Who Can Help You Establish Your Solo 401k Retirement Savings Plan?

Yes, it's true. There are plenty of other legal firms and experts that can help you set up your self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k).

So what separates Royal Legal Solutions from the competition? In short, our experience as actual tax attorneys with the credentials you want from experts.

Warning Signs: Things to Watch Out For in a 401k Provider

Of course, we don't expect you to simply take our word for it. Here are some things to be wary of when you're shopping around for a solo 401k provider:

Unfortunately, many of our clients come to us after another one botches the job. Royal Legal Solutions has had to help many individuals who worked with a number of these companies. Why? Because these individuals made their "friends at the IRS" unhappy due to their improper plan contributions or with their prohibited transactions.

Royal Legal Solutions Ensures Tax Compliance

 The Solo 401k Plan is based on the rules found in the Internal Revenue Code, which can be complicated to someone without a tax professional background. This is why it's strongly advisable to work with a Solo 401k Plan provider like Royal Legal Solutions.

When you come to Royal Legal Solutions, you will be working directly with a 401k Plan tax professional that has been specifically trained on the special tax aspects of the solo 401k Plan.

We can guarantee your plan will remain in full IRS compliance and that you will not be engaging in any plan activities not approved by the plan or the IRS.

We can help you retire earlier & richer.

Most solo 401k Plan providers have already forgot about you once your plan has been established. But not us. As you begin administering your solo 401k Plan, you'll be able to consult with our trained 401k plan tax professionals.

Royal Legal Solutions can also take care of the annual maintenance of your solo 401k Plan. Proper maintenance is crucial in making sure your solo 401k Plan remains in IRS compliance. We'll also ensure that the IRS respects all your plan contributions and investment gains.

Is Your Individual 401k Compliant? Here's What You Should Know

Many investors prefer the individual 401k because it's specifically designed for small businesses with no employees. Individual 401ks offer cost effective and tax efficient investment benefits. Think of it as a Self Directed IRA made just for investors & the self employed.

It's like a dream come true right? However, a lot of individual 401ks are not correctly managed, which leads to costly penalties or even plan termination. If you have an individual 401k, you want to make sure it is managed correctly. Here's 5 things you need to ask yourself to make sure your 401(k) is compliant and keep it that way.

Has Your Individual 401k Plan Been Updated?

Your friends at the IRS require your individual 401k plan to be updated at least once every 6 years. If you’ve had your plan over 6 years and you’ve never updated it according to new IRS guidelines, it's not compliant and when that audit comes in the mail you will be subject to costly fines and even plan termination.

If your plan is out of date, the smartest thing you can do get it updated to guarantee its compliance with new IRS guidelines.

Are You Keeping Track of Your Plan Funds?

Your individual 401k plan funds must be accounted for and identify the different income sources for each member of the plan. Let's say two spouses are contributing Roth 401k employee contributions and the company is matching the contributions. In this situation, you need to be tracking these four different sources of funds, and you must have a written record documenting these different types of funds.

Are Your Plan Funds Being Separated by Both Source and Participant?

You must use separate bank accounts for the different participants’ funds and also separate traditional funds from Roth funds. You must properly track and document investments from these different fund sources so that returns to the individual 401k are properly credited to the proper investing account. Yep, there's a lot to keep track of!

Do You Need to File a Form 5500? 

Yea that's right, another form. There are two situations where you usually have to file a Form 5500 for your individual 401k. First, if your individual 401k has more than $250,000 in assets. And second, if the individual 401k plan is terminated (regardless of total assets). If either of these instances occur, then you will need to file a Form 5500 to the IRS annually.
Individual 401ks can file what is known as a 5500-EZ. The 5500-EZ is an easy to file version of the standard Form 5500. Unfortunately, the Form 5500-EZ cannot be filed electronically and must be filed by mail. Individual 401k owners have the option of filing a Form 5500-SF online through the Department of Labor (DOL).

The online filing is a preferred method as it can immediately be filed and tracked by the plan owner. Actually, if you qualify to file a 5500-EZ, the IRS/DOL allow you to file the Form 5500-SF online but you can skip certain questions so that you only end up answering what is on the shorter Form 5500-EZ.

Are You Correctly Accounting for Contributions and Rollovers? 

If you’ve rolled over funds from an IRA or other 401k to your individual 401k, you should’ve indicated that the rollover or transfer was to another retirement account. So long as you did this, the company rolling over the funds will issue a 1099-R to you, but will include a code on the 1099-R indicating that the funds were transferred to another retirement account, and that the amount on the 1099-R is not subject to tax.  If you’re making new contributions to the individual 401k, those contributions should be properly tracked on your personal and business tax returns. If you are an S-corp, your employee contributions should show up on your W-2, and your employer contributions will show up on your 1120S S-corp tax return. If you are a sole proprietor your contributions will typically show up on your personal 1040 on line 28.

Keep Your Friends at the IRS Happy

It's important to make sure you are updating your plan and complying with these rules on an annual basis. If you suspect that your individual 401k retirement plan is out of compliance, meet with your attorney or CPA immediately to make sure everything is okay. The penalty for not properly filing Form 5500 is $25 a day up to a maximum penalty of $15,000 per return not properly filed. Don’t lose your hard earned retirement dollars over a simple form folks!

Solo 401k Plan Roth Contributions: Frequently Asked Questions

The short answer is yes. Your Solo 401k does allow for Roth contributions.

You can choose to treat contributions under your plan which would otherwise be "elective deferrals" as designated Roth contributions. In this context, an “elective deferral” is an employer contribution to your 401k plan which is excluded from your gross income.

An elective deferral is instead a designated Roth contribution if you “designate” it as not being excludable. Your designated Roth contributions for any year may not exceed the maximum amount of elective deferrals that could be excluded from gross income.

All About the Roth IRA: A Hybrid Account

The Roth "sub-account" of the Solo 401K Plan is a hybrid of sorts. Although it is technically a type of 401k plan, it has some of the features of a Roth IRA. Only after-tax salary deferral contributions may be deposited in the Roth 401k sub-account.

No employer contributions and no pretax employee contributions are permitted. The entire account will contain only after-tax contributions from your salary plus pretax earnings on those contributions.

Note: Because the Roth 401k is actually just part of a regular 401k plan, most of the rules that apply to a regular 401k plan also apply to a Roth 401k plan, including the contribution limits.

Can a Roth 401k Plan Exist On Its Own?

We wish! Unfortunately, the answer is no. A Roth 401k plan is only available as an option that can be added to a traditional 401k.

When Are Roth 401k Distributions Taxable?

Distributions from a designated Roth account are excluded from gross income if they are:

However, the exclusion is denied if the distribution takes place within five years after your first designated Roth contribution to the account from which the distribution is received. Or if the account contains a rollover from another designated Roth account, to the other account.

Other distributions from a designated Roth account are excluded from gross income under Internal Revenue Code 72 only to the extent they consist of designated Roth contributions and are taxable to the extent they consist of trust earnings credited to the account.

Can I Convert a Traditional 401k Plan to a Roth 401k Plan?

Yes, you can. The Small Business Jobs Act of 2010, signed by then-President Obama contains a provision, which went to effect on Sept. 27, 2010. This provision allows for the conversion of a traditional 401k or 403b account to a Roth in the same plan if their employer offers one.

However, you must pay income tax on the amount converted. Let's take a look at 3 important criteria below that need to be satisfied in order for you to reap all the benefits of a Roth 401k:

All income and gains from your Roth 401k plan investment would be tax free!

Can I Rollover the Roth 401k Plan to a Roth IRA?

Yes. You are permitted to roll over your Roth 401k plan assets into a Roth IRA. Your assets can be transferred via a direct rollover, which will avoid mandatory income tax withholdings.

Can I Rollover a Roth IRA to a Roth 401k Plan?

No. But you can rollover assets from a Roth 401k to a Roth IRA. (Basically, you can't do the reverse.)

How Are Distributions From Roth 401ks Taxed?

 All distributions from Roth 401k's are either qualified distributions or non-qualified distributions.

Also, because all qualified distributions from Roth 401ks are tax-free, they are also exempt from the early distribution tax as well.

What is a "Qualified Distribution?"

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

Are You Required to Take Distributions From Your Roth 401k?

Yes, the required distribution rules that force you to begin taking money out of your retirement plans and Traditional IRAs during your lifetime also apply to Roth 401k.
If you have leftover money in your Roth 401k after your death, the distributions will be directed to your beneficiaries.
Note: The rules for a Roth 401k plan are different from those for a Roth IRA. If you have a Roth 401k, you must begin taking distributions from the account when you reach age 70 and 1/2, or after you retire, whichever comes first.

How Should a Solo 401k Plan Trustee Administer a Plan With Roth Contributions?

A trustee of a Solo 401k plan with a qualified Roth contribution program must establish separate accounts including only designated Roth contributions and “earnings properly [allocated] to the contributions”.

Also, the plan administrator must maintain separate records for these accounts.

Since distributions from accounts containing elective deferrals are included in the distributees' gross income, while distributions from accounts containing designated Roth contributions are generally excluded from gross income, an employee's designated Roth contributions cannot be grouped with elective deferrals.

Note: Forfeitures may not be allocated to Roth accounts.

That's all for our FAQ on the Roth option. If you have any questions about your Solo 401k plan, take our financial freedom quiz now. We're happy to help with any concerns you may have.

Interested in a Solo 401k? Royal Legal Solutions Can Help!

There are many benefits to setting up a Solo 401k.

When you come to Royal Legal Solutions you'll get to work directly with our in-house tax and ERISA professionals to customize your Solo 401k to suit your investment and retirement goals.

At Royal Legal Solutions, we can handle or help with all of the following Solo 401k issues.

Establishing your IRS-Compliant Solo 401k Plan

A plan that is compliant in the eyes of the IRS is the only kind of plan you want. Trust us on that.

When you meet with our retirement account experts, they will guarantee your compliance. This will help you avoid those costly penalty fees.

We are able to help you with the following:

Note: We will also supply you with free tax updates and ERISA changes.

Transferring Your Retirement Funds Tax-Free

Once you've established your account, you will need to transfer your retirement funds (IRA, SEP-IRA, 401k, 403b, etc.). You can do so tax-free. We can help you move funds from your current custodian to any IRS-approved financial institution or credit union without incurring additional fees.

To do this, simply direct your current custodian to transfer the retirement funds to your new Solo 401k Plan bank account.

Of course, there are mistakes many investors can make that will incur taxes or penalties. But the retirement tax professionals at Royal Legal Solutions will assist you in completing this task in a simple and tax-free manner.

You can look forward to using any local bank or credit union to serve as your custodian. Doing so will allow you to self-direct your retirement assets without the costly custodian fees and delays.

Note: Royal Legal Solutions will assist you in completing all the necessary custodian documents. Your retirement funds may be transferred to a local bank account established in the name of your Solo 401k Plan quickly and without any tax.

Open a local trust bank account for your Solo 401k Plan at any bank or credit union of your choice. If you don't know how to do this, our in-house tax and ERISA professionals will guide you.

Understand the Basic Benefits of Solo 401ks

You get the freedom of choice plus tax-free investments.

As the trustee of the Solo 401k Plan, you will have the freedom to make all investment decisions. Your Solo 401k Plan will allow you to eliminate the expense and delays associated with an IRA custodian. This means you can act instantly when the right investment opportunity presents itself to you.

Once you make an investment, the investment is then made in the name of your Solo 401k account. Finally, all you have to do is sit back and wait for those returns.

 

The Solo 401k Vs SEP IRA For Self-Employed Retirement Planning

Solo 401ks and SEP IRAs have both been around for awhile now. Previously, SEP IRAs were considered better only because they had lower administration cost and fees.

However, in recent years, competition among brokerages has made administration cost and fees much lower for Solo 401ks. Most brokerages no longer have fees, aside from for the initial setup.

This means that you, the self-employed business owner or real estate investor, are able to choose the retirement plan that's best for you based solely on the merits. Let's take a look at each.

What Is a Solo 401k Plan?

A Solo 401k plan is an IRS-approved retirement plan, which is suited for business owners who do not have any employees. These include consultants, freelancers, yoga instructors, Uber drivers ... and of course our favorite clients: real estate investors.

The Solo 401k, as its name implies, is a plan designed for one person who is a business owner. You can include your spouse on the plan if you have one. For example, a Solo 401k Plan allows you and your spouse to contribute a combined $60,000 annually.

Note: If you REALLY want to learn everything there is to know about the self-directed Solo 401(k), join our Tax, Legal, & Asset Protection Secrets For Real Estate Investors Facebook Group. Once you're in, go to "Units" and look for the Solo 401(k) Unit, where you'll find the "Know More Than Your Attorney" book by Scott Smith. It's 117 pages and nearly 40,000 words but designed to be skimmable so you can find exactly what you're looking for.

9 Reasons Why a Solo 401k is Better For Self-Employed Business Owners Than a SEP IRA 

1. You can open a Solo 401k at any bank.

With a Solo 401k, the 401k bank account can be opened at any local bank or trust company. However, in the case of a Simplified Employee Pension (SEP) IRA, a custodian is required to hold the IRA funds, which will eat into your bottom line whether your investments gain or lose.

2. Roth features are available.

A Solo 401k plan contribution can be made in pre-tax or Roth (after-tax) format. In the case of an SEP IRA, contributions can only be made in pre-tax format.

3. No annual paperwork.

With a Solo 401k, there is no annual paperwork required if your plan has less than $250,000 in plan assets.

4. You can use non-recourse leverage tax free.

With a Solo 401k Plan, you can make a real estate investment using non-recourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax.

However, the non-recourse leverage exception is only applicable to 401k qualified retirement plans and does not apply to IRAs. In other words, using a SEP IRA to make a real estate investment involving non-recourse financing would trigger the UBTI tax.

5. You can reach your maximum contribution limit quicker.

A Solo 401k includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan. Business owners with a Solo 401k plan can contribute to their plan both as owners and employees in two ways:

  1. Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
    • $18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over.
  2. Employer non-elective contributions up to:
    • 25% of compensation as defined by the plan.

Note: Total contributions cannot exceed $54,000 unless catch up contributions are used by those over age 50.

6. You don't need an LLC.

With a Solo 401k Plan, the plan itself can make real estate and other investments without the need for an LLC.
Since a 401k plan is a trust, you can be the trustee on behalf of the trust and can take title to a real estate asset without the need for an LLC.

7. Better creditor protection.

 A Solo 401k Plan offers you greater creditor protection than a SEP IRA. The 2005 Bankruptcy Act protects all 401k Plan assets from creditor attack in a bankruptcy proceeding.

8. Tax free loan option.

With a Solo 401K Plan you can borrow up to $50,000 or 50% of your account value in the form of a loan for any purpose. If you tried to borrow money using a SEP IRA, it would be considered a prohibited transaction.

9. No catch up contributions.

Catch-up contributions allow you to make larger contributions than normal if you qualify. SEP IRA's do not allow for catch-up contributions.

With a Solo 401k Plan you can make a contribution of up to $54,000 to the plan each tax year ($60,000 if the participant is over the age of 50).

The Drawback of a Solo 401k

The only drawback to a Solo 401k is that there is slightly more paperwork required to initially set one up than a SEP IRA.

But investing requires more than just money, it also requires time. So what if a Solo 401k takes an extra hour or two to set up? That's time well spent.

Contact us or explore our Solo 401k offering if you're interested in learning more about a Solo 401k plan.

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

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

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

Wait: Aren't IRAs Tax Exempt?

They are, most of the time.

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

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

The UBTI/UBIT Income Rules.

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

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

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

Where Does UBTI and UBIT Apply?

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

Let's go over them.

What is "Trade or Business?"

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

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

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

What is "Regularly Carried On"?

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

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

What About Short Term and Intermittent Activities?

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

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

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

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

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

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

What Are The Actual UBTI and UBIT Tax Rates?

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

Meanwhile UBIT tax is levied based on corporate taxes.

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

How To Save For Retirement When You're Self Employed: The Solo 401k

Have you ever heard of the Solo 401k plan? The Solo 401k is the most tax efficient way for small business owners, consultants and contractors to save money for their retirement.
The Solo 401k plan is an IRS approved retirement plan which is suited for business owners who do not have any employees, other than themselves or their spouse. Learn more about the Solo 401k and its benefits below.

Solo 401ks Are Designed Uniquely For Self-Employed Individuals.

If you're self employed, you know how crucial it is to maintain financial security for yourself and your family. The Solo 401k offers powerful and exclusive features not found in traditional 401k or IRA retirement plans.
Are you sick of being forced to invest in Wall Street stocks and mutual funds? Are you ready to invest in any and all opportunities as you see fit? If you answered yes, then a Solo 401k is just what you need!

What Are The Features That Make A Solo 401k So Useful?

In addition to the tremendous 401k benefits (tax free profits, high tax contribution deductions, asset protection and estate planning), the Solo 401k also allows you to invest tax free in virtually anything.
Popular Solo 401k investments include: real estate, private businesses, public stocks, private stocks, and even cryptocurrency. You can also borrow up to $50,000 or 50% of the account value for any purpose.
Besides letting you make high contributions (up to $60,000 for 2017) and borrow between $1,000 to $50,000 (tax free), the Solo 401k plan offers you the same investment opportunities as a Self-Directed IRA LLC. But without having to hire a custodian or create an LLC (both of which are costly ventures.)
Note: The money you borrow from a Solo 401k is lent to you at the current prime rate + 1%.

Some Disadvantages Of Solo 401k's

Of course, no retirement plan is perfect. As you read above, Solo 401k's have high contribution amounts. Naturally, this doesn't go unnoticed by the people who manage these 401k's. Which means they want a piece of your cake.
Most firms charge between $100 to $500 to set up a Solo 401k. After that, you can expect to pay annual fees of up to $500. So you don't want to get a Solo 401k unless you intend to contribute tens of thousands of dollars as soon as you open one.
And then there's the IRS you have to deal with. With Solo 401k's you don't have to file any paperwork annually unless you have $250,000 or more in your 401k (form 5500-EZ). When you take a distribution, you will have to file a form 1099-R with the IRS.
If you're thinking of establishing a 401k or need other advice on retirement options for self-employment, contact Royal Legal Solutions. Our experts are happy to help you asses your situation.

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

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

There are two things you should know first:

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

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

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

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

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

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

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

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

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

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

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

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

What’s The 60 Day Rollover Rule?

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

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

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

Royal Legal Solutions Will Guide You Throughout The Entire Process.

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

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

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

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

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

The SIMPLE IRA

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

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

The Solo 401k

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

8 Solo 401k Benefits

1. Higher Contributions.

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

For those below the age of 50:

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

For those over the age of 50:

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

Compared to a SIMPLE IRA:

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

2. Reduced Catch-Up Contribution Amount.

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

3. No Roth Feature.

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

4. Tax-Free Loan Option.

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

5. Access to Tax-Free Nonrecourse Leverage.

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

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

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

7. No Need for the Cost of an LLC.

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

8. Greater Creditor Protection.

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

Using Your Self-Directed IRA LLC For Hard Money & Peer To Peer Lending

A Self-Directed IRA LLC is a great way for hard money and peer to peer lenders to generate tax deferred & tax free returns.
Most financial institutions continue to require good credit history. They also take a couple weeks to review financial statements, tax returns and business plans, which can be a problem in the real estate business. (Think of deadlines, etc.)
Because of this there is a growing need for quick financing for many individuals, small business and investors. Real estate developers and builders for their real estate projects are a massive piece of this growing population.

What is Hard Money Lending?

A hard money loan is where a lender allows a borrower to receive funds secured by real property. Hard money loans are often used in the real estate business. Interest rates vary, but are often higher than normal business loans.
Due to the limited amount of financing available to most individuals and small businesses, many hard money lenders are eager to use their IRA or 401k funds to make loans and generate tax-deferred income or gains.

What is Peer to Peer Lending?

Peer to peer lending is a method of debt financing that enables individuals (such as yourself) to borrow and lend money without the use of a financial institution as an intermediary.
Peer to peer lending removes the middleman (banks, etc.) from the process. But it also involves more time and risk than using a bank. However, the advantages include more money for investors and more control.
The average American is looking to have more control over the loan process without the high transaction fees. As a result, a growing number of peer-to-peer lenders are eager to use their IRA or 401k funds to make loans and generate tax deferred income or gains.

How To Use Your Retirement Funds To Lend

A Self-Directed IRA LLC offers you the ability to use your retirement funds to make almost any type of investment on your own without requiring the consent of any custodian or person. (Not to mention, tax benefits!)
The most notable advantage to using your Self Directed IRA LLC to make loans, whether peer to peer or hard money, is that you can make the loan by simply writing a check.
Also, all income and gains associated with a Self-Directed IRA loan would grow tax-deferred. Learn more details from our previous article on investing with your Self-Directed IRA LLC.

The Self-Directed IRA LLC Lending Advantages

With a Self-Directed IRA your funds can be used to make secured or unsecured private loans to small business owners or home builders.
Then there's also the LLC advantage, which mind you is extremely helpful, but there are a few cost associated with setting one up.
The Self-Directed IRA LLC involves the establishment of a limited liability company (LLC) which is owned by your IRA and managed by you or any third party you choose. If you want a third party to manage it, you can.
As manager of the IRA LLC, you will have total control over your IRA assets to make traditional as well as non-traditional investments, such as hard money and peer to peer loans.
If lending or making other nontraditional investments with your retirement dollars appeals to you, schedule your personal Self-Directed IRA LLC consultation today.

Your Self-Directed IRA: Asset & Creditor Protection

Your retirement account is probably one of the most valuable assets you own, as it is for tens of millions of other Americans. But what will happen if someone sues you? Will you be protected or will you find yourself being circled by the sharks? You may know these sharks by the technical name for their species: creditors.

Protecting Your Retirement Assets

In general, the asset and creditor protection strategies available to you depend on a few things, such as:

Using a Self-Directed IRA LLC will offer you the ability to make a wide range of investments, such as real estate, in addition to offering you strong asset and creditor protection.
By using an LLC owned by your IRA, you will also gain another layer of limited liability protection. Using a Self-Directed IRA LLC to make investments offers you far greater asset and creditor protection versus making the investment personally.
For this reason, growing and investing your retirement funds through a Self-Directed IRA LLC is a great tool to protect your retirement assets from creditors, inside or outside of bankruptcy.

Federal Bankruptcy Protection for Your IRA

Traditional and Roth IRAs created and funded by a debtor are subject to an exemption limitation of $1 million. Which means that nobody can ever touch that $1 million except with your consent and creditors can't take it. That's hard to beat!

Protection From Other Creditors

Your protections extend beyond the bankruptcy setting. In general, ERISA pension plans, such as 401k qualified plans, are afforded extensive anti-alienation credi­tor protection both inside and outside of bankrupt­cy.

However, these extensive anti-alienation protections do not extend to an IRA, including a Self-Directed IRA. Since an individually estab­lished and funded Traditional or Roth IRA is not an ERISA pension plan, IRAs are not preempted un­der ERISA.

Which means for anything short of bankruptcy, state law determines whether IRAs (including Roth IRAs) are shielded from creditors’ claims.

Note: Inherited IRAs do not enjoy the protections of "normal" IRAs in bankruptcy proceedings.

Royal Legal Solutions Helps You Protect Your Assets From Creditors

Before you wade into shark-infested waters, get yourself a life vest. If you're interested in learning more about how you can better protect your assets using a Self-Directed IRA LLC, call Royal Legal Solutions today at (512) 757–3994 to schedule your retirement plan consultation.

Solo 401k Vs Self-Directed IRA: Which is Better for You?

The choice between a solo 401k and a self-directed IRA LLC really depends on you—there is no one-size-fits-all solution. However, as we will see, a solo 401k is usually the best option for self-employed people.

What is a Self-Directed IRA?

A self-directed individual retirement account (SDIRA) is a type of individual retirement account (IRA) that can hold alternative investments normally prohibited from regular IRAs. The account is administered by a custodian or trustee, but managed by the account holder. This is why it's called "self-directed."

The benefits of the self-directed IRA include having the ability to use your retirement funds to make almost any type of investment (including real estate).

What is a Solo 401k?

A solo 401k is an IRS-approved retirement plan, which is suited for business owners who do not have any employees other than themselves and perhaps their spouse. The solo 401k is not a new type of plan. It is a traditional 401k plan covering only one employee. It lets you contribute up to $60,000 each year.

9 Reasons Why A Solo 401k Is Better for Self-Employed People

There are a number of options that are specific to solo 401k plans that make the Solo 401k plan a far more attractive retirement option for a self employed individual than a Traditional IRA.
Here are nine of the best reasons we've found.

  1. Reach your Max Contribution Amount Quicker.

A solo 401k includes both an employee and profit sharing contribution option. Compare this to a traditional IRA, which has a low annual contribution limit.

Under the 2017 solo 401k contribution rules, if you're under the age of 50, you can make a maximum employee deferral contribution in the amount of $18,000. On the profit sharing side, your business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including your employee deferral, of $54,000.

If you're over the age of 50, you can make a maximum employee deferral contribution in the amount of $24,000. Up to a combined maximum of $60,000.

  1. Roth Feature Options.

A solo 401k plan contribution can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a  Self Directed IRA, contributions can only be made in pre-tax format.

  1. Tax-Free Loan Options.

With a Solo 401K Plan you can borrow up to $50,000 or 50% of your account value in the form of a loan for any purpose. With a Traditional Self-Directed IRA, you can't even borrow $1 dollar from the IRA without triggering a prohibited transaction.

  1. You Can Use Non-recourse Leverage & Pay No Tax.

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

  1. Open the Account at Any Local Bank.

With a Solo 401k Plan, the 401k bank account can be opened at any local bank or trust company. However, in the case of a Traditional Self Directed IRA, a special IRA custodian is required to hold the IRA funds.

  1. No Need for the Cost of an LLC.

With a solo 401k plan, the plan itself can make real estate and other investments without the need for an LLC, which depending on the state of formation can be expensive.
Since a 401k plan is a trust, you can be the trustee on behalf of the trust and can take title to a real estate asset without the need for an LLC.

  1. Better Creditor Protection.

A Solo 401k Plan offers you greater creditor protection than a Traditional IRA. The 2005 Bankruptcy Act protects all 401k Plan assets from creditor attack in a bankruptcy proceeding.
Note: Most states also offer greater creditor protection to a Solo 401k than a Self-Directed IRA outside of bankruptcy.

  1. Easy Administration.

With a Solo 401k Plan there is no paperwork required if your plan has less than $250,000 in plan assets.
Note: In the case of a Solo 401k Plan with greater than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed. Royal Legal Solutions can help you with that.

  1. Flexible Structure.

Royal Legal Solutions' Solo 401k Plan is a flexible, self-directed plan that will allow you to make traditional as well as non-traditional investments, such as real estate, by simply writing a check.

Bottom Line: Most Self-Employed People Benefit from the Solo 401k

The solo 401k plan was designed with owner-operated businesses in mind. If you're self employed, there aren't too many other plans out there that offer more benefits than the solo 401k. Of course, this is a generalized statement and your unique circumstances may be different.

We recognize that not all self-employed people are the same. That's why we recommend talking over your retirement plans with a professional. You may also be interested to read Solo 401k Vs. SIMPLE IRA: Which is Better for You?

How to Convert Your Retirement Plan To A Self-Directed Roth IRA

Do you want to control what you invest in, have a greater variety of investment choices, and have more money to spend during your retirement? If so, then you may just want to convert your retirement plan to a Self-Directed Roth IRA.

If you're considering making a big leap forward towards gaining more control over your retirement account, it's a good idea to carefully read the information below. Not everything will pertain to you, but you'll leave with a greater understanding of how these accounts work.

IRA Rollovers to the Self-Directed Roth IRA

Most of the time Roth IRA conversions and retirement plan rollovers to a Roth IRA are taxed. This is offset by the fact that you won't have to pay tax on your future distributions.

A conversion is a taxable movement of cash, real estate or other assets from a Traditional IRA, SEP IRA, or a Savings Incentive Match PLan for Employees (SIMPLE IRA) to a Roth IRA.

Note: A SIMPLE IRA can only be converted to a Roth IRA after a two-year period, which begins on the date your first SIMPLE IRA contribution was deposited.

Are There Any Eligibility Requirements to Do a Roth IRA Conversion?

There are no eligibility requirements for making a Roth IRA conversion. If you earn too much to make a Roth IRA contribution, you can contribute to a Traditional IRA instead and then do a Roth IRA conversion.

Roth IRA Conversion Taxes & Penalties

If you decide to convert your Roth account to a Self-Directed Roth IRA LLC structure, you will have to pay tax on the Roth IRA conversion on a "pro rata basis". This means the portion representing pretax assets is taxable in the year of the conversion, and the portion representing after-tax assets is not taxable.

Also, you will need to file Form 8606 to determine the taxable portion of the conversion. You will need to list all the pre-tax IRA assets to determine the taxable and nontaxable assets.

How To Convert Into a Self-Directed Roth IRA

A Roth IRA conversion can be completed either via a direct or indirect rollover. So what's the difference between the two?

A conversion in which the check is made payable to the receiving financial institution for the benefit of your Roth IRA is a direct conversion.

An indirect conversion occurs when you request and receive a distribution from your pre-tax IRA custodian and deposit the amount into a Roth IRA account within 60 days.

Note: With an indirect Roth IRA conversion, the one rollover per 12-month restriction does not apply.

Reporting a Roth IRA Conversion on Your Taxes

Since most conversions are generally subject to taxation, your financial organization distributing the pre-tax IRA assets will probably apply withholding rules to the account.

However, an exception applies to IRA funds being converted to a Roth IRA.

Note: A Roth IRA conversion is a reportable transaction regardless of whether it was handled directly or indirectly.

Direct Rollover to a Self-Directed Roth IRA

When you directly roll over your employer sponsored retirement plan distribution to a Self-Directed Roth IRA (excluding a designated Roth account rollover to a Roth IRA), your financial institution transferring the retirement funds must report the tax-free direct rollover distribution.

Note: The receiving Self-Directed Roth IRA custodian must report the amount as a rollover contribution in Box 2 of IRS Form 5498.

Indirect Rollover to a Self-Directed Roth IRA

If you're eligible and take a distribution from your employer sponsored retirement plan (401k Plan) the financial institution sending your distribution should make the check payable to you.

If your distribution is eligible for a rollover, your financial institution will apply withholding. You would then be required to deposit your money into a Traditional IRA account within 60 days. Once your funds have been deposited in a Traditional IRA account, your IRA funds can be converted into a Roth IRA.

Note: The new Self-Directed Roth IRA custodian receiving the rollover assets must report the amounts on IRS Form 5498 as a rollover contribution in Box 2.

 

How To Buy Real Estate With A Self-Directed IRA LLC

Remembering these tips will not only help you make more money, but they'll also keep your friends at the IRS happy!
So I realize you might be wondering...

Why buy real estate investments with a Self-Directed IRA LLC?

A self-directed IRA LLC offers you the ability to use your retirement funds to make almost any type of investment. The IRS permits using this legal entity to purchase real estate or raw land. Making a real estate investment is as simple as writing a check from your Self-Directed IRA bank account.

The advantage of purchasing real estate with your self-directed IRA LLC is that all gains are tax-deferred until a distribution is taken (pre-tax 401k distributions are not required until you turn 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you purchased real estate with your self-directed IRA LLC for $500,000 and you later sold the property for $800,000, the $300,000 of gain appreciation would generally be tax-deferred.

If you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and probably state income tax as well. (Which obviously sucks.)

Tips For Self-Directed IRA LLC Investing

If you have any questions about investing in real estate with a self-directed IRA LLC, Royal Legal Solutions is here to help you.

How To Use a Loan With Your Self-Directed IRA To Make Investments

Hey, you may or may not know this already. But your Self-Directed IRA is the ultimate retirement solution. A whole world of profitable investment opportunities is just waiting for you.

Think of your Self-Directed IRA as a "retirement investment vehicle" that allows you to invest your retirement funds in almost anything, even real estate. The best part? This is all tax free, and you don't need a custodian. That means you don't have to pay those costly custodian fees.

Why Would You Need a Loan in the First Place?

Most investors using retirement funds to make an investment will use cash to make their investment. Whether the investment is in the form of stocks or real estate, most investors will not borrow any funds to make an investment.

One significant reason why retirement account investors will generally not borrow money (also called debt or leverage) as part of an investment of real estate acquisition is the IRS. (Surprised?)

Internal Revenue Code Section 4975 prohibits the IRA holder (you) from personally guaranteeing a loan made to your IRA.

What about self-directed ira real estate loans? So in the case of a Self-Directed IRA, you could not use a standard loan or mortgage loan as part of an IRA transaction since this would trigger a prohibited transaction pursuant to Code Section 4975. (Which is bad.)

What it comes down to is this.:You can't get a "normal'" loan with Self-Directed IRA. This leaves you, the empowered Self-Directed IRA investor, with only one financing option...a non-recourse loan.

What Is a Non-Recourse Loan?

A non-recourse loan is a loan that is not guaranteed by anyone. Sounds crazy right? Basically the lender is securing the loan by the underlying asset or property that the loan will be used for.

So if you, the borrower, are unable to repay the loan, the lender’s only recourse is against the underlying asset (i.e. the real estate) not you. Hence the term "non-recourse".

Non-recourse loans are  more difficult to secure than a traditional loan or mortgage. There are a number of reputable non-recourse lenders. However, the rate on a non-recourse loan is less slightly higher than a traditional loan.

What Are The IRS's Rules For Non-Recourse Loans?

The IRS allows IRA and 401k plans to use non-recourse loans for financing only. The rules covering the use of non-recourse financing by an IRA can be found in Internal Revenue Code Section 514.

Section 514 requires debt-financed income to be included in unrelated business taxable income (UBTI or UBIT), which generally triggers close to a 40% tax for 2017.

If non-recourse debt financing is used, the portion of the income or gains generated by the debt-financed asset will be subject to the UBTI tax, which is generally 40% for 2017.

For example, if an individual invests 70% IRA funds and borrows 30% on a non-recourse basis, 30% of the income or gains generated by the debt financed investment would be subject to the UBTI tax.

Which means if a Self-Directed IRA investor such as yourself invests $70,000 and borrows $30,000 on a non-recourse basis and the IRA investment generates $1,000 of income annually, 30% of the income or $300 would be subject to the UBTI tax.

Note: There are ways to reduce the $300 base tax.

How to "Escape" UBTI/UBIT Tax

Here's another great reason why the Solo 401k Plan is such an attractive investment vehicle.

If you use non-recourse financing to invest in real estate through your Solo 401k Plan, you will "escape" UBTI/UBIT tax due to an exception. This exception can be found in the Unrelated Debt Financed Income (UDFI) rules found under IRC 514(c)(9).

 

Buy Tax Liens With Your Self-Directed IRA LLC Or Solo 401k

Did you know tax liens can be purchased with retirement account funds? Yes, it's true!
By Self-Directing your IRA LLC or Solo 401k Plan investments into tax liens, your profits are tax-deferred back into your retirement account. More importantly, purchases can be made on the spot as fast as you can write a check.
But hold on a minute! What are "tax liens"?
A tax lien is Uncle Sam's (most likely the city or county's) claim on your property. They are usually placed when a taxpayer, such as a business or individual, fails to pay taxes owed.
You probably don't know much about tax liens right now. However, by the end of this article you will know how they can multiply your earnings in a tax-deferred IRA LLC or 401k, making them one of the soundest investments in your retirement account.
The purchase of tax lien certificates is a surprisingly safe investment. The transaction is fast for those using a Self-Directed IRA LLC or Solo 401k. The use of a Self-Directed IRA LLC is actually one of the most tax efficient ways to finance your tax lien purchase.
But this doesn't mean the Solo 401k isn't great for buying tax liens. On the contrary, the Solo 401k Plan offers a loan feature allowing for the purchase of tax liens.
Under the Solo 401k Plan, you can borrow up to either $50,000 or 50% of your account value at the prime interest rate + 1%.
What You Should Know About Tax Liens
Real estate has long been considered one of the greatest investment opportunities for both the large and small investors.
Ask yourself, how do real estate investors make money in a post recession climate? By purchasing properties for a fraction of their value!
The question is how? The answer is: Tax Lien Sales.
Where Do Lien Sales Originate?
When a property owner falls behind on their taxes, failing to pay for one or more years, the local taxing authority has the legal right to place a lien/repossess the property and sell it at auction to get the lost tax revenue.
How long local authorities wait to seize individual properties, and how much they allow to be owed on it before one of these events is up to the lien laws in their particular area.
Properties are often shockingly acquired for a few thousand dollars, regardless of how much they're actually worth! Similarly, paying off the lien on other properties may cost more than the house or land is worth.
The key to investing in tax liens is to take your time to research each property carefully before sale/auction day.
When & Where Do Tax Lien Sales Take Place?
Tax lien sales usually take place at public auctions. How often depends on the area in where it is located, and how many properties the government may seize annually for back taxes.
For example, larger urban areas may hold monthly auctions, while smaller rural ones might only have one auction a year.
2 Types of Tax Liens
There are two types of tax lien sales through auction: the tax lien certificate and the tax lien deed. So what exactly are these liens?
Tax Lien Certificate 
The Tax Lien Certificate offers a delinquent homeowner who has fallen behind on their taxes one last chance to retain ownership of their property.
The certificate gives them a chance to use third-party investment money to pay off the taxes and a bit more time to collect the money needed to pay their debt without the risk of losing their home.
When you bid on a tax lien certificate, you are agreeing to loan the homeowner the money needed to pay all taxes due. The homeowner in turn agrees to pay you, the tax lien certificate holder, back with interest by a specified date.
If the homeowner fails to pay the debt on time, the deed to the property is transferred to you for the amount paid on the taxes.
Either way you make a profit. Whether your profit is on the interest you earn on the loan or by obtaining the property for a fraction of its value through the tax lien sale and then reselling it.
Tax Lien Deed
Tax Lien Deed sales are handled a bit differently, since you are actually buying/bidding for the property at the time of auction, with no responsibility to give the homeowner more time to pay his/her tax debt.
Once the selling price is approved, the deed is automatically transferred to you. Which gives you free reign as to what to do with the property next. You could renovate it, sell it as is or build a new home.
Properties in this type of tax lien sale tend to cost more, which may lower your profit margins compared to the acquisition of tax lien certificate properties. But the advantage to this lien is that you don't have to worry about homeowners.
Either way, investing in tax liens can be a profitable and easy way to enter the real estate market.
3 Ways You Can Make Money With Tax Liens.

  1. Supercharge Your IRA.

You can buy tax lien certificates with your Self-Directed IRA LLC or Solo 401k. For example, let's say you buy a tax lien certificate which earns 16% of your initial investment annually.
When you buy tax lien investments you receive the amount invested plus interest within 12 months. If you continue to reinvest in tax liens year after year at 16%, you can double your money in about 4 years.
Note: Only a Self-Directed IRA LLC can preserve this 16% return, as traditional IRAs can't invest in tax liens.

  1. Grow Your Retirement Money Tax Free.

By buying tax liens with a Self-Directed IRA LLC or Solo 401k, you can avoid all taxes until the money invested is withdrawn from your IRA or 401k, which is usually around age 59 1/2. (Unless you like giving the IRS free money.)
The money can be invested once, twice or a thousand times and continue to grow tax-free, so long as it is not withdrawn for personal use.

  1. Flexibility.

With a Self-Directed IRA LLC, you can serve as the trustee. This means that all assets of the 401k trust are under your sole authority. This gives you the freedom to fund any investment anytime.
As trustee, you can buy tax liens with the stroke of the pen, without a custodian trying to charge you fees or slow you down.
Tax liens are backed and leveraged by the property being "liened" and are guaranteed by the taxing authority.
In most states, they are a first lien on real estate, and when foreclosed, they wipe out all junior liens (such as mortgages). Which means you can snag a valuable piece of real estate for next to nothing!
Tax Liens Are A Great Investment Opportunity.
Real estate has been the cornerstone of wealth since the beginning of civilization. Even cave men had caves!
Although many people have left the real estate market because of the housing bust, many real estate investors are still enjoying huge profits by investing in tax liens.
To learn more about buying tax liens with a Self-Directed IRA LLC, call Royal Legal Solutions today at (512) 757–3994  to schedule your free consultation!

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

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

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

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

Solo 401k Features and Benefits

1. Easy to maintain.

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

2. Freedom of choice and tax-free investing.

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

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

3.You can get a loan.

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

4. No Custodian fees.

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

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

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

5. High contribution limits.

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

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

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

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

6. Contribution options.

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

7. Roth contributions.

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

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

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

9. Exemption from UDFI tax.

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

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

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

10. Rollover options.

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

Still Using an IRA?

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

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

The Solo 401k: Who Is It For? What Are The Advantages?

The solo 401k is a unique plan because it only covers the 401k owner and his or her spouse. Those who take advantage of a solo 401k can receive all the benefits of traditional 401ks without having to worry about the Employee Retirement Income Security Act (ERISA).

History of the Solo 401k 

Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) took effect in 2002, there was no incentive for an owner-only business to establish a 401k plan. After all, why bother to when you could receive the same benefits by adopting a profit sharing plan or SEP IRA?

However, EGTRRA changed everything. After EGTRRA, solo 401ks became the most popular retirement plan for the self employed. This is because EGTRRA makes it possible for an owner-only business to defer more money into a retirement plan cost effectively than a profit sharing plan.

One of the key changes brought about by EGTRRA was that it added the employee deferral feature found in a traditional 401k plan to the solo 401k plan. This feature turned the solo 401k into a plan that continues to provide the highest contribution benefits to the self employed.

Who Is The Solo 401k Best For?

A solo 401k plan is perfect for many sole proprietors, consultants, or independent contractors. A solo 401k plan offers the same abilities as a Self-Directed IRA LLC, but without having to hire a custodian or create an LLC.

The solo 401k plan allows you to:

Benefits of The Solo 401k

There are a number of benefits that are unique to solo 401k plans (also known as individual 401ks), which make them a far more attractive retirement option for a self-employed than a traditional IRA. In fact, it offers perks that other options don't come close to. Let's take a look at eight of the greatest advantages of the solo 401k.

Simple Administration

With a solo 401k plan there is no annual tax filing for any plan that has less than $250,000 in plan assets.
Note: If your plan has more than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed.

Roth After-Tax Benefit

A solo 401k plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a Traditional IRA, contributions can only be made in pre-tax format.

Borrow up to $50,000 Tax-Free

With a solo 401k plan you can borrow up to $50,000 or 50% of your account value, whichever is less.  The loan can be used for any purpose.  Traditional IRA holders cannot borrow money from their IRA, unless they want to trigger a prohibited transaction.

Buy Real Estate With Leverage Tax-Free

 With a solo 401k plan, you can make a real estate investment using non-recourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax. If you were to use an IRA to make a real estate investment (Self Directed Real Estate IRA) involving non-recourse financing would trigger the UBTI tax.

No Need to Establish an LLC

With a solo 401k plan, the plan itself can make real estate and other investments without the need for an LLC. Since a 401k plan is a trust, the trustee on behalf of the trust can take title to a real estate asset without the need for an LLC. (You would be the trustee.)

Protection From Creditors

A solo 401k plan offers greater creditor protection than a Traditional IRA.  The 2005 Bankruptcy Act generally protects all 401k Plan assets from creditor attack in a bankruptcy proceeding. Also, most state laws offer greater creditor protection to a solo 401k qualified retirement plan than a traditional IRA outside of bankruptcy.

More Options to Maximize Your Investments

A solo 401k plan includes both an employee and profit sharing contribution option. Whereas a Traditional IRA has a very low annual contribution limit. Under the 2017 solo 401k contribution rules, if you're under the age of 50 you can make a maximum employee deferral contribution in the amount of $18,000.
On the profit sharing side, your business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including your employee deferral, of $54,000.
If you're over the age of 50, you can make a maximum employee deferral contribution in the amount of $24,000. Up to a combined maximum of $60,000.
Note: If your plan has more than $250,000, a simple 2 page IRS Form 5500-EZ is required to be filed.

Freedom Of Choice

A solo 401k will allow you to make traditional as well as non-traditional investments. As trustee of the solo 401k plan, you will have "checkbook control" over your retirement assets and make the investments you want when you want.

Quick List of Reasons to Choose the Solo 401k

Bottom line, when you choose the solo 401k, you:

 

Do You Know About The Plan Asset Rules?

 
The Plan Asset Rules, designed by our buddies at the Department of Labor, were made to limit you from using retirement funds to transact with your own investment fund or assets. They exist for ethical reasons. Of course, we know you're not unethical, but if they didn't exist, people could do all sorts of crooked things.
The Plan Asset Rules list the circumstances under which entity-owned assets can be considered to be owned by a 401k or IRA. There are, of course, exemptions.  
This is important to know because otherwise innocent business between Plan Assets and disqualified persons quickly becomes a prohibited transaction. This is naturally something you want to avoid. Unless you like giving the IRS money. For everyone else, here are the basics of the plan asset rules, how they affect your retirement investments, and how to avoid triggering them.

Plan Asset Rules: The Basics

The DOL’s Plan Asset Rules define when assets are considered ‘Plan” assets. IRAs are usually treated similarly to pension plans under the law. When a plan (or even a combination of plans) earns a certain percentage of a construct like an LLC, the whole she-bang can be treated as if it's entirely owned by the plan. This includes not only the assets, but different types of gains like interest.
The most important practical aspect of the Plan Asset Rules for most investors is the fact that these rules determine prohibited transactions. Plan assets play by different rules than other types of assets you may own. If you engage in a prohibited transaction, you will absolutely pay the price. Typically, this is in the form of a massive and unavoidable penalty.

Here are the circumstances where Plan Asset Rules can be triggered:
 

 
 

How Do The Plan Asset Rules Impact My IRA/401k Investments?

 
The Plan Asset Rules are often only triggered if your IRA/401k assets will own greater than 25% of an investment company (such as a mutual fund or other form of passive investment) or will own ALL of an operating company (gas station).
Most investments involving IRA/401k assets should not become a prohibited transaction. Making a typical loan, buying a condo for yourself, or even purchasing nontraditional assets for your IRA entity should not bring Plan Asset Rules into play.  If they were triggered for some reason, you aren't necessarily doomed to pay the prohibited transaction penalty. Of course, this is only true if you aren't engaging in business with a disqualified individual.


Why You Want To Avoid Triggering Plan Asset Rules

 
If your retirement plan involves an investment in one of the following:

Then all assets of these types of companies are owned by the plan itself, meaning your IRA or 401k. Any exchange between the company types mentioned above, including assets owned by such companies, and a disqualified person is a prohibited transaction. Be aware that there are other types of prohibited transactions, but the Plan Asset Rules describe the most common type.

This may all seem abstract, particularly if you're new to retirement accounts in general or these rules in particular. Let's take a look at a couple of examples involving common situations that illustrate what the Plan Asset Rules look like in real life.

Plan Asset Rule Examples

Scenario One:

Your Self Directed IRA LLC invests in JP Morgan, which will purchase a gas station, an “operating company”. You pay yourself $70,000 per year for your role as the station's manager, because that’s hard work after all.
The payment of the salary would be a prohibited transaction.
Note: Any income generated by the gas business would probably be subject to UBIT Tax if it becomes part of your IRA LLC.
 

Scenario Two:

 
Barney the Dinosaur's Self-Directed IRA LLC owns 10% of I Love You,  LLC. Mr. Rogers’ IRA owns 20% of I Love You, LLC. Barney and Mr. Rogers are business partners not related by blood or marriage. In this case, their plans own a combined total of 30% of the company. 25% is the maximum allowed before Plan Asset Rules kick in. Since this is an "investment company," I Love You LLC's assets are owned by Mr. Rogers' and Barney's respective IRAs.   
So if I Love You, LLC makes a loan to Barney’s father, the loan would be a prohibited transaction. This isn't because of dinosaur-related discrimination. It's because Barney's dad would be disqualified from any transaction with his IRA. If I Love You, LLC is deemed a Plan Asset, the same rules apply.
Royal Legal Solutions is happy to assist you with forming, running, or investing with a retirement account. It's never too early or too late to start planning for the future. Call (512) 757–3994  or use our web tool to schedule your personal retirement consultation.