Prohibited Transactions: What Investors Can (And Must NOT) Do

What are prohibited transactions?

If you don’t know, and you’re the owner of a self-directed (or “Solo”) 401(k) or self-directed (Solo) Roth IRA, you could end up in serious legal trouble.

In short, a "disqualified" person is anyone who directly benefits from any activity that occurs inside of a self-directed retirement account.

The Self-Directed IRA and Self-Directed 401(k) have become popular instruments for buying real estate over the past decade, because they allow “alternative” investments. With this growing popularity, there is a growing risk that the IRS will increase its enforcement of “prohibited transactions.”

In order to help you avoid accidentally making a prohibited transaction, in this article, we’re going to define some key terms that you need to know in order to get a solid grasp on the concept, outline common prohibited transactions, go over the four different types of prohibited transactions, and give you some tips on how to better protect your assets.

If you want to see our library of articles about these two self-directed retirement plans (note: they are not simply for retirement... they're also great vehicles for tax-free investing), click the links below to get our content hubs:

prohibited transactions: disqualifiedTerms to Know: Solo 401(k)/IRA, Disqualified Person, Prohibited Transaction

We’ll need to define a few terms first. Prohibited transactions are exactly what they sound like: transactions that aren’t allowed by the IRS. But for our purposes, “prohibited transactions” occur in a very specific context, and to explain that context, we need to go over some common definitions:

You might be thinking: If prohibited transactions include anything that directly benefits the account holder and his/her family, why would you ever open a self-directed account in the first place?

Well, just because you can’t buy assets that directly benefit you doesn’t mean that the assets never benefit you. You can still buy assets that make you a lot of money inside of the account.

It’s the difference between buying shares of a company and buying shares of your own company. Both can be wildly profitable, but only one benefits you directly.

prohibited transactions: classic sports carTypes of Prohibited Transactions

In general, there are four types of prohibited transactions. In this article, we already provided examples of a couple of them.

prohibited transactions: i say noWhat are Some of the Most Common Prohibited Transactions?

With that said, how do most people end up getting in trouble? It’s probably not how you might think.

You can’t be directly involved in the investments you make using a self-directed Roth IRA in any way, and that can lead to some confusing scenarios. Additionally, the money that you use to maintain the investment needs to come from inside the account.

That means the most common prohibited transactions are mistakes—not intentional fraud.

For example, if you buy a rental property with a self-directed account, you can’t go to that property to make repairs. You need to hire outside help to fix anything that may be broken, no matter how tempting it is to make the repairs yourself. And, when you’re paying for that outside help, you can’t use your personal savings. If you do, that’s a prohibited transaction.

Interested in learning more? Check out our related articles:

How Can You Avoid Making a Prohibited Transaction?

In order to avoid making a prohibited transaction and incurring penalties and fines, ask yourself two simple questions:

  1. Outside of my account, do I personally benefit from making this investment?
  2. Do any of my family members, friends, associates, or business entities personally benefit?

If the answer is "yes", you’re likely making a prohibited transaction.

IRS rules are difficult, and it can be nearly impossible to get a grasp on all of them. 

If you want to make sure your real estate investing business is protected, start with our investor quiz and we'll help you find ways to protect your assets.

 

Alternative Investments: The Hidden Path to Huge Tax Savings

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

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

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

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

What are alternative investments?

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

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

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

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

What are the types of alternative investments?

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

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

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

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

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

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

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

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

What are the Tax Implications for Alternative Investments?

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

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

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

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

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

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

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

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

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

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

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

Keep more of your money with a Royal Tax Review

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

Why Your Self-Directed IRA Needs A Special Custodian

Individual Retirement Account (IRA) is a term known to all Americans, but even smart real estate investors we work with don't always understand how they work.

It all starts with understanding the role of the Self-Directed IRA custodian.

An IRA must be established by a bank, financial institution, or authorized trust company.  Which means only banks such as Bank of America or financial institutions such as Fidelity are authorized to establish and administer IRAs. And not all of these IRA "custodians" allow your IRA to invest in alternative assets, such as real estate.

ira llc custodians: no, not that kind of custodian

Not THAT kind of custodian ...

I'm here to say: You do NOT have to invest your IRA funds solely in Wall Street if you don't want to.

You may know that the IRA was designed by Congress to encourage people to save for retirement.
You of course know that you can contribute a certain amount of income each year to an IRA account for investment.

You also need to understand the concept of tax deferral and that retirement funds don't have to be invested only through Wall Street. See our article about Reasons To Form a Self Directed IRA to learn more.

Traditional Institutions Do Not Always Have Your  Financial Best Interests At Heart

It’s not in the financial interests of the traditional institutional investment companies, such as Bank of America, Vanguard, or Scottrade to encourage you to make alternative investments using retirement funds.

Why? Because they make money when you invest in their financial products and keep your money there for a long time. They make money off of highly profitable trading commissions or by leveraging the power of your savings.

On the other hand, they make no money when you use your money to invest in alternative or nontraditional investments, such as a plot of land or a private business.

They get no commissions and lose access to your money when you don't invest through them. They have no reason to tell you about other forms of investing that wouldn't be in their best interest.

The IRS has permitted non-traditional/alternative investments since 1974. It says so right on the IRS website.

And what's the best way to make those non-traditional investments? Why, with a Self-Directed IRA of course!

So what do you need for a Self-Directed IRA? Money, for one thing. And a custodian who can help you invest it correctly. Which brings us back to the main point...

The Responsibilities Of A Self-Directed IRA Custodian

The majority of all Self-Directed IRA custodians are non-bank trust companies for the reasons outlined above.

The Self-Directed IRA custodian or trust company will typically have a banking relationship with a bank who will hold the IRA funds in a special account called an omnibus account, offering each Self-Directed IRA client FDIC protection of IRA funds up to $250,000 held in the account.

The following are the roles and responsibilities of a Self-Directed IRA custodian:

What are the Differences Between a Self-Directed IRA Custodian and Third-Party Administrator?

All IRA custodians, banks, financial institutions, and approved trust companies are regulated and are authorized by the IRS to act as IRA custodians.

But since actual custodians are directly approved by the IRS, they are the only ones in this group that’s allowed to physically hold retirement assets. IRA custodians are needed in order to make investments with IRA funds.

Whereas, an IRA administrator is not able to hold IRA assets and is not approved or overseen by the IRS or any state banking regulators. IRA administrators essentially act as intermediaries between the IRA owner and a partner custodian.

You Should Work Directly With An IRA Custodian.

IRA administrators are not subject to any IRS or state audit or reviews. Which means they have less "motivation" to do their job perfectly.

An IRA custodian is subject to quarterly state banking division audits and reviews, as well as IRS audits, helping keep your IRA safe from prohibited transactions and fraud.

 

Is My Roth IRA Protected in a Bankruptcy?

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

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

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

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

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

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

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

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

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

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

To read more, check out our other resources:

What if your account is over the limit?

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

How to protect rollover IRAs

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

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

What About Inherited Roth IRA Assets?

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

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

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

The court gave the following as reasons for the ruling:

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

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

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

To Wrap It Up ...

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

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

 

 

 

Photo by Jason Dent on Unsplash

 

 

 

5 Ways The Self-Employed Can Invest for Retirement

When it comes to being self-employed, it can feel like the deck is stacked against you. 

Gig workers and independent contractors don’t have the benefit of an employer-sponsored 401k plan or retirement contribution matching program. It can be tough to set aside 15-20% of your income to pay your own payroll and Social Security taxes, take out a little bit more for your healthcare program, and then worry about retirement savings on top of that. 

Still, here are 5 ways the self-employed can invest for retirement.

Why Worry About Retirement At All?

The outlook for retirement in the United States is bleak, to say the least. If you aren’t worried about it, you should be.

Here are the facts:

In the United States, 15% of adults aged 25+ have nothing saved for retirement at all, according to Northwestern Mutual’s Planning and Progress Study.

For those that do have retirement savings, the median 401k account balance is only $25.8k (roughly $64.5k for adults at retirement age), according to Vanguard’s 2020 Analysis, “How America Saves.”

But there’s always Social Security, right? Unfortunately, if that’s what you’re relying upon, you’ll only be slightly above the poverty line during your Golden Years. The average Social Security benefit is about $18k per year, according to the Social Security Administration.

Meanwhile, a retiree’s average expenditures are $49,279, according to the Bureau of Labor Statistics.

That means, of the 85% who do have retirement savings, only a very small fraction of them can actually afford to retire.

Luckily, if you clicked on this article, we’ll get you set on the right path. And, if you’re young, your money has time to compound, which means even a little bit of money goes a long way.

self-employed retirement strategies: playing cards Self-Employed Retirement Investing Strategies

Roth IRA

The Roth IRA is the gold standard for most self-employed people, for both its effectiveness and ease of use. Why? First off, when you open a Roth IRA, you contribute after-tax money. Normally, with a 401k or traditional IRA, your money grows tax-deferred, so it lowers your tax bill for the year by reducing the amount of taxable income that you have, and then you pay normal income taxes on distributions that you take in retirement.

With a Roth IRA, you’re paying those taxes up-front and, in return, receiving tax-free distributions in retirement. According to the Congressional Budget Office, taxes are near historic all-time lows. We can’t predict the future and we aren’t trying to, but there’s a solid chance that taxes won’t remain as low as they currently are. It’s certainly possible that they remain at the same rate, or possibly even decrease -- but, looking at historic trends, it seems unlikely. 

If you expect a similar income in retirement as you have now -- or if, after your ~$18k per year Social Security benefit, you expect to make more, or if you expect taxes to increase -- then the Roth is your go-to.

Furthermore, a Roth IRA is simply easier than a 401k. In order to open a 401k, you need an EIN at the very least, but if you want to open a Roth IRA, you just have to contact an investment firm and request one. You could do it online in fifteen minutes.

Finally, you can withdraw your contributions penalty-free at any time. You don’t have to wait until you’re 59 ½, like you do with a lot of other accounts (although you will be taxed on gains that you withdrew). So, if you put in $5k last year, and that $5k grew to $8k, you can still withdraw up to $5k with no penalties, because you already paid the taxes on it.

What’s the catch?

Solo 401k (Roth or Traditional)

The Roth 401k takes the second spot on our list, tied with the traditional (although we’ll explain why we prefer the Roth).

A 401k is a bit more difficult to open than an IRA. In order to open a solo 401k, you must be a business owner with no employees, and you must have an employer identification number (which you can quickly get by applying for one with the IRS).

The benefits of the Roth 401k are similar to the benefits associated with a Roth IRA, except the contribution limits are much higher. You can contribute up to $57,000 to a Solo 401k, so chances are you’ll never truly max out your retirement savings -- although major props to you if you do.

If you invest in a Roth 401k, you have access to your contributions at any time, which gives you quite a bit more freedom regarding when you use your money.

But, with that said, the traditional Solo 401k is also a great option. Plus, if you combine it with the Roth 401k, you’ll have more options in retirement for controlling your taxable income to make sure you stay below a certain tax bracket.

Traditional IRA

The traditional IRA is similar to the Roth except it works the other way: you pay taxes in retirement rather than now.

A traditional IRA is your best option if you expect your income in retirement to be lower than it is right now, if you earn too much to contribute to a Roth, or if you expect tax rates to decrease.

This might seem confusing. You might be thinking to yourself, “Now I have to gamble on whether or not taxes are going to go up? I don’t know anything about that. This is all too much. I don’t want to think about it right now.” Rest assured that the difference between a Traditional IRA and a Roth IRA is not a deal-breaker. The deal-breaker is inaction, doing nothing at all, continuing not to contribute to your retirement. Very few people look back and say “I wish I had saved less for retirement,” but at our current rate, about 90% of people are going to wish they had saved more -- chances are, you’re one of those people.

Here are some things to know about the Traditional IRA.

Simple IRA

The Simple IRA is a good option if you’re looking to hire employees in the future (or if you currently have employees). Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, any business that sets up an automatic contribution plan for retirement gets a $500 tax credit.

The Simple IRA contribution limits are $13,500. You’ll have two options for your employees: automatically contribute 2% of their paycheck or match 3% of their contributions dollar-for-dollar. The option you choose depends on how much they currently earn and how much you’re willing to contribute.

SEP IRA

The maximum contributions for a SEP IRA are 25% of your earnings up to $57,000.

SEP IRAs offer fewer benefits than the Roth IRA or Solo 401k, and you can’t make catch-up contributions past the age of 50. Still, SEP IRAs are easy to set up and typically have low administrative costs. They were designed for businesses that wouldn’t have otherwise developed a retirement plan.

The exact limitations are a bit more confusing, and they depend on how many employees you have -- that’s why it earns the bottom spot on our list.

Conclusion

Gig workers and independent contractors have a lot to juggle. You have to pay close attention to your taxes, making sure you’re setting aside at least 15-20% for payroll and Social Security taxes. After that, you have to consider how you’re going to pay for healthcare. Then, finally, you get to worry about your normal tax bill.

Amidst all that, while you’re just trying to get a business off the ground or do some gig work on the side, it can feel like it’s impossible to plan for retirement. 

With these 5 ways the self-employed can invest for retirement, though, we’ll get you set on the right path to a well-funded retirement. 

 

IRA Rollovers: Yes, Rolling Over Your 401(k) Into An IRA Is Smart!

Changing careers? Deciding what to do with retirement funds is going to be a primary concern. While there are a number of options available, many choose to roll these funds over into an Individual Retirement Account.

There are a number of good reasons for this, and we'll be looking at seven of them here in a minute. But first ...

What Exactly is a Rollover IRA?

IRA rollovers can be deposited into an IRA from another retirement fund, such as a 401(k). Those who don’t already have an IRA can open one for the express purpose of rolling over funds from a previous employer’s retirement plan. Those who already have an IRA can simply roll over the money into the existing IRA.

IRA Rollovers

7 Reasons an IRA Rollover Makes Sense

Many folks are content to let their 401(k) plans accrue money over time, and there’s nothing wrong with that option. Why would you fix something that isn’t broke?

Well in this instance, you would not be fixing something that is broken so much as replacing it with something better.

What do we mean?

Those who have just switched jobs have a short list of options concerning their retirement funds. These include:

Cashing the funds out immediately is not advisable. While leaving the money in the original 401(k) or rolling it over into the new one aren’t bad options, there are a number of reasons why an IRA rollover is the best option on the list.

Reason #1: Rollovers Can Preserve Tax-Favored Status

Those who choose to cash out their accounts early are not only subject to a 10% early withdrawal penalty if they are under the age of 59 ½ but will also need to pay income tax on the balance.

By contrast, rollovers can preserve tax-favored status so long as they’re transferred from one trustee to another. In other words, the IRA will continue to grow tax-deferred until a retiree begins collecting on their investment.

Reason #2: IRA Rollovers Can Increase Investment Options

Some folks choose to leave the funds in their old plan alone or roll the funds over into a new employer-offered plan. There’s nothing wrong with this per se, but rolling the money over into an IRA can increase the number of options that are available to you. For instance, IRAs typically offer a broader range of investments. 401(k) plans, on the other hand, may be limited to a handful of mutual funds.

This advantage will contribute to a better investment strategy and can prove more lucrative in the long run.

Reason #3: IRAs Have Lower Fees

Generally speaking, employer-sponsored 401(k) plans typically have higher administrative fees than IRAs.

Reason #4: An IRA Centralizes Control of Your Retirement Monies

There might some good reasons to keep your old 401(k) open, particularly if you’re satisfied with the returns. On the other hand, it’s much more convenient to have one centralized location from which to manage all of your retirement funds. IRAs are easy to figure out and significantly reduce the complexity of managing separate accounts.

From one centralized location you can access:

Reason #5: Brokers Will Compete For Your Business

Brokerage firms are more than willing to offer incentives to bring your business to them. In some instances, this could even mean free cash. In other instances, you may be entitled to free trades. It’s certainly something to look into as you figure out how you want to invest your retirement money.

Reason #6: 401(k) Plans are Subject to Rules an Individual Company Establishes

Every company has a great deal of wiggle room when it comes to setting up a 401(k) plan for their employees. IRAs, on the other hand, are subject to a centralized set of rules established by the IRS.

This is better for two reasons:

Reason #7: The Rollover Itself is Free

While there are other costs to consider, rolling over a 401(k) into an IRA is free. There will be transaction costs for individual investments and other costs to bear in mind, but setting up and rolling over the money is a relatively pain-free process.

The Bottom Line

The advantages of rolling over your 401(k) into an IRA far exceed the risks. It makes sense not because the other options are bad, but simply because IRAs are better for some. With more investment options to choose from, lower administrative costs associated with the account, a simple centralized location from which to access your retirement investments, and more transparency regarding how the fund operates, IRAs make the most sense  for your retirement plan.

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

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

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

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

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

Tax Advantage of Retirement Tax Savings

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

That means you have a head start against the pirates.

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

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

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

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

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

The Difference 20 Percent Can Make

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

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

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

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

Keep more of your money with a Royal Tax Review

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

Everything You Need To Know About IRA & 401k Distributions

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

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

Options For IRA or 401(k) Distributions

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

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

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

How Are Distributions From a Traditional IRA Taxed?

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

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

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

 

Options For Receiving Distributions Before Retiring

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

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

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

Congratulations! You've lived long enough to retire or you're almost there.

But before you "cash out" and get your money via distributions from your retirement account, you may want to know what some people learn the hard way.

Let's start with distributions from traditional IRAs and 401(k)s. 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.

And whether you're getting ready to retire or you have a long way to go, the information below can benefit everyone.

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.

When 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 401(k)s

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.

Checkbook Control: A Self-Directed 401(k) Feature You Need!

Odds are good that if you're considering the self-directed 401(k) as an investment vehicle for your retirement funds, you have at least heard the term "Checkbook Control." You may even already have a grasp of checkbook control and know that you want this feature for your solo 401(k).

But many investors who start researching online quickly learn that the IRS doesn't actually mention the words "Checkbook Control." They do, however, discuss Trustees, and the great deal of control that the Trustee has over the plan.

It's no wonder that this language can be a source of confusion for many investors. Read on to get some clarity on this subject and learn how trustees and checkbook control influence your self-directed 401(k).

Checkbook Control

What is Checkbook Control?

Checkbook control is actually a term that came about from providers of 401(k)s. Rarely is there a literal checkbook involved, but it can be helpful to think of the checkbook as a metaphor for how your plan's assets are managed.

Checkbook control for self-directed 401(k)s simply refers to the ability to invest in anything that the IRS allows, including a broad range of nontraditional investments. It's a highly desirable feature, and likely the reason you're considering a self-directed 401(k) in the first place.

Essentially, Checkbook control is the aspect of your account that allows you to break free from the shackles of custodians and traditional investments. If you want the freedom to control how your retirement assets are invested and the ability to diversify these investments, then you need this feature.

But as we mentioned, the IRS does not use this terminology. If you read through the regulations on self-directed 401(k)s, you'll actually see that most of the "control" of the account goes to the trustee. This brings us to the obvious question.

What is a Trustee for a 401(k)?

Uncle Sam defines the trustee of a 401(k) as the person who has the power to manage and control the plan and its assets. This person will also make decisions about which kinds of investments your plan's funds are going to. The trustee can make or break the self-directed account because they're the one holding that metaphorical checkbook.

What Does This Mean For Your Retirement Account?

The good news is, you can easily get the checkbook control you want and serve as a Trustee. In fact, you can self-direct your account while serving as the trustee. Doing so has many advantages. Remember that metaphorical checkbook? By taking on the trustee's responsibilities while also being the plan's participant, you take total possession of the plan's "checkbook."

 

Charitable Gift Options Using a Self-Directed 401(k)

Charitable contributions are a popular strategy among the wealthy for lowering tax payments. But this method isn't exclusively for the Michael Dells and Kim Kardashians of the world. Investors from all income levels, including you, can use it too. But even savvy investors don't always know that charitable gifts can be made from retirement accounts. So whether you simply want to donate money from your 401(k) to a cause close to your heart, save on your taxes, or both, this article is for you. Read on to learn more about your options for giving charitable gifts with your Self-Directed 401(k).

Why You Should Consider Giving Your Retirement Funds to Charity

The funds in IRAs and 401ks are among the most heavily taxed that the average investor will hold, and redirecting them towards charity can make a meaningful difference. Charitable donations help you save money by reducing your taxable income. This is why many highly wealthy individuals give in large quantities. Sure, many of them are philanthropic at heart, but there is also a distinct tax advantage to donating. The higher your taxable income, the greater your tax responsibilities when Uncle Sam comes around to collect his bills.
Giving to charity also qualifies you to receive a Charitable Gift Tax Credit. Literally anyone can take advantage of this. Generally, the credit is computed by taking the market value of an item or actual amount of cash donated, then subtracting the percentage of your tax bracket.
Strategic donations can lead to thousands returning to your pocket. Of course, there are limits: you cannot donate more than half of your income in a given year. Similarly, for these benefits to apply, you must itemize each donation.

What Options You Have For Giving to Charity

You're likely already familiar with some types of donations. Others are less obvious. Here are some, but not all, of the many methods you can use to your taxable income to a charitable cause:

Which Options Are The Most Beneficial?

While any of these options is certainly beneficial and altruistic to the receiving organization, smart investors may be wondering which will benefit their own bottom lines. You may be surprised to learn that retirement and life insurance donations are among both your strongest and lesser-known gift choices.
Many potential donors do not know much about life insurance or retirement plan asset gifts simply because charities are less likely to request them. Many nonprofit organizations have a need for immediate cash that is simply not addressed with these types of donations. They are nonetheless useful for the charities--and you.

Ways to Give To Charity From Your 401(k)

Below, we'll describe the two simplest options for donating to causes you care about with your 401(k) funds.

Option 1: Donate Directly From the Plan

You can liquidate an asset (or several) held by your plan, then directly donate the funds to the nonprofit group or cause of your choosing.

Option 2: Name a Charity as a Beneficiary of Your Plan

Naming the charity of your choosing as a beneficiary works the same way as designating any other beneficiary. However, this option has the added advantage of allowing plan funds to pass through to the charitable organization completely tax-free. If you have tax-deferred funds, this is actually the smarter expense than passing those same funds on to your heirs. Your heirs would have to pay the taxes, but the charity does not. Though this may not directly benefit you as much, it is certainly the most efficient use of money that would otherwise be gifted to the U.S. Government. That you can control the funds by selecting any qualifying charity means you have the luxury of supporting a cause you truly believe in.
 

Solo 401(k) Contribution Deadlines: What The Self-Employed Need To Know

Nobody loves them, but deadlines are nonetheless an important part of "adulting." If you have ever participated in a traditional employer-sponsored 401(k), you likely already know (or have been reminded) that you cannot contribute to these plans beyond the end of the calendar year. What about the solo 401k contribution deadline? Are things different with this type of plan?

Yep. You see, if you don't work for "The Man," the burden is on you to be aware of your contribution deadlines. That's why we have written this little cheat sheet, which will explain your deadlines based on the type of business you own.

Spoiler alert: these deadlines are unlikely to line up neatly with the traditional ones. 

Sole Proprietorship Solo-K Deadlines

Elective Deferrals

If your business is set up as a sole proprietorship, you can make contributions all the way up until your personal tax return is due on April 15th or October 15th. You may choose to make traditional (pre-tax) or Roth (post-tax) contributions to the account. Those interested in making Roth contributions to their Solo-K will want to check to ensure their plan allows for such contributions.
One thing to keep in mind is that regardless of when you make the contributions, you must fill out a form to formally elect the deferrals no later than December 31st, which is generally assumed to be the end of the business year.

Profit-Sharing Contributions

Like elective deferrals, profit-sharing contributions share a deadline with your tax filing: either April 15th or October 15th. Calculating profit-sharing contributions accurately is essential. These contributions are based off of your income, which for these purposes is determined by your net earnings. The IRS has helpfully defined net earnings as your earnings minus half of the self-employment tax deduction as well as the Solo-K contribution deductions. Learn more about how much you can contribute from Uncle Sam's handy memo on Solo-K profit sharing.

S-Corp or C-Corp Solo-K Deadlines

Elective Deferrals

Using an S-Corporation or C-Corporation structure simplifies contributions because they are simply made through payroll. Typically, this means employees elect to defer and their contributions are automated alongside pay.

Profit-Sharing Contributions

Corporations have the luxury of being able to contribute up to 25% of an employee's earnings. These pre-tax contributions are due at the time of business tax filing: either March 15th or September 15th. If the plan allows, employees who wish to may later convert such contributions into Roth contributions.

Royal Legal Solutions Can Help You Understand Your Deadlines

Still with us? If that seemed like a lot of information, it's because it was. We're here to help you wade through the alphabet soup of retirement accounts and meet your deadlines. Of course, deadlines may differ for investors using LLCs or other business entities. The retirement and tax professionals at Royal Legal Solutions can offer you the best advice for maintaining your Solo-K's compliance.

Benefits of a Self-Directed Roth 401(k)

Real estate investors are typically excellent candidates for self-directed retirement accounts, in no small part because of their experience with evaluating investment opportunities. But there is a world of options: Self-Directed IRAs, 401(k)s, and of course, the Roth options for both. To make the best choice for your situation, you must understand your options. Today, we are going to focus on the Self-Directed Roth 401(k) and its many benefits. Read on to learn the reasons many investors love Roth accounts and whether this option is the retirement plan for you.
Flexibility With Your Investments
The Self-Directed Roth 401(k) featuring Checkbook Control gives investors more leeway to invest in what they understand. Rather than being confined to traditional investment choices like stocks, bonds, or whatever financial products a custodian happens to be pushing, you can invest your retirement funds into nearly any type of asset you wish. These can include nontraditional investments as diverse as real estate, lending transactions, and even the various cryptocurrencies. While there are three types of assets Roth accounts cannot invest in, that leaves literally everything else in the world as an option.

Multiple Contribution Options

Roth accounts are famous for their ability to grow your retirement assets tax-free. Why? Because you typically pay taxes on the "front end," meaning that your contributions have already been taxed. When retirement rolls around, you take your distributions totally tax free. You've paid the piper at that point.
While this is reason enough for many investors to be crazy about Roth-style accounts, the Self-Directed Roth 401(k) also allows you to make pre-tax contributions. That's right: you can truly have it both ways. Of course, there's a caveat. If you choose to make traditional tax-deferred contributions, you may, but you must place them inside of a Traditional 401(k) first. Then, they can be converted into the Roth account, or you can simply allow both accounts to grow. Our experienced professionals can help you with this process and judgment call.

Ability to Make Higher Contributions At Once and Overall

Total plan contributions for Self-Directed Roth 401(k)s are much higher. You can contribute a whopping $50,000 annually--or $55,000 if you're over 50. That's over twice what the IRS allows for IRAs.
We should also note that the Self-Directed Roth 401(k) blows any IRA's individual monthly contribution limits out of the water. Traditional IRAs limit you to a measly $5,500 if you're under 50, and $6,500 if over 50. Although, if you're going to do an IRA at all, we highly recommend the Self-Directed Roth IRA. Learn more from our previous educational article on the benefits of converting your retirement account to a Roth. These perks will also apply to your Self-Directed Roth 401(k).

Exemption From Income Limitations

You want to contribute the maximum amount possible to your account, don't you? Of course you do! That's why it's a huge advantage that this type of account is exempt from the Modified Gross Income (MGI)  limitations. We've written about the MGI limits before if you want more details. But the short version is this: your income will not limit your contributions. This simply isn't the case with Roth IRAs.
And remember: these aren't all of the advantages, just four of our favorites. When in doubt, reach out to the pros. Royal Legal Solutions can help you establish your 401(k) and ensure its compliance.



Double Your Real Estate Investment Return With a Tax-Efficient 401(k) Strategy

Did you know that you can use a self-directed IRA for your real estate investment? I’ve talked about this before and you can read more from our article about self-directed IRA investments.  There's no doubt that self-directed IRAs are powerful investment vehicles, but they aren't silver bullets for all investors.

That said, they do come in handy for Roth funds or when you’re planning to buy and hold onto one property for a long time. But the current IRS trends have many investors eyeballing different types of accounts.

So, what is an alternative I recommend?  I’m a big fan of the Qualified Retirement Plan (Solo 401(k) or Profit Sharing Plan) because it comes with the same benefits as a self-directed IRA and some more. Today, I’ll go over a strategy you can use to partner with your QRP to buy investment property.

House Flipping With a Solo 401(k): An Example

Fred Stark is a real estate investor who has spotted a hot property going for $200,000. He has a QRP with about $150,000 and $100,000 in the bank. Fred can easily buy the property in his own name or opt to partner with his QRP for the transaction.

How Do Investors Partner With a Retirement Plan?

To partner with his QRP, Fred is required to form an LLC. He then divides the ownership of the property in proportion to each member’s (Fred and the QRP) contribution. For example, if Fred puts in $70,000 and the QRP contributes $130,000, then ownership will be split in a 35% to 65% ratio between Fred and his QRP respectively.

How Profits Are Treated

Profits from an investment are usually distributed based on the percentage of ownership. This means that if the investment property Fred is buying generates an income of $30,000, he will receive $10,500 while $19,500 goes to his QRP. Consequently, John will have a taxable income of only $10,500. The $19,500 received via the QRP will not be taxable.

How Depreciation is Treated

Real estate depreciates over a period of between 27.5 years to 39 years. Fred can use the depreciation of the property to offset the income gains. So in fact, he can use this “paper loss” to his advantage.

What Impact Does Depreciation Have on Taxable Income?

Let’s have one more look at Fred’s $200,000 house. $175,000 is allocated to structures subject to depreciation while $25,000 is allocated to land. This means that the property will have a depreciation of $6,400 every year. Then his share of depreciation given that he owns 35% of the property is $2,240. This reduces his income to $4,760 from $7000. His QRP gets allocated $4,160. But since the QRP income is non-taxable, there is no benefit accruing from this depreciation.

But, wait: can he allocate the whole chunk of depreciation to his portion of income?

Yes. And this is where the magic happens. By using an Anderson Tax Efficient LLC, Fred can allocate all the losses to himself, reaping the full benefit. Now his taxable income is only $600. Now his taxes are only $180 bringing his net income to a whopping $19,820 from the initial $20,000.

Set Up Your Solo 401(k) Today

If that’s not exciting, I don’t know what is.

The Solo 401(k) is a QRP that has amazing income and tax benefits that you should take advantage of. But you should proceed with caution. You may want to read our article on using a 401(k )to buy a house first. This is not a collaboration you should set up on your own.  Use a professional who has the qualifications and experience to execute it the right way.

Keep more of your money with a Royal Tax Review

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

Beneficiary Mistakes — Self-Directed 401(k) or IRA

Designating a proper beneficiary is essential for retirement account holders to guarantee their interests will be served. Whether you're using a Self-Directed IRA or 401(k), you want to ensure that you are doing the most you can for the appropriate beneficiary. Other investors have made critical errors in judgment on this subject, but you can fortunately learn from their mistakes. Today, we are going to talk about major mistakes investors make regarding their Self-Directed 401(k) or IRA's beneficiary, and how to avoid making them yourself.

Mistake #1: Naming Your Child as Your Beneficiary

Most people immediately want to name their child as a beneficiary. This is only natural, but if your child happens to be a minor, things can get extremely complicated. Run this scenario through your head: if you're hit by a bus tomorrow, will your 8-year-old know what to do regarding your retirement account? Do most 8-year-olds even know what an IRA or 401(k) is, let alone how to responsibly direct one?
Even if your little angel is a MENSA-qualified financial prodigy, it is nearly impossible that a court would allow your tiny genius to directly receive your plan's benefits.
Some investors believe they can avoid this issue by simply designating their child as a secondary beneficiary, with their spouse as the primary. But if something should happen to both you and your spouse, you're still going to run into the problems above. Fortunately, there is a simple solution for these situations: appoint a guardian to represent your minor child's interests in your plan. Note that you'll want to do this yourself. If you don't, the judgment call will be up to the court. Make the choice while you can so you know your child will be protected by a person you trust.

Mistake #2: Bungling The Beneficiary Form

There are several ways your beneficiary designation form can actually sabotage the person it is intended to help. The most obvious of these is lacking one altogether. But let's assume you did everything correctly when filling out and filing the form. Don't skip this next critical step: let your beneficiary (and ideally your attorney) know where it is.

If you don't, you're adding even more troubles to your already grieving loved ones. We recommend that you not only provide copies of your form to all interested parties, but that you also keep an additional copy in a home safe or safety deposit box. Anyone who needs the form, from your professionals to your heirs, should be notified ahead of time of the copy's secure location.

Solution: Help Your Beneficiary Efficiently in Other Ways

Of course, when you name a beneficiary, you are hoping that he or she will actually benefit from your account and its investments. While they likely will, we have found that there are limits on how much a Self-Directed IRA or 401(k) can actually do for your chosen party. To be precise, there's one big limit: Uncle Sam.
Uncle Sam likes his money. He will always get it. And getting it from your retirement account upon your passing is child's play for Uncle Sam. Every dime that goes to him is essentially coming out of your beneficiary's pocket. That brings us to one of the most common-sense ways to look after your loved ones: life insurance.
Life insurance is an incredibly valuable tool, particularly if you have children. Yes, you will pay premiums for the policy, and they may be expensive. But in the event of your death, the benefits will pass directly to your heirs without the Taxman getting in the way.
 

How a 401(k) Affects Real Estate Investors on Tax Day

You are probably already familiar with the benefits of a 401(k) for retirement planning. But did you know that using this type of account can also help you save on your taxes? In fact, there are multiple tax benefits to taking advantage of the 401(k). Read on to learn about some major ways to save on Tax Day.

401(k) Tax Credits

That's right: you can actually get a tax credit just for contributing to your 401(k). The Retirement Savings Contribution Tax Credit, also known as the Saver's Credit, is intended to ease tax burdens for workers with moderate or modest incomes. But if you meet the eligibility requirements, you can receive a credit up to $2,000. Married couples filing jointly may benefit even more, as their maximum credit is $4,000.

401(k) Contributions Can Lower Your Tax Bracket

Whether you are using a traditional 401(k) or the Solo 401(k), any pre-tax contributions you make are automatically going to lower your tax liability. How does this work? In simple terms, the contributed funds are being pulled from your paycheck before you even receive it. You're already receiving less on your paycheck, but this is actually an advantage when Tax Season comes. The IRS essentially acknowledges the loss you take from these withholdings. They're counting the money you actually receive, meaning your taxable income is lower. Thus, your tax obligations are also lower.
Smart investors in any tax bracket can take advantage of the rewards of making pre-tax contributions. Larger contributions lower your taxable income further. This means, if you contribute enough to the account, you can potentially lower your tax bracket--and enjoy massive savings on your taxes.

Roth 401(k)s Save You Money in The Long Run

There are many reasons to love a Roth 401(k). Roth retirement accounts in general come with many benefits, namely that contributions to the account are tax-free. Distributions won't be taxed when you take them, either. You can also take advantage of strategically timing your Roth contributions to relieve tax obligations.
Using a Roth 401(k) offers a multitude of exclusive benefits in both the short and long term. If you are having a low income year, are early on in your career, or expect to retire in a higher tax bracket than your current one, the Roth 401(k) is seriously worth considering. Check out our previous educational article to help determine if converting your 401(k) to a Roth plan is right for you.

Royal Legal Solutions Helps Our Clients Use 401(k)s to Save on Taxes

Retirement accounts can be intimidating, even for seasoned investors. Since we all must take accurate tax filing seriously to avoid penalties, savvy investors choose to get some help from the pros. The tax and retirement professionals at Royal Legal Solutions can help you get the most savings possible out of your 401(k). We offer a variety of retirement planning services to ensure you are using the correct types of accounts for your circumstances. And, of course, we can advise you on how to get the most tax benefits out of your retirement account.
 

Self-Directed 401(k) Contribution Limits: What Investors Have To Know

Every year, the IRS updates contribution limits for the various types of retirement plans. If you want to ensure that you are getting the most out of your plan, you need to know the self-directed 401(k) contribution limits.

This issue is particularly pressing for plan holders over 50, who are allowed to contribute more than younger individuals in the early stages of their working lives. Wherever you are in your career, it is helpful to know the most current information to effectively plan for retirement.

Elective Employee Contributions

The contribution permitted from the employee to the plan is now $18,500 for those under age 50. This is a $500 increase from the 2017 limits.

Catch-Up Contributions

If you are over the age of 50, you have the option to make "catch up" contributions to maximize your retirement savings. There was no increase in catch up contribution limits for 2018. The limit remains the same as it was in 2017: $6,000.

Total Annual Maximum Self-Directed 401(k) Contributions

Total Annual Maximum Contributions take into account all possible sources of plan income. The new limit is $55,000. This is an increase of $1,000 from the 2017 maximum. For those over 50 who choose to make a catch-up contribution of $6,000, the limit is $61,000. You can learn details about why taking advantage of this maximum is a good idea from our educational article on the Solo 401(k)'s unique features.

Health Savings Accounts (HSAs)

Many investors who want to maximize their savings take advantage of HSAs alongside their 401(k). If you are among them, then you may want to know about the new HSA maximum contributions. The new limit for individual HSAs is $3450, which is $50 more than was permitted in 2017. Family HSA plans also saw in increase of $150 from last year, up to $6900.

What About IRAs?

At the time of this writing, contribution limits for IRAs have remained unchanged for several years. The most recent increase was in 2013. If you're using an IRA, the contribution limits remain the same as they did last year: $5,500 for individuals under 50, and $6,500 for individuals over 50. For many people planning their retirement, this is yet another compelling reason to look into the Self-Directed 401(k).

 

401(k) Investment Options

For many individuals who want to plan ahead, a retirement account is one of the best means to save for the future. For most, an individual retirement account (IRA) or 401(k) plan are the primary means of doing so. However, did you know there were other options? At Royal Legal Solutions, we understand your desire to capitalize on a diverse investment portfolio. Below, we talk about the types of 401(k) accounts available to you, as well as the investment options each present.

Different Plans, Increased Options

There are several types of 401(k) accounts you can have. Depending on the type of 401(k) you have, your investment options can be greatly expanded.

For most individuals, a company-sponsored 401(k) account is the kind that comes to mind. These accounts, set up through your employer, come with their own set of guidelines. Typically, a company will partner with a financial service business in order to provide these accounts to their employees. More often than not, these plans are strictly limited to the typical stocks, mutual funds and bonds. Can a business elect to have a more diverse investment portfolio for their employees to choose from? Yes. Yet, this is seldom the case. Most employers, however, do help you save for your retirement faster by matching all or part of your contribution.

If you are self-employed, without employees, you may elect to open your own 401(k) account with a financial institution. These accounts, known as individual 401(k) plans, are also limited in scope. This is because most financial institutions do not offer “self-directed” options to their clients. In fact, your investment options will be limited to those options offered by the company.

As with the individual plan above, a self-directed 401(k) can be established by anyone who is self-employed without employees. In a self-directed 401(k) account, your investment options are almost limitless. In fact, with a self-directed 401(k), you can expand your investments from those traditional options above to include real estate, private placements, precious metals, and more. A self-directed 401(k) can be either traditional or Roth-based, which allows you to use either pre- or post-tax dollars for your contributions.

Invest with a Reputable Firm

There are many benefits to opening a self-directed 401(k) account. (Likewise, you can also open a self-directed IRA account too!) To do so, however, you need to find a reputable and specialized firm that offers this. Royal Legal Solutions can help! Our professionals specialize in self-directed retirement accounts. We understand the laws established by the Internal Revenue Service (IRS), as well as any state and federal laws that may affect your account too. If you would like to learn more about self-directed accounts, saving for your future, or IRS regulations, contact us today.

401(K) Loans For Investment Property + Prohibited Transactions

For those who want to save for retirement, a 401(k) account can help. If you are self-employed and do not have employees, you have the option of opening a self-directed 401(k) account. Unlike most company-sponsored accounts, a self-directed 401(k) offers you investment options that go well beyond mutual funds, stocks and bonds.

In fact, your self-directed 401(k) allows you to invest in real estate—as well as precious metals, renewable energy sources, private placements and much more. This means your portfolio can be more diverse, allowing you to take bigger risks but reap much larger rewards. You can save much more at a faster rate for your future. 

IRS Regulations

The Internal Revenue Service (IRS) establishes regulations that govern all kinds of financial realities. The IRS strictly forbids certain types of transaction when it comes to your retirement account. Referred to as "prohibited transactions," these include very specific types of trades and actions the IRS considers “self-dealing.”

Your 401(k) is intended for future use, if you are under 59 ½, taking money from your account is considered an early distribution. This will subject you to regular income tax rates as well as a 10 penalty. However, unbeknownst to many account owners, the IRS does allow you to take a loan from your 401(k). Let's take a closer look

401(K) Loan For Investment Property

A loan from your 401(k) can help you take part in a transaction that the IRS would prohibit. This may sound sneaky, but there are certainly times when such a transaction may be necessary. Regardless of the reason for the loan, however, you should understand how to take one.

The first thing you should do is find out if your plan permits personal loans. Not all financial institutions will allow this. (If you have a self-directed 401(k) with Royal Legal Solutions, you are in luck! We recognize that your account is built from your money and investment choices and respect that. If you need access to a personal loan, we can help.)

If your plan allows for a personal loan, you will then need to apply for one. As the participant, you must apply for the loan; the Trustee will then approve it. (With a self-directed 401(k), you are both the participant and Trustee, so this part is easy.)

You should know that your loan is limited. You can request $50,000 or 50% of your entire account balance. (The IRS dictates that you can take the lower of those two, which means you will not be eligible for a $50,000 loan if your account balance is not $100,000 or more.)

You dictate your repayment plan. With an amortized loan, your repayment schedule must be five years or less. Your repayments must be made regularly. This includes weekly, bi-weekly, monthly or quarterly payments. (You cannot make a single lump sum repayment or semi-annual payments.) Your loan’s interest rate must be consistent with interest rates being applied to other loans.

 

Self Directed Solo 401k: How To Avoid Tax Penalties

Self-administering your retirement plan may sound daunting, but a self-directed solo 401(k) isn’t rocket science. Still, it does require strict compliance with both IRS and DOL regulations. Failure to comply can result in the IRS considering your retirement fund disbursed, penalizing you, and then taxing the disbursements. Be careful—the penalties can be high when you don’t strictly adhere to the guidelines!

The self-directed solo 401(k) can give real estate investors and the self-employed unmeasured flexibility in the types of investments they can hold in their retirement account.

Today, we’re going to focus on one aspect of self-administering a Solo 401(k): the segregation of funds.

Segregating Funds within a Self-Directed Solo 401(k)

Remember, 401(k)s are funded in various ways. There are funds that have been rolled over into the current plan, contributions made by you, and returns on investments, for instance. Suffice it to say, when all these funds are kept as one lump sum, it becomes difficult to show compliance with certain IRS restrictions.

As an example, there may be some instances in which you can hold life insurance in a 401(k). If all the funds are mixed, however, it’s that much more difficult to prove to the IRS that you are in compliance with their regulations. Now you have the IRS hovering over your retirement fund with the threat of penalties and disbursement looming on the horizon.

You also want to segregate pre-tax contributions from other funds within the account because it’s easier to show the IRS where this money went when you claim it at the end of the year. Roth funds, on the other hand, must be specifically designated as such. See also: Solo 401k Contribution Limits: What The Self-Employed Need To Know.

Segregating Funds is Simply Good Practice

Segregating funds helps keep your books more transparent. It may sound like a lot of work, especially when you’re your own trustee, but it works to your benefit and protects you from a possible audit. Being able to account for all funds in your retirement account will keep you in the clear with the IRS and allow you to easily show where all of the money in the account came from.

A self-directed solo 401(k) plan is a great investment vehicle and very versatile in terms of your investment options. But as the trustee, you’re responsible for anything that goes awry with the plan. With the proper planning and bookkeeping, you can ensure that you comply with all IRS regulations.

Keep more of your money with a Royal Tax Review

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2018 401(k) Contribution Limits

There is no doubt – the Internal Revenue Service (IRS) is the governing body when it comes to your retirement account. For 2018, the IRS did not make any major changes. However, any change, regardless of size, it worth knowing. This is especially true when they affect your contribution limits.

A Quick Note

Before we get into the contribution limits for 2018, we want to make one thing clear. The limits imposed by the IRS on 401(k) plans apply to all types of these accounts. This includes your individual 401(k), self-directed 401(k), self-administered 401(k)s and more.

2018 Contribution Limits for 401(k) Accounts

The contribution limits below apply to both employees and employers. Let us take a look.

Other Types of Accounts

The IRS also sets limit for other types of accounts as well. Your health savings account, or HSA, is one such example. For individual HSAs, there was a $50 increase, which gives you a new total contribution limit of $3,450. Family HSA plans also increased. With a new limit of $6,900, these accounts have a $150 increase.
For individual retirement accounts (IRAs), however, the IRS has continued with the current contribution limits. These limits, established in 2013, remain at $5,500 for individuals under the age of 50. For individuals over the age of 50, the limit remains at $6,500 as well.

Stay Informed

One of the best ways to stay informed regarding your retirement account is to hire a reputable custodian. At RLS, we do the homework for you when it comes to IRS regulations. Our professionals have years of experience studying and applying tax laws to help our clients avoid penalties and unnecessary fees. If you would like to learn more about retirement accounts, tax laws, or contribution limits, contact us today!

401(k) Contribution Limits In 2018

There is no doubt – the Internal Revenue Service (IRS) is the governing body when it comes to your retirement account. For 2018, the IRS did not make any major changes. However, any change, regardless of size, it worth knowing. This is especially true when they affect your contribution limits.

A Quick Note On Retirement Accounts

Before we get into the contribution limits for 2018, we want to make one thing clear. The limits imposed by the IRS on 401(k) plans apply to all types of these accounts. This includes your individual 401(k), self-directed 401(k), self-administered 401(k)s and more.

2018 Contribution Limits for 401(k) Accounts

The contribution limits below apply to both employees and employers. Let us take a look.

Other Types of Retirement Accounts

The IRS also sets limit for other types of accounts as well. Your health savings account, or HSA, is one such example. For individual HSAs, there was a $50 increase, which gives you a new total contribution limit of $3,450. Family HSA plans also increased. With a new limit of $6,900, these accounts have a $150 increase.

For individual retirement accounts (IRAs), however, the IRS has continued with the current contribution limits. These limits, established in 2013, remain at $5,500 for individuals under the age of 50. For individuals over the age of 50, the limit remains at $6,500 as well.

Stay Informed On Contribution Limits For 401(k) Accounts

One of the best ways to stay informed regarding your retirement account is to hire a reputable custodian. At Royal Legal Solutions, we do the homework for you when it comes to IRS regulations. Our professionals have years of experience studying and applying tax laws to help our clients avoid penalties and unnecessary fees. If you would like to learn more about retirement accounts, tax laws, or contribution limits, contact Royal Legal Solutions today!

'Life Cycle' of a Retirement Plan: Setting Up a Solo 401(k)—And When To Shut It Down

When we talk about 401(k) plans having a life cycle, we mean that as literally as it can be meant. They are born, they exist, and then they’re terminated. It’s a useful analogy because it draws attention to the distinct stages of a 401(k) and creates a blueprint for managing it.

What is a Solo 401(k)?

Solo 401(k)s are the same as any kind of 401(k) but they’re for those who run their own business as sole proprietors. Typically, an employer would set up a 401(k) for you, but as a sole proprietor, you are the employer. You have to do it yourself. It may sound daunting, but it’s not as hard as you might imagine.

The Birth of the Solo 401(k) (How To Set It Up)

Let’s face facts. The economy is changing. Salaried careers still exist, but more and more folks are proprietors in the gig economy. That means they run a business out of their own homes or use their own capital and property to support themselves.

If that describes you, and you’re looking for options to save for your retirement, you should know that the 401(k) allows you to save more money than other kinds of retirement vehicles. As the “parent” of the plan, you must sign an Adoption Agreement. In order to do that, you must have an EIN (Employer Identification Number).

Setting up a solo 401(k) isn’t difficult, but there are quite a few forms to fill out. The second form identifies a Designation of Successor Plan or Administrator and requires a notary or a witness.

For individuals you will also need to fill out:

After all this, your solo 401(k) has been born!

The Operation or Execution (the Life) of Your Solo 401(k) Plan

First, you’ll need a place for it to live. Many people erroneously believe that the only place you can “house” a 401(k) is at a bank. That’s not true and it may not even be close to the best option available to you.

You’ll also need to nourish your solo 401(k). Remember that you can roll over funds from previously established 401(k)s or even IRAs.

You also don’t want to raise a delinquent child, so you will need to ensure that your 401(k) complies with IRS regulations. That includes reinvesting the money that your plan generations and being aware of which transactions are prohibited.

Death or Terminating Your Solo 401(k)

This is where we hope the parent/child analogy falls a bit short. The plan will terminate after the sole proprietor shuts down the plan and begins taking disbursements.

While the process can be managed on your own, it helps to have a financial professional on your side who can help ensure you remain in compliance with IRS regulations.