alive, say because of a medical emergency. Perhaps most importantly, because this tool avoids probate, your heirs will receive their share far faster with no surprise fees.

Similarities Between the Will and Living Trust

Essentially, each of these options gives you a legal way to direct where specific assets go upon passing. Both also allow for the possibility of naming a guardian for minor children. A will has this option, while a living trust would need to be set up properly (in conjunction with a pour-over will) to achieve this goal.

The similarities end there, however. Let’s take a look at the crucial differences between these tools before exploring which option is best for the real estate investor.

Differences Between the Will and Living Trust

There are many crucial distinctions between the living trust and the will. The differences touch on everything from legal and business differences to the costs you can expect to pay for your estate plan.

Wills must be probated, while living trusts bypass this process. The living trust offers greater anonymity for real estate investors, even after their passing. Your heirs will also benefit from this privacy. Probate court records are public, while trust filings are private. The probate court would never be involved in handling matters pertaining to your trust. Where a will names an executor, a living trust names a successor trustee. While both are involved in administering the estate, your trustee’s actions aren’t in the probate court’s purview.

Wills may be cheaper upfront, but you get what you pay for. The money you “save” could lead to more costly heartache for your heirs, particularly if you truly cheap out and write it yourself. Resist that urge. True, living trusts are more expensive to establish, but you’ll be far more protected. They can’t be contested or held up in probate court for months, even years--a fate all too normal for those who die with only a “Last Will and Testament.”  Your heirs won’t have to worry about paying out lawyers and accountants or fighting for their fair share if your living trust leaves no room for ambiguity. This is just one more reason to get professional help for your estate plan.

Which Tool is Best for the Real Estate Investor?

Because of the additional benefits conferred by the living trust, we often recommend that our real estate investor clients use this tool instead of a traditional will alone. While we’ve hit on the basic features, an example may help illustrate the differences in real life.

Example: Meet The Identical Twins With Different Estate Plans

Amy and Caroline are 36-year-old identical twin real estate investors. The twins got started investing together, even splitting profits and losses. They grew their businesses, yet happened to always have the same number of assets, each with the same value.

But Amy and Caroline didn’t do everything exactly the same. Although their financial conditions and portfolios were dead ringers just like the sisters, the women disagreed about how to handle estate planning. The two made their appointments to address the issue the same day. Each sister had five chosen beneficiaries, but neither included the other.

Amy read online that the will is the oldest and most accepted document available, and partially to save money, she used a consultation with a lawyer to draft a will. She spent some time googling a cheap attorney, and found one who agreed to create a document that listed her existing assets. The price was right and she felt secure. “I’m young,” Amy reasoned: “I’ll update it later.”

Caroline, however, is more cautious. She spent more time researching her options and learned about living trusts and estate planning for real estate investors. She spent some time looking for references for an estate planning attorney with real estate experience, narrowed down her candidates, and opted for an attorney who was also an investor. This lawyer spent some time with Caroline looking at her full situation and providing thoughtful feedback. He agreed to form her living trust and advised that she use a pour-over will, a tool which ensured all of her assets would be added to the living trust. She spent more upfront than her sister, but also would not need to come back to update a will (and pay the necessary legal fees) like her sister would. Caroline also took advantage of the lawyer’s estate planning review services, which meant her lawyer ensured compliance and made suggestions twice annually.

What Happens if Tragedy Strikes?

Now let’s see what would happen for our sisters if they were to pass away suddenly. No actual twins were harmed in the making of this example.

Five years after drafting her will, Amy has essentially forgotten about the document. During those years she got married, had two children, acquired three new investment properties, and got busy with life. She is driving to work on an uneventful morning. Out of nowhere, her small sedan is T-boned by an 18-wheeler. She passes away immediately upon impact. Amy’s five-year-old will is her only estate planning document.

First, her will would have to be probated no matter what. Things get darker, though. She listed beneficiaries before her marriage and kids existed, and while there are legal ways to sort these things out, they are expensive and time-consuming processes for her already-grieving family to handle. Further, not all of her assets are accounted for in that will. The investments she had purchased since weren’t listed because the will wasn’t updated, creating yet another issue for the court. Sorting out these details usually means legal and accounting fees are deducted from the estate while the heirs, both listed and presumed, wait. Sometimes they fight. Amy’s family would be in a much better position if she had followed her sister’s lead.

Suppose Caroline also started a family and grew her portfolio in the five years since making her plan. Now let’s suppose she’s fatally struck by lightning. Her heirs won’t be attending probate court like Amy’s, because she used the power combination of a pour-over will, living trust, and closely involved attorney. Her family was included in her trust agreement, and even though her last investment hadn’t been formally listed in her documents before she passed on, the pour-over will ensure all assets went into her living trust for distribution.

You Can Have it All: Using a Pour-Over Will With a Living Trust

While a living trust clearly beats a will alone, the pour-over will combined with a living trust is the gold standard for the vast majority of our clients. The pour-over will is superior to the simpler will solution mentioned above because it accounts for all assets you control at the time of your death. Any you hadn’t added are “poured” into your living trust, offering a smooth business transition option that also takes care of your heirs.

 

To learn more, check out our article, What Is The Difference Between A Will And A Trust?

 

Which Self-Directed IRA Transactions Trigger the UBTI Tax?

Designating funds for your retirement is a great step if you are planning for your future. You probably already know about the 401(k) and the individual retirement account (IRA). These plans allow owners to invest in various stocks, bonds and mutual funds.

But for those of us who want a little more, there's another option: a self-directed IRA (SDIRA). These plans, which can be traditional or Roth accounts, allow for much more diversified investments. In fact, you can invest is almost anything, including real estate, precious metals, renewable energy and private placements.

SDIRAs and UBTI Tax

Establishing a limited liability company (LLC) in the name of your SDIRA makes a lot of sense. It helps to isolate and protect your investment funds. It also provides you with a level of anonymity that many owners find beneficial.

IRAs and SDIRAs are typically exempt from the Unrelated Business Taxable Income (UBTI) tax. This rule, as established by the Internal Revenue Service (IRS) in 1950, was introduced as a means of preventing tax-exempt businesses from unfair competition related to their profits.

Most passive investments made with your SDIRA LLC are considered tax exempt. However, real estate in particular can trigger the UBTI tax. Why? UBTI taxes are generally applied to incomes generated by “any unrelated trade or business” that is “regularly carried on” by an organization that would be subjected to the tax. To better understand this, let us take a look at the main components of this regulation.

What Does 'Trade or Business' Mean In Relation to UBTI?

The Internal Revenue Code (IRC) Section 162 defines “trade or business” as profit-oriented activities that involve regular actions by a taxpayer. There are very few cases in which activity needs to be attributed to a trade of business, however. This is because most expenses that are incurred from the profit-oriented activities of a taxpayer can be listed as deductibles under IRC 212.

What Does 'Regularly Carried On' Mean In Relation to UBTI?

For an activity to be considered “regularly carried on”, it is compared to those activities of a competitive, taxable business. There are some nuances to this. A short-term activity are typically tax-exempt if a similar commercial occurs all year. An example of this would be an ice cream stand operated by a tax-exempt organization during a state fair. Seasonal activities, however, are likely to be subjected to the UBTI tax. Intermittent activities are typically exempt if they are done so without the same type of promotional actions taken by a commercial enterprise.

UBTI Tax Triggers

It is important to identify and quantify the types of activities your SDIRA LLC has used to generate profits. This will help you to determine whether the activity and its profits are exempt or not. As previously stated, most passive transactions associated with your SDIRA LLC would not be subjected to the UBTI tax. However, there are several that could.

Legal Examples

There are plenty of examples of taxpayers butting heads with the IRS. Let us take a look at two examples that resulted in very different court rulings.

Invest with a Professional

Finding the right plan can be hard. However, when you open an account with a reputable professional, like IRA Business Trust, our experts go to work for you. Not only do we handle any documents and tax forms you may need, but also as experts, we understand where the IRS draws a line. Your SDIRA is a vital part of your future. To find out more about opening a SDIRA, forming an LLC, or understanding UBTI, contact us today!

How to Protect Your IRA in Two Steps

How to Protect Your IRA in Two Steps

People will tell you that your IRA is safe and they're wrong. Your IRA is only safe from a lawsuit against you and somebody coming after your IRA. If your IRA is invested in an asset class such as real estate where it can be sued, the IRA itself is exposed. Your IRA is exposed in the sense that it can be disqualified. If any of the transactions of the IRA are exposed.

There's two things that we do. The first thing that we do is, we can split up multiple IRA accounts. That way if any one type of investment is disqualified or has some type of issue that the IRS would look at? This limits your exposure, because it's only that one account that we have to worry about.

The second thing that you could do is set up a self-directed IRA with an LLC. I like to do it with a Series LLC. What that allows us to do is if you look at our videos regarding the Series LLC structure, we can take each different asset belonging to the IRA and put it into its own series.

That way if there's an issue with asset A, it doesn't affect asset B, C, D, etc. And this way, if you have one property that has a lawsuit against it, somebody can't take your entire IRA amount. They could only take a very limited amount of that structure.  Be sure that your IRA is properly structured with asset protection, because it's not by default the safest way to do it.

My name is Scott Smith, I'm an asset protection attorney with real estate. I'm a real estate investor myself, and I want to help you. Click here to set up a consultation today!

Navigating The Complexity Of A Buyout Agreement In A Traditional LLC

Forming an LLC with partners can be a lot like a marriage. What partners expect during the duration of the partnership are more clearly expressed than what’s expected when things end. In an LLC, the operations agreement is where these expectations regarding roles and responsibilities are expressed. However, like in a marriage, partners often don’t clearly plan and specify what they expect to occur when one member wants to leave or is forced out. We’ve seen several cases where not planning ahead can lead to both business and personal discord. This is completely avoidable with a properly structured LLC and buyout agreement.

A buyout agreement is also known as a buy-sell agreement. These agreements do not deal with outside parties acquiring a business. Rather, they deal with the shared expectations between members of an LLC on how to proceed when partnerships end. A buyout agreement may force members to confront some uncomfortable “what if” scenarios. This can save businesses and relationships. Here are three important questions to help guide the drafting of your buyout agreement.

What Happens When One Member Wants Out?

There are two likely paths forward once one or multiple members decide that they want out:

  1. The company dissolves. In this case, the company is sold and what’s remaining is sold. Members must agree on how shares will be divided. This is an uncertain and thus terrible time to decide who gets what. While on neutral ground, decide who gets what and draft this into the binding buyout agreement.
  2. The company forges ahead. In this case, remaining members will be forced to decide on how much the departing member will be bought out for. How much the business will spend in buying the departing party out can make a huge impact on its vitality going forward.

What Happens When A Member is Unexpectedly Lost?

Sometimes a business is forced to move forward through one member’s incapacitation, bankruptcy or even death. In any of these unfortunate circumstances dissolution of the LLC is a possibility, but not required. Members must ask themselves beforehand the following key questions:

  1. Do we want to continue the business if one member is lost?
  2. If the business continues, at what rate will the departing member’s share be sold?

What Happens When a New Member Wants In?

This scenario can be a good sign as it signals that the company is an attractive prospect to outsiders. However, bringing in the wrong person can lead to conflicts down the line. A buyout agreement should set expectations regarding:

  1. Who can a current member sell their share to? This can clarify any potential conflicts of interest that can arise with a new member. It can also set expectations on their expertise and experience level.
  2. How can a new member join the company? This can clarify how a new member is vetted and can even clarify whether consensus vote, majority vote or some other process is required for joining.

Include a Buyout Agreement in Your Traditional LLC

As you can see, a member buyout can be a complex process. However, thinking of potential buyout scenarios ahead of time and seeking legal counsel can avoid problems later on. We’ve helped numerous clients form their LLC with member buyout agreements that satisfy all parties. Call us today at [GLOBAL VAR=phone-number] for a consultation.

Why All IRAs Require a Custodian

Why All IRAs Require a Custodian

[00:08] Not all LLCs are taxed. The same single member LLCs aren't going to always have pass through tax cheat. This is ideal as well as married couples owning and I'll see together in a community property state. However, married couples in a non community property state will have to file a partnership tax return for their LLC. They're both [inaudible].

[00:37] Hey, thanks for watching this video. If you want more high quality content just like this, you can find it here on our youtube channel are going to our website, royal legal solutions.com we have a ton of free content from our blogs or videos, the podcasts that I had been featured on. Whatever question you have, we're going to have it there for you. Are

[00:54] you.

Quick Fix: 2018 IRA Contribution Limits

Hello, fellow investors. Every new year, I get many questions about IRA contribution limits and what changes have taken effect. This year, there have been many more questions than usual about this subject, as well as the new tax laws.  Don't worry, there's an article in the works about how these new tax laws will impact real estate investors soon. While it would be impossible to answer all of the questions I've received in this space, I will be giving an update on the IRA Contribution Limits for 2018.

Today, we're just going to talk about a "quick fix" for your IRA and retirement concerns. We'll also show you one big way to get around the 2018 limits and make the most of your retirement savings.  Even better, you can learn all of this information in less than ten minutes.
 

2018 IRA Contribution Limits

Let's start with the good news:  IRA contribution limits remain the same in 2018 as they did in 2017 (and even as far back as 2016). Here's the quick and dirty update:

But maybe you want to contribute more. If you're ready to take your retirement account to the next level, here is our Quick Fix solution:  take advantage of a self-directed IRA LLC.
 

Why Is a Self-Directed IRA LLC Good For Me?

Self-Directed IRA LLCs  are a mouthful to talk about, so it's possible you haven't even heard of this tool at all. But they will offer you the ability to make tax-free investments without custodian consent. Since you don't need to get permission from a custodian (you are, after all, an adult--or possibly an extremely bright teenager planning retirement early), you can make the investments you want, and you can make them faster than you would if you were stuck in Traditional IRA Land. Self-directed IRA LLCs are special purpose liability companies. Yours will be fully owned and managed by you. You can lord over it and feel like a God on the weekends. The LLC can become a pass-through for tax purposes, which allows you, the owner, to assume the tax burden instead of the LLC. This gives you tax options.
 
In most cases, income and gains flow back into the IRA tax-free. You are also able to keep and funds in an LLC bank account without having to go through a custodian. These accounts operate similarly to personal checking accounts, but the company is separate from you as an individual. You have control over, and access to your money, which means greater investment flexibility.
 
You can invest in anything from your IRA LLC. And when I say anything, I mean literally anything: real estate, gold, Bitcoin, and so much more is all fair game. Your only limit is your imagination. No matter where you put your money, your income and gains flow back into your fund tax-free. You can stick it to Uncle Sam--who among us hasn't wanted to? And even better, you can maximize your contributions and plan the retirement you've fantasized about for during your working life.


Quick and Dirty Recap of Self-Directed IRA LLC Benefits

 
So, to briefly review for the scanners in the audience, when you get a Self-Directed IRA LLC:


Pretty cool, right?

That's it for today. If you have any questions about Self-Directed IRA LLCs, want to sing their praises, or want to pick an argument with me because you think I'm totally off-base, you can do so in the comments below. Let's spread the Self-Directed IRA LLC Gospel and work towards a happy, healthy, and comfortable retirement plan together.
 
 
 

Business Trust For Self Directed IRA With Checkbook Control

The most exciting aspect for owners of a Self-Directed IRA with checkbook control is to have more direct authority and oversight over the investment and management decisions regarding the funds and investments held in the retirement account. The driving factor is to avoid having to submit documentation for each investment transaction or transfer of funds to the IRA custodian for their review and approval. This review process can take up to 2-3 days and moreover, the custodian usually charges a fee for (1) this review and approval process and (2) the transfer of funds to the investment. Ouch! Why waste your retirement funds on such administrative overheads?

How Self-Directed IRA Business Trusts Work

One way to achieve greater discretionary and more immediate control over the funds in your self-directed IRA is to form an IRS-approved legal entity into which the funds of the IRA are invested and you as the IRA owner and the manager/trustee of that legal entity, can assume direct control over those funds by your management role with that entity. Business trusts and limited liability companies (“LLCs”) are the two types of entities typically selected for this purpose for which the self-directed IRA would transfer the funds for investment. With a Business Trust the IRA owner will serve as the Trustee. With a LLC, the IRA owner will serve as the Manager.

With a Business Trust the Checkbook IRA account makes an investment in the trust by acquiring 100% of the “beneficial interests” of the business trust. Acquiring the beneficial interests of the business trust is similar to an IRA account acquiring the “membership interests” of a limited liability company or shares of a corporation. Essentially, the term “beneficial interests” is the title for the “equity interests” in the business trust that are acquired when the investment is made in a business trust.

By acquiring 100% of the “beneficial interests” of the business Trust, the IRA account has now become both (i) the “trustor,” or “settlor,” of the business trust (i.e. the party that has transferred assets into the business trust) and (ii) the “beneficiary” (i.e. the party that holds the “beneficial interests” of the business trust).

We believe that the Business Trust is a better type of entity to choose for your self directed IRA with checkbook control for the following reasons and as illustrated here.

No Public Filing Preserves Your Full Confidentiality

When an LLC is formed, it must (1) Name and Agent for Service Of Process in the Articles Of Organization and (2) File the Articles Of Organization with the Secretary of State in the state of organization. The IRA owner is typically going to list himself or herself as the Agent. Once the filing is complete, the LLC and all details of the owner become public record and there goes the confidentiality of the owner. If there are substantial funds in the LLC transferred from the self-directed IRA, this transparency could compromise the privacy for the owner.

In contrast, there is no public filing requirement when forming a business trust. The Declaration of Trust, or Trust Agreement, remains a private and confidential document. Moreover, while the IRA owner will typically serve as the trustee of the business trust, there is no automatic publication of the name of trustee. Thus there is a higher level of privacy and confidentiality available with a business trust.

A 'True' Disregarded Entity

Both a business trust and an LLC will be classified for tax purposes as a partnership under federal and state income tax regulations. If classified as a partnership, then the business trust and LLC must file income tax returns with the IRS and the respective state agency. However, an entity classified as a partnership that has only one owner will be “disregarded as an entity separate from its owner.” Once classified as a “disregarded entity” then that entity will not have to file federal income tax returns.

A limited liability company with just one member will be classified for federal and state income tax purposes as a “disregarded entity.” With this classification, the LLC will avoid having to prepare and file a federal income tax return. But not so at the state level, at least not in California. Despite being a “disregarded entity” for California state income tax purposes, the LLC must still comply with California return filing requirements because this is method for the LLC to pay the California minimum franchise tax imposed on LLCs.

In contrast, if a business trust has only a single holder of its “beneficial interests,” it will then be classified as a “disregarded entity” and, as a result, not have to file either a federal or state income tax return. Thus the fees and costs of preparing a state income tax return, as well as a federal income tax return, are avoided.

No Registered Agent Needed In A 'Foreign Jurisdiction'

Making investments in commercial and residential real estate is quite common by owners of a Self-directed IRA with checkbook control. If that real estate investment is in a property in a state that is different than the state where the LLC is formed, then the LLC would have to file appropriate documents in that foreign state in order to "qualify to do business" in that state. For this purpose, unless the IRA owner/LLC manager has someone they know in that state, who is willing to serve as the registered agent for the LLC in that state, the LLC owner would need to hire an independent registered agent in that state just to remain compliant. Although the fees for such registered agents are in the low $100s, it is an annual expense nonetheless from your retirement funds - unnecessary overhead which can legally be avoided.

But if a Business Trust as the holding entity for the Checkbook IRA is used to make these real estate investments in states other than the IRA owner’s state of residence, there is no requirement or need to hire an agent in that “foreign” state. This is because the business trust does not have to file any documentation to “qualify to do business” in that state in order to purchase real estate for investment purposes. Thus you as the IRA owner can avoid having to pay the fees typically required with such filing as well as avoiding having to pay any annual fees to an agent in that state. These all add up in the long run as hard money that go directly to increase your account balance.

No Franchise Tax

As Wikipedia states so correctly, "Franchise tax is a tax charged by some U.S. states to corporations with a nexus (aka a filing obligation) with those states. The common feature of a state's franchise tax is that it is not based on income. "This is a mandatory requirement for any LLC that wants to be "qualified to do business" in that state. Depending on the state, these fees can be quite high, which erodes the funds in your Checkbook IRA account year after year or as long as your LLC wants to remain “qualified to do business” in that other state.

There is no such franchise tax requirement for Business Trusts.

As you can understand when a Business Trust is used as the holding entity for a self directed IRA with checkbook control, you as the Trustee and Owner can enjoy the best of both worlds - freedom to invest, divest, manage any qualified investments at any time from your retirement funds and also be able to prevent unnecessary overheads from fees, taxes and expenses with full confidentiality.

Getting Started With A Self-Directed IRA Trust

My specialty is in structuring companies to protect and hide assets in anticipation of litigation. 100% of my clients are real estate investors, and I am an investor myself. Whether you are looking to protect your personal assets, set up a self-directed IRA, or need estate planning, I can help. 

Self-Directed IRAs: Frequently Asked Questions (FAQ)

Self-Directed IRAs offer investment freedom, but they require some explanation. Here are the answers to the most common questions we receive regarding Self-Directed IRAs.

1. What Is a Self-Directed IRA?

A self-directed IRA account allows the IRA to invest funds anywhere allowed by law.
The main reason most people don’t use Self-Directed IRAs is that the large financial institutions that administer most U.S. retirement accounts don’t think it's a good idea to hold real estate or non-publicly traded assets in retirement plans.

2. Can I "Roll Over" or Transfer My Existing Retirement Account to a Self-Directed IRA?

This depends on your situation:

Your Situation: Transfer/Rollover
I have a 401k or other
company plan with a current
employer.
____________________________________		 No, in most instances your current
employer’s plan will make it impossible
until you reach retirement age.
____________________________________
I inherited an IRA and keep the
account with a brokerage or
bank as an inherited IRA.
____________________________________		 Yes, you can transfer to a self-directed
inherited IRA.
____________________________________
I have a Traditional IRA with a
bank or brokerage.
____________________________________		 Yes, you can transfer to a self-directed
IRA.
____________________________________
I have a Roth IRA with a bank
or brokerage.
____________________________________		 Yes, you can transfer to a self-directed Roth IRA.
____________________________________
I have a 403(b) account with a
former employer.
____________________________________		 Yes, you can rollover to a self-directed
IRA.
____________________________________
I have a 401k account with a
former employer.
____________________________________		 Yes, you can rollover to a self-directed
IRA. If it is a Traditional 401k, it will be a
self-directed IRA. If it is a Roth 401k, it will be a self-directed Roth IRA
____________________________________

3. What Can I Invest in With a Self-Directed IRA?

The most popular self-directed retirement account investments include:
• Rental real estate.
• Secured loans to others for real estate (trust deed lending).
• Private small business stock or LLC interests
• Precious metals, such as gold or silver.
• Cryptocurrency

You May Not Invest In:

• Collectibles such as artwork, stamps, coins, alcoholic beverages, or antiques
• Life insurance
• S-corporation stock
• Any investment owned by someone in your close family.

4. What Restrictions Are There on Using a Self-Directed IRA?

When self-directing your retirement account, you must be aware of the prohibited transaction rules found in IRC 4975. These rules don’t restrict what you can invest in, but whom your IRA may transact with.
The prohibited transaction rules restrict your retirement account from transactions with someone who is disqualified. Disqualified persons include: the account owner, their spouse, children, parents, and certain business partners.

On the other hand, your retirement account could buy a rental property from your distant cousin, college roommate, friend, or a random third party.

5. Can My Self-Directed IRA Invest in My Personal Company, Business, or Deal?

No, it would violate the prohibited transaction rules if your IRA transacted with you personally or with a company you own.

6. What Is Checkbook Control?

Many self-directed retirement account owners, particularly those buying real estate, use an IRA LLC, also known as a “checkbook-control IRA”, to hold their retirement assets so that they have fast access.

7. Can I Get a Loan to Buy Real Estate With My IRA?

Your IRA can buy real estate using its own cash and a loan or mortgage. To do this, you must obtain a non-recourse loan.

A non-recourse loan is made by the lender against the asset. In the event of default, the sole recourse of the lender is to foreclose and take back the asset. The lender cannot pursue the IRA or the IRA owner for any deficiency.

8. Are There Any Tax Traps I Should Know About?

The Unrelated Business Income Tax, or UBIT, applies when your IRA receives unrelated business income. If your IRA receives investment income, that income is exempt from UBIT tax. Investment income exempt from UBIT includes the following:
• Real Estate Rental Income: Rent from real estate is investment income and is exempt from UBIT.
• Interest Income: Interest and points made from money lending is investment income and is exempt from UBIT.
• Capital Gain Income: The sale, exchange, or disposition of assets is investment income and is exempt from UBIT.
• Dividend Income: Dividend income from a C-Corp, where the company pays corporate tax, is investment income and exempt from UBIT.
• Royalty Income: Royalty income derived from intangible property rights, such as intellectual property, oil, gas, or mineral leasing activities is investment income and is exempt from UBIT.
So, make sure your IRA receives investment income as opposed to “business income”.

9. What Is Unrelated Debt-Financed Income (UDFI)?

If an IRA buys an investment with debt, then the income attributable to the debt is subject to UBIT. This income is referred to as “unrelated debt-financed income” (UDFI), and it triggers an UBIT tax. This often occurs when an IRA buys real estate with a non-recourse loan.

For example, let’s say an IRA buys a rental property for $100,000, and that $40,000 came from the IRA and $60,000 came from a non-recourse loan. The property is now 60% leveraged, and as a result, 60% of the income is not a result of the IRA's investment, but the result of the debt invested. This debt is not retirement plan money, so your friends at the IRS will require you to pay tax on 60% of the income. So, if there were $10,000 in net rental income on the property then $6000 would be subject to UBIT taxes.

10. Should I Use an Individual 401k Instead of A Self-Directed IRA?

This is where things get interesting.

An individual 401k is a great self-directed account option, and can be used instead of an IRA for persons who are self-employed. If you are not self-employed, then the individual 401k may not work for you.
If you are self-employed and you want to maximize your contributions the individual 401k has much higher maximum contribution amounts: $54,000 annually versus $5,500 annually for an IRA. That’s a significant difference.

A self-directed IRA is a better option for someone who has already saved for retirement. Some funds can be rolled over and invested in a self-directed IRA.

If you are going to carry debt and you are self-employed, you are much better off choosing an individual 401k over an IRA. Individual 401ks are exempt from UDFI tax on leveraged real estate.

There are a lot of things to consider when rolling funds into an IRA. If you have additional questions, feel free to reach out to us.

Roth IRA: Top Benefits You Should Know For Retirement Planning

The Roth IRA is a beauty. Everyone should be buying these beasts. By the time you're done reading this, you will know the primary benefits.

Roth IRA Benefit #1: Massive Tax Savings

A Roth IRA is bought with income that has already been taxed. You can write this off in the year you pay those taxes. The genius of the Roth IRA is that you don’t pay tax ever again. You don’t pay tax on the growth or the withdrawal. This is a wonderful long-term investment plan.
What you don’t know, because you aren’t paid to know, is that there are a whole host of ancillary benefits that ride the coattails of these beauties.
So, if the first reason to buy an IRA isn’t enough, here are some of the other beautiful features of this beast.

Roth IRA Benefit #2: Exemption from Required Minimum Distributions

 
First, your traditional retirement plan is subject to Required Minimum Distributions (RMDs).
When you get up to seventy and half years old, you have to take distributions and you have to take tax on them from traditional IRA’s. Roth IRA’s can just keep growing. Maybe you remember my friend Randy. He’s making enough money off of his fishing business that he’d just as soon leave his money in the bank. He can keep accruing growth for a dream vacation, or to leave a nest egg for his family.
A surviving spouse can keep feeding a Roth IRA or combine it with an existing Roth IRA. You cannot do this with a traditional IRA account. A non-spouse beneficiary cannot continue to grow the account, but they can delay the Required Minimum Distributions. For five years, they can ride those tax-free returns. As a second option, you can choose a lifetime expectancy distribution. Setting aside the morbid reality that this requires you to consider your own mortality, this will provide the best option for a non-spouse beneficiary who wants to keep as much money as possible in the Roth IRA where it will continue to grow tax-free.

Roth IRA Benefit #3: No Early Withdrawal Penalties

Finally, Roth IRA owners are not subject to the 10% early withdrawal that is comprised of contributions or conversions. Randy, because he’s a genius, took care of his money early. When he hit fifty-six it was time to go fishing. He never took the ten percent hit because he planned for his early retirement with a Roth IRA.
Randy couldn’t touch his growth or earnings if he wanted to avoid the taxman. He had to wait five years for the conversions, but he took a lot of investment capital out, tax free, then reinvested it in a new business to further insulate him against the government’s sticky fingers.
There are definitely some requirements to qualify for an Roth IRA, but you can convert existing funds and get started right away.
Let your money grow in a Roth IRA. Be a beast, and your retirement will be a beauty.
If you're considering going the Roth route, get a professional opinion. Schedule your personal retirement consultation today.

Self-Directed IRA LLCs: The Best of all Worlds

The self-directed IRA LLC gives you one hundred percent control over how you invest. Most investors lack this ability.
It’s not the right move for everybody, but if you want to truly maximize the return on your investment, and you don’t mind going the extra mile to set up a company that handles your funds, there are some very sexy benefits.

1. Tax Benefits

You will get tax deferral and tax-free through your LLC along with the benefits of a traditional IRA. All income and gains generated by your IRA LLC will land in your IRA tax-free.
You’re IRA LLC will also grow tax-free. This is the tax equivalent of finding El Dorado. It is possible. You will pay tax on distributions, but all of your growth is tax-free.

2. Options for Diversification

If this doesn’t get you excited, you don’t have a pulse. With a self-directed IRA LLC you can invest in anything, including real estate and private business entities.
I know you kids love my man Randy. Randy, that sly old fox, invested in his own fishing business with his IRA LLC and got WINDFALL fishing up off the ground without giving the IRS a dime. That’s why he catches so many
fish. Randy is a whale.
You don’t need to grow your own business with your retirement’s funds of course. You’ll be making fat stacks of green with a solid portfolio in both bad times and good if you diversify.

3. Access to Your Own Account

You aren’t retiring and starting an IRA LLC to have a boss. With this option you will have direct access to your IRA funds. You can make an investment quickly and efficiently. No need for approvals. No need to pay a custodian. It’s just you baby, and you’re calling the shots.

4. Speed

The handmaiden of access. If you want to make an investment, all you need to do is write a check. You can transfer funds straight from your LLC bank account.

5. Lower Fees

No custodian means one less person to pay. There are also no account valuation fees.

6. Limited Liability

Any assets you hold outside of the LLC are protected from litigation against the LLC. This is important for real estate investors, as claims arising from defects in the design or construction improvements are subject to statutes of limitations.

7. Asset and Creditor Protection

You are covered for up to a million in bankruptcy protection. Markets do have massive fluctuations. It’s good to be backed up.
The Self-Directed IRA LLC is like an IRA on steroids. If you want to take back control of your finances, get yours in the game.
For assistance forming or investing with your Self-Directed IRA LLC, schedule your consultation today.

5 Most Common IRA Contribution Questions Answered

My clients are always asking me what the deal is with the individual retirement account (IRA).  Don't worry if you're totally lost when it comes to retirement accounts. I spend a lot of my time addressing all sorts of IRA-related queries. Like if it's a good idea to get one even if you're young. Or why  I'm so into this Roth dude that people are constantly talking about talked, and if he's paying me off? (He isn't. He also isn't a "he" either--more on that below). Or what the maximum IRA contribution level is. And will the taxman cut retirees a break, finally? Maybe if I ask super nicely?

Fear not, friends. I've got your backs.  Here are the five most common questions I get about IRAs, finally answered in plain English.

Question #1: Is My Contribution Tax Deductible?

Maybe. All sorts of things factor into whether you will get a deduction. Some circumstances the taxman considers include whether you're married, if your job is backing your IRA, what tax bracket you fall into, etc.  Depending on those variables, you’ll be placed into one of three categories.

Group 1: No Tax Deductions

Contributions to a Roth IRA aren’t deductible. Never. Sorry about it. That said, contributing to your Roth account is still a good idea. You'll want to check your  modified adjusted gross income (MAGI) . Roth accounts have a cut-off for how much you can earn annually and still be eligible to hold the account at all.
 
If you're really looking to save in tax terms, one strategy you can use is maxing out your 401(k) or 403(k) first. You'll get all the same tax perks of the old-school IRA, and more, since you're a superstar taking advantage of multiple accounts.  You can even have one of these AND an IRA if you want to be super comfortable in retirement.

Group 2: Deductions with Limits

You may fall into this group if either of the following apply to you.

  1. You or your husband/wife are covered by your employer.
  2. You or your husband/wife are outside of the allowed income range.

Now you'll need to be aware of the fact that the IRS changes its parameters on this matter all the time. You'll want to do some research to ensure your eligibility before moving forward with filing. If this is confusing for you, call your lawyer and ask for help.

Group 3: Total Tax Deductions

You belong to this group if both of the following statements apply.

  1. You don't have a retirement plan through your work, and aren't married to someone who does.
  2. Your income(s) falls under the IRS cut-off point.

See above for information on income ranges. We'll talk more about the cut-off points below.

Question #2: Can I Contribute To An IRA Even if I Have It Through My Employer?

You bet! And frankly, you  probably should, especially if that employer is matching or offering other incentives to do so. You don't even have to have a conventional account.  SEP (self-employed) or SIMPLE IRA account holders can take advantage of this as well.

You'll want to note that there are limits to how much you can contribute. You may not be able to deduct the entire amount, but that will depend largely on your circumstances. (See Question #1 for more details on that).

I can already hear some of you saying, "Wait! I'm not covered by my job."  Take a deep breath now. That's okay. You can still contribute to an IRA. One of the perks of IRA plans is that they're available to literally anyone: which type (self-directed, Traditional, etc.) is best for you will depend on your circumstances. There's even the SEP IRA option for self-employed folks. Those contributions could even be deducted entirely depending on your income. Again, consult a CPA on this matter.

Question #3: Is It Possible to Contribute if I Didn't Earn Anything This Year, But My Spouse Did?

Absolutely.  You'll have to file your taxes jointly to do this, but it's A-okay with the taxman if only one partner is earning taxable income. It doesn't matter which individual  earned the money you plan to contribute.

As with all things tax-related, there are some restrictions. You have to ensure your contributions don't exceed those. The limits for 2018 are $5500 in if you're under the age of 50, or $6500 if you're over the age of 50.

Question #4: Is There a Way to Contribute To My Roth Account If I Earned Too Much Money In 2018?  

The IRS has set the contribution cutoff at $135,000.00 for single individuals and $199,000.00 for couples who file jointly, which up significantly from last year. Some exceptions apply if you are a qualified widower. If you're married and filing separately, you aren't eligible for a Roth account. Whether you want to reconsider how you file is up to you.

It comes right down to whether you earned more or less than that figure above. If you're under that number, you're good to go.  But if you have earned more, your Roth custodian can limit or even freeze your account.


But there are loopholes here if you do earn more than the Roth cut-off. You can use a Traditional IRA (which is available to everyone, regardless of income). Contribute to that, and pay the taxes upfront. Now roll that cash money over to your Roth IRA. Why this is legal is you've already paid the taxes, so it's eligible to transition into the Roth. Pretty cool, right?

Fun fact for all my retirement superstars out there: This tactic was made possible when the IRS removed the income level restrictions for making Roth conversions in 2010.

Question #5: Can I Contribute To My IRA if I'm older than 70½?

Maybe. The type of IRA you use is the critical factor here.

If you've gone with the old-school IRA, the answer is no. Once you hit that age, you won't be able to contribute any further. But if you've opted for a Roth IRA, you can still add funds there. You may also move funds between IRA accounts.  Barring any unforeseeable and unlikely dramatic changes of law, this will always be true, even if you live into your 100s.

And I sincerely hope you do!

There you have it. Those are the short versions of answers to the five most common IRA questions I get. If there's a detail still gnawing away at you, or if a question you didn't see answered above, please use the comments below to ask about anything still on your mind. Thanks for reading!

IRA and Cryptocurrencies

IRA’s are virtual baby.
Bitcoin is a virtual currency that uses blockchain technology. If you want to know more about what that means, you’re going to have to find that on another channel. Should you know? Probably. Do you know? Probably not. So before you consider investing in Bitcoin out of your IRA, you might want to know what you are buying. Go ahead. I’ll wait.
PAUSE
It’s a touch complicated. The lesson. Don’t buy into a bubble at the wrong time because you didn’t research the investment. Is Bitcoin substantiated? Is any currency substantiated? Did I just warp your brain? 
When all currency is Fiat, it’s time to create currency. That’s how you really make money.
If you’re not that smart, here’s a thought. Right now, Bitcoin can be exchanged for goods, services, and even dollars. It is currency today, and boy has it gone up.
Early adopters bought Bitcoins for mere cents, the kind of change you'd find in a piggy bank. As of 2018, one is worth several hundred dollars.
So of course, you want to know if you can buy Bitcoin from an IRA.
FIRST, yes, your IRA can own Bitcoin, Ethereum and Litecoin. In fact, your IRA can own anything other than life insurance, S-Corp stock, and collectibles. If you want to buy cryptocurrencies to dominate the virtual market when you upload your consciousness to a machine in the transhuman future, you can start building your virtual empire today. But of course, there are some things you should know first.

Bitcoin is Taxed.

The IRS has stated that virtual currency is property. The sale of property is treated as a capital gain, so buying and selling crypto for investment purposes will not trigger a UBIT or any of the other adverse tax consequences that can occasionally arise in an IRA.
The process of buying cyptocurrency with your IRA isn’t as easy as moving some money around though. Here are the steps you need to take to get started in digital currency.

1. Create a Self-Directed IRA

First, you need a self-directed IRA whose custodian allows for alternative assets. If this isn’t something your custodian can do you may need to find a custodian who will meet with your investment criteria.
You will invest funds from the IRA into the LLC you created when you went self-directed. Your IRA will own the LLC and that LLC will have a business checking account.

2. Buy Bitcoin

Then you buy Bitcoin just like everyone else. Your LLC checking account will need to establish a “wallet” through a company like Coinbase. Through this wallet, you can buy, sell and store cryptocurrency. Other methods for buying Bitcoin include public exchanges, like LocalBitcoin.
You can buy into a publicly traded fund that owns Bitcoin, but if you want to own Bitcoin directly with your IRA, you need to follow these steps.
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 almost triple that of an ounce of gold.
Times change.

3. Do Your Homework on Cryptocurrency

However, as with any new investment, make sure you proceed with caution. By the time you read this article, Bitcoin could be worth nothing, or it could be well on its way to being the dominant currency of the future. The American dollar wasn’t always the international standard. Currency evolves with the market.
Keep your eye on Bitcoin. Stable or not, today, Bitcoin is making a splash among investors for a reason. Whether you decide to invest is ultimately up to you and your trusted financial and legal experts.

IRA Rollovers, Explained

An IRA rollover is a transfer of funds from one retirement account a traditional IRA or Roth IRA.

IRA Rollovers are defined as tax-free transfers of retirement from one type of investment account to another. Rollovers were originally introduced to increase the mobility of qualified plan funds for employees moving from one job to another.

You can find the basic provisions governing rollover transfers here. These provisions cover transfers from one IRA to another, transfers from qualified pension, profit-sharing, stock bonus, and annuity plans to IRAs, and transfers from IRAs to qualified plans.

There are a few rare exceptions to the rollover rules. For example, in certain situations, an IRA can make a rollover distribution to a health savings account (HSA).

In other words, if you receive a distribution from a qualified plan (such as a 401(k)), you might decide to put some or all of the distribution amount into an IRA. The IRA that receives the qualified plan distribution is called a rollover IRA.

You can do this either through a direct transfer or via check. If you do a rollover via check, your custodian will write you a check, which you will then deposit into the other account.

How Often Can I Do a Rollover?

The privilege of rolling over from IRA to IRA may be exercised only once in a 12-month period.

Can You Rollover Funds From a Traditional IRA to Another Traditional IRA?

Yes, as long as the money being moved is withdrawn from your old account and deposited in another account within 60 days. Failing to follow this rule can cause your rollover to lose tax-deferred status and cost you big time.

This rule operates on an all or nothing basis. The entire amount received from your old IRA must be transferred to the designated IRA. If you pocket anything, the rollover rule does not apply, and everything received from the old IRA, including any amount transferred to another IRA, is treated as a taxable distribution.

What If I'm Transferring Property That Isn't Money?

If property other than money is received from your old IRA, that property, (not substitute property of equal value or the cash proceeds of the property's sale), must be included in the transfer to the new IRA.

Note: According to our friends at the Tax Court, the rollover contribution must be of cash if the distribution is in cash.

Can I Rollover Funds From a Qualified Plan to a Traditional IRA?

Yes. A qualified plan (or annuity participant) can roll over any distribution other than a distribution that:

 Note: An employee's surviving spouse may also roll over a similar distribution received on account of the employee's death.

Can a Traditional IRA be Rolled Into a Qualified Plan?

Yes. Within 60 days after the distribution, an IRA can be rolled into an eligible retirement plan for the distributee's benefit.

The term “eligible retirement plan” includes:

A rollover contribution must include the entire amount received in the distribution, but it may not exceed the portion of the distribution that, in the absence of the rollover, would be included in the distributee's gross income.

Can I Rollover a Traditional IRA I inherited?

No, usually. A taxpayer whose interest in an IRA is as a beneficiary of the person who created the IRA is usually denied the privilege of rolling over tax free from the IRA to another type IRA or a qualified plan or tax deferred annuity.

Rare exception: a surviving spouse may roll over to another IRA but not a qualified plan.

So why isn't this usually allowed? Because the tax allowances for IRAs (including an IRA’s tax exemption) are intended to encourage saving for the retirement of the contributor and surviving spouse.

Blame Congress. They're the ones who decided it was inappropriate to allow the tax exemption to be prolonged by rollovers after the contributor has died and the account has passed into the hands of a person other than a surviving spouse.

Are There Reporting Requirements For Traditional IRA Holders?

Yes. But don't worry, it's not that bad! (Hopefully you have someone else doing the paperwork for you.) Individuals maintaining IRAs and surviving beneficiaries under IRAs must usually file an annual information return on Form 5329.

Also, an individual maintaining an IRA must make an information filing for each year in which a nondeductible IRA contribution is made or a distribution is received from an IRA.

The filing, which must be included with the individual's return for the year, must disclose the following:

What Will The IRS do if You Fail To File Properly?

A $50 penalty is assessed for not filing, unless you can justify why you didn't. Also, because non-deductible contributions are recoverable tax free upon distribution, the IRS will want $100 if these contributions are overstated in the return and you, the taxpayer, cannot justify the overstatement.

I hope this article answered any questions you may have had. If you have any questions about IRA rollovers feel free to ask me, I'd love to help you.

 

Should You Convert Your IRA or 401k to Roth?

Are you thinking about converting your IRA or 401k to a Roth? Doing so may or may not be a good idea. If you have a traditional IRA or 401k, your money is currently growing tax deferred and you'll pay tax on the money as it is drawn out at retirement. So why might you want to convert? Read on to learn the benefits, and who is a good candidate for this kind of switch.

Reasons to Convert Your Traditional IRA/401 to a Roth

A Roth is the opposite of a traditional IRA or 401k. Roth IRAs and 401ks grow and the money invested in them is distributed tax free when you decide to retire. So if you had a Roth, you'd pay taxes now and pay no taxes on distributions when you decide to retire.

The benefit of paying now is it's less money in the long run. If you can afford to pay taxes today, they'll be cheaper than their equivalent in 20 or even 5 years. $20 today can inflate dramatically in the time until you retire.

There are several differences between traditional and Roth accounts. To put it simply, a Roth is best for you if you plan on being in a higher tax bracket then the one you're in now when you retire. If you plan on being in a lower tax bracket, a traditional account is better for you.

Note: You may also want to check out our related articles:

Roth IRA Conversion Doesn't Have to Be Forever

Yes that's right! If you have second thoughts, you can convert at any time. The good news is you can convert your traditional IRA to a Roth IRA, or your traditional 401k to a Roth 401k. The price to make that conversion is including the amount you convert to Roth as taxable income for the year in which you make the conversion.
For example, if you convert $100,000 from your traditional IRA to a Roth IRA in 2017, you will list $100,00 as income on your 2017 tax return. You will then pay any federal and state taxes on that income depending on your 2017 tax bracket.

You probably don’t like the idea of paying additional taxes to convert. Honestly, who would? Nobody likes paying their friends at the IRS more taxes now. However, you can easily end up saving more money as your account grows and the entire growth comes out tax free.

Three Situations Where Converting Your IRA or 401k Funds to Roth Is Your Most Profitable Option:

  1. Expecting Higher Than Average Returns From An Investment Opportunity.

If you're about to make an investment you expect will produce huge returns, then it'll be in your best interest to convert to a Roth.
Wouldn't you rather pay tax on the smaller investment amounts now? Those larger returns will go back into your Roth IRA or 401k, where they will grow to an unlimited amount and come out tax free.
I realize this is hard to predict. After all, if it was easy we'd all be rich. However, a situation like this is bound to happen when you're investing in real estate, startups, pre-IPOs, and other investments.

  1. Low Income Year.

The biggest pain of a conversion is that you have to pay tax on the money you convert. The best time to convert is when you're in a lower tax bracket because you'll end up paying less in taxes.
For example, if you are married and have $50K of taxable income for the year and you decide to convert $100K to Roth, you will pay federal tax on that converted amount at a rate of 15% which would result in $15,000 in federal taxes.
And don't forget about state income tax (if you live in a state that actually has one) because they tax conversions the same way the fed does!

If you choose to convert when you're in a high tax bracket at around $250,000 of income, then you’d pay federal tax on a $50K conversion at a rate of 33%. This would result in federal taxes of $16,500. In other words, that's one third of your money down the drain. Ouch!

Unfortunately, many of us have careers where we can't just expect to be in a lower tax bracket. This option is probably more likely for those who are self employed as small business owners, consultants and freelancers.

  1. You'd Rather Have The Money Sooner Instead Of Later

Roth accounts are kind of like the gift that never stops giving.  With a Roth you can take out the funds you've contributed or converted (NOT the earnings) after five years without paying tax or the early withdrawal penalty. Even if you aren’t 59 1/2.

For Roth conversions, the amount you convert can be distributed from the Roth account five years after the tax year in which you converted. The five-year clock starts to tick on January 1st of the tax year in which you convert, regardless of when you convert within the year.

Let's say you converted your traditional IRA to a Roth IRA in May 2017. You'd be able to take a distribution of the amounts converted without paying tax or penalty on January 2nd, 2022.

Whereas if you try to access funds in your traditional IRA or 401k before you are 59 1/2, you will pay tax AND a 10% early withdrawal penalty even if the amounts you distribute are only the contributions you put in, not the investment gains.

Roth accounts offer you flexibility, plain and simple. So if you're looking to always have access to your retirement money, a Roth is what you need!

Final Thoughts on Who Should Convert to a Roth

Whether or not you should convert to a Roth largely depends on your future. Will you be richer or poorer when you retire? Also, many employers are willing to match your contributions to a traditional 401k to a certain degree, whereas for a Roth they aren't.

For most people, a Roth conversion simply isn't worth the money. But for some circumstances, it's a no-brainer. If you need help determining if a Roth conversion is in your best interest call Royal Legal Solutions now at (512) 757–3994 to schedule your retirement consultation.

A Series Of Landmark Prohibited Transaction Cases: Peek & Fleck Vs The IRS

This article is part 2 of a series with the goal of educating you, the Self-Directed IRA LLC investor, on how to successfully invest & avoid triggering prohibited transactions.

At this point in your life you know two things in life are certain, those things being death & taxes. It almost feels like a no-win situation, doesn't it? Funny enough, according to Greek mythology, you even have to pay to book passage on the boat that takes you to the afterlife.

Why You Should Understand Prohibited Transactions

Try to think of prohibited transactions as the sharks circling you and your state of the art Self-Directed IRA LLC investment boat.
The prohibited transaction rules are extensive, and the penalties even more so. Penalties for triggering a prohibited transaction range from excise taxes to instant dismantlement of your IRA plus fines.  (Can you say "ouch" ?)

As you can see, anyone investing with a Self-Directed IRA LLC should be careful to avoid engaging in prohibited transactions, for to do so is doom. Not to mention, the IRS will always have an eye on you from then on out. (But then again, they already did, didn't they?)

Peek & Fleck Vs The IRS

In 2001, two taxpayers, Mr. Lawrence Peek and Darrel Fleck decided to use Self-Directed IRA's to acquire a business. They established Self-Directed IRAs using 401k rollovers, created a new company named FP Company, and then directed the IRAs to purchase the stock of FP Company with the cash in their IRA's.

To finalize their purchase, in addition to the cash and other credit lines, FP Company provided a promissory note to the sellers. This promissory note was backed by the personal guarantee of Peek & Fleck, and the guarantees were then backed by the deeds to the Peek & Fleck's homes.

In 2003 and 2004, Peek & Fleck converted their traditional IRAs to Roth IRAs. In 2006 and 2007, the IRAs sold FP Companies stock, which had increased in value, for a gain. Peek & Fleck used their Roth IRAs to ensure there would be no tax on the gain from the sale of the stock.

The IRS, believing a prohibited transaction had occurred, audited the income tax return for both Peek & Fleck for the tax years of 2006 and 2007.
After reviewing the individuals’ tax returns, the IRS adjusted their tax returns to include the capital gains income from the sale of the stock as well as imposed excise tax for excess IRA contributions.

Both Peek and Fleck contested the IRS’s adjustment and went to the Tax Court with a petition.

Why Was This A Prohibited Transaction Case?

The IRS argued that Mr. Fleck’s and Mr. Peek’s personal guarantee of a promissory note from FP Company to the sellers of the business in 2001 as part of FP Company’s purchase of the business assets were prohibited transactions.
Unfortunately for Peek & Fleck, The Tax Court agreed with the IRS. The Tax Court found that Peek & Fleck had committed prohibited transactions, that their IRA's had ceased to be IRA's as of the beginning of 2001, and that their capital gain from the sale of FP Company by the IRA's should've been taxed.

The Tax Court pointed to Internal Revenue Code Section 4975, which prohibits direct and indirect lending of money or extensions of credit between an IRA and its owner.

The Tax Court found that it did not matter if the loan guaranteed by Peek & Fleck was to FP Company and not the IRAs directly. Why? Because IRC Code 4975 clearly prohibits the lending of money or extension of credit between a retirement plan and a disqualified person.
Then Peek & Fleck countered this, claiming that the IRS’s notices issued in 2006 and 2007 were too late because the loan was made in 2001. The IRS disagreed and so did the Tax Court.

The court cited that since the non-recourse loan was ongoing, the prohibited transaction continued and on January 1, 2006 it remained true that both Mr. Peek and Mr. Fleck personally guaranteed the company loan.

Case Outcomes & Summary

The Tax Court found that Mr. Peek, his attorney, and his business colleague's  (Mr. Fleck) personal guarantees of a loan/note from their newly-formed corporation stock of which was owned by Peek & Fleck's Self-Directed IRA's, to third party incident to asset purchase transaction, was an IRC Section 4975 prohibited transaction.

The Court set a precedent, finding that whether or not their IRA's were involved directly was irrelevant since IRC Section 4975 was broadly worded to include both direct and indirect loans and guaranties to IRAs.

What Happened to Peek & Fleck?

The Tax Court found Peek and Fleck liable for a 20% tax penalty because their underpayments of tax were a “substantial understatement of income tax”. But unfortunately for them, that wasn't the worst part.

Most prohibited transactions are resolved with the owner paying a tax, such as UBTI or UBIT. But in this case, because a prohibited transaction occurred between an IRA and its owner, which results in the tax disqualification of the IRA, Peek & Flecks IRAs were disqualified and totally distributed.

What You Can Learn From This Prohibited Transaction Case

The Peek case affirmed that, in the eyes of the Tax Court and the IRS, an IRA holder can legally use retirement funds to invest in a wholly owned entity that is controlled by him or her without triggering the IRA prohibited transaction rules. That entity could be an LLC, to give a clear example.

What was not mentioned above is that Peek & Fleck relied on the advice of a certain CPA, who was also advocating for the transaction, no doubt for personal gain. (Conflict of interest, anyone?)

When it comes to investing with a Self-Directed IRA, you should always seek the help of a professional who knows the ins and outs of the IRS rules so you don't find yourself in a situation like Peek & Fleck.

If you want to learn more about investing with a Self-Directed IRA LLC and how to avoid triggering prohibited transactions, take our Tax Discovery Quiz.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ