What Self-Directed IRA Owners Need To Know About UBTI & UBIT Tax

Your friends at the IRS just love making new rules for us lawyers to learn. I decided to "share the love" and write this article for you. Don't panic--this is much more readable than the version I got.

While UBTI (Unrelated Business Taxable Income) and UBIT (Unrelated Business Income Tax) sound familiar, they apply in different investment scenarios and are certainly not the same tax rate.

Wait: Aren't IRAs Tax Exempt?

They are, most of the time.

When it comes to using your Self-Directed IRA, most of the investments you make are exempt from federal income tax. Some examples of exempt income include: dividends, royalties, most rentals from real estate and gains/losses from the sale of real estate.

But this doesn't mean you can't end up finding yourself in trouble with the IRS.

The UBTI/UBIT Income Rules.

The IRS enacted a set of rules in the 1950s in order to prevent IRAs from engaging in an active trade or business and having an unfair advantage because of their tax-exempt status.

These rules became known as the Unrelated Business Taxable Income rules or UBTI or UBIT. If the UBTI rules are broken, the income generated from your activities will be subject to a 40% tax for 2018.

Note: An IRA investing in an active trade or business using a C Corporation will not trigger the UBTI tax.

Where Does UBTI and UBIT Apply?

The UBTI/UBIT tax applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words “trade or business” “regularly carried on” and “unrelated.”

Let's go over them.

What is "Trade or Business?"

The rules start with the concept of “trade or business” as used by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.”

Although Internal Revenue Code Section 162 is a natural starting point, the case law under that provision does little to clarify the issues. Expenses incurred by individuals in profit-driven activities not amounting to a trade or business are deductible under Internal Revenue Code Section 212. This means it is rarely necessary to decide whether an activity conducted for profit is a trade or business.

The few cases on the issue under Internal Revenue Code Section 162 generally limit the term “trade or business” to profit-oriented endeavors involving regular activity by the taxpayer.

What is "Regularly Carried On"?

Whether a trade or business is regularly carried on is determined based on intent. If the underlying objective is to reach activities competitive with taxable businesses, your business may meet this criterion.

The requirement is met by activities that “manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.”

What About Short Term and Intermittent Activities?

Short-term activities are exempted if comparable commercial activities of private enterprises are usually conducted on a year-round basis. But a seasonal activity is considered regularly carried on if its commercial counterparts also operate seasonally.

Intermittent activities are similarly compared with their commercial rivals and are ordinarily exempt if conducted without the promotional efforts typical of commercial endeavors.

If an enterprise is conducted primarily for beneficiaries of an organization's exempt activities (e.g., a student bookstore), casual sales to outsiders are ordinarily not a “regular” trade or business.

What Type of Income Is Subject to UBTI or UBIT Tax?

The type of income usually subject a Self-Directed IRA to UBTI or UBIT is income generated from the following sources:

Income from the operations of an active trade or business. (A restaurant, laundry mat, car wash, etc.)
Business income generated via a pass-through entity, such as an LLC or partnership.
Using a nonrecourse loan to purchase a property.
Using margin on a stock purchase.

Internal Revenue Code Section 511 taxes “unrelated business taxable income” (UBTI) at the rates applicable to corporations or trusts, depending on the organization's legal characteristics.

What Are The Actual UBTI and UBIT Tax Rates?

A Self-Directed IRA subject to UBTI is taxed at the trust tax rate because an IRA is considered a trust. For 2020, a Solo 401k Plan or Self-Directed IRA is subject to UBTI is taxed at the following rates:

Up to $2,600: 10% of the amount over zero
$2,600 up to $9,450: $260 + 24% of the amount over $2,600
$9,450 up to $12,950: $1,904 + 35% of the amount over $9,450
$12,950 and over: $3,129 + 37% of the amount over $12,950

Meanwhile UBIT tax is levied based on corporate taxes.

I hope this article helped any answer questions you might have concerning your Self-Directed IRA and UBIT/UBTI tax. If you have any questions, feel free to ask in the comments below or contact us directly.

How To Transfer Your Roth IRA To A Self-Directed Roth IRA LLC

If you're ready to kick your Roth account up a notch, you're in the right place. Today we will discuss how to easily transfer your Roth IRA into a Self-Directed Roth IRA LLC, as well as why you may want to do this.

There are two things you should know first:

You can move the funds from a Roth IRA (as well as any other retirement funds you may have in other accounts) into a Roth IRA LLC.
The opposite isn't true. You can't move Roth funds into other types of retirement accounts. For instance, you won't be able to successfully roll over funds from a Roth into a Traditional 401k. This goes for any account with tax deferral.

Okay, with those basics down, let's move onto the nuts and bolts.

What is the Easiest Way to Add Money to a Self-Directed Roth IRA?

There are two types of transactions that let you re-arrange funds between multiple IRAs. These are known as transfers and rollovers. Remember, you have to stay in line with the rules we mentioned above. Roth accounts are, by definition, funded after taxes are paid. Therefore, you can't roll pre-tax funds into one. At least not without getting in trouble with Uncle Sam. We promise you don't want that.

What You Need To Know About Roth IRA Transfers To A Self-Directed Roth IRA.

As I told you above, direct transfers tend to be the most straightforward method. A transfer is defined by the fact that it takes place between two banks or custodians. Occasionally, you may encounter transfers within a financial group.

There are some clear advantages to using a transfer. When you do, the funds aren't taxed by, or even reported to, our friends at the IRS.

As the account holder, you control and direct any transfers. You won't, however, directly accept the cash or other assets involved. That honor goes to your financial institution. This is simply the way it must be. If you were to get directly involved, you could incur taxes and penalties unnecessarily.

So, keep your name off of any checks in this transaction. Make it clear that your payment is to the bank or other approved custodian. If you're having any doubts or reservations about that, call a professional. It's much cheaper to pay for help with this process beforehand than to learn the hard way about the penalties.

How Does The Roth IRA To Self-Directed Roth IRA Transfer Work?

Royal Legal Solutions is here to help you with any phase of this process. We begin by establishing a new Self-Directed Roth IRA account for you. After you grant permission, we can even execute the rollover or transfer on your behalf to fund your new account. We will ensure all steps are followed to current legal requirements, meaning you'll have a complete Roth IRA transfer free of taxes and penalties.

Once your Roth IRA funds are either transferred by wire or check to the new Roth IRA custodian, that institution can place the funds into your new Roth IRA LLC.

As soon as the transfer is complete, you have complete control over your retirement funds. Any investment that you see fit, with few exceptions, can now be held in your retirement account. Real estate investors especially love this solution, because the Roth IRA LLC can hold property and other nontraditional investments.

What’s The 60 Day Rollover Rule?

You generally have 60 days to complete the transaction. The clock starts ticking when you actually receive the funds from your original Roth IRA. There are very few exceptions to this rule, and you don't want to mess around with it. When you do get an exception, it's very limited. Typically, you'll be required to do the rollover on the following business day.

Note: You may elect to roll over all, or simply some of your funds. We don't advise that you withdraw funds from the Roth that you don't intend to rollover, because they could be subject to massive taxes. Half of the beauty of the Roth is in the tax breaks.

But don't worry, we're here to assist with technicalities like this.

Royal Legal Solutions Will Guide You Throughout The Entire Process.

When you come to Royal Legal Solutions, you will be assigned a dedicated retirement tax professional to help you establish your Self-Directed Roth IRA LLC. He or she will guarantee that your rollover goes smoothly, and that your new account is up, running, and ready for business.

How To Transfer Your SEP IRA To A Self-Directed IRA LLC Tax Free

Is your retirement account not working out for you the way you hoped? Or maybe you're just ready to kick it up a notch and have already heard about the amazing benefits of having a Self-Directed IRA LLC. The rumors are true: Self-Directed IRA LLCs let you take total control in your financial future and may give you the most investment flexibility and diversity of all the retirement options currently on the market.

Whatever your motivations, this article will tell you everything you need to know about SEP IRA transfers to a Self-Directed IRA LLC. We'll break the process down step by step, and also point out where you're going to want some help from the pros. Let's get moving.

SEP IRA Transfers to a Self-Directed IRA: The Basics

Usually a transfer from one IRA to another is actually performed between two separate banks or other institutions. But it is also possible to move funds back and forth from IRAs overseen by the same custodian or institution. Handled properly, you won't have to report this type of IRA transfer to the IRS. And even better, it can be absolutely tax-free.
In this scenario, you, as the IRA holder, will be directing the transfer. But you don’t actually receive the IRA assets. At least not into your hands personally. Instead, the transaction in completed by the sending and receiving financial institutions for you.

Of course, you want your transfer to be tax-free and penalty-free, so you'll want to follow a couple of simple guidelines to ensure that. The main thing is that you must ensure that you do not personally receive the IRA funds in a transfer. Instead, the your newer financial institution will be the recipient of the funds. Write your checks or direct your wire transfers accordingly.

This is the point where the average investor might want to call in their dream-team cavalry. If you're not 100% certain what you're doing, ask for help. A good retirement tax professional can virtually guarantee a tax-free and penalty-free transfer, which means more money in your pocket and therefore greater comfort and luxury in retirement.

How the SEP IRA to Self-Directed IRA Transfer Works

You may be wondering how this transfer will go down if you haven't created your Self-Directed IRA LLC. Well, it's actually fairly simple. You, along with the help of the professionals of your choosing, will establish a new Self-Directed IRA account with the reputable custodian of your choosing. After getting your permission, the new institution will request the transfer of your SEP IRA assets from your former IRA custodian. It is only with this method that you'll be able to avoid all taxes or penalties.

Once the IRA funds are transferred to your new IRA custodian, they can place the old IRA assets into your new IRA LLC. Which means you, as manager of the IRA LLC, will have complete control over your retirement funds so you can invest them in anything you want, from cryptocurrency to real estate to tangible goods and more. And you're doing it all tax- and penalty-free.

Be Aware of the 60-Day Rollover Rule

You will have exactly 60 days after you get your rollover from your original SEP IRA account to pool those funds into the new Self-Directed IRA LLC structure. This time period begins the day after the custodian gets the distribution.
This 60-day period is a rather strict rule. There are some rare flexibilities. Examples include if your expiration date falls on a federal holiday or weekend. In these cases, you will get one (and only one) additional business day.

If you’re receiving an eligible rollover distribution, you may opt to either rollover whatever you receive in part or in whole. It's up to you, but you'd be wise to get it taken care of well ahead of the 60 day cut-off point.

If you're under the age of 59.5, there's one final issue you definitely want to keep in mind for maximum savings. This is that any money eligible money that you choose not to rollover to the new IRA can count against you. It counts as part of your income for tax purposes, and if you choose to take it, you will likely get you hit with the 10% early distribution withdrawal penalty. You'll want to color inside the lines of the method outlined above to ensure this doesn't happen to you. You'll have plenty of ways to express your inner investing artist once your Self-Directed IRA LLC is funded, but stick to the script for the transfer to avoid unnecessary penalties like this.

Our experts are here to make your life easier and your accounts fatter. So use them. If you at any point feel like you're in over your head, that's what CPAs, tax professionals, and attorneys are for. It's okay not to know everything, especially about retirement accounts. You're in good company with most of the world.

Thanks for reading, and I hope you understand the SEP IRA to Self-Directed LLC transfer process better now. Please feel free to keep the conversation going with any comments or questions below.

Solo 401k Vs. SIMPLE IRA: Which is Better for You?

You've got lots of investment options. But not all of them are created equal. This is especially true when it comes to the SIMPLE IRA and the solo 401k.

The SIMPLE IRA plan is similar to a solo 401k plan. They are both funded by employee deferrals and additional employer contributions.

But there are a few differences you should be aware of. As you can see below.

The SIMPLE IRA

A SIMPLE IRA plan can be established at a bank, insurance company, or other qualified financial institution by any employer who has less than 100 employees, who will receive at least $5,000 in compensation from the employer in the preceding calendar year.

The SIMPLE IRA plan has a lower deferral limit than a solo 401k. But unlike a solo 401k plan, the SIMPLE IRA plan uses an IRA-style trust to hold SIMPLE IRA contributions for each employee, rather than the a single plan like a 401k Plan or other qualified retirement plan.

The Solo 401k

The solo 401k plan is an IRS-approved retirement plan, which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. There are a number of benefits that are specific to solo 401k plans that make them a far more attractive retirement option for a self-employed individual than a SIMPLE IRA.

8 Solo 401k Benefits

1. Higher Contributions.

A Solo 401k Plan includes both an employee and profit sharing contribution option, whereas, a SIMPLE IRA only offers minimal employee deferral opportunities.

For those below the age of 50:

Under the 2017 Solo 401k contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $54,000.

For those over the age of 50:

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can also be made in pre-tax or after-tax (Roth).
On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $60,000.

Compared to a SIMPLE IRA:

Whereas, a SIMPLE IRA has a lower deferral limit of $11,500 for 2017, plus a $2,500 catch-up contribution. In addition, the employer must provide either a dollar-for-dollar contribution of up to three percent of compensation to all who defer or a two percent non-elective contribution to all employees who are eligible to participate in the plan and who have earned $5,000 or more in compensation from the employer during the year. Hence, a participant in a SIMPLE IRA would be significantly limited in the amount of annual deferrals to be made to the retirement account in comparison to a Solo 401k Plan participant.

2. Reduced Catch-Up Contribution Amount.

With a Solo 401k Plan a plan participant who is over the age of 50 is able to make a catch-up contribution of up to $6,000. Whereas, with a SIMPLE IRA, the maximum annual contribution limit for is just $2,500.

3. No Roth Feature.

A Solo 401k Plan can be made in pre-tax or Roth (after-tax) format. Whereas, in the case of a SIMPLE IRA, contributions can only be made in pre-tax format. In addition, a contribution of $18,000 ($24,00, if the plan participant is over the age of 50) can be made to a Solo 401k Roth account.

4. Tax-Free Loan Option.

With a solo 401k plan you can borrow up to $50,000 or 50% of your account value, whichever is less. The loan can be used for any purpose. With a SIMPLE IRA, you can't even borrow $1.

5. Access to Tax-Free Nonrecourse Leverage.

With a solo 401k plan, you can make a real estate investment using non-recourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax. However, the non-recourse leverage exception is only applicable to 401k qualified retirement plans and does not apply to IRAs. In other words, using a Self-Directed SIMPLE IRA to make a real estate investment involving non-recourse financing would trigger the UBTI tax.

6. You Can Open Your Account at any Local Bank.

With a Solo 401k plan, your 401k bank account can be opened at any local bank or trust company. In the case of a SIMPLE IRA or a Self-Directed IRA, a special IRA custodian is required to hold the IRA funds.

7. No Need for the Cost of an LLC.

With a Solo 401k, the plan itself can make real estate and other investments without the need for an LLC. (Depending on the state you're in, forming an LLC could prove costly.) Since a 401k Plan is a trust, the trustee on behalf of the trust can take title to a real estate asset without the need for an LLC.

8. Greater Creditor Protection.

A Solo 401k offers greater creditor protection than a SIMPLE IRA. The 2005 Bankruptcy Act generally protects all 401k assets from creditor attack in a bankruptcy proceeding. In addition, most states offer greater creditor protection to a solo 401k qualified retirement plan than a SIMPLE IRA outside of bankruptcy.

The 5 Most Common IRA Contribution Questions

What's up with the individual retirement account (IRA)? I seem to always be answering random questions. Like why this Roth guy gets talked about all the time? Or what's the maximum IRA contribution level? Or whether it's possible to get a tax deduction, pretty please! Don't worry folks, I've got you covered.

Question #1: Is my IRA contribution tax deductible?

The answer is: it depends. Your eligibility depends on your income, marital status, employment benefits and more. Depending on those variables, you'll be placed into one of three categories.

No Tax Deduction

Contributions to a Roth IRA aren’t deductible. Not ever.

That said, contributing to your Roth account is still a solid plan. Just make sure your modified adjusted gross income (MAGI) isn’t higher than the Roth contribution limit.

Also, if you're looking for tax deductions, then consider maximizing out your 401(k) or 403(k). These plans accomplish much the same thing as traditional IRAs in terms of taxation.

Limited Deduction

There are two scenarios where your contributions may be limited.

If you or your spouse are covered by a retirement plan at work
If you or your spouse fall outside the allowed income range

Remember, the IRS frequently updates income ranges, so double check the date before assuming you're good to go. Better yet, consult an attorney.

Full Tax Deduction

You can deduct the full contribution amount from your taxes if both of the following things are true.

Neither you nor your spouse have an individual retirement account through your employer.
Your income(s) falls under the IRS cutoff point.

See above for information on income ranges.

Question #2: Can I contribute to an IRA if my retirement plan is covered through work?

Yes! You can still contribute if your employer sponsors your retirement plan. This holds true even if the plan is a SEP or SIMPLE IRA. However, be aware that there is a maximum contribution limit. Also, whether or not you can deduct the full contribution amount depends on a variety of factors which were covered in the first question.

What about if you aren't covered by an employer retirement plan? You can still contribute to an IRA. Plus your contributions are fully deductible as long as your MAGI doesn’t exceed $60,000.

Question #3: Can I establish a self-directed IRA if only my spouse has earned income for the year?

Yes. If you file a joint return, you and your spouse can each contribute, even if only one of you has taxable compensation, regardless of which of you earned the compensation.

The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return and cannot exceed the maximum IRA contributions for the year ($5500 in 2017 or $6500 if over the age of 50).

Question #4: How can I contribute to my Roth IRA account if I earned too much money in 2017?

The IRS has set the contribution cutoff at $181,000 for the year 2017.

If your modified adjusted gross income is below the cutoff point and you file a joint return, you can make a Roth IRA contribution. However, if you earned more than that during the year, you will see your maximum Roth IRA contributions reduced or completely eliminated.

One way to "get around" the Roth income threshold rules is to make an after-tax contribution and then convert it into a Roth IRA. Since the traditional contribution was made after-tax there would be no tax on the Roth IRA conversion.

Fun fact: 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 Individual Retirement Account after I turn 70½?

It depends on which type of IRA you’re using.

You won’t be able to make regular contributions to a traditional IRA in whichever year you turn 70½. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA. This is always true, regardless of your age.

Your IRA Custodian's Management Fees May Now Be Tax Deductible!

Have you ever thought about deducting your custodian/trustee fees from your taxes? That'd be fun, considering you'd most likely have to talk to your custodian/trustee about it.

Many retirement account holders don't know their payment IRA custodian/trustee fees may in fact be tax-deductible. The irony is not lost on us.

Example of an IRA Custodian Tax Deduction For Investors

According to the IRS rules, in place of the standard deduction, you can deduct certain expenses as miscellaneous itemized deductions on Schedule A.

But you can only claim the amount of expenses that are more than 2% of your adjusted gross income.
For example, Alexander is a single taxpayer who has an adjusted gross income of $50,000. He may deduct her miscellaneous itemized deductions only to the extent that they exceed 2% of $50,000, or $1,000.

Facts About IRA Tax Deductions

Some of the more popular itemized deductions are for: charity contributions, mortgage interest, tax preparation fees (ironically), medical, and dental expenses.

So if you're using Schedule A to itemize deductions in place of taking the standard deduction, your IRA custodian/management fees can be deducted.

There are over 50 million IRAs.
The majority of all IRA accounts are subject to small annual administration fees, which generally cover basic paperwork and maintenance of the account.

These annual IRA management fees may be tax-deductible, according to the itemized deduction rules. As long as the fees are separately billed and paid for using IRA funds.

In other words, IRA management fees paid by personal cash or check that are not deducted from the IRA may be deducted as investment expenses, subject to the itemized deduction limits.

IRA Custodian fees are also not considered part of the total IRA contribution for the year.

On the other hand, IRS rules state that if your IRA administrative/management expenses are paid directly from the IRA, such payment will not be considered a distribution from the IRA.

For example, if you contribute the maximum for a person under age 50 ($5,500 as of 2018), and your trustee deducts $200 from the account for advisory or custodian fees, the fee paid would not be considered a distribution.

Note: You cannot increase your IRA contribution to compensate for that amount.

How To Pay IRA Fees To Get A Tax Deduction Properly

You have to pay IRA management/custodian fees with the money in a retirement account (which is subtracted directly from the account without tax consequences) or pay the fee with outside/personal dollars instead. Only then can you claim the itemized deduction.

The same applies to a retirement account where you are subject to investment management fees associated with the retirement account.
The IRS recently confirmed that “wrap fee” style arrangements like ongoing assets under management and investment advisory fees can be paid with outside taxable dollars and still deducted as Section 212 expenses, subject to the itemized deduction limits.

The determination of whether the IRA administration/management fee is deductible is dependent on how it is billed. For example, if the money simply comes out of any cash balance in the IRA, then you can't deduct it.

Instead, for tax purposes, the fee is offset against earnings in the account when you begin withdrawing the retirement account funds.
But if the IRA administrator/trustee bills or invoices the individual separately and allows you to pay from another source, then the fee may be deductible for the year in which it was paid.

However, because of the “prohibited transaction” rules, a transaction can be subject to tax and penalties.

Note: Make sure personal expenses are NOT paid using retirement funds or vice versa. This will help you avoid costly penalties.

Given that IRA custodian and related investment advisory fees can be paid from retirement accounts, as long as the fee is attributable only to the retirement account.

Close readers and smart investors (we're pretty sure that's all of you) may still have one question.

Given the Choice, Should You Pay IRA Fees with Retirement or Personal Funds?

The answer is generally dependent on a variety of factors, specifically, on how much of the IRA fee would have been deductible if it was simply paid with outside/personal dollars instead based on the itemized deduction rules.

The benefit to paying the IRA custodian/management fee from a retirement account is the ability to pay it with pre-tax dollars.

If the fee would have been fully deductible if paid with personal/outside dollars, then it’s best to simply pay with outside dollars, and allow the IRA to maximize its ongoing tax-deferred growth.

Although, in reality, IRA custodian/management fees are often not fully deductible due to the 2%-of-AGI floor on miscellaneous itemized deductions and due to the reach of the alternative minimum tax (“AMT”).

In any event, it will generally always be preferable to use personal funds to pay the IRA custodian/investment management fee for a Roth IRA, even if the fee is not deductible.

Get Professional Help Managing Your IRA Retirement Account

The ability to deduct IRA custodian/trustee fees can be a nice tax benefit to many IRA account holders itemizing their tax deductions. However, the process can be time-consuming, so it's not advised unless you have a lot to gain from doing so.

If you want to learn more about deducting your IRA management fees, take our Tax Discovery Quiz below.

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

Top 10 Features Of The Solo 401k Plan: Empower Your Business

Are you an independent contractor or the only employee of a business you own? If so, you may want to learn about the Solo 401k.

A Solo 401k is a dream come true for small businesses, independent contractors and sole proprietors, such as consultants or freelance writers. A Solo 401k Plan can be adopted by any business with no employees other than the owner(s).

The business can be a sole proprietorship, LLC, corporation, or partnership. The Solo 401k is a tax efficient and cost effective plan offering all the benefits of a Self-Directed IRA, plus additional features.

Solo 401k Features and Benefits

1. Easy to maintain.

There is no annual filing requirement unless your solo 401k plan exceeds $250,000 in assets. If it does you will need to file a short information return with the IRS (Form 5500-EZ).

2. Freedom of choice and tax-free investing.

With a Solo 401K Plan, you will be able to invest in almost any type of investment opportunity, including:

Real estate
Private businesses
Precious metals
Hard money & peer to peer lending
Stock and mutual funds

Your only limit is your imagination.
Note: The income and gains from these investments will flow back into your Solo 401K Plan tax-free.

3.You can get a loan.

The Solo 401k allows you to borrow up to $50,000 or 50% of your account value, whichever is less. The interest rate will be the current prime rate. You can use the money for anything you want.

4. No Custodian fees.

A Solo 401k plan allows you to eliminate the expense and delays that come with an IRA custodian. This enables you to act quickly when the right investment opportunity presents itself.

Also, because you can open a Solo 401k at any local bank or credit union you won't have to pay custodian fees for the account as you would in the case of an IRA.

Another benefit of the Solo 401k plan is that it doesn't require you to hire a bank or trust company to serve as trustee. This flexibility allows you to serve in the trustee role. This means all assets of the 401k trust are under your direct control.

5. High contribution limits.

While an IRA only allows a $5,500 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), the solo 401(k) contribution limits are $54,000. (With an additional $6,000 catch up contribution if you're over age 50.)

Under the 2017 Solo 401k contribution rules, if you're under the age of 50 you can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after tax. The after-tax method is known as the Roth account.

On the profit sharing side, your business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including your employee deferral, of $54,000.

If you're over the age of 50, you can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre tax or after tax (Roth). (Up to a combined maximum of $60,000.)

6. Contribution options.

You always have the option to contribute as much as legally possible, as well as the option of reducing or even suspending plan contributions if necessary.

7. Roth contributions.

The Solo 401k plan contains a built-in Roth sub-account you can contribute to without any income restrictions. With a Roth sub-account, you can make Roth type contributions while having the ability to make significantly greater contributions than with an IRA.

8. Tax deductions can offset the cost of your plan.

By paying for your Solo 401k with business funds, you would be eligible to claim a deduction for the cost of the plan, including annual maintenance fees.

9. Exemption from UDFI tax.

When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (UDFI). This means you're going to be paying a lot of money in taxes!

How much is a lot you ask? The UBTI tax is approximately 40% for 2017-2018! Learn more details about this whopping tax penalty from our previous UBTI breakdown.

But, with a Solo 401k plan, you can use leverage without being subject to the UDFI rules and UBTI tax. This exemption provides significant tax advantages for using a Solo 401k Plan over an IRA for real estate purchases.

10. Rollover options.

A Solo 401k plan can accept rollovers of funds from another retirement savings vehicle, such as an IRA, a SEP, or a previous employer's 401k plan. Which means you can directly rollover your IRA or qualified plan funds to your new 401k Plan for investment or loan purposes.
Note: Roth IRA funds can't be rolled into a Solo 401k Plan.

Still Using an IRA?

While the IRA is nice and all, it just can't compete. With a solo 401k plan, your business will pay less in tax, and you won't have to deal with the typical IRA restrictions.

Are you interested in learning more about Solo 401ks? Call Royal Legal Solutions at (512) 757–3994 to schedule your retirement consultation today.

What is the Self-Directed IRA?

Do you have an IRA? If yes, you've probably only invested in mutual funds and other types of stock investments. But did you know lot of people that are in the know are now using their IRAs to invest in real estate and other more productive assets? All thanks to the self-directed IRA.

The Self-Directed IRA Basics

As its name suggest, the self directed IRA is an IRA you self-direct, or control. You might think that you control your IRA already. The truth is you don't. Your IRA is controlled by a custodian, and you have a limited choice of investments. You can only invest in things like stocks, bonds and mutual funds.
But by using a self-directed IRA, you'll be able to take complete control of your IRA. You'll be able to streamline the investment process and cut out the custodian, which means no more custodian fees or undue delays. And the best part? You can invest in real estate using a self directed IRA!

The Self-Directed IRA Rules

However, there are certain restrictions that apply to self directed IRA investors. You don't want to violate the IRA rules. (If you do, there are several consequences, including a fine.)
For example, one of these IRA rules is you can't loan money to a disqualified person. Also, there are certain assets that you can't invest in such as artwork, life insurance or collectibles.
Yet despite all these IRA rules, the self-directed IRA is the most powerful investment tool available for an IRA owner. Once you have a self directed IRA, you'll be able to use to invest your IRA funds into highly profitable asset classes with the ease of not having to involve a custodian.
If you have any questions about the self directed IRA, I've written several blog post that should be able to answer all of your questions. To learn more about the self-directed IRA (including how to fund and create one), check out our answers to top self-directed IRA questions. You may also be interested in learning how to buy real estate with your self-directed IRA.
If you have more questions or want to establish your self-directed IRA, Royal Legal Solutions is here to help. Contact us today.

Why You DON'T Want A Self Directed IRA LLC In California

You may have heard about the benefits of the self directed IRA before. The self directed IRA offers many advantages, including asset protection, tax benefits, and freedom of choice. But if you live in California, you don't want to get one.

California Investor: Don't Get an LLC, Get An IRA Business Trust

With an LLC you end up having to pay an $800 yearly franchise tax as a California resident. (That's on top of the filing fees.) Instead of getting an LLC, you should get what's known as a business trust.

Business trusts aren't subject to the costly franchise tax laws in California. And with a business trust you're able to do everything you can do with an LLC. You can direct your funds where you would like to and you can invest in anything you want. All without involving a custodian.

So yes, with a business trusts you will save money where fees are concerned. But there are some downsides.

The One Downside Of Using An IRA Business Trust

Unfortunately business trusts lack the asset protection you would get with an LLC. However, they're still partly anonymous, which can help you a little bit.

While a business trust won't give you all the asset protection you need, you'll still be able to invest in a cost and tax efficient manner. At the end of the day that's always better than paying custodian fees and missing out on great investment opportunities.

I wish I could've given you better news, but on the bright side at least you know what you're up against in California. If you have any questions feel free to ask me in the comment section, It'd be my pleasure to assist you.

Learn more about the exclusive benefits of having a self directed IRA.