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.

You Can Use Your Self-Directed IRA To Buy A Retirement Home. Here's How.

In my experience, a retirement that you are in charge of makes for a better retirement than one that is financially uncertain.

If you are starting to think about where you’ll be spending your retirement, you’ve probably been growing your IRA for some time. If real estate investing is what has gotten you to where you are now, you might want to think about buying a retirement home from your self-directed IRA, also known as a SDIRA or solo IRA.

You can use a self-directed IRA to purchase your retirement home  before your loving children dump you on the side of the road and run off with their inheritance. Here's how.

What To Know About Buying Your Retirement Home With Your SDIRA

This is one of the great reasons to go with self-directed IRA. Traditional IRAs can hold investments, but you can’t buy a home with them. With a self-directed IRA you can buy an investment property and distribute later for personal use. This is black-belt level stuff. You can rent the property as an investment, so you are still making money off of it until you are ready to retire and move in.

To do this you need to purchase the property through your IRA, which will own it as an investment until you retire. When that time comes, you will distribute the property via title transfer from your self-directed to your traditional IRA.
This makes your retirement home a retirement benefit.

Beware of Prohibited Transactions

You need to avoid prohibited transactions. You cannot use the property. Your family cannot use the property. You do not own the property. It is the IRA’s property. It rents the property; you don't.

The rental income accrues in your account because, I repeat, your IRA owns the property. You can lease the property, of course—that’s how investments work. They make income. You will have to lease it to someone outside the family until it’s been distributed, but after that, your dream home is all yours.

Be Smart About Distributions and Taxes

When you take control of your retirement home, it is an “in kind” distribution and it means taxes are due for traditional IRA’s. If your future retirement home was appraised at $250,000, you will receive a 1099-R for $250,000 from your custodian upon distribution.

Distribution taxes can be high. You might prefer to take partial distributions over time, to spread out the pain, but it’s going to sting no matter what you do and this can be a trap. You need appraisals every year for fair market valuation. These valuations cost money. Whatever you decide, you and your family cannot use the property until it has been 100% distributed.

As with most things retirement related, if you take a distribution before you are 59½, you’re going to pay a penalty. Ten percent is stiff. Be patient.

Do Your Homework Before Buying

This process of home ownership isn’t going to work for everyone. It takes a lot of work, but most things worth doing are a lot of work, including putting yourself in a position to purchase a retirement home in the first place. It is possible, but if you self-direct your IRA investments, make sure you understand relevant investment laws and tax structures.

You need to be like a Boy Scout when it comes to retirement planning. Be prepared.

4 Pet Law Facts Animal Owners Should Know

I once owned a pit bull named Jackson. He went down a bad path. He was a product of public obedience school. I was too busy with my legal career to notice that Jackson was out on the corner hustling with local thugs.
Every night I went to bed thinking: "Please, don’t make me financially responsible for my pet’s poor life choices. Please."
There are a lot of situations where pet law can get rough. Pet custody is fiercely contested in divorces. Your pet might go down a bad road like mine did. And heaven help you if yours commits the greatest crime in the canine criminal code: biting somebody. You will also have to make provisions for your animals after you’re gone.
Pets are beloved family members, but there are some legal realities that you need to be aware of if you are a pet owner. To that end, here are a few Pet Law fundamentals.

1. Pets are property, and "duds" happen. 

If life sells you a lemon, trade it in for an orange. Or at least something that isn't dying. It may not be the kindest idea, but if you purchase a pet with an illness or a disease, you can return it for a full refund in 21 states. Then you just have to live with the knowledge that Snowball is going to be left on a rock to be consumed by an eagle. Circle of life.

2. Laws regulating the treatment of pets vary from state to state.

All laws regulating pet care can be reduced to one Elvis Presley maxim: don’t be cruel. Don’t leave you dog outside in a hurricane. Don’t leave them in a hot car. And of course, no dog fighting. I thought this one was common sense, but it seems necessary to say it out loud because Michael Vick did 18 months for it. If dog fighting gets you off, you might also want to consider a psychiatrist. You’re a sadist.

3. Pet custody issues are real: understand them.

Look, you love your dog and so does your wife. You might love it more than your car but less than your boat. You might love it more than your children but less than your dinner. To be frank, the law doesn’t care. Pets are considered property no matter how meaningful deep attachment to them may be.
So, in the event of a divorce where pet ownership is in dispute, the court has to consider a number of factors similar those that would be considered during a child custody hearing. Of course there are differences, since you legally own your dog. You don't own your kids. That’s why you can’t put them to work in your salt mine.
Still, the rubric for pet custody and children is similar. The court considers who took care of the pet and who can pay for it. If it is a family pet, it will likely end up wherever the children go. Either way, this is going to be in the judge’s hands. If pet custody is important to you, prepare your case.

4.  Include your pet in your estate plan.

So, you’ve been dead for a week. Your dog has finished mourning at your grave and now he needs to eat. Who is going to feed him?  If you want your pet taken care of after your passing, you can state in your trust or will what provisions you are leaving behind for its care. You can create a "pet trust" to outline the care of your pet after you are gone.

There is good chance there is someone in your life who will take the pet for free because generally speaking we all no at least one person who isn’t completely heartless. If you don’t, I’m sorry that you are dying alone, but cheer up! You can see to your pet’s care either way. Leona Helmsley left millions of dollars to her dog. I mean, none of it was spent on her dog, but if the dog one day developed the powers of speech through the integration of silicon-based microprocessors and the carbon-based canine brain, he might say something like, “You know what I want to do? I want to take LADY to TONY’s for a nice plate of spaghetti.” If that were to happen, TRAMP could afford to take his girl for a nice dinner and a bottle of Chianti.
If you want your pet to fill the void left by your absence with a jettsetting, playboy lifestyle and a solid gold grill, you can leave them your entire estate. Tony will appreciate the business.
Do you have questions about pet ownership or pet law? Fire away in the comments below. Better yet, let Royal Legal Solutions help you. Whether you want to protect a show dog or racehorse as an asset or incorporate your emotional support peacock into your estate plan, we've got you covered. Our nonjudgmental, empathetic attorneys are pet parents themselves. Schedule your consultation today.
 

Pet Ownership Laws & How They Can Bite You In The Assets

I once owned a pit bull named Jackson. He dropped out of obedience school and went down a bad path. I was too busy with my legal career to notice that Jackson was out on the corner hustling with local thugs.

Every night I went to bed thinking: "Please, Lord. Don’t make me financially responsible for my pet’s poor life choices. Please."

There are a lot of situations where our furry and feathered friends run afoul of pet ownership laws. Pet custody is fiercely contested in divorces. You will also have to make provisions for your animals after you’re gone.

Your pet might go down a bad road like mine did. And heaven help you if yours commits the greatest crime in the canine criminal code: biting somebody. 

Pets are beloved family members, but there are some legal realities that you need to be aware of if you are a pet owner. These legal risks also may apply if you are a landlord or property owner and your tenant's dog bites someone. To that end, here are a few pet law fundamentals.

pet ownership laws: bird law

Laws regulating the treatment of pets vary from state to state

All laws regulating pet care can be reduced to one Elvis Presley maxim: don’t be cruel. Don’t leave your dog outside in a hurricane. Don’t leave them in a hot car. And of course, no dog fighting.

I thought this one was common sense, but it seems necessary to say it out loud because Michael Vick did 18 months for it. If dog fighting gets you off, you might also want to consider a psychiatrist. You’re a sadist.

Whether you're a dog owner or a property owner with "animal-friendly" policies, know the laws regarding animal treatment where you live and do business.

Pet custody issues are real: understand them

Look, you love your dog and so does your wife. You might love it more than your car but less than your boat. You might love it more than your children but less than your dinner.

To be frank, the law doesn’t care. Pets are considered property, just like any other asset, no matter how meaningful or deep your attachment to them may be.

So, in the event of a divorce where pet ownership is in dispute, the court has to consider a number of factors similar those that would be considered during a child custody hearing. Of course there are differences, since you legally own your dog. You don't own your kids.

Still, the rubric for pet custody and children is similar. The court considers who took care of the pet and who can pay for it. If it is a family pet, it will likely end up wherever the children go.

Either way, this is going to be in the judge’s hands. If pet custody is important to you, prepare your case.

pet ownership laws: pit bull with kissesInclude your pet in your estate plan

So, you’ve been dead for a week. Your dog has finished mourning at your grave and now he needs to eat. Who is going to feed him?  

If you want your pet taken care of after your passing, you can state in your trust or will what provisions you are leaving behind for its care. You can create a "pet trust" to outline the care of your pet after you are gone.

There is good chance there is someone in your life who will take the pet for free because, generally speaking, we all know at least one person who isn’t completely heartless.

If you don’t, I’m sorry that you are dying alone, but cheer up! You can see to your pet’s care either way. Leona Helmsley left millions of dollars to her dog.

If you want your pet to fill the void left by your absence with a jettsetting, playboy lifestyle and a solid gold grill, you can leave them your entire estate. Tony will appreciate the business.

Don't Get Left Holding The Bag If Your Tenant's Dog Bites Someone

What happens when your tenant’s dog bites a neighbor? Generally, the dog owner is the one liable for injuries.

However, there are instances in which the landlord or property owner can be legally responsible. For example, if the landlord has been made aware of a dog having an aggressive streak and failed to take appropriate measures, he or she could be facing a lawsuit.

Remember: One lawsuit can wipe your real estate investments if your investing business is established as a sole proprietorship. It may be a legal and easy way to structure your business, but it does little to protect you and your assets. The neighbor’s lawyers can see all of your investments, and you can be sued for everything you have.

It doesn’t matter if you’re just starting out in property investing or if you have been doing this for decades, you can keep more of what you earn through legal tax strategies and entity structures that shield your assets from unexpected lawsuits.

Interested in learning more? Read Renting To Tenants With Dogs: What Landlords Need To Know About Liability and Dog Bites and Landlord Liability: Know Where You Stand.

Wrapping It All Up

Most lawyers will give you cookie-cutter advice. You should learn from lawyers who are also property investors and who know how to protect you from any opportunistic lawsuits while making sure you pay no more tax than you really need to. Find someone who can legally structure a range of real estate investments to make sure your real estate investments or business are protected from unfair taxes or lawsuits.

Do you have questions about pet ownership or pet law? Fire away in the comments below. Better yet, let Royal Legal Solutions help you. Whether you want to protect a show dog or racehorse as an asset or incorporate your emotional support peacock into your estate plan, we've got you covered.

Joint Ventures in Real Estate Investing: How They Work

After the recession, Joint Ventures were hotter than documentaries about corruption at investment banks. If you’ve been in real estate investing since then, you’ve probably entered into one at some point.

These tasty commodities were attractive because they gave loan-to-value ratios as high as 70%. Not many real estate investors like to gamble with those kinds of numbers, at least not alone. However, get a pack of lemmings together and they’ll pretty much gamble on anything, up to and including jumping off of a cliff.

What is a Joint Venture in the Context of Real Estate Investing?

A JV agreement is a contract between two or more parties that divides up the investment, the responsibilities, and the profits or losses. You know, an agreement. It’s for those entering into a one-time deal. You aren’t wining and dining here. You’re in and out fast for a quick and tidy profit.

Parties usually form a new company to own and operate an investment if it is a long-term deal. For short-term investments, a Joint Venture does have some great benefits.

Example of Joint Venture Agreements in Real Life

This is a common JV Agreement scenario for real estate investors. My friend Randy purchased a property with his LLC that he intended to restore and then sell for a profit. Then he hired a contractor, our buddy Johnny.

Together, they agreed that Randy would reimburse Johnny his expenses and they would share the profits from the sale, in accordance with the terms of the JV agreement they’ve drafted.

By the way, you can add a contractor to your S Corporation or LLC in order to share profits, but that can be a bad idea. If you don’t want to give up a permanent piece of your company (and there are a lot or reasons why you might not want to do that) a JV agreement will bridge can bridge the gap without giving away your firstborn. It is a collaborative contract between companies, rather than a permanent marriage.

By creating a venture-specific LLC, all of the parties acquire some much-needed liability protection.
If you find that the arrangement is worth keeping to explore new opportunities, there is no reason why you can’t modify the terms.

Who knows? Maybe this short-term fling will become the real thing.

Your new LLC will also isolate the JV’s capital and resources in the event of litigation. Your other companies are safe from being liable for this new one.

Is a Joint Venture Right For Me?

As in so many things finance related, your decision really depends on the size of the deal. If you are pushing millions around, the added liability protection of an LLC is essential. If you’re just puttering around with tens of thousands of dollars, as was often the case between Randy and Johnny, that JV agreement is the cheaper option.

JVs work well where the goal is quick cash and in cases where the partners do not qualify for financing. They also let you partner with companies that have different skills than you. The investor/contractor arrangement like Randy and Johnny’s is a perfect match for quick flips on real estate.

In the end, no matter how short-term a deal is, you’re going to have to work with the person you go into business with for longer than you think. Whether starting a new company or signing a Joint Venture, find people who you trust and who you like to work with. Make sure you understand Joint Venture liability. Forge business relationships that have potential for growth and leave the door open for more collaboration. A good deal is an awful thing to waste.

Do you still have questions about your Joint Venture or LLC? Take our quick investor quiz and we'll help you find the solution that is best for your situation.

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.

Keep Your Individual 401k Compliant: 5 Steps For Self-Employed Investors

Investors love the self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—because it’s perfect for businesses with sole owners. These retirement plans offer serious benefits. These are like self-directed IRAs made just for investors and the self-employed.

This may seem like a dream come true, but when you’re busy investing or running a business, the management of a 401k can get overlooked. Mistakes can be costly. Making sure your plan is compliant comes down to five easy steps.

1. Update Your 401k Account on Time

Updates are required by the IRS every six years. If you don’t update them, you’ll face costly fines and possibly even plan termination. Just like your phone, if it’s out of date, you are vulnerable to all kinds of attacks. Fortunately this one is straightforward. If your plan is out of date, get it updated.

2. Keep Track of Your Funds

Your income sources must be accounted for. My friend’s wife used to make contributions to one of his accounts, but he tracks everything to the letter. Make a spreadsheet in Excel. Those night classes you took are good for something and excel feels is feeling so neglected.

3. Separate Your Funds By Plan and Participant

If two people are contributing to one account, make sure they contribute from their own accounts. Also keep Roth accounts in their own space separate from traditional funds. By now, you’re more organized than the foreman at an ant farm, and you have to be. There is a lot to keep track of.

4. File a 5500 with The Department of Labor

Yes, another form. I often wish I’d gone to art school, but then I remember that artists fill out less forms because they have no money.

There are two situations that demand a 5500 for your individual 401k. First, if you have more than $250,000, start stretching your writing hand. Second, if you terminate a plan, regardless of assets, you need to file a 5500. You have to do this annually, so make sure you have enough money in the plan to make it worth it.

You can opt for a 5500-EZ. This is, as you might suspect, an easy file version of a 5500. This has to be filed by mail. If you opt for a 5500-SF you can do it online through the Department of Labor. This is obviously more convenient.

Online filing can be tracked immediately. The SF skips portions of the 5500 like an EZ. Opt for the SF and get the best of both worlds if you qualify for EZ filing.

*See Form 5500 EZ Filing Requirements For Solo (One Participant) 401(k) Holders for more information.

5. Document Contributions and Rollovers

If you make contributions or roll over funds from an IRA or 401k into your individual 401k, you need to state that the rollover is coming from another retirement account. The company rolling over the funds will issue a 109d9-R to you. It states that the source of the roll over so you don’t get taxed on it. Unless you like paying tax. If that’s the case, you’re on the wrong website.

If you are making new contributions to an individual 410k, track them on personal and business tax returns. If you’re an s-corp, employee contributions show up on your W-2 and your employer contributions will show up on your 1120S s-corp return, unless you are the sole proprietor, in which case your contributions show up on your personal 1040 on line 28.

Head spinning yet? Yes, this portion of tax law is confusing. You may be better off with a professional, but if you can make sense of it, you will save yourself a lot of money.

In short, be updated and organized to keep your enemies at the IRS from sticking you with non-compliance. If you suspect you are out of compliance, meet with your attorney or CPA and get that treated before it is malignant.

To give you a sense of what is at stake, the penalty for not properly filing a 5500 is $25.00 a day to a maximum of $15,000.00 on your return. A mistake made on a filed return might keep you from retiring at all. See to the boring stuff. Get your paperwork done. Be up to date. The rewards are worth it. 

As always, if you're struggling to manage your retirement plan, get professional help. Royal Legal Solutions has experts and attorneys who can help you decide which of the many retirement options is best for you.

How to Fund Your Business with Self-Directed IRA Investors

Private companies need start-up funding.
There are trillions of dollars in retirement plans across the United States. These funds can be invested in your business.
Most entrepreneurs and investors don’t know this. Which is a shame, because everybody who owns a retirement fund is a potential source of financing. Most people who have a retirement account don’t actually know what their retirement package is invested in. This is an untapped resource just waiting for your pitch.
Industry surveys show that there are over one million self-directed retirement accounts invested in private companies, real estate, venture capital, private equity, hedge funds and start-ups.

Investing with Self-Directed IRA Funds

 
So how can you tap this wellspring? If you ask your CPA or your lawyer, they’re going to tell you that it’s possible but inadvisable. This is because they don’t have any idea how to do what you are asking them to do, or they are too shortsighted to see why you want to. Your financial adviser is going to tell you this is a bad idea because he doesn’t get the fee that he collects on your mutual funds, annuities and stocks. I’m not going to tell you this is a conflict of interest, but it does lower your adviser's motivation for alternative investments. He’s trying to make money too after all.
There are different sets of risks in private investment, so self-directed IRA investors need to be strategic. Keep a diverse profile. Don’t hitch your entire wagon to an unproven company. There will be tax and legal issues, so make sure you get help when and where it is necessary.
Selling corporate stock or LLC units to self-directed IRAs can generate capital in exchange for stock or equity in other companies. You can offer shares or units in your retirement account without going public.
This was what employees at Google, PayPal, Domino’s, Sealy, and Yelp did. They invested their self-directed IRAs before their companies were publicly traded and made enough money to retire very nicely.
Popular investment options include:

You must be in compliance with state and federal securities laws when raising money from investors.

Avoiding Prohibited Transactions/UBIT

Be careful to avoid prohibited transactions. For example, you cannot invest your retirement money with close family members. If an error occurs, an investor will have their ENTIRE ACCOUNT DISTRIBUTED. Don’t make this mistake.
You may also be subject to an Unrelated Business Income Tax. A UBIT applies to an IRA when it receives business income. Learn more from our previous article about the UBIT.
Generally, IRA’s and 401k’s don’t pay tax on gains because they’re considered investment income. When you wander outside of standard investments, such as mutual funds and annuities, you may find yourself in the cold wilderness outside of investment income parameters. UBITs are very costly at 39.6% of $12,000 of taxable income. That’s steep.
The most common situation where a self-directed IRA will be subject to a UBIT is when the IRA invests in a business that does not pay corporate tax.
If you are trying to raise capital from retirement funds, you should have a section in your documents that notifies people of potential UBIT on their investment. This doesn’t cost you, but it does cost the investor, and at 39.6% you might do some damage to someone’s retirement plans if you aren’t clear with them.
If the investment from a self-directed IRA was via a note or debt instrument, then the profits are considered interest income. This income is always considered investment income, which is not subject to a UBIT.
Many companies raise capital from IRAs for real estate or equipment purchases. These loans are often secured with the assets being purchased. In this case, the IRA ends up earning interest like a private lender.
So, to Recap (because that was a lot!)
• There are trillions of dollars in retirement plans across the U.S.
• These retirement accounts can be used to invest into your private company, start-up or small business.
• You must comply with the prohibited transaction rules.
• Anyone can invest into your company, except you & your close family members.
• There may be UBIT, depending on the structure of the company.
• UBIT usually arises within IRAs that operate businesses structured as LLCs where the company doesn’t pay a corporate tax on their net profits. This income gets passed down to IRA owners & can cause UBIT liability.
Retirement account funds can be a huge source of funding and investment for your business, so it’s worth the time and effort to learn how to access them as investment capital. Just make sure you follow the rules.
How you handle your retirement money matters at money matters.

Finding a Trustee For Your Estate Plan

Finding a trustee for your estate plan is tricky. If you choose someone who isn’t up to the task, you won’t be around to correct them.

On the surface, the job is simple. You name which assets go to whom and under what conditions. The trustee just has to execute. So, as with any trust designed to protect your investments, you need a trustee you can, well, trust. You may also want to see our Trustee Vs. Executor article.

In order to pick the right person, consider the following:

What Will My Estate's Trustee Do?

  1. The trustee will make the funeral arrangements with the help of the family. The hardest part about this is managing a grieving family. If your son or daughter doesn’t do well with grief, you may want to consider someone else.
  2. Your trustee will inform your family members and your heir of your estate plans. This is just like in the movies where the deceased leaves behind a video. The trustee puts in the video and the eccentric old billionaire announces that to get his money you have to do something hilarious like defeat his greatest enemy in mortal combat, or solve a terrific riddle that leads you to a treasure buried on an island off of Nova Scotia. No? Maybe that’s just my grandmother, who wasn’t a billionaire, but she was crazy.
  3. Your trustee pays people. Dying is expensive. Make these arrangements ahead of time. By the time your trustee steps in, all he should be doing is signing checks in accordance with your carefully laid plans.
  4. After the dust settles, the trustee determines what assets you still have and how to distribute them. Might be a good idea to include “well- organized” on your list of desirable trustee qualities. With that in mind, you should have selected a beast of a bean counter to execute your will. Someone meticulous, organized, and financially sound. It won’t hurt if they’re funny either. Your family might need a laugh while they divide up what remains of your life in the days and weeks after your death.

Now that you have found a trustee who can educate and entertain, you need to make a plan for your estate. Once again, you need to choose the right trustee for the job.

Here are a few things to consider.

How Big is Your Estate?

If it’s not extremely large, you can probably entrust its distribution to a family member. Unless of course merciless thieves populate your family, in which case you may need outside help. Sometimes family member receive a small honorarium for their services, but this job is largely pro bono. That’s right, you can keep taking advantage of your family even after death.

Now that’s a haunting.

When an estate is worth over 10M, you may want to name a company or a bank as the trustee. Absolute power corrupts absolutely and every family has a Mr. Burns buried somewhere, just waiting to get their hands on the cash so they can “release the hounds."

If you appoint a company or bank, this will cost…a lot. This means it’s only practical for larger estates. It’s also a lot to hoist off on your daughter, even if she is majoring in finance.

You may also want to appoint a non-family member or friend as a trustee simply so that your estate doesn’t tear the family apart. It can get ugly when one family member is dividing up wealth amongst the others. See: KING LEAR.

Does Your Trustee Have Solid Financial Skills?

This one should seem obvious, but a lot of people make posthumous financial decisions with their heart instead of their head. Whether it’s your wife, your child, or a friend, you need to make sure that your trustee is organized, responsible, and financially sound.

What Are Your Family Dynamics?

Families are made up of people and people get into disagreements. They are flawed units made up of flawed people. Every gold digger and delinquent in the world belongs to somebody’s family. If you have any in yours, keep them away from your finances when you’re gone.

Are You Compensating Your Trustee?

Generally, family members act as trustees without compensation, but you can leave them a little something for their trouble. A little bonus out of the estate might motivate them to do a better job. You’re son also tends to do a better job on the lawn when he’s receiving an allowance.

Conflict of Interest

If you are naming a child as a trustee, you are probably naming them as an heir as well. Don’t sweat this one too much. The trustee is bound to the terms of the trust, so if you are thorough, there is very little that can be done to abuse the trustee position for personal benefit.

Co-Trustees

Sometimes it’s important that several people are trustees. Once again, family members are people, and people are petty. You don’t want to bruise egos that are in the middle of grieving.

Multiple trustees are fine, but make sure that you are specific about authority and responsibility. Your death might leave a financial rat’s nest. One monkey will take long time to untangle it. If you involve multiple monkeys you might turn your funeral into a mud-slinging contest. When you're estate planning, you can be the circus ringleader who prevents these issues. 

Most people will name a child as trustee. Siblings and close friend of the family are common choices where the children are too young. Keep in mind; this is more than just the distribution of your wealth. This is the evolution of your legacy. Make sure you have chosen the right captain to steer the ship.

Take care of your family’s future. Choose a capable trustee. For much more information and a look at things from the trustee's point of view, read up on trust executor duties.

DIY Estate Plans: Three Of The Mistakes To Avoid

Normally when you think "Do It Yourself" you might imagine painting your house or a trip to the store. But now you can also plan your own estate from the comfort of your own home. Thank the internet. Not only is this cheaper, but it's also more convenient.

However, this increase in affordability and convenience has caused disasters for many families. "Do It Yourself" estate plans often fail to provide the kinds of benefits and protections that you would get in a well drafted and planned estate.

And I'm not just saying that because I'm an attorney. The same mistakes come up over and over when people create wills and other documents without legal counseling.

3 Most Common Mistakes Found in DIY Estate Plans

1. Improper Signatures in Wills

Most states require the signature of the person creating the will as well as two witnesses to the will. The only exception to the two witness requirement in most states is hand written wills.

Failure to adhere to the signature and witness requirements invalidates the entire will. It doesn’t matter how good it looks or how many terms you included. If the signature and witness requirements are not followed, then the will is invalid.

2. Failure to Fund The Trust.

Many people who create a revocable living trust (AKA a "trust") on their own don't fund the trust with the assets from their trust. Funding a trust means that you actually put the assets you want to be controlled by the trust in the name of the trust.

Let's say you want your home to be subject to the terms in your trust. To do this you would need to deed the home out of your personal name and into the name of the trust.

If the property is not deeded into the trust it falls outside the trust terms and your heirs will need to go to probate court to get a judge to approve any transfers of title to the property following your death.

As for stock or LLC ownership, those need to be transferred into the trust. And for insurance, investment, and savings accounts, those should be put in the trusts name or the trust should be listed as a beneficiary.

Note: Failure to properly fund your trust will lead to your heirs going to probate court.

3. The General Forms May Not Address Your Unique Situation.

Most families have at least one unique situation to their estate that is not covered by standardized documents found on the web. One situation that would be hard to deal with in a will is when you have a child who is financially irresponsible while the rest of your children are not.

Or, maybe you have an estate that has more debt than assets, in which case you would need to structure your estate plan to leave as little money as possible to the creditors.

More "unique situations" include you having assets in multiple states or being married to a spouse with children from a prior marriage.
The list could go on and on but these unique situations are rarely handled properly when you’re doing your estate plan on your own.

Solution: Get Help With Your Estate Plan From an Attorney

My suggestion is that, if you've completed an estate plan the DIY way, consider at least having a lawyer look at it to make sure what you have down is correct in the eyes of the law. Doing so will probably save your heirs and family a few court dates.

Disinheriting Your Heirs: Your Legal Options

Disinheriting an heir is something most of us hope we never have to do. It’s sad, but it happens. Sometimes you grow estranged from an heir. Other times, the heir may be on a path to self-destruction that you don't want to aid and abet. 
Not all circumstances are this dire. Occasionally, an heir surpasses you financially so they won’t benefit as much from an inheritance as the family artist who is still paying off his American Studies degree.
Whatever your hilarious or tragic reason might be, removing an heir from your estate is fairly straightforward. Emotionally, this move can be devastating to your personal life and tear your family apart. But legally it’s a piece of cake. The following will outline the disinheriting process, but also present legal alternatives to disinheriting.


Why You Will Need to Legally Disinherit An Heir

Unless you specifically state otherwise in a legally binding document, the state is going to assume that you intended your spouse, and then your children to be your heirs. You know, because they assume you love your family. If you think about it, that is the appropriate default setting.
So, if you want to cut an heir out of an inheritance you’ve got to really mean it. You can't undo this move from beyond the grave.
It is important to complete an entire list of your children in the estate plan and to specify any child who will not be an heir. This will make for a wonderful and dramatic moment suitable for a movie:
The estranged youngest son shows up on the day of his father’s death. After comforting his mother and arguing with his brother, his father’s will is read aloud in father’s study.  As the grieving family gathers around, the executor reads in a loud, authoritative voice: “…and to my youngest son Samuel, I leave nothing.”
The son lowers his head. His sister tries to comfort him. He dashes from the room. It’s the sweetest revenge of all: revenge from beyond the grave!
In all seriousness, I know what a tragic situation disinheriting can be. That's why I'm going to share another, less final option below.


What To Do If You Don't Want to Disinherit Your Heir: Use Stipulations in Your Will

If you want to leave something for a lost or wayward child, you can always attach a few strings to an inheritance. In this way, you take a family tragedy and turn it into a hilarious, heart-warming comedy.
Now, you cannot just attach any stipulation you can think of to an inheritance. Everything has its limits. For instance, you cannot ask an heir to commit a crime. You cannot subject them to anything torturous, no matter how personally entertaining you might find those posibilities. If you want to make your heir miserable, you’ll have to double up on the emotional torture while you’re still alive. Disinheriting isn't the best option for haunting beyond the grave. Not that we recommend a life spent in resentment for anyone.
You also cannot ask an heir to divorce their partner. This topic is kind of a "fan-favorite," and comes up all the time. Most of us tolerate our children, but you may not relish the prospect of sharing your money with your money-grubbing in-laws. Nonetheless, most courts view such a request as a violation of public policy because it promotes divorce.
We'e previously covered how to use wills and trusts instead of disinheriting your heirs. I recommend you read that as well if you're considering this process.
 

Why You Need a Lawyer's Help With Estate Planning for Your Heirs

You should talk to a lawyer about what kinds of stipulations you can place on an inheritance. You might demand that your heirs do something with their lives, from maintaining stable employment to educating themselves, before they can access what you leave behind. This will teach them to fish for themselves before you give them all of your catch.
If you need help disinheriting, adding stipulations to your will, or otherwise planning your estate, contact us today. At Royal Legal Solutions, our experts can help with all phases of the estate planning process.
 

Choose Royal Legal Solutions For Your 401k

Lots of companies claim to be 401k experts. You know what the difference is between us and them?
We’re actual tax attorneys. That’s right. Instead of having your finances planned by some guy with a printed certificate from an online university, you’ll get a real tax lawyer, as in an educated and trained tax professional. Some other Solo 401k providers will offer you Employee Retirement Income Security Act guidance that they are not qualified to give.
We also work with sharp, detail-oriented CPAs to ensure your compliance Additionally, we offer lots of free educational information on your part in keeping your 401k compliant.
 

Why You Don't Want To Skimp on Retirement Planning

Other companies will tell you that you don’t need a tax attorney or specialized professional to establish a 401k plan. They’re right. You technically don't. But if you want to save money and stay off the IRS naughty list, you want to get your 401k done and managed right. That's what Royal Legal Solutions can help you do.
The problem with trying to save money initially is that you'll end up paying to repair the damage in the long run. If you're unfortunate enough to hire a less-than-stellar outfit to create and manage your 401k, you'll end up needing an attorney to clean up the mess eventually. We’re just trying to save you that first costly step. Pass on the amateurs. Go with the pros at Royal Legal. Unless you enjoy extra attention from Uncle Sam.

401ks Work Best For You With Qualified Professional Assistance

The Solo 401k plan is based on the rules of the Internal Revenue Code. This is a complicated document that tax professionals are paid to understand. Royal Legal’s experts know the code inside and out. They make it work to your best financial advantage every time.
Royal Legal will help you retire earlier and wealthier. Other providers forget about you once your retirement plan has begun. You’ll be able to consult with our expert navigators when you get lost in some of the murkier waters of investment and retirement planning.

How Royal Legal Solutions Helps You Retire Wealthier

We take care of your annual maintenance so that you’re investment plan maximizes growth and always remains in compliance with IRS regulations.
We’ve helped thousands of people across North America achieve great success with their Solo 401ks. Call Royal Legal Solutions today for your personal retirement planning consultation. Let us help you achieve your financial goals.

How to Get Out of Annuities

Annuities promise some pretty amazing things including a lifetime of income for you and your partner. They also carry some very sizable fees. There are some benefits, such as no maximums on annual contributions and tax deferral, but they aren’t right for a lot of investors.

What is an Annuity and How Do I Get Out of One?

An annuity is a contractual agreement with an insurance company. You invest money with the company and they agree to pay you a specific amount of money over your life. Like most investments, you give up some money now and the insurance company will pay you later.
Most people who own an annuity with an IRA are seeking a new investment plan for those retirement dollars. Dumping annuities is harder to do than selling mutual funds or stocks. Which is a problem for those people who are realizing that their annuity isn’t working for them they want had hoped.

Cancelling Annuities: Beware the Surrender Penalty

You can cancel your annuity, but will be subject to a surrender penalty. There is no way around it. You get penalized if you take out your investment early, so short of taking a hefty financial hit, you have to wait for the time to elapse. During this surrender period they penalty usually will go down. It can as high as 10% at ten years, but the penalty will decrease by 1% a year until it reaches 0. Like so many things retirement related, you may have to practice some patience again unless you think an alternative investment is really worth taking the loss.
If you do bite the bullet and cancel, your funds need to stay within your IRA to avoid taxes and penalties with the IRS. You could get smacked with a double whammy here so keep that money where it’s going to grow.
A lot of people have found themselves stuck with annuities that aren’t working for them. It’s not an easy choice to make, but if you think it’s worth it, you can get out. Follow these tips to mitigate the loss if you want to increase the return on your investment.

Bottom Line: Know What You're Investing In

In the future, make sure you understand an investment before you make it.
If you're unsure of an investment, there are a number of questions to ask about potential investments. Doing your homework can save you a lot of money and grief. When in doubt, get an opinion from a qualified expert now so you won't regret your investment later.

Protect Yourself from Swimming Pool Liabilities

For those that don't remember, we're going to start with a real case that was all over the news. You may have even heard about it at the time.

We're doing this to make some general points about the risks all pool owners face. Being rich and famous won't save you from an improperly maintained or managed pool. It sure didn't help Demi Moore.

Swimming Pool Lawsuit Case Study: What Happened to Demi Moore

Demi Moore’s assistant had a pool party in 2015 at Demi Moore’s California home where alcohol was served. Somebody drowned. It was an unfortunate accident and Demi Moore, who wasn’t even at the party, was quickly swimming in litigation. 

It sounds so ridiculous it could be the plot of one of Demi’s erotica thrillers.

There are carefully outlined state safety regulations that you have to comply with if you don’t want to end up on the witness stand with Tom Cruise screaming at you. In most states you are responsible for keeping your pool reasonably safe.

It doesn’t matter that it was Demi’s assistant who held the party. Demi owns the pool. Demi is responsible.

Understanding How Swimming Pool Lawsuits Happen 

There are two ways you can be considered too lazy, cheap or careless to own a pool under the law:

#1 You violate a local pool safety law

In this case, you’re strictly liable, like Demi Moore.

The solution here is simple. Bring your death trap up to code. Find out what the law is and comply. Build a fence and put on a pool cover. These are the basics.

# 2. Your pool is deemed “unsafe”

This is trickier, from a liability standpoint. Broken fences, rusty nails, lack of depth markings, and more can make a pool unsafe. Once again, this varies, but I’m sure through the use of the computer you are using to watch this video, you can figure out your local regulations. Better yet, contact an asset protection attorney to help you understand them.

Here’s another issue, and this one is key. If you party by your pool and your friends enjoy drinking cocktails, you may want to consider hiring a lifeguard for the afternoon. Preferably a sober lifeguard.

It’s a small expense that may keep somebody alive. If the conditions at the party are deemed unsafe (SEE: Rooftop cannonball championships) you might be on the hook.

Remember, like Demi, you might be liable even if you are not at the party so be sure that there are safety measures in play. It’s the summer time, so party hard. Just don’t end up paying for it.

In short, if you own the pool, you are responsible for its compliance with safety regulations. Landlords must keep this in mind when considering tenants. But you also have to make sure that everything you own is up to those same safety standards. Sorry fellas, but it’s not all collecting rent checks. Even trespassers can hold you liable if they get hurt in your unsafe pool.

How to Prevent Swimming Pool Lawsuits

Here’s a short summary of what you need to do if you want to avoid fishing dead bodies out of your pool and the costly lawsuits that come with it.

1. Comply with all safety requirements for your city and state. If you can’t afford them, you can’t afford a pool. But you’re a good little saver. Maybe next year.
2. Include a clause or separate pool disclosure and waiver. This is a tip for landlords or investors with rental property. Taking a few minutes to do this could save your ass in court. That way if some fool wants to work on his swan dive after his tenth martini, he’s already assumed the liability at least in part.

Your waiver should include the following:

Asset Protection with Royal Legal Solutions Can Keep You Above Water

Losing your investment, as noted above, is terrible. Losing your house is much worse. When it comes to owning a pool, be PROACTIVE with your liability before you have to be REACTIVE to a lawsuit.

Yes, there is work, responsibility and expense here, but you need to own a pair of big boy trunks before you go swimming in liability. Royal Legal Solutions can help you address legal matters relating to  your pool and construct an asset protection plan that keeps you out of court. If you would like advice on how to navigate this issue or begin protecting your assets like the pros, send us a message take our quick investor quiz for landlords and investors.

Rollover IRAs Explained

An IRA rollover is a transfer of funds from one retirement account into another, such as a traditional IRA or Roth. 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 account which you will then deposit into the other account.

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 roll over 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 401k), 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.

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.

Why Not?

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.

 

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.

How To Flip Houses & Avoid UBTI/UBIT

First of all, I'd like to commend all you house flippers out there. Flipping houses isn't easy--not unlike some less honorable professions. But you know what makes it a little easier? Avoiding unnecessary contributions to Uncle Sam. Let's talk about the best way to flip houses and limit or avoid UBTI/UBIT.

Use a Self-Directed IRA for Flipping Houses

With a Self-Directed IRA, you can flip homes or engage in real estate transactions funded with your retirement savings by simply writing a check. As owner of your Self-Directed IRA LLC, you will have the authority to make real estate investment decisions on your own without having to wait for the consent of an IRA custodian.
Another advantage of using a Self-Directed IRA to flip homes is when you want to purchase a home with your self-directed IRA, you can make the purchase, pay for the improvements, and sell or flip the property on your own without involving an IRA custodian.

Did I forget to tell you all the money you make from flipping houses using a Self Directed IRA will be tax free? This is true, believe it or not. However, there are a few things you need to watch out for.

Understand and Avoid UBTI & UBIT

When engaging in a real estate transaction, like flipping a house, you should always be mindful of the Unrelated Business Taxable Income rules (also known as UBTI or UBIT).
The purpose of the UBTI and UBIT rules is to make sure those who are traditionally tax exempt, (IRA's, charities and 401k's) are taxed as a for-profit business when they engage in active business activities or use leverage.
The UBTI or UBIT rules generally 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.”
Overview of The Three UBTI/UBIT Aspects
Trade or Business
The rules start with the concept of “trade or business” listed by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.”
The tax code is vague on this issue, but by using Section 162 as a reference you can limit the term “trade or business” to profit oriented activities involving the tax exempt entity. Let's break down the language.

"Regularly Carried On"

The UBIT or UBIT rules only applies to income of an unrelated trade or business that is “regularly carried on” by an organization.
Whether a trade or business is "regularly carried on" is determined by comparing what the tax exempt entity does to non-tax exempt entities. Basically, tax exempt entities can't do things that are deemed "commercial".
Unless they want to start paying taxes.

"Unrelated"

In the case of an IRA or 401k plan, any business activity will be treated as “unrelated” to its exempt purpose. This can be confusing, I know.
For IRA's and 401k's, a transaction would not trigger the UBTI or UBIT rules if the transaction is deemed not to be considered a trade or business that is "regularly carried on".
Activities which wouldn't trigger UBIT OR UBTI include capital gains, interest, rental income, royalties, and dividends generated by the IRA/401k. The passive income exemptions to the UBTI or UBIT rules are listed in Internal Revenue Code Section 512.

But if you, as a tax exempt entity, engage in an active trade or business, such as a restaurant, store, or manufacturing business, the IRS will tax the income from the business since the activity is an active trade or business that is regularly carried on.

How Do The UBTI/UBIT Rules Apply to Flipping Homes?

So now you're probably wondering what kind of real estate transaction will trigger the UBTI or UBIT taxes. As I mentioned earlier, the IRS is unfortunately vague on issues like this. What a coincidence, right?
There's no telling how many houses you have to flip in order to trigger the UBTI or UBIT tax. But the IRS does have a number of factors it will use to determine whether you've engaged in a high enough volume of real estate transactions, such as home flipping, to trigger the UBTI or UBIT tax.
3 Factors The IRS Uses:

What Happens If You Trigger UBTI or UBIT?

If it's determined that an activity/transaction you engaged in is an active trade or business transaction, you will trigger the UBTI or UBIT tax, which is taxed at a rate of approximately 40% for 2017.
The 40% rate can be lower or higher, depending on the facts and circumstances of your situation. What you should know is that one or two flipping transactions per year wouldn't be considered an active trade or business and wouldn't trigger the UBTI or UBIT tax.

Final Thoughts on Flipping and UBTI/UBIT: One Size Doesn't Fit All

Now, knowing the real estate tycoon that you are, you're probably asking yourself, what happens  if you do 4 or 5, or even 10 flipping transactions in a year? Would that be considered an active trade or business causing the UBTI/UBIT taxes to get triggered?

The answer to your question largely depends on the circumstances of your unique situation. It's all about how and why you flip the houses, not how many you flip. At least, that's how your friends at IRS see it anyway.

 

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

A Series Of Landmark Prohibited Transaction Cases, Part IV: Dabney Vs The IRS

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

Because the prohibited transaction rules are so broad, the scope of their enforcement is as well. You'll probably agree with what I'm saying if you've read the previous articles in this series.

We've seen Self-Directed IRA investors lose their bankruptcy protection, gains, and even their entire IRA account, simply because they failed to properly follow the prohibited transaction rules.

The case we're about to go over below is different from our earlier cases because it doesn't actually involve a prohibited transaction. Of course, the IRS tried to pin this on him anyway. But what it does involve could happen to any of us: a mistake in judgment.

Dabney Vs The IRS: Background

Back in 2008, Mr. Dabney rolled over funds from an IRA at Northwest Mutual into a pre-existing Self-Directed IRA he had with Charles Schwab. After this, he learned of a piece of undeveloped land in Brian Head, Utah that was for sale. Mr. Dabney believed the land was priced below its fair market value.
He then conducted some Internet research and came to the conclusion that IRAs are permitted to hold real property for investment. He then set out to have his Charles Schwab IRA purchase the Brian Head property.

Mr. Dabney also contacted his CPA (Certified Public Accountant). The Schwab customer service line told Mr. Dabney that he would not be able to make the real estate investment with his IRA at Charles Schwab as they did not permit such investments with IRA funds.
(Of course they wouldn't. There's no money in it for them.)

Mr. Dabney Makes a "Creative" Real Estate Purchase

After carefully considering his telephone conversations with the Charles Schwab customer service representative and his CPA, as well as his own internet research, Mr. Dabney arranged what he believed to be an "IRS approved" way to have his Charles Schwab IRA purchase the Brian Head property.

Mr. Dabney proceeded to wire $114,000 directly to the bank account of Chicago Title and purchased the property. He told them to put the property under the name of “Guy M. Dabney Charles Schwab & Co. Inc. Customer. IRA Contributory”.

He planned to then resell the property for a profit and to contribute the proceeds of the sale back into his IRA. Mr. Dabney believed that the property would not need to be managed by a trustee as long as he did not use or "enjoy" the property.

Although he had hoped to sell the property sooner, Mr. Dabney was unable to find a buyer until 2011. It was then that Mr. Dabney discovered that the property was incorrectly titled in his own name.

Upon discovering this error, Mr. Dabney sought and received a scrivener's affidavit from Chicago Title, which means the company admitted the error was their fault.

Mr. Dabney then sold the Brian's Head property and received $127,226 on the sale, after taxes and fees, which was about $13,000 profit. That amount was wired back directly into his Charles Schwab IRA around January 28, 2011.

Mr. Dabney’s CPA prepared his Form 1040, U.S. Individual Income Tax Return, for 2009. Charles Schwab issued Mr. Dabney a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for 2009, although Mr. Dabney said he didn't receive it.

The Form 1099-R stated that he had received a $114,000 early distribution from his Charles Schwab IRA and that no exceptions to the early distribution penalty applied. Mr. Dabney did not report the withdrawal on his Form 1040.

The Court's Conclusion

The Court confirmed that an IRA is allowed to hold real estate, but that the law does not require an IRA trustee or custodian to give the owner of a Self-Directed IRA the option to invest IRA funds in any asset that is not prohibited by statute, such as real estate.

The Court further held that the withdrawal of the IRA funds from Schwab was not considered a tax-free direct rollover, which means he was subject to a 10% fee. On the bright side, the court did not hold Mr. Dabney liable for the 20% understatement penalty, citing that he had acted in "good faith".

What Real Estate Investors Can Learn From The Case 

The traditional financial institutions and banks, such as Charles Schwab, etc, don’t make money when you invest your IRA funds in alternative investments, like real estate, and as a result, will not allow you to do so.

To that point, the Tax Court was clear in stating that an IRA custodian is not required to provide its IRA clients with the ability to invest in all IRS permitted investment options if they don't want them to.

In the words of the Tax Court "The flaw is not in Mr. Dabney's intent but in his execution." If Mr. Dabey had initiated a rollover or a trustee-to-trustee transfer from his IRA to a different IRA (one that is permitted to hold real property) he would have won this case hands down.

The Dabney case is a great example of why you want to use a special Self-Directed IRA custodian, such as Royal Legal Solutions when making alternative asset investments with an IRA. A small mistake can cost you thousands, which is far more than the cost of hiring a custodian.
The tax code is vast and can be overwhelming for someone who lacks years of experience in dealing with them as well as the IRS. Save yourself the money and the court dates and get a Self-Directed IRA custodian if you're not 100% sure you won't be triggering a prohibited transaction or some other penalty.

I hope you enjoyed this series of articles and learned a thing or two about directing your own investments.

To learn how to take control of your future and your retirement savings with a Self-Directed IRA LLC, 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