How To Purchase Real Estate With A Self-Directed IRA (And Save Taxes In the Process)

Wall Street has successfully fooled the majority of American investors into believing they can only invest in stocks, bonds, mutual funds or bank CDs. If you've fallen for this, you're not alone. But we're about to teach you how to break free.

The truth is, you can you invest in virtually anything you want with a Self-Directed IRA LLC (excluding collectibles and art). Even better, you don't even need a custodian in the middle to do it.

Real estate is the most popular Self-Directed IRA LLC investment, particularly among our clients. Why? Because there are many advantages, tax benefits, and other little tricks which are only accessible to real estate investors who use a Self-Directed IRA LLC.

Let's go over the biggest perks below.

Advantages of Using a Self-Directed IRA LLC to Purchase Real Estate

Income or gains generated by a Self-Directed IRA  LLC are tax-deferred. Which means you can invest tax free and not have to pay taxes right away, or in the case of a Roth IRA, ever.

Tax Advantages Of Buying Real Estate With A Self-Directed IRA LLC

When you buy real estate with a Self-Directed IRA, instead of paying tax on the returns of a real estate investment, tax is paid only at a later date, allowing your real estate investment to grow quickly.

The key to investing in real estate with a Self-Directed IRA LLC is to do so when you're earning high income (and being taxed at a higher rate.) Then when you start making less money (and get taxed at a lower rate) you should make withdrawals because your withdrawals will be taxed at a lower rate.

After 20 years your $200,000 investment would be worth $349,572 after taxes on your earnings. Whereas, if you had made the investments with taxable, personal funds (non-retirement funds), in 20 years your investment would only be worth $320,714.

Popular Types of IRA-Funded Real Estate Investments

Below is a small list of real estate related investments you can make with a Self-Directed IRA LLC (foreign and domestic):

And that's actually the short list. There are many more opportunities available.

The Differences of Investing With a Self-Directed IRA LLC

Buying real estate with a Self-Directed IRA LLC is essentially the same as buying real estate personally. Except you have way more benefits and advantages when you do it with a Self-Directed IRA LLC.

But there are a few differences as far as the "backend" is concerned:

How To Make Real Estate Investments With a Self-Directed IRA LLC

When using a Self-Directed IRA LLC to make a real estate investment there are a number of ways you can structure the transaction:

Partnering with your family & friends to make a real estate purchase won't trigger a prohibited transaction if your Self-Directed IRA LLC is set up correctly. For this reason, it's important that you get professional help to establish your Self-Directed IRA LLC.

Also, when it comes to borrowing money, you must use a non-recourse loan. That is, unless you want to trigger a prohibited transaction and pay the taxes below.

If you do trigger a prohibited transaction, you will be paying UBTI (Unrelated Business Taxable Income) Tax. You will be taxed at the trust tax rate because your IRA is considered a trust. For 2018, a Self-Directed IRA LLC is taxed at the following rates:

Why Should You Buy Real Estate Using a Self-Directed IRA LLC?

There are so many benefits to using the self-directed IRA LLC for your real estate investments that we have written multiple previous articles on the subject. Check out some of our top reasons to use a Self-Directed IRA LLC in greater detail. But we'll go over the basics here. The top four reasons investors use this method include the following:

Royal Legal Solutions Can Guarantee Your Tax Efficiency & Compliance

Tax-Free Investing: Be happy like this man

As you can see, there are so many advantages and benefits when it comes to investing in real estate with a Self-Directed IRA LLC.

However, in order to enjoy those benefits you have to make sure that everything is structured correctly from a legal standpoint. The legal aspects are what matter for protecting you and your hard-earned money from the IRS.

Royal Legal Solutions can guarantee that your Self-Directed IRA LLC is set up correctly and kept up to date with all future IRS regulations. Your satisfaction is our greatest priority.

401(k) For The Self Employed: What Kick-Ass Entrepreneurs Should Know

A self-directed 401(k) for self-employed business owners isn't the same as an employer-funded retirement plan.

And if you're a kick-ass entrepreneur, a solo 401(k) is a kick-ass way to save for retirement. Why? Because this unique plan offers the ability to use retirement funds to make any type of investment on your own without requiring the consent of a custodian.

The following are some examples of the types of investments you can make with your solo 401(k) :

Indeed, you can make just about any type of investment except art and collectibles.

solo 401k self employed

Who Benefits The Most From a Solo 401(k) Plan?

The solo 401(k) plan is designed specifically for small, owner-only businesses. It’s a tax-efficient and cost-effective plan that offers all the benefits of a self-directed IRA, and includes a couple of unbeatable benefits, such as high contribution limits (up to $60,000 or $54,000 depending on your age) and a $50,000 loan feature.

There are many benefits and features of the solo 401(k) plan that make it useful to self-employed individuals. These features and benefits are what make the solo 401(k) plan so popular:

Roth Type Contributions

Roth IRAs have historically been unavailable to people with high incomes. But if you have a solo 401(k), you can use the built-in Roth sub-account which can be contributed to regardless of how much money you make.

Flexible Investment Options

As I mentioned above, you can make almost any type of investment, including real estate and private stock, and then channel them back into your solo 401(k) tax-free.

Loan Features

I also mentioned earlier how the solo 401(k) allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose. The interest rate on this loan will be the prime interest rate, which is around 4% give or take.

But be careful, failing to pay back this loan will "displease" your friends at the IRS to say the least!

UDFI Exemption

Most IRAs generate Unrelated Debt-Financed Income (a type of Unrelated Business Taxable Income) when they buy real estate. Which means they'll end up paying more taxes. Thankfully, a solo 401(k) plan is exempt from UDFI.

Sky High Contribution Limits

Under the 2017 solo 401k contribution rules, if you're under the age of 50 you can make a max contribution of $18,000. This amount can be made in pre-tax or after-tax dollars.

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

If you're over the age of 50 everything is the same, except your contribution limit, which is $60,000 instead of $54,000.

Consolidation

A solo 401(k) can accept rollovers of funds from any other retirement account, such as an IRA, a SEP, or a previous 401(k).

Employee Elective Deferrals & Employer Profit Sharing

For 2017, you can contribute up to $18,000 per year through employee elective deferrals. An additional $6,000 ($24,000) can be contributed for persons over age 50. These contributions can be up to 100% of your self-employment compensation.

As an employer, you can make an additional contribution of up to 25% of your self-employment compensation.

Total Limit

As I mentioned earlier, the contributions to a solo 401(k) are capped at a max of $54,000 per year or $60,000 for persons over age 50.

But if your spouse also participates in the Solo 401(k) with you and earns compensation from the business, the spouse is allowed to make separate and equal contributions.
This would increase your combined annual contribution limit to $108,000 (or $120,000 if both spouses are over the age of 50).

Cost-Effective Administration

The solo 401(k) is not only easier to administrate, but it's also cheaper! There is no annual filing requirement unless your solo 401(k) plan exceeds $250,000, in which case you will need to file Form 5500.

Do Self-Employed Solo 401(k) Owners Need a Custodian?

Nope! The most cost-effective benefit of the solo 401(k) is that it does not require you to hire a bank or trust company to serve as trustee. This allows you to serve in the trustee role.

This means that all assets of the 401(k) trust are under your sole authority. You won't have to pay fees, or wait for a custodian's consent, unlike most other people with retirement accounts! And then you'll also be able to invest in almost anything by simply writing a check.

Click here to watch videos on Solo 401(k) and other retirement planning tools

Are There Any Administration Costs or Maintenance Fees With a Solo 401(k)?

Yes and no. You won't have to pay a custodian, so that kills 90% of the fees right there.

As for maintenance cost, there is generally no annual filing requirement unless your solo 401(k) plan exceeds $250,000 in assets. If you have more than $250,000, you'll need to fill out Form 5500.

Besides the $250,000 filing rule, you're not required to do anything else. However, I would advise you to keep all records, receipts, and contracts related to your solo 401(k) and its investments on file. So, if you hire someone to do those things for you, that will probably be your biggest administrative cost.

Do you want to learn more about solo 401(k) to see if it's the right option for you? Check out our previous article to find out if you're eligible for the solo 401(k).

10 Tips To Help You Boost Your Retirement Savings (At Any Age!)

It's never too early or too late to start saving for your retirement. If you are just starting out, focus on saving as much as you can now. And If you are nearing retirement, consider increasing contributions to your savings or delaying Social Security.

This might surprise you, but the earlier you start saving, the better. Even at the age of twenty, $1000 invested every year will earn you as much as if you were to invest $5000 monthly at the age of 50.

And even if you began saving late or have yet to begin, it's important to know that you are not alone. This article will offer you some tips to start increasing your retirement savings.

Remember, it's never too late to get started. You know what they say, better late than never!

Consider the following tips, which can help you boost your savings-no matter what your current stage of life-and pursue the retirement you envision.These pieces of advice will help you boost your savings so when you retire you'll be able to live the life you want or even leave a lasting legacy.

  1. Start saving now!

Time is a precious commodity, and nothing makes your invested dollars more valuable than compound interest. Compound interest will allow your investment to grow without costing you anything. That's why $10,000 today has the potential to be worth $30,000 in ten years.

  1. Set A Goal!

Setting a goal gives you something to strive for. Ask yourself, why do you want to save money for your retirement? Once you figure out why, make it your goal and you'll never lose sight of it!

  1. Put Your Money In A 401k If You Can.

Many employers offer traditional 401k plans. 401ks allow you to contribute pre-tax money, which can be a significant advantage.
Let's say you're in the 20% tax bracket and plan to contribute $100 per pay period.

Since that money comes out of your paycheck before taxes are assessed, your take home pay will drop to $80. That means you can invest more of your income now without lowering your standard of living.

Your employer may also offer a Roth 401k, which uses income after taxes rather than pre-tax. You should consider what your income tax bracket will be in the future when you reach retirement to help you decide whether this is the right choice for you.

  1. Meet Your Employer's 401k Match.

Many employers will not only offer you a 401k, but they'll even offer to match your 401k contributions (for every $2 dollars you contribute they might contribute $1, etc). Make sure you contribute at least enough to take full advantage of the match.

For example, your employer may offer to match 50% of your contributions up to 5% of your salary. That means if you earn $100,000 a year and contribute $5,000 to your retirement plan, your employer would contribute another $2500.

That's free money. Don't miss out!

  1. Open An IRA. (Individual Retirement Savings Account)

I realize not everyone is lucky enough to have a 401k option. But anyone, including you, can establish an IRA to help build savings for retirement.
You have two options: Traditional IRAs, where your money will grow tax free until you decide to start taking distributions and Roth IRAs, where you pay taxes upfront on the money you contribute instead of later when you retire.

Traditional IRAs are great for those who don't have as much money to invest with initially. Meanwhile Roth IRAs are a good route to go if you plan on being in a higher tax bracket then you are now upon retirement.

  1. Take Advantage Of "Catch-Up" Contributions.

One of the reasons it's important to start saving early if you can is that yearly contributions to IRAs and 401(k) plans are limited.

So what's the good news? Once you reach age 50, you’re eligible to go beyond the normal contribution limits with catch-up contributions to IRAs and 401ks.

If you haven't been able to save as much as you would have liked, catch-up contributions can help boost your retirement savings. Take a look at the chart, below, for contribution limits for individuals over the age of 50.

  1. Automate Your Savings.

Make your retirement contributions automatic each month and you'll be able to grow your retirement savings without having to think about it. Ever. Or at least until you retire.

  1. Cut Down On Expenses.

Are you going to out to eat every day? That could cost you thousands of dollars a year. Even if it's just a cup of coffee from Star Bucks. Also, try lowering your insurance premiums or your premium channel subscriptions. You can negotiate for lower rates, believe it or not!

  1. Save Extra Money.

Did you get any extra money? A raise at work, a winning lottery ticket, unexpected gift? Don't just spend it. Save it instead.

I know as well as you do that it can tempting to take your tax refund or salary bonus and splurge on designer fashions, a vacation or a car. But the question is, do you want to live better now or later when you retire?

  1. Delay Taking Social Security.

I know, who would think of doing such a thing? Age 62 is the earliest you can begin receiving Social Security benefits, but for each year you wait (until age 70), your monthly benefit will increase by the hundreds, adding up to several extra thousand dollars per year.

That's all for our top ten retirement tips. If you have questions, fire away in the comments below. If you're wondering what the best plan for your circumstances is, schedule your personal retirement consultation with Royal Legal Solutions today.

A Series Of Landmark Prohibited Transaction Cases, Part Three: The Kellermans

This article is part 3 of a series with the goal of educating you, the Self-Directed IRA LLC investor, on how to successfully invest and avoid triggering prohibited transactions.

If you've read parts 1 and 2, get ready for something completely different. The case we're going to go over today is about bankruptcy, something I hope you never go through!

Oddly enough, with Self-Directed IRA LLCs, you have a bit of an advantage as far as protection from creditors is concerned. But as you will find out by the end of this article, once you go in too deep, there's no way out.

The Beginning: The Kellermans File For Bankruptcy

The Kellermans, for whatever reason, decided to file for voluntary Chapter 11 bankruptcy. Prior to filing for bankruptcy, Barry Kellerman created an IRA, which as of October 27, 2008, had a reported value of $252,112.67.

The named administrator of the IRA is Entrust Mid South LLC. The IRA is Self-Directed by Barry Kellerman, who made all of the decisions related to the issues raised in the objections.
At the start of their case, the Kellermans valued their IRA at $180,000.00 and claimed the entire fund as exempt under the Bankruptcy Act.

The trustee in the bankruptcy case against the Kellermans objected to the Kellermans’ claimed exemption in the IRA on the basis that it was no longer exempt from taxation as of the commencement of the case and is not eligible for exemption.

The trustee alleged that the IRA lost its exempt status in 2007 because Barry Kellerman directed the IRA to engage in prohibited transactions involving disqualified persons.

The Kellermans' LLC and Its Alleged Prohibited Transactions

The alleged prohibited transactions involved the 2007 purchase of four acres of real property located near Maumelle, Arkansas. Panther Mountain Land Development LLC helped setup the purchase.

Barry Kellerman and his wife each own a 50 percent interest in Panther Mountain. To effect the acquisition and development of the four-acre property, the IRA and Panther Mountain formed a partnership whereby the IRA contributed property and Panther Mountain contributed property and cash.

The purchase took place to assist in the development of two nearby tracts of approximately 80 and 120 acres owned by Panther Mountain. Controlling the 4 acre tract assisted in the development of the other Panther Mountain properties.

The Plot Thickens

Interestingly enough, Panther Mountain filed its own Chapter 11 bankruptcy on September 20, 2009 after the Kellermans filed for bankruptcy on June 3, 2009.

Even more interesting is that the Kellermans admitted that they are “disqualified persons". Specifically, Barry Kellerman is the beneficiary of the IRA and a fiduciary because he exercises “discretionary authority” and “discretionary control” over the IRA as the owner.

Dana Kellerman qualifies as a “member of the family” as the wife of Barry Kellerman. Panther Mountain is a “disqualified person” according to 4975(e)(2)(G) because Barry Kellerman asserts a 50 percent membership interest. Likewise, the Entrust Partnership is also a disqualified person according to subsection 4975(e)(2)(G).

Remember: in this case it is already clear that a prohibited transaction occurred. The debtors are only seeking bankruptcy protection.

The Court Rules Against The Kellermans

Based on the Kellermans' admittance and the court's findings on disqualified persons, all that remained was a determination of whether a prohibited transaction occurred that terminated the tax exempt status of the IRA.

The court concluded that in 2007, Barry Kellerman engaged his IRA in transactions including the purchase of the real property with IRA funds and the cash contribution of $40,523.93 made by the IRA to the Entrust Partnership.

Both collectively and individually, both the non-cash contribution and the cash contribution are prohibited transactions with disqualified persons according to IRC Sections 4975(c)(1)(B), (D), and (E), which rendered their IRA non-exempt.

Hidden Details

What was not stated above is that, during Panther Mountain's own bankruptcy filings, (which were happening around the same time) they made it seem as if they were using the Kellerman IRA as a lending source for the purchase and development of property.

So then, the real purpose of these transactions was to directly benefit Panther Mountain and the Kellermans in developing both the four acres and the properties owned by Panther Mountain.
Here's a shocker. The Kellermans each owned a 50 percent interest in Panther Mountain and stood to benefit substantially if the four acre tract and the adjoining land were developed into a residential subdivision.

Case Outcome & Summary

The Kellerman case involved a construction company's owners, the Kellermans, who were also LLC co-owners. They were denied a claim for bankruptcy estate exemption for Mr. Kellerman’s Self-Directed IRA.
The court found that Mr. Kellerman who, along with his wife, were disqualified persons who had engaged in prohibited transactions by:

  1. By directing their IRA to deliver property as a non-cash contribution to an IRA and LLC.
  2. By making cash contribution to partnerships to develop property.

You can view the full case here.

What Real Estate Investors Can Learn From The Kellermans 

This case is a clear example that using retirement and personal funds together in the same transaction can trigger a prohibited transaction.

The Kellermans entered into a transaction with their IRA funds, which involved a disqualified person, in this case Panther Mountain. Because they did that, they then had the burden of proving the transaction didn't violate any of the self dealing or conflict of interest prohibited transaction rules under IRC Section 4975.

A burden that, as this case shows, can be difficult to prove.

So here's the lesson we've all learned from the Kellermans: Using retirement funds and personal assets in the same transaction can potentially trigger the prohibited transaction rules.

Don't end up like the Kellermans!  If you're interested in learning more about Self-Directed IRA LLCs, we have many free resources for you to read about investing with these entities. If you're going to set up your own, get the job done right: contact Royal Legal Solutions now.

Forget Wall Street: 6 Reasons To Form a Self Directed IRA LLC

You're living in the 21st century now, which means you don't have to put all your eggs in one basket when it comes to investing.

With a Self-Directed IRA LLC (Limited Liability Company) you can take back control of your retirement and receive higher returns from your investment dollars.

Here's 6 reasons why you should forget about Wall Street and form a Self Directed IRA LLC:

1. To Purchase Non-Traditional Assets

It's might be hard for you to forget about Wall Street, when for nearly a hundred years people have been told that they could only invest their money there. But with a Self Directed IRA you can move beyond Wall Street and invest in a whole new world of opportunity.

A Self Directed IRA LLC will allow you to use your IRA funds to make self directed investments in “non-traditional” assets of your choice. Most Wall Street IRA custodians only allow you to invest in stocks, bonds, mutual funds, annuities, CDs and other traditional investments.

The problem is, while traditional investments are numerous, they only make up a fraction of the profitable assets you can purchase and hold for investment.

2. Checkbook Control

With an IRA, you can be the manager of your own IRA LLC, but you can't be compensated for services or use your funds to pay any of the IRA LLC’s expenses. Doing so would make your friends at the IRS angry and cost you big time.

3. Asset Protection

In most states the owner of an LLC isn't liable for the debts or obligations of their LLC.

For example, in Arizona the law is that the members (owners) of an Arizona LLC are not liable for the debts or obligations of the LLC. This is an especially important factor when the IRA LLC has members who are not IRAs.

However, there are rare instances where a member's personal assets can be pursued by creditors, such as if they act as a guarantor for a loan to fund the LLC and fail to pay it back.

4. To Pool Assets with Other Investors

Banks have recently tightened up on their lending regulations, which means it's become harder for real estate investors to secure capital to acquire property. This has become a major obstacle for many real estate investors.

When the cost to acquire an asset exceeds the funds available to you,  combining your money with other investors may be the only way you can purchase an asset. A great way for investors to pool assets is through an IRA LLC.

Your IRA and other investors contribute money to the IRA LLC and then use the LLC funds to purchase the asset. An IRA LLC can have multiple members including more than one IRA, people and entities as long as the prohibited transaction rules are not violated. (I will go over the rules towards the end of the article.)
Not only do you get the benefit of having your money combined under legal and contractual guidelines, but you also get the protection an LLC offers, such as protection from creditors and lawsuits.

5. To Create A Legal & Organized Structure When There Are Multiple Members

It can be hard to decide what to do with an asset when several people own it. An IRA LLC provides a legal governing structure, rules and policies to how the joint owners will operate the company and deal with its assets.

You shouldn't rely on oral statements or agreements. An Operating Agreement signed by all of the members of your LLC will provide the firm foundation from which you all can make decisions together.

For example, an Operating Agreement will prevent members from being "lone wolves" and doing something that the majority of the members disagree with, such as entering into an unprofitable contract.

6. To Make Day-To-Day Property Management Easier

If you purchased a complex asset, you will want a Self Directed IRA LLC to be the owner of that asset. For example, if you want to purchase a thirty unit apartment complex, you should form an IRA LLC to own and operate the apartments. Why?

Because you and your IRA custodian don't have time to be involved in the day to day operations of a thirty unit apartment complex, such as paying utilities, depositing rent checks, or evicting tenants.

And then think of the liability involved. Anyone of those tenants could sue you for a variety of reasons. An LLC will protect you from an "unhappy camper".

What Can't You Purchase With An IRA?

An IRA LLC may not purchase any of the following three types of assets:

What Are The Most Popular Self Directed IRA Investments?

Real estate is the most popular investment people make with self directed IRA funds.
IRA funds can be used to purchase homes, condos, duplexes, penthouses, raw land, office buildings, shopping centers, factories, mobile home parks and all other types of  commercial and residential real estate.

What Are The Consequences if an IRA LLC Engages in a Prohibited Transaction?

Okay so I mentioned the prohibited transactions earlier. If your IRA purchased a prohibited asset (such as life insurance) or engaged in a prohibited transaction, your friends at the IRS would get extremely angry. They could dismantle your IRA, tax you until you bleed and make you pay fees on top of the taxes.

What are the Prohibited Transaction Rules?

All the prohibited transactions rules can be found in IRC Section 4975. The quickest way to sum those up is that a “prohibited transaction” includes any direct or indirect:

Who are Disqualified Persons?

IRC 4975(e)(2) states “the term ‘disqualified person‘ means a person who is:

The Bottom Line

If you're looking for more control over your retirement savings, you have multiple options to consider, including traditional self-directed IRAs and self-directed IRA LLCs with Checkbook Control.

There's also the IRS regulations, which if not followed to the letter could cost you thousands of dollars and waste all the time you spent securing a good investment return.

Depending on your level of investment experience & IRS knowledge, it can be hard for you to figure out all these financial and legal definitions. If you want help taking back control of your retirement, contact Royal legal Solutions today.

Are You Eligible For a Solo 401k? What About Your Employees?

Chances are if you're reading this you've probably heard of a solo 401k, which our friends at the IRS call a "one participant 401k." But what about solo 401k eligibility? Before you waste 5 minutes of your life reading my masterpiece, I'd like to let you know: if you're not self employed you aren't eligible for a solo 401k.

I know, some people just got their hearts broken. It'll be okay, trust me. You've got options. And you can read about the Roth IRA and conventional IRAs/401ks from our previous posts on the subjects. Anyway, for those of you who are self employed and interested in learning more about solo 401ks, read on.

Solo 401k Basics

The solo 401k was born out of the Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA. The idea is to give kick-ass entrepreneurs who'd rather work for themselves than "the man" an opportunity for tax-deferred retirement savings.

With that introduction out of the way, you should know there are some limitations to solo 401k eligibility.

What Are The Limitations Of a Solo 401k?

A solo 401k is limited to companies with one employee (you as the owner) although if you have a spouse then he or she can also contribute to the plan. Partners or shareholders can be included in the plan as well.

Your company can have part-time employees who are excluded from the plan, as long as they work less than 1,000 hours a year, or belong to a union or are non resident aliens.

But if your company takes on full time employees who aren't married to you (the boss), then your solo 401k will unfortunately have to be converted to an old-school 401k plan.

The solo 401k plan is available to anyone who is already a business owner or who will be establishing a sole proprietorship and does not have, or plan to have, full time employees.

The solo 401k is great for consultants, freelancers, home businesses, and independent contractors. So now I bet you want to know about the contribution rules huh. As a good host, I must oblige my audience.

Solo 401k Contribution Rules

If you're under the age of 50, you can make a max contribution in the amount of $18,000. This amount can be made before or after tax.

On the profit sharing side, your business can also make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to $36,000. That comes out to a combined max of $54,000.

Note: If you're over the age of 50, the contributions are the same, except you can contribute $6,000 extra.

The 2 Kinds Of Solo 401k Contributions

The solo 401k plan accepts two types of contributions: salary deferrals and a profit sharing contribution. Both are tax deductible and grow tax-deferred until withdrawals.

You can withdraw money from your solo 401k penalty free after you turn 59 1/2. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals must begin at the age of 70 1/2--but this rule doesn't apply if you go Roth style.

To fund a solo 401k, you can rollover funds from your previous retirement plans, IRAs etc,  by setting up a Trust account for the solo 401k and directly transferring your funds from the old custodian to the trust bank account.

A Trustee needs to be designated to hold the assets of your solo 401k, preferably you. However, if you do serve as Trustee, you cannot legally benefit directly from the trust, enter into a transaction with the trust, or use the trust as your personal fund.

Since a solo 401k is an IRS qualified retirement plan, it has to have a written 401k plan document that establishes the provisions of the plan. It's a lengthy document which will explain how the plan works and operates.

For example, the plan document will explain how you are able to borrow up to 50% or $50,000 (whichever is greater) from your solo 401k tax free, and literally for free. You pay interest, but the interest is paid into your account, so you're really paying yourself.

What Are The Technical Requirements For a Solo 401k Plan?

Great question! To be eligible for a solo 401k plan you must meet two eligibility requirements:

Allow me to explain these two lines in detail.

The Presence of Self Employment Activity

This basically means you should be the owner/operator of one of the following: sole proprietorship, LLC, C Corporation, S Corporation, or Limited Partnership where the business intends to generate revenue for profit and make contributions to the solo 401k plan.

There's no set amount of revenue for profit you should be generating. In most cases the IRS will consider you eligible if your business is legitimate and run with the intention of generating profits. You can be self employed either part time or full time, and even have another job somewhere else.

You can also participate in an employer’s 401k plan alongside your solo 401k. But if you choose to do this, your contribution limits will not be raised. (So a few thousand dollars contributed to your employer 401k will mean a few thousand dollars less you can contribute to your solo 401k.)

The Absence of Full-Time Employees

As you already know, a solo 401k is available to self employed individuals or small business owners who have no other full time employees.

The following types of employees are excluded from solo 401k coverage:

If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will have to include them in any plan you set up. You can get around this by employing independent contractors.

Once you have a solo 401k, you'll be able to invest in anything from real estate to cryptocurrency and more!

IRA & Real Estate Investments: What You Need To Know

If you don't have a self-directed IRA LLC, you've probably at least heard about them. Especially if you're a regular reader of this blog. Once you start looking for ways to invest your retirement funds outside of Wall Street, you'll realize there is no better way to do it than with an IRA-owned LLC.

The cost to establish a self-directed IRA LLC varies on where you go, but it usually will cost between a few hundred to about a thousand. Once you establish an LLC, a bank will serve as your custodian, which means you pay less fees and gain the ability to quickly invest your retirement money in anything except collectibles and life insurance.

We're talking about using the IRA for real estate investments, but the following are some other kinds of investments that can be made with your self-directed IRA LLC:

As you can see above, using a self-directed IRA LLC to make investments allows you to make traditional as well as non-traditional investments, such as real estate or cryptocurrency, in a tax efficient manner.If you'll direct your attention below, you can read about the most popular reasons to purchase non-traditional assets with your self-directed IRA LLC.

The Ability To Invest In What You Understand

One of the oldest pieces of advice in the world of investing is "invest in what you know". The chances are you've probably never met the person managing that mutual fund, or the CEO of that company doing an IPO next week.
Compare them to Real estate. You grew up around real estate. Remember when you bought your first home? Real estate is the one form of investing the average American knows about more than any other.
Real estate is just like any other form of investing, it's not without risk, but many retirement investors feel more comfortable buying and selling real estate than they do stocks.

Diversification

This is a no-brainer. You're always going to hear people talking about the importance of diversity. But the truth is there isn't much diversity on Wall Street. When you get a self-directed IRA LLC you won't just be thinking outside the box, you'll also be investing outside of it too!

Cryptocurrency

Cryptocurrency is one of the fastest growing investments. As of if this writing, the value of Bitcoin continues to skyrocket. For years it has been speculated that the price would crash, but so far it hasn't. With a self-directed IRA LLC, you can jump on the band wagon and cash in on the profits.

Loans & Notes

If you used a self-directed IRA LLC to loan money to a friend, all interest received would flow back into your IRA tax free. Whereas, if you lent your friend money from personal funds (non-retirement funds), you would pay taxes on the interest received.

Inflation Protection

Inflation can have a drastic impact on your retirement portfolio because it means a dollar today may not be worth a dollar tomorrow. Inflation increases the cost of things, so not only is your money worth less, everything also cost more.
Investing in real estate can provide natural protection against inflation, as rents tend to increase when prices do, acting as a hedge against inflation. People will always need homes to live in.

Just remember, being protected against inflation can mean the difference between retiring and working the rest of your life.

Hard Assets

Hard assets are things we can see and touch, like real estate and gold. They're considered non-traditional investments as well. Do you know what it feels like to drive by a building or property you own with your family, point to it, and say "We own that?" Once you invest in hard assets, you will!

Tax Deferral

Tax deferral literally means that you are putting off paying tax. Tax deferral means that all income, gains, and earnings, such as interest, dividends, rental income, royalties or capital gains, will grow tax free until you withdrawal (or distribute) the funds.

This means you can grow the money in your retirement account at a much faster pace and retire many years earlier. And, when you withdraw your IRA funds in the form of a distribution after you retire, you will likely be in a lower tax bracket and be able to keep more of what you saved.

Real Estate & Raw Land

Okay so I know I already mentioned real estate, but there's more you should know about using a self-directed IRA LLC.

Real estate is the most popular investment made with a Self-Directed IRA. Let's look at an example to see why.
Let's say you purchased a piece of property with your Self-Directed IRA for $200,000 and later sold the property for $150,000, the $50,000 gain would be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and, depending what state the property is in, state taxes.

Private Companies

With a self-directed IRA LLC you are permitted to purchase an interest in a privately held business, unless it's held by an S corporation.

Note: Remember to avoid the triggering a prohibited transaction!

Stocks, Bonds & Mutual Funds

By now you know that you can invest in just about anything. The advantage of using a self-directed IRA LLC is that you are not limited to investing only in traditional Wall Street investments. 

Everything You Need To Know About IRA & 401k Distributions

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

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

Options For IRA or 401(k) Distributions

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

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

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

How Are Distributions From a Traditional IRA Taxed?

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

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

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

 

Options For Receiving Distributions Before Retiring

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

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

Clash Of The Titans: IRA Vs 401K

You've probably heard a lot about 401ks and IRAs. But do you know how they compare to each other? More importantly, how do you know which is better for you?

401ks are usually employer-sponsored retirement accounts. Unfortunately, not everyone has access to those. Meanwhile, anyone can open a Roth IRA or Traditional IRA. To get the most benefits possible, you should max out contributions to both accounts if you're able to.

But maxing out both may not be an option for you. So the real question here is, should you contribute to your IRA or 401k first?

I'll give you two answers, one will be a short "quick version" while the other will be a detailed comparison and contrast analysis via chart below (as in, the actual "Clash of the Titans" you came here for.)

Let's start with the quick and dirty version.

The Quick Answer: IRA Vs. 401k

The account you should contribute to first depends heavily on whether your employer offers a 401k with a company match. Scroll to the option that applies to you.

Contribute to your 401k only to the point where your employer will no longer continue matching your contributions. This way, you can get as much free money as possible. Then consider an IRA.

Start with an IRA first. Opening one is free. After contributing up to the limit, contribute to your 401k for the pre tax benefit it offers.

 

A Detailed Comparison of The 401k, Traditional IRA, and Roth IRA: Clash Of The Titans

 

  401k

 

 Traditional IRA Roth IRA
contribution limit $18,500 for those under age 50.

$24,500 for those age 50+.

 $5,500 as a combined IRA limit. $6,500 for those age 50+.
Pros Employer contribution match. (If offered.)
Higher annual contribution limit.
Contributions lower taxable income in the year they are made.
Eligibility is not limited by income.
Able to borrow up to $50,00 or 50% of your 401k's value, whichever is greater.		 Large investment selection.
If deductible, contributions lower taxable income in the year they are made.		 Large investment selection.
Qualified withdrawals in retirement are tax free.
Contributions can be withdrawn at any time.
No required minimum distributions when you retire.
Cons No control over plan and investment costs.
Limited investment selection.
Distributions in retirement are taxed as ordinary income, unless a Roth 401k.
Required minimum distributions start at age 70 1/2.		 Contribution limits are lower than a 401k.
Deduction phased out at higher incomes if you or your spouse are covered by a workplace retirement account.
Distributions in retirement are taxed as ordinary income.
Required minimum distributions begin at age 70 1/2.		 Contribution limits are lower than a 401k.
No immediate tax benefit for contributing.
Ability to contribute is phased out a higher incomes.
Bottom line Fund a 401k first if your company is willing to match your contributions. Fund an IRA first if your 401k doesn't offer a match or if you can't get a 401k.

If you max out your IRA, start funding your 401k. Are you not sure which IRA is best for you?

If you plan on being in a higher tax bracket when you retire, choose a Roth. (Yea. I know that isn't the easiest thing in the world to predict.)

Keep reading to read more useful information about IRAs and 401ks, along with the conclusion to this article. Spoiler alert: we are going to discuss a nontraditional option that you might consider--especially if you're a real estate investor.

  401k Traditional IRA Roth IRA
Tax treatment of contributions Contributions made with pretax dollars, which reduces your taxable income on a dollar for dollar basis. Some employers offer a Roth 401k option, funded with after tax dollars.
Investments in the account grow tax deferred. If Roth 401k, investments grow tax free.		 Contributions are deductible. Higher income and participation in a workplace retirement account (for you or your spouse, if married filing jointly) may reduce or eliminate deduction.
Investments in the account grow tax deferred.		 Contributions are not deductible.
Investments in the account grow tax free.
Investment options Limited choice of investments.

Some plans have a brokerage option with access to investments outside of the plan.

 Any investment available through your account provider (stocks, bonds, mutual funds, etc.).
Taxes on withdrawals after age 59 ½. Distributions are taxed as ordinary income. If Roth 401k, distributions are tax free. Distributions are taxed as ordinary income. Distributions are tax free as long as the account has been open for at least five years.
Early withdrawal rules before age 59 ½. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Contributions can be withdrawn at any time without taxes or penalties.

Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes.

Best Practices For Traditional 401ks and IRAs

If you've got enough money, max out both. Otherwise, fund your 401k to the point where you max out your employer contributions for the year, then max out your IRA. And if you have a lot of money to invest, consider establishing a Self Directed IRA LLC.

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

What Is a Self-Directed IRA LLC & Should I Get One?

A Self Directed IRA LLC offers the same benefits as a Traditional or Roth IRA, but with even more investment opportunities available for you to choose from, such as real estate, along with asset and liability protection up to one million dollars.

Fair warning though, a Self Directed IRA LLC requires more involvement on your part and is not intended for passive investors. I'll tell you this though. If you're already investing in real estate with your personal funds, there's no reason for you not to get a Self Directed IRA. If you're considering this option, you may find our previous article on investing in real estate with your Self-Directed IRA LLC helpful.

If you still have questions about IRAs, 401ks, or lesser-known retirement options, feel free to ask them below or contact us.

 

Top 10 Self Directed IRA Questions: A Bona-Fide Checklist

You wouldn't believe how many people ask me these questions. Especially number 1 on our list. I can promise you that by the end of this article, you're guaranteed to walk away (or should I say click away?) with new knowledge regardless of your IRA experience level.
Let's dive right into it shall we!

What is a self-directed IRA?

A self-directed IRA is an IRA where the custodian of the account allows the IRA to invest into any investment allowed by law. These investments include: real estate, stock, gold and cryptocurrency, just to name a few.
If you haven't heard about self-directed IRA's before, that's understandable. The main reason most people haven't is large financial institutions who 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.

Can I rollover or transfer my existing retirement account to a self-directed IRA?

I can't blame you for wanting to know, now can I?
The answer to this question is that depends. The chart below can help you determine the answer.

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 roll-over 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.

 

What can a self-directed IRA invest in?

The most popular self-directed retirement account investments include:

Under current law, a retirement account is only restricted from investing in the following:

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 your account can invest in, but rather, whom your IRA may transact with.
The prohibited transaction rules restrict your retirement account from engaging in a transaction with someone who is a disqualified person to your account. A disqualified person to a retirement account includes: The account owner, their spouse, children, parents, and certain business partners.
So, for example, your retirement account could not buy a rental property that is owned by your father since a purchase of the property would be a transaction with someone who is disqualified to the retirement account (e.g. father). On the other hand, your retirement account could buy a rental property from your cousin, friend, sister, or a random third-party, as they are not disqualified persons.

Can my self-directed IRA invest in my personal business, company, or deal?

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

What is a checkbook-control IRA or IRA/LLC?

Many self-directed retirement account owners, particularly those buying real estate, use an  IRA/LLC (aka “checkbook-control IRA”) as the vehicle to hold their retirement account assets.
An IRA/LLC is a special type of LLC, which consists of an IRA (or other retirement account) investing its cash into a newly created LLC. The IRA/LLC is managed by the IRA owner, and the IRA owner then directs the LLC investments and the LLC to take title to the assets. Which pay the expenses to the investment, and receive the income from the investment.
However, there are many restrictions against the IRA owner being the manager (such as not receiving compensation or personal benefit) and many laws to consider. You definitely want to consult with your attorney before establishing an IRA/LLC.

Can my IRA invest cash and 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/mortgage to acquire the property. Whenever you leverage your IRA with debt, however, you must be aware of two things. First, the loan your IRA obtains must be a non-recourse loan.
A non-recourse loan is made by the lender against the asset, and 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. Also, your IRA may be subject to a tax known as unrelated debt financed income tax (UDFI/UBIT).

 Are there any tax traps? (UBIT/UBTI)

The Unrelated Business Income tax (UBIT) applies when your IRA receives “unrelated business income.” However, if your IRA receives investment income, then that income is exempt from UBIT tax. Investment income exempt from UBIT includes the following.

 So, make sure your IRA receives investment income as opposed to “business income”.

What is unrelated debt financed income (UDFI)?

If an IRA uses debt to buy an investment, then the income attributable to the debt is subject to UBIT. This income is referred to as “unrelated debt financed income” (UDFI), and it causes UBIT. The most common situation 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 IRAs investment, but the result of the debt invested.
Because this debt is not retirement plan money, your friends at the IRS require tax to be paid on 60% of the income. So, if there is $10,000 of net rental income on the property then $6000 would be subject to UBIT taxes.

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 with no other employees (other than business owners and spouses). If you are not self-employed, then the individual 401k will not work in your situation.
An individual 401k is generally a better option for someone who is self-employed and still trying to maximize contributions, as the individual 401k has much higher contribution amounts ($54,000 annually versus $5,500 annually for an IRA).
On the other hand, a self-directed IRA is a better option for someone who has already saved for retirement and who has enough funds in their retirement accounts which can be rolled over and invested via a self-directed IRA as the self-directed IRA is easier and cheaper to establish.
Another consideration in deciding between an individual 401k and a self-directed IRA is whether there will be debt on real estate investments. If there is debt and the account owner is self-employed, they are much better off choosing a individual 401k over an IRA as individual 401ks are exempt from UDFI tax on leveraged real estate.
Congratulations! You made it to the end of this article!
That sure was a lot of information wasn't it? Hopefully this article helped you, and if you have any questions please don't hesitate to ask them.
 

Top Six Duties For Trustees and Executors of Estates

Unlike the movies, you won't just get a call one day telling you that you've been named as the executor or trustee to a billion-dollar estate. Not usually, anyway.

But let's say you do.

So you’ve been named as an executor in a will or as a trustee in a trust? Now you have some serious duties to carry out. Before I explain the trustee duties and the trust executor duties, you need to know the difference between the two.

What Is an Executor?

An executor, also known as a personal representative, has the authority to administer and distribute an estate. If you were appointed as an executor (or personal representative) in a will, you will need to understand the terms of the will and who the heirs are.

In most situations where only a will is used, you will need to go to court to be appointed as the legal executor of an estate and will need court approval to transfer certain assets (such as a home.)

What is a Trustee?

If you were appointed as a trustee in a trust, you will need to understand what assets are owned by the Trust and what assets are owned outside the Trust. In general, a trust is used by individuals to avoid probate and to provide better direction and control of their estate.

If the Trust was established correctly and if it was properly funded (the trust owns the assets of the deceased person), then you will not need to go to court to get approval to administer the estate.

The Difference Between an Executor And a Trustee

The position of executor tends to be temporary, while someone could serve as a Trustee for a few months or a few decades.

Think of an executor as a "liquidator" and a trustee as more of a "manager." An executor's duties are complete once everything has been liquidated, whereas a Trustee's duties are complete when there is nothing left to be managed.

Fun fact: Usually neither an executor nor a trustee is compensated for their position.

Now that we've got that covered, let's go over the six most essential duties of executors and trustees.

Responsibilities as an Executor or Trustee

#1 Understand the Estate Documents.

Before you do anything, you need to read the estate documents. These documents will determine the distribution and management of the estate. These documents may include funeral and burial instructions. (Where and how the person wants to be buried, or where they want to be cremated, etc.)

There may also be a memorandum of personal property that outlines how specific items of personal property are to be distributed to heirs. Common items identified and handled on the memorandum of personal property are jewelry, guns, and other valuables.

#2 Determine the Assets.

You will need to determine what assets are included in the estate. Sometimes this can be difficult to determine, as the deceased person may not have provided complete information as to their bank accounts, investment accounts, real estate, retirement accounts, and life insurance policies.

Many children who become executors and trustees have a difficult time locating the assets of their deceased family member despite having an otherwise close relationship.

#3 Identify the Heirs.

Most estate documents such as a will or a trust will list the heirs to the estate and these heirs (AKA, beneficiaries). Usually, the heirs are clearly identified. However, what happens if the will or trust listed one of your siblings as an heir, and what if that sibling in longer living?

Does that portion of the estate go to your sibling’s surviving spouse or children or to the other siblings? Hopefully, the will or trust will state what shall occur in this instance. But in many instances, this item can be overlooked and not considered in the estate plan.

As executor or trustee, you are left to determine who shall take the place of your deceased sibling and this decision is subject to the terms of the document and state laws.

#4 Identify the Creditors.

Almost every estate has creditors who need to be paid. From credit card companies and other consumer debt to mortgage lenders with liens on real estate owned by the deceased.

As executor or trustee of the estate, you have an obligation to guarantee that all creditors' claims are paid from the estate. Failure to do so may result in liability to you as the executor or trustee or to the heirs who receive distributions from the estate.

Whether you are working with a secured or unsecured creditor, you will need to provide evidence of your position as executor or trustee, which in the case of a Will would include a copy of the Will, or in the case of, a Trust would include a copy of the certificate of trust.

In general, secured creditors such as mortgage lenders or car lenders will be paid upon the sale of the property or asset unless the estate otherwise has cash available and intends to hold these assets.

Regardless of whether the asset will be held or sold, you should immediately notify secured creditors of the death of the deceased person. Where possible, you should make sure that payments are made to these creditors to avoid late fees and other penalties.

If properties or assets subject to the secured creditor are paid, then the proceeds from the sale will resolve these debts.
As for unsecured creditors, you should notify them of the passing of your loved one. However, these creditors are not always paid in full. Don't be hesitant to negotiate with unsecured creditors, such as credit card companies. They can be negotiated with fairly easily.

Maybe start with an offer of 1/3 of the amount owed and see if the unsecured creditor will accept that amount as a payoff. While they do have legal recourse against the estate, they do face significant legal fees in probate court to collect on the debt.
If the estate must go through probate in the court, as will typically occur if there is only a will, then as executor you are required to notify creditors of the probate court action and of the assets of the estate.

Unsecured creditors then have a certain amount of time to assert their claim against the estate. Most unsecured creditors won't follow up and make a claim against the estate despite being given notice of the assets of the estate.

Look to negotiate with these creditors and if you are in probate court already, wait until they actually make a claim in the probate court (following notice of the case and deceased person's death you will be required to provide) before paying those creditors.

You have a good chance that the creditor won’t even make a claim.

#5 Conduct the Proper Process.

The estate documents and the assets of the deceased will determine the process to administer the estate. Also, if the deceased person had assets in multiple states if they only left a will, you may need to conduct probate in multiple states.

There are a number of common situations where you will need to go to court to obtain court approval in administering the estate.

In the case of a will, you will typically need to go to probate court to be appointed as executor by the court and to get court approval to transfer any real estate assets to heirs or in a sale from the estate.

Also, if the identity of heirs is in question, you may need to get approval from the court as to the proper heirs to receive proceeds from the estate.

Lastly, you may be required to go to court if the estate documents leave contradictory, improper, or confusing provisions that cause disagreement amongst heirs. In this situation, obtaining approval from the court is advisable in order to avoid claims against yourself and the estate.

#6 Final Tax Returns

As executor or trustee, you must also make sure individual income tax returns and estate tax returns are filed. This can be tricky, considering the circumstances.

For example, you must write the word DECEASED across the top of the tax return. In addition to a final income tax return, you may be required to file an estate tax return using IRS form 1041. This is required if the estate receives $600 or more in gross income.

Conclusion

Being a trustee or executor isn't easy. You may want to get some professional help to make sure everything goes smoothly.

Remember, the estate can pay the expenses of professionals and if you incur out-of-pocket expenses then the estate can typically reimburse those expenses.

One last thing you should be aware of as an Executor or Trustee. I didn't mention this in the list above, but as an Executor or Trustee, you will typically be involved closely with the heirs/beneficiaries. Sometimes this can involve drama, emotional support, and other sticky situations. For your convenience, we've created an additional Survival Guide for Trustees and Executors. You can make it. We believe in you and are here to support you through this process if you need help.

How to Fund Your Business or Start-Up With Self Directed IRA

Do you have a private company or start-up that could use some funding? Maybe you're planning on starting your own soon. Whatever the case is, you're in for some great news!

There are tens of trillions of dollars in retirement plans across the United States. But did you know that these funds can be invested in your business? Yes, it’s true! IRA's and 401k's can be used to invest in start-ups, private companies, and even real estate.

Most entrepreneurs and retirement account owners have no idea that retirement accounts can invest in private companies. And there's a good reason for that. (More on this later.)

And it's not just anyone who owns these retirement funds, it's EVERYONE! Literally. Have you ever asked anyone to invest in your business with their retirement account?

Probably not.

But why not? How much do you think they have in their IRA or old employer 401k and how attached do you think they are to those investments? Think hard on that one.

(The answer is they usually have lots of money and they probably don't even know anything about what it's invested in.)

Those two questions have paved the way for over a billion dollars to be invested in private companies and start-ups!

This kind of funding isn't as uncommon as you might think.

Recent industry surveys show that there are over one million retirement accounts that are self-directed into private companies, real estate, venture capital, private equity, hedge funds, and start-ups.

How does it work?

So now you want to know how these funds are properly invested into your business. Well, if you ask your CPA or lawyer, the typical response is, “It’s possible, but we wouldn't recommend it.” Which probably means they don't know-how.

So they don't know, how about you ask a financial adviser? If you ask a financial adviser, especially your own, they'll tell you it's a bad idea. Most likely because you won't be paying him or her fees like how you do with mutual funds, annuities, and stocks.

There are "different" risks in a private company or start-up investments, so self-directed IRA investors need to be cautious and they shouldn’t invest everything into one private company or start-up. And yes, you will probably need some help regarding the tax and legal issues.

What is a Self Directed IRA?

A self-directed IRA is a retirement account that can be invested into any investment allowed by law. In order to invest in a private company, start-up, or small business, the retirement account holder must have a self-directed IRA. If you have an account with a "typical" IRA or 401k company, such as Vanguard or Ameritrade, then you can only invest in investments allowed under their platform. Usually, these companies won’t allow your IRA or 401k to invest in private companies or start-ups. To do so, you would first need to roll over or transfer the funds to a self-directed IRA custodian.

For a detailed list of the companies that provide these types of accounts, check out the (RITA) Retirement Industry Trust Association’s website and membership list. RITA is the leading national association for the self-directed retirement plan industry.

How to sell corporation stock or LLC units to Self Directed IRA's

Are you seeking capital for your business in exchange for stock or other equity? You might consider offering shares or units in your company to retirement account owners. And no, you don't have to go public. Companies that have had individuals with self-directed IRA's invest in them before they were publicly traded include Google, Facebook, PayPal, Domino’s, Sealy, and Yelp.

There are many investment options available. Popular ones include:

Note: you must comply with state and federal securities laws when raising money from investors.

What You Need to Know: Prohibited Transactions

One of two important things to be aware of when someone invests their retirement account money into your business relates to what they can and can't invest in (prohibited transactions). The tax code restricts an IRA or 401k from transactions with the account owner personally or with certain family members (parents, spouse, kids).

This is called the prohibited transaction rule. If you own a business personally you can’t have your own IRA or your parent's IRA invest into your company to buy your stock or LLC units. However, family members such as siblings, cousins, aunts, and uncles could move their retirement account funds to a self-directed IRA to invest in your company. Anyone else can invest in your company without worrying about that rule.

Note: If a prohibited transaction occurs, the investors self-directed IRA is entirely distributed. Make sure the rules are followed!

What You Need To Know: UBIT Tax

The second thing you need to be aware of is the tax known as Unrelated Business Income Tax (UBIT).

UBIT is a tax that can apply to an IRA when it receives “business” income. Generally, IRAs and 401k's don’t pay tax on the income or gains that go back to the account because they're considered "investment income". Investment income would include rental income, capital gain income, dividend income from a c-corp, interest income, and royalty income. (e.g. income from a mutual fund).

However, when you go outside of these forms of investment, you may find yourself outside of “investment” income. This means you might be receiving “business” income that is subject to the extremely costly “unrelated business income tax.”

This tax rate is at 39.6% at $12,000 of taxable income annually last time I checked. That’s steep. You want to make sure you avoid it.

When should an investor anticipate paying UBIT?

The most common situation where a self-directed IRA will have to pay UBIT is when the IRA invests in an operational business selling goods or services that do not pay corporate income tax.

Let's say you own a new business that sells goods online, and is organized as an LLC and taxed as a partnership. This is a very common form of private business and taxation, but one that will cause UBIT tax for net profits received by self-directed IRA. On the other hand, if your new business was a c-corporation and paid corporate tax (that’s what c-corps do), then the profits to the self-directed IRA would be dividend income, a form of investment income, and UBIT would not apply.

Self-directed IRAs should expect that UBIT will apply when they invest into an operational business that is an LLC but should expect that UBIT will not apply when they invest into an operational business that is a c-corporation.

Note: IRAs can own c-corporation stock, LLC units, LP interest, but they cannot own s-corporation stock.

Are you an LLC wanting to raise capital from other peoples IRA's or 401k's?

You should have a section in your offering documents that notifies people of potential UBIT tax on their investment. UBIT tax doesn’t your company any additional money or tax. But it will cost the retirement account investor since UBIT is paid by the retirement account.
If the investment from the self-directed IRA was via a note or other debt instrument, then the profits to the IRA are simply interest income and that income is always investment income, which is not subject to UBIT tax.

Interestingly, many companies raise capital from IRAs for real estate or equipment purchases. These loans are often secured by the real estate or equipment being purchased and the IRA ends up earning interest income like a private lender.

Recap (because that was a lot!)

So, here’s a brief recap of everything you just read.

Retirement account funds can be a huge source of funding and investment for your business, so it’s worth some time and effort to learn how these funds can be used. Just make sure you follow the rules.

How to Fund Your Business With Self-Directed IRA and 401(k) Money

Do you have a small business or start-up that could use some funding? If so, you're in for some great news!

There's tens of trillions of dollars in retirement plans across the United States. But did you know that these funds can be invested into your business?

IRAs and 401(k)s can be used to invest in startups, private companies, and even real estate.

Most entrepreneurs and retirement account owners have no idea that retirement accounts can invest in private companies. And there's a good reason for that. (More on this later.)

And it's not just anyone who owns these retirement funds, it's EVERYONE! Literally. Have you ever asked anyone to invest in your business with their retirement account?

Probably not.

But why not? How much do you think they have in their IRA or old employer 401(k) and how attached do you think they are to those investments? Think hard on that one.

(The answer is they usually have lots of money and they probably don't even know anything about what it's invested in.)

Those two questions have paved the way for over a billion dollars to be invested in private companies and startups!

This kind of funding isn't as uncommon as you might think. Recent industry surveys show that there are over one million retirement accounts that are self directed. Those accounts invest heavily in private companies, real estate, venture capital, private equity, hedge funds, and start-ups.

How does it work?

So now you want to know how these funds be properly invested into your business. Well, if you ask your CPA or lawyer, the typical response is, “It’s possible, but we wouldn't recommend it.” Which probably means they don't know how.

What about you ask a financial adviser? If you ask a financial adviser, especially your own, they'll tell you it's a bad idea. Most likely because you won't be paying him or her fees like how you do with mutual funds, annuities and stocks.

There are "different" risk in private company or start-up investments, so self directed IRA investors need to be cautious and they shouldn’t invest everything into one private company or start-up. And yes, you will probably need some help regarding the tax and legal issues.

What is a Self Directed IRA?

A self directed IRA is a retirement account that can be invested into any investment allowed by law. In order to invest into a private company, start-up, or small business, the retirement account holder must have a self directed IRA.

If you have an account with a "typical" IRA or 401(k) company, such as Vanguard or Ameritrade, then you can only invest in investments allowed under their platform.

Usually these companies won’t allow your IRA or 401(k) to invest in private companies or start-ups. To do so, you would first need to rollover or transfer the funds to a self directed IRA.

For a detailed list of the companies that provide these types of accounts, check out the (RITA) Retirement Industry Trust Association’s website and membership list. RITA is the leading nationwide association for the self directed retirement plan industry.

How to sell corporation stock or LLC units to Self Directed IRAs

Are you seeking capital for your business in exchange for stock or other equity? You might consider offering shares or units in your company to retirement account owners. And no, you don't have to go public.

Companies who have had individuals with self directed IRAs invest in them before they were publicly traded include: Google, Facebook, PayPal, Domino’s, Sealy and Yelp.

There are many investment options available. Popular ones include:

Note: you must comply with state and federal securities laws when raising money from investors.

What You Need to Know: Prohibited Transactions

One of two important things to be aware of when someone invest their retirement account money into your business relates to what they can and can't invest in (prohibited transactions).

The tax code restricts an IRA or 401(k) from transactions with the account owner personally or with certain family members (parents, spouse, kids).

This is called the prohibited transaction rule. If you own a business personally you can’t have your own IRA or your parents IRA invest into your company to buy your stock or LLC units.

However, family members such as siblings, cousins, aunts and uncles could move their retirement account funds to a self directed IRA to invest in your company. Anyone else can invest into your company without worrying about that rule.Note: If a prohibited transaction occurs, the investors self directed IRA is entirely distributed. Make sure the rules are followed!

What You Need To Know: UBIT Tax

The second thing you need to be aware of is the tax known as Unrelated Business Income tax (UBIT). UBIT is a tax that can apply to an IRA when it receives “business” income. Generally, IRAs and 401(K)s don’t pay tax on the income or gains that go back to the account because they're considered "investment income".

Investment income would include rental income, capital gain income, dividend income from a c-corp, interest income, and royalty income. (e.g. income from a mutual fund).

However, when you go outside of these forms of investment, you may find yourself outside of “investment” income. Which means you might be receiving “business” income that is subject to the extremely costly “unrelated business income tax.”

This tax rate is at 39.6% at $12,000 of taxable income annually last time I checked. That’s steep. You want to make sure you avoid it.

When should an investor anticipate paying UBIT?

The most common situation where a self directed IRA will have to pay UBIT is when the IRA invests into an operational business selling goods or services who does not pay corporate income tax.

Let's say you own a new business that sells goods online, and is organized as an LLC and taxed as a partnership. This is a very common form of private business and taxation, but one that will cause UBIT tax for net profits received by self directed IRA.

On the other hand, if your new business was a c-corporation and paid corporate tax (that’s what c-corps do), then the profits to the self directed IRA would be dividend income, a form of investment income, and UBIT would not apply.

Self directed IRAs should expect that UBIT will apply when they invest into an operational business that is an LLC, but should expect that UBIT will not apply when they invest into an operational business that is a c-corporation.
Note: IRAs can own c-corporation stock, LLC units, LP interest, but they cannot own s-corporation stock.

Are you an LLC wanting to raise capital?

You should have a section in your offering documents that notifies people of potential UBIT tax on their investment. UBIT tax doesn’t your company any additional money or tax. But it will costs the retirement account investor since UBIT is paid by the retirement account.

If the investment from the self directed IRA was via a note or other debt instrument, then the profits to the IRA are simply interest income and that income is always investment income, which is not subject to UBIT tax.

Interestingly, many companies raise capital from IRAs for real estate or equipment purchases. These loans are often secured by the real estate or equipment being purchased and the IRA ends up earning interest income like a private lender.

Recap (because that was a lot!)

So, here’s a brief recap of everything you just read.

The bottom line

Retirement account funds can be a huge source of funding and investment for your business, so it’s worth some time and effort to learn how these funds can be used. Just make sure you follow the rules.

Top 10 Things You Need To Know About Distributions From Your Retirement Account

To whoever is reading this: Congratulations! You've probably either lived long enough to retire or you're almost there. But before you "cash out" and get your money via distributions, you may want to check out this article first.
And whether you're getting ready to retire or you have a long way to go until you can, the information below can benefit everyone. Let's start with distributions from traditional IRAs and 401ks. The first five questions will relate to these traditional accounts. If you have either a Roth account (IRA or 401k), you can skip to number 6 on the list below.

Traditional IRA and 401k Accounts

1. Early Withdrawal Penalty.

A distribution from your traditional IRA or 401k before you reach the age of 59 1/2 will cause a 10% early withdrawal penalty on the money distributed. And yes, you're paying taxes too, so you're losing a big chunk of money if you withdrawal early.
Let's say you take a $5,000 distribution from your traditional IRA at age 50. You will be subject to a $500 penalty and you will also receive a 1099-R from your IRA custodian. You will then need to report $5000 of income on your tax returns.
Long story short: Don't withdraw early unless you really need the money.

2. Required Minimum Distributions (RMD).

But whether you need the money or not, at age 70 1/2, your friends at the IRS will force you to begin taking distributions from your retirement account. Unless you're still employed.
Your distributions will be subject to tax and you will also receive a 1099-R of the amount of money distributed which will be included on your tax return. The amount of your distribution is based on your age and your account’s value.
For example, if you have a $150k IRA & you've just hit the age of 70 1/2, your first RMD would be $5,685 (3.79% of $150k).

3. Don't Take Large Distributions In One Year.

Unfortunately, money from your traditional retirement account is subject to tax at the time of distribution. With this in mind, it would be wise of you to be careful about how much money you take out in one year. Why? Because a large distribution can push your distribution income and your other income into a higher tax bracket.
Let's say you have  employment or rental/investment income of $100,000 yearly. That would mean you're in a joint income tax bracket of 15% on additional income.
However, if you take $100,000 as a lump sum that year this will push your annual income to $150K and you will be in a 28% income tax bracket.
If you chose to instead break up that $100K over two years, then you could stay in the 15% to 25% tax bracket. This way, you reduce your overall tax liability.
Long story short: When it comes time for you to start enjoying retirement, don't take out too much money or the IRS will be enjoying it instead.

4. Distribution Withholding.

Most distributions from an employer 401k or pension plan will be subject to a 20% withholding, unless you're at the age of 59 1/2. This withholding will be sent to your friends at the IRS in anticipation of tax and penalty that will be owed.
In the case of an early distribution from your IRA, a 10% withholding for the penalty amount can be made.

5. If You Ever Have Tax Losses Consider Converting to a Roth IRA.

Roth IRAs are popular for a reason. When you have tax losses on your tax return, you may want to consider using those losses to offset income that would arise when you convert a traditional IRA or 401k to a Roth account.
Whene you convert a traditional account to a Roth account, you pay tax on the amount of the conversion. This is usually worth it, because you’ll have a Roth account that grows entirely tax free which you won't pay taxes on when you distribute the money.
Interesting fact: Some tax savvy people use tax losses so that they end up paying less in taxes later on.

Tips For Roth IRAs and Roth 401ks

6. Roth IRAs Are Exempt from RMD.

It's amazing right? While traditional IRA owners must take required minimum distributions (RMD) when they reach the age of 70 1/2, Roth IRAs are exempt from RMD rules. This allows you to keep your money invested for as long as you wish.

7. "Designated" Roth 401ks Must Take RMD.

Yea, tax code can be confusing. "Designated" Roth 401k accounts are subject to RMD. These kinds of Roth accounts are part of a 401k/employer plan, which is where the word "designated" comes from.
Anyway, so how do you avoid this you may ask? By rolling your Roth 401k funds over to a Roth IRA when you reach the age of 70 1/2.

8. Distributions of Contributions Are Always Tax Free (Unless The Government Changes That)

Unless the government makes major changes, distributions of contributions to a Roth IRA are always tax-free. No matter your age, you can always take a distribution of your Roth IRA contributions without penalty or tax.

9. Tax Free Distributions of Roth IRA Earnings.

However, in order to take a tax free distribution from your Roth IRA, you must be age 59 1/2 or older and you must have had your Roth IRA for five years or longer.
As long as those two criteria are met, all amounts (contributions and earnings) may be distributed from your Roth IRA tax free.
Note: If your funds in the Roth IRA are from a conversion, then you must have converted the funds at least 5 years ago and must be 59 1/2 or older in order to take a tax-free distribution.

10. Delay Your Roth Distributions.

Don't be so quick to use the funds in your Roth account. It's usually better to distribute and use other funds and assets that are at your disposal. Why? Because those funds aren’t as tax efficient while invested.
Long story short: Roth retirement accounts are the most tax efficient way to earn income in the U.S if you use them right. Learn even more from our other article on the lesser-known benefits of Roth accounts.
That's all folks. As always, if you have any questions, please don't hesitate to ask in the comments below.
 

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

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

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

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

Benefit #1: Your Roth IRA Can Outlive You

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

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

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

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

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

Your Pool Is a Liability

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

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

What You Should Know About Strict Liability and Local Laws

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

Pool Accidents and How to Avoid Them

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

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

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

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

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

This document will include the following:

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

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

Estate Planning 101: Who Will Carry On Your Legacy?

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

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

The Purpose of a Trust in Estate Planning

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

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

How Do I Pick My Trustee?

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

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

Factors To Consider When Picking Your Trustee

What Will My Trustee Do?

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

How Large is Your Estate?

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

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

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

When Should You Appoint a Non-Relative Trustee?

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

Does Your Trustee Have Good Financial Skills?

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

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

What Are The Dynamics of Your Family?

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

Will You Compensate Your Trustee For Managing Your Estate?

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

Can Your Heir/Beneficiary Be a Trustee?

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

Should You Appoint Co-Trustees?

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

Who is Most Commonly Listed as Trustee?

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

 

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

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

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

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

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

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

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

Example: A Typical Umbrella Policy Situation

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

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

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

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

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

LLCs & Corporations: Always Reliable

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

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

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

The Cost of an LLC

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

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

The Cost Of An Umbrella Policy

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

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

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

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

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

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

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

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

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

Can You Sue Over False Bad Reviews?

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

  1. Was the Statement False?

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

  1. Is It Really Defamation?

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

There are two types of defamation:

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

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

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

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

The Smart Way to Handle Bad or False Reviews

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

How To Pocket Your Retirement Distributions Tax Free

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

States with No Income Tax.

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

States Income Tax Exceptions for Retirement Distributions.

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

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

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

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

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

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

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

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

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

Steps To Getting the RMD Penalty Waived

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

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

Step #1: Take The RMD

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

Step #2: Complete Section IX Of Form 5329.

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

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

Step #3:  Attach a Missed RMD Letter of Explanation

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

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

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

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

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

Showing Good Faith Gets You The Waiver

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

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

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

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

Conclusion

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

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

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

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

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

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

 

 

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

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

How Uncle Sam Gets Your IRA Money: Taxes and Distributions

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

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

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

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

Example of Bypassing Withholding Tax on your IRA/401k

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

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

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

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

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

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

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

How To Disinherit Someone Legally Using a Will Or Trust

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

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

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

Other Ways to Provide for a Disinherited Heir

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

Limits on Trust Clauses

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