Roth Conversions to a Solo 401K to Offset Losses

Are you a self-employed real estate investor? If so, the solo 401K may be the best option for you. The solo 401K is an IRS-approved retirement plan that enables you to minimize your tax burden. Read on to learn more about how this tax strategy works and how you can offset losses with a solo 401K and Roth conversions.

What is a Solo 401k?

As mentioned, a solo 401K is an IRS-approved retirement plan. Also, the solo 401K is ideal for self-employed business owners or business owners with one other employee, usually their spouse.

This retirement plan allows contributions of up to $60,000 each year.

If you want to learn more about the solo 401K and its many benefits, read our informative guide: Solo 401K vs. Self-Directed IRA: Which Is Better For You?

What is a Roth IRA conversion?

A conversion is a taxable movement of cash, real estate, or other assets from a Roth IRA to a Solo 401K.

When you convert from a Roth IRA to a solo 401K, there's a tradeoff. You will face a tax bill, possibly a big one, due to the conversion. If you decide to convert a portion of your Roth IRA conversions into a Solo 401K, you will pay taxes on the money you convert.

However, you'll be able to secure tax-free withdrawals as well as several other benefits, including no required minimum distributions, in the future. With proper tax planning, you may even be able to mitigate the tax bill from the conversion.

All in all, you pay taxes on the money you convert to secure tax-free withdrawals and several other benefits. One of the most significant benefits is that you will no longer have the required minimum distributions in the future.

Why are Roth conversions a popular tax strategy?

Roth conversions remain popular as many taxpayers fear that tax rates will only increase in the next few years. A Roth conversion enables you to convert now at lower tax rates, let your account grow, and let you make a tax-free withdrawal over the life of your retirement!

How is a solo 401K different from a traditional IRA or 401(k)?

Remember, if you have a traditional IRA or 401K, that money grows tax-deferred, but you pay tax on the distributions as you withdraw the funds at retirement.

The tax rate might be much higher when you retire. That means you would potentially lose more money to taxes each time you make a withdrawal.

Another thing to remember is that once you reach age 72, you must withdraw a certain amount of money each year, or the "required minimum distribution."

How can I offset losses with a Roth conversion?

One of the ways to mitigate the tax impact of the conversion is for a business owner to offset net operating losses (NOL). The income generated by a Roth conversion may offset the NOL, and the business owner may not incur any additional tax liability. Additionally, there is no limit to the amount of income that an NOL can offset.

What is a net operating loss?

Generally, a net operating loss (NOL) is an excess of deductions over income from the operation of a business. These deductions are expenses from the operation of a business.

For individuals, an NOL may also be attributable to casualty losses. A casualty loss occurs from the destruction or loss of your (taxpayer's) personal property. The casualty loss is a single, sudden event.

For instances of theft, you will need to prove that someone stole the property.

Example of how you would offset losses with a solo 401k

First, a disclaimer: these calculations can be complex, and investors should consult with a tax professional or financial advisor to decide the best strategy for them.

The following example illustrates the calculation.

INCOME

Spouse’s wages
$75,000

Interest and dividends
5,000

Total income
80,000

DEDUCTIONS

Net business losses
(itemized deduction and personal exemptions not allowed in net operating calculation)
(170,000)

NOL for tax year
(90,000)

Income from Roth IRA conversion
90,000

Net taxable income
0

This example is for illustrative purposes only.

In this case, the couple may decide to convert $90,000 from the IRA. Then they can use that $90,000 to offset the loss and possibly avoid generating any tax consequences.

If you want to learn more about how the solo 401K lowers your tax burden, read Self-Directed Solo 401K: How to Avoid Tax Penalties.

Here's The Bottom Line

The solo 401K is probably right for you if you are self-employed. You need to decide if it's the right time for you to convert money in your Roth IRA to a Solo 401K.

If you do decide on a conversion, remember the tax bill upfront secures your freedom from "required minimum distributions." Also, you may be able to offset your losses with a solo 401K.

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.

Tax Savings Strategy to Achieve Financial Freedom

Are you ready to grow your real estate business? To do that, you need a solid tax savings strategy.

You already know that there are considerable advantages to investing in real estate. The passive income, substantial tax savings, and long-term security most likely drew you to real estate investing.

Real estate investing is the first step in your plan for financial freedom. The first thing you need to focus on is finding good real estate deals.

The next step is to maximize how your money works for you. Read our list of six tax savings strategies to achieve financial freedom and build wealth.

#1: Start with the children, house, and vehicle

#2: Maximize your deductions

This tax strategy is primarily for single-family home investors and the available deductions.

You have a multitude of deductions available to you as a real estate investor.

Deductions that do not impact financing Deductions that do impact financing
- Amortization
- Auto
- Depreciation
- 529 Plan
- Home office
- HSA
- SDIRA
- SOLO 401K
- Business expenses
- Credit card processing fees
- Legal fees
- Office furniture
- Office supplies
- Repairs and maintenance
- Tax prep fees
- Travel expenses

As a sharp real estate investor, you need to know which deductions impact financing because it affects your ability to get loans, secure more properties, and generate wealth.

#3: Start a SOLO 401K

With a SOLO 401K, you can save $58,000 a year in taxes. If you're married, the tax savings increase to $116,000.

How a SOLO 401K works as a tax savings strategy:

Do you want to know more about this powerful tax vehicle? Visit our SOLO 401K Hub to learn more!

#4: Create a Self Directed IRA (SDIRA)

You can add a Self Directed IRA on top of your SOLO 401K.

This SDIRA enables you to manage everything as long as you set up an LLC owned by the IRA. Then, you can invest through the LLC and shelter about $7,000 more per year from taxes.

#5: Use the DB(K) Tax Savings Strategy

The official name of this plan is the Eligible Combined Plan which Congress created as part of the Pension Protection Act of 2006 under Section 414(x) of the Internal Revenue Code.

You can combine the SOLO 401K and SDIRA with the DB(K) strategy. You gain an additional shelter which allows you to grow your wealth with a deferred tax, more capital in play, and higher returns.

#6: Get a Real Estate Professional Designation

If real estate is the primary source of your income or you are a "stay at home" husband or wife, use this strategy.

You can use your depreciation and other losses from real estate to offset other income.

If you are a high self-employed or 1099 income earner, you should consider investing in commercial and multifamily investments. You can use cost segregation, accelerated, and bonus depreciation to avoid taxes.

Even if you are a W2 employee, you have to document your time thoroughly and may be able to secure the designation.

Learn more about the requirements it takes to earn a real estate professional designation.

Tax Savings Strategy Key Takeaways

We went over six tax strategies you need to take to grow your real estate business. These six strategies will help you achieve financial freedom and grow your wealth.

Remember to:

  1. Start with the children, house, and vehicle
  2. Maximize your deductions
  3. Start a SOLO 401K
  4. Create a Self Directed IRA (SDIRA)
  5. DB(K) strategy
  6. Get a Real Estate Professional Designation

We've covered a lot of information that may include concepts that are new to you. To hear this content presented by Scott Smith check out Royal Investing: Episode #1 Tax Savings Strategies on our Wistia channel.

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.

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.

 

Using Your IRA to Invest In Crypto (4 Steps)

Crypto is blowing up. And traditional retirement accounts simply aren't equipped to handle the excitement.

Cryptocurrencies (like Bitcoin, Litecoin and Ethereum) are a popular alternative to government-backed currency—especially if you want to conduct transactions quickly and anonymously.

The global crypto market cap has been more than $2 trillion for much of 2021 so far. The market cap of Bitcoin (crypto’s biggest star) hit $1.2 trillion in April.

Looking to get in on the action? The Self-Directed IRA (SDIRA) is the best tool for leveraging your retirement savings to invest in digital currencies.

The SDIRA also offers major tax advantages, leaving you with more capital to invest in cryptocurrencies and other non-traditional assets.

Since Bitcoin and other digital currencies are intangible, they can be difficult for many traditional real estate investors to wrap their heads around. 

However, investors who fully grasp how cryptocurrency works and wish to invest in this alternative asset through their retirement plans may do so with accounts that give them "checkbook control."

Using Your IRA to Invest In Crypto (4 Steps)Steps To Take

Here are the steps you'll follow to invest in crypto using your SDIRA:

  1. Establish and fund an SDIRA (Start with our investor quiz if you need help getting started and we'll take it from there.).
  2. Register an LLC that is 100% owned by the IRA. This gives you the same tax-advantaged status as the IRA. The income and expenses related to the assets will flow through the IRA LLC in accordance with Internal Revenue Service requirements. Note: Cryptocurrency is considered property for federal tax purposes, but because the assets are owned by a retirement account, gains are tax advantaged.
  3. Open a business checking account. You'll do this using funds from the IRA. An IRA LLC is also referred to as a “checkbook IRA.” The checkbook puts the account owner in full control of the transaction (checkbook control). The funds in the IRA LLC’s business checking account are solely for investing in the digital assets (or any other alternative assets allowed with self-directed accounts).
  4. Open an account on a cryptocurrency exchange. You'll do this using the name (and tax number) of the IRA LLC. In addition to being purchased or traded on exchange platforms, digital assets may also be purchased through brokers or by investing in a fund that holds various digital currencies through private placement. In effect, the IRA purchases shares or directly invests as a limited partner.

Family Office Can Keep You Compliant

It's important that you get the right structure in place before you make a move in crypto or any other non-traditional asset. Royal Legal Solutions helps investors use an LLC (limited liability company) to incorporate cryptocurrency into their retirement accounts. If you don't have a LLC and a Self-Directed IRA for real estate investors structure set up already, let's talk about it. 

We'll review your real estate investment options and business structures to ensure they are up-to-date, compliant, and bulletproof against whatever the future holds.

Once you're set up, you can become a Family Office member to ensure ongoing compliance with your state and local laws and tax requirements. We meet with our Family Office members every quarter to give them actionable steps to take, making sure their asset protection plans are up-to-date. 

 

 

Why The Self-Directed IRA LLC Means You Don't Have To Pay IRA Custodian Fees

A Self-Directed IRA LLC is an IRS-approved tax structure that allows you to personally manage your retirement account without having to pay a custodian. It also offers several other benefits, such as ease of access and tax-free profits.

Self Directed IRA LLCs vs. Traditional IRAs

A Self-Directed IRA LLC allows you to take control of your retirement by giving you the ability to invest in anything you want. Except collectibles, such as art. The best part is, you won't have to ask a custodian for consent or pay any custodian fees.

With a traditional IRA, you must go through a custodian when you wish to make investments using your retirement funds, which often triggers high custodian fees and transaction delays.

With a Self-Directed IRA LLC, a special purpose limited liability company (“LLC”) is established that is owned by the IRA and managed by you or any third-party. As manager of the IRA LLC, you will have total control over the IRA assets to make the investments you want and understand – not just investments forced upon you by Wall Street.

ira llc custodians: no, not that kind of custodian

Not THAT kind of custodian ...

A Self-Directed IRA LLC Gives You Control of Your Retirement

With a Self-Directed IRA LLC, you will have total control to make any approved investment, including a real estate purchase. You can even pay for improvements and then sell the property without ever talking to the IRA LLC custodian.
Since all your IRA funds will be held at a local bank in the name of the Self-Directed IRA LLC, all you would need to do to engage in a real estate transaction or other investment is write a check straight from the IRA LLC account or simply wire the funds from the IRA LLC bank account.

No longer will you need to ask an IRA custodian for permission or have the IRA custodian sign the real estate transaction documents. You will be able to make investments by simply writing a check.

With a Self-Directed IRA LLC you will never have to seek the consent of a custodian to make an investment or be subject to excessive custodian account fees based on account value and per transaction.

Self-Directed IRA LLC Benefits

#1 Invest in real estate & much more tax-free

With a Self-Directed IRA LLC, you will be able to invest in almost any type of investment opportunity, including real estate, tax free.

#2 Virtually no IRA custodian fees

With a Self-Directed IRA LLC you no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with a Self-Directed IRA LLC, you keep your money with a passive Self-Directed IRA custodian, often a bank.

Think of the passive custodian as a piggy bank for your Self-Directed IRA LLC. Whenever you need money for an investment, you just go to the piggy bank. You can write a check. You don't actually have to go or speak to your passive custodian.

#3 Tax deferral

With the Self-Directed IRA LLC structure, all income and gains from IRA investments will flow back to your Self-Directed IRA LLC tax free.

An LLC is treated as a pass-through entity for federal income tax purposes and your IRA, as the member of the LLC, is a tax exempt party. Which means all income and gains of the LLC will be tax free.
A Self-Directed IRA LLC allows you to enjoy many more advantages, including the following:

To learn more Royal Legal Solutions' IRA LLC custodian services, call us now at (512) 757–3994  or start with our investor quiz and we'll take it from there.

Business Trusts: Your Key to Greater Control Over Your Investment Accounts

Business trusts can allow you to safely and inexpensively manage your Self-Directed IRA (SDIRA). 

With typical IRAs, you’re at the mercy of the "custodian" (the financial institution that manages your investment). With a Self-Directed IRA business trust or LLC, you get access to different types of alternative investments (including real estate), that you otherwise wouldn’t be able to purchase with those funds.

So the SDIRA grants you the "checkbook control" you need, which means more direct authority and oversight over the investment and management decisions regarding the funds held in your retirement account.

With a business trust, there are even more benefits, as we'll see ...

Why You Should Use a Trust Instead of an LLC

If a legal entity allows you to manage your Self-Directed IRA more effectively, should you open a business trust or LLC? You could theoretically become the trustee of either entity, so why would you choose a business trust?

One key reason: the trust saves you money.

business trusts: making money is fun 

Business Trusts Don’t Have Annual Fees

LLC filing fees vary by state, but most states charge anywhere between $50-800 for annual filing fees and reports, creating an additional and unnecessary expense.

The states with the highest annual LLC filing fees are:

That’s not to mention the initial filing fee cost, which averages anywhere from $100-200. If you ignore or forget to pay your fees, your LLC gets shut down. If you’re managing a lot of money in that LLC, this could cause even bigger issues.

For Self-Directed IRA investors, business trusts offer the same checkbook control with fewer annual fees. That means a lower cost and generally less upkeep. A California business trust, for example, would save you $800 a year right off the bat (and an additional $70 if you count the initial filing fee). Instead, you could pay nothing annually.

But that isn’t the only benefit trusts afford you...

LLCs Can’t Offer the Same Level of Anonymity

Additionally, business trusts go beyond the protections afforded to you by an LLC. They don’t require that you file publicly. When you form an LLC, the Articles of Organization, along with your name and address as the trustee of that LLC, must be filed with your Secretary of State.

Business trusts don’t have that same requirement, giving you an additional layer of anonymity and asset protection in the event of a lawsuit. If the litigators can’t find who owns the trust, they can’t sue that person.

Business Trusts: Anonymity

Tax Efficiency

Finally, business trusts can be more tax-efficient than LLCs. A business trust is considered a “disregarded entity” separate from its owner. That’s also true for LLCs—but there’s a key distinction: even if you file taxes as a partnership, most states require LLCs to file income taxes. If you choose to use an LLC, that’s an additional headache.

This also ties in with the anonymity. Business trusts don’t have to be filed publicly, they don’t have to be updated annually with any reports, and they don’t have to report income taxes. If you use them to shield your Self-Directed IRA, you’re protecting against legal trouble to the greatest possible extent while minimizing costs.

What Can You Hold in a Self Directed IRA Business Trust?

To give you an idea of the types of assets that you could invest in with your retirement funds using a business trust, here’s a short list:

However, just because you have access to more investments doesn’t mean there aren’t rules to what you’re allowed to do and what you aren’t allowed to do. We actually have a specific list of prohibited transactions.

For one, you aren’t allowed to self-deal in any way. If you want to buy a vacation home using your Self-Directed IRA, that’s prohibited. The investment can’t serve you, and you aren’t allowed to work on it yourself. If you choose to purchase a fixer-upper, you also need to hire contractors for that fixer-upper. DIY is expressly prohibited.

Your Key to Greater Control Over Your Investment Accounts

Here are some of the biggest takeaways from this article: 

Self-Directed IRA Bitcoin Investing

Bitcoin is constantly making headlines. We're getting a little sick of hearing about it, to be totally honest.

As Bitcoin becomes mainstream, we hear stories of the crypto-savvy investor buying Bitcoin in its early years and becoming a millionaire. Which leaves more investors asking, “Why not me?”

In 2021, IRA investors are increasingly diversifying with Bitcoin and other cryptocurrencies. Self-Directed Bitcoin IRA investing can deliver high yields along with the tax benefits of non-digital investment.

Here’s a brief primer on Bitcoin and three steps investors can take to start making their own Bitcoin investments using a Self-Directed IRA-owned Business Trust.

Here are the 3 most popular types of investments for our Self-Directed IRA clients. Reach out and we can help you decide whether or not they have a place in your portfolio.Bitcoin Basics

With cryptocurrencies, encryption is used to make new currency units and perform transactions. All this is done in a decentralized system and records are kept in a blockchain, which is a type of digital ledger.

Bitcoin, released in 2009 by Satoshi Nakamoto, is one of thousands of cryptocurrencies but is easily the most popular. Bitcoin must be stored using an online digital wallet or in a personal computer. Due to hacking concerns, some owners use a hardware wallet (a USB-like device protected with a PIN code).

Bitcoin Gets Attention From Investors

Bitcoin turned heads in the investment world by going from a price of under $1 in 2011 to $40,111 on January 14, 2021. The highs and lows have attracted headlines, as in December of 2017, when prices doubled in a matter of weeks. As I write this, its current U.S. value is $33,626.60.

Bitcoin’s wider adoption and impressive gains led to the “Bitcoin IRA," bringing the flashy new investment into the stodgy world of traditional retirement accounts.

Bitcoin Meets the IRA

A traditional IRA (individual retirement account) doesn't permit alternative investments such as Bitcoin and other cryptocurrencies. They're not really known for trying new things.

But what about the Self-Directed IRA (SDIRA), with its more flexible structure? The IRS doesn’t list Bitcoin as a forbidden investment (only list life insurance and collectibles are specified as non-permissible IRA investments). Check out our article, Our 3 Most Popular Self-Directed IRA Investments, to see what else is (and is not) permitted.

Using Your IRA to Invest In Crypto (4 Steps)How to Invest in Bitcoin Using a Self-Directed IRA

#1 Do Your Research

The information I’ve provided about Bitcoin is a good primer, but is by no means a substitute for doing your own due diligence. Be prepared for the uncertainty that surrounds Bitcoin as a new investment.

Also, since Bitcoin isn’t under a regulated system don’t expect the same type of publicly available financials you’d find with traditional stocks or mutual funds.

You can educate yourself on how the IRS deals with Bitcoin investments; a good cryptocurrency resource is Investopedia.

#2 Choose the Right IRA Custodian

The "custodian" is the financial services company that manages your retirement account for you. To learn more, check out our article, Why Your Self-Directed IRA Needs A Special Custodian.

Traditional IRA custodians won't even think about it, but if you're in the market for the self-directed version, you'll need to make sure your IRA custodian is IRS-approved and allows Bitcoin investments. Still, you probably won’t enjoy true checkbook control over your account.

Your SDIRA is self-directed (as the name says), but it isn’t “self-managed.” This means you can’t write a check out yourself for a Bitcoin transaction without a custodian approving the transaction. The processing time can hurt you when you're trying to buy or sell quickly. Also, the fees can add up when choosing this route.

This doesn’t mean you should give up on Bitcoin investing with a Self-Directed IRA. Royal Legal Solutions may be able to help you eliminate the custodial overhead. Many of our clients are Bitcoin investors who enjoy direct control over their IRA investments. Start with our investor quiz to see if you can take advantage of our custodial services.

#3 Choose a Good Cryptocurrency Exchange

Once your Self-Directed IRA is setup and you have direct access to your funds, you’re ready to purchase Bitcoin. Choose a reputable exchange and understand its fee structures. More importantly, be aware of any security flaws and hacking issues. Currently, Coinbase and Kraken are some of the most reputable exchanges.

#4 Choose a Good Cryptocurrency Wallet

For those new to cryptocurrency, this step may seem like the hardest to understand. A cryptocurrency wallet isn’t a physical wallet, although it can take physical form as a hardware digital wallet. Wallets are accessed via a private key, which is a hexadecimal code that you should guard just as you would a security box key. Like a bank account, the wallet holds your balance and a reference to all transactions. It’s also where you can send and receive currency. Think about security when choosing a wallet. Online wallets are convenient and usually offer a mobile version. However, they are susceptible to hackers. Hardware wallets are more secure because they hold the private key in an offline, unhackable device.

#5 Keep Your BTC Investments in Compliance

The “self-dealing” rules that apply to other alternative assets also apply to Bitcoin. For instance, an investor can’t sell Bitcoin to his own IRA nor can any of his family members. This can disburse the IRA or lead to a taxable event. Also, be mindful of annual reporting requirements which require market valuations similar to real estate properties.

#6 Enjoy Tax-Deferred Earnings

With a Self-Directed IRA you can apply the tax-deferral benefits enjoyed by other alternative investments towards Bitcoin. Bitcoin investments can grow unhindered as taxes aren’t applied till funds are disbursed, which can mean decades of growth.

#7 Explore Other Cryptocurrency Investments

Bitcoin is the most widely-known cryptocurrency. However, once you’ve gotten your feet wet in Bitcoin investing, you can expand towards others currencies such as Ethereum and Litecoin. Like Bitcoin, Litecoin has enjoyed tremendous growth. It’s second to Bitcoin in market capitalization, followed by Ethereum and Ripple.

When expanding your Self-Directed IRA, consider what advantages rival currencies have as an alternative to Bitcoin. For instance, Litecoin enjoys faster transaction times and a larger coin supply limit of 84 million compared to Bitcoin’s 21 million.

gold mining bitcoin - miner with pickaxeStart Investing Today

Like any other investment, investors should complete their due diligence, choose the right custodian and be aware of custodial fees. Check out our Using Your IRA to Invest In Crypto (4 Steps) article while you're at it.

Lastly, keep Bitcoin investments in compliance with IRS regulations. The unique steps Bitcoin investors need to make may be overwhelming at first. They include choosing a cryptocurrency exchange and digital wallet. However, once investors get their feet wet, they’ll be a step ahead in expanding their Self-Directed IRA towards other cryptocurrencies. For now, investors could start off with Bitcoin and other private investments using a Self-Directed IRA.

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

 

 

 

What Is the Roth IRA 5-Year Rule?

The Roth IRA 5-year rule sounds like it is far from the sexiest topic in the world.

However, if you invest in a Roth IRA, it’s crucial that you understand it unless you’re cool with paying extra taxes. You’re not? We didn’t think so.

Following the 5-year rule when taking funds out of your Roth IRA can help you avoid taxes and substantial penalties.

This article seems a little sexier now, doesn’t it?

Keep on reading if you want to learn more about how understanding the 5-year rule can save you serious cash.

What Is the Roth IRA 5-Year Rule? sexy man and woman

Self-Directed IRAs: The Sexiest of All Retirement Accounts?

What Is An IRA?

An IRA (short for Individual Retirement Account) is a retirement savings account you can open and manage without going through an employer. Traditional IRAs are “tax-deferred,” which means that you can invest pre-tax funds in the account. With a traditional IRA, you can contribute up to $6K of pre-tax income each year. Once you hit 50, that annual limit jumps to $7K. 

While you can invest in a traditional IRA with pre-tax money, you know Uncle Sam isn’t going to let you avoid taxes forever. Once you turn 72, or 70½ if you hit 70½ before January 1, 2020, the IRS is done waiting for its tax money. You’ll have to start taking required minimum distributions (RMDs) each year, and, unsurprisingly, you have to pay income taxes on them. 

What Is A Roth IRA?

While you use pre-tax income to invest in a traditional IRA, Roth IRAs are the exact opposite. With a Roth IRA, you are only allowed to invest post-tax income. However, for many people, Roth IRAs actually offer more significant tax benefits and more flexibility.

First, since you already paid taxes on the money you invest, the IRS won’t make you take RMDs from a Roth IRA. You can keep your money invested and keep earning more and more income. And the kicker is, you don’t have to pay taxes on your earnings. Unlike traditional IRAs, you pay income tax on the amount you invest, not the amount you take out, so any money you make with your Roth IRA investments is almost always tax-free! 

Income and Contribution Limits 

Of course, the feds have to put SOME restrictions on the awesomeness of Roth IRAs. As with Traditional IRAs, you can only contribute $6K each year ($7K for our 50+ friends). There are also income requirements for who is allowed to use a Roth account. As of 2021, phase-out amounts for married couples who file jointly are $198,000 to $208,000 and $125,000 to $140,000 for single people and heads of households.

What Is The Roth IRA 5-Year Rule?

Now that we’ve given you way more information about Roth IRAs than you probably needed let’s move on to what we’re actually supposed to be talking about: The 5-year rule. While you can always withdraw contributions you have made to your Roth IRA without taxes or penalties, the Roth IRA 5-year rule refers to the five-year waiting period imposed on some withdrawals from a Roth IRA account. There are three circumstances where the 5-year rule applies: earnings withdrawals, conversions from a traditional IRA to a Roth IRA, and inherited Roth IRAs.

Withdrawing Earnings

The most commonly encountered situation involving the Roth IRA five-year rule is when attempting to withdraw money that you earned from account interest rather than money that you contributed to the account. 

For earnings withdrawals to be tax-free, you must withdraw the earnings at least five tax years after the date you made your first contribution to any Roth IRA you own. You must also be at least 59½ years old. This means that even if you are over the age limit, you have to wait until it has been five years since your first contribution to take out your earnings without taxes or penalties.

Converting A Traditional IRA To A Roth IRA 

The second way the five-year rule applies to Roth IRA withdrawals is when you convert a traditional IRA or a traditional 401(k) to a Roth IRA. Since traditional IRAs and 401(k)s are funded with pre-tax money, you have to pay taxes on any funds you convert from a traditional account to a Roth IRA. 

Once you convert to a Roth IRA, you’ll have to wait five years to withdrawal any converted funds. This can get confusing because each conversion has its own five-year waiting period before you can withdraw the funds tax- and penalty-free.

However, IRS rules state that when you take money out of a Roth IRA, the oldest conversions are considered to be withdrawn first. When the IRS decides whether your distribution should be subject to early-withdraw penalties, the order of withdrawals are contributions first, followed by conversions, and then earnings. 

Say, for example, that you have $100K in a Roth IRA - $75K in contributions; $20K in conversions; and $5K in earnings. If you were to withdraw $80K from the account, the IRS would consider you to have depleted your contributions before moving to converted funds, so only $5K of your balance of conversions would need to comply with the 5-year rule. 

Inheriting A Roth IRA

The rules surrounding inherited IRAs can be incredibly confusing, but fortunately, applying the 5-year rule to inherited Roth IRAs is relatively straightforward. When the owner of a Roth IRA passes away, a beneficiary who inherits the account can withdraw contributions or earnings without penalty as long as the Roth IRA has been open for five years. If not, you’ll need to wait until you hit the five-year mark before withdrawing any earnings if you want to avoid a penalty. However, you can still take out all of the contributed funds regardless of the age of the account.

Never Hurts To Double-Check

We’ve covered the basic principles about the 5-year rule in this article, but many other factors must be considered before withdrawing funds from a Roth IRA. We recommend consulting with your lawyer or CPA before taking an unscheduled distribution from your Roth IRA to ensure you won’t suffer penalties or have to pay taxes.

Especially when it comes to your money, a second opinion is very sexy indeed!

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 For Real Estate Investors

Get more control of your retirement plan, your investments and your real estate assets.

WHY USE ROYAL LEGAL SOLUTIONS?

We have experience in setting up the best asset protection structures and making them easy for an investor to use. Our system keeps things simple while making sure your needs are met.

With the Self-Directed IRA For Real Estate Investors, retirement plan isn’t limited to stocks, bonds, mutual funds and bank CDs.

The Self-Directed IRA lets you grow your retirement savings with smart real estate investments.

At tax time, you’ll report everything on Schedule E of your personal return (if you’re an individual/married partners) or a partnership return (if unmarried partners). You don’t need multiple bank accounts as long as you have accurate accounting records.

Before you go, check out the rest of our articles and videos about the Self-Directed IRA. You may also be interested in our Self Directed IRA Business Trust.

Self-Directed IRA Options: Choosing the Best Investment Plan

Everyone has a vision for their retirement, but planning how to fund your post-work years is a puzzle that too many people fail to solve.

You already know about the individual retirement account (IRA), which lets you make tax-deferred investments in mutual funds, stocks and bonds. Typically, someone else (a custodian) manages those investments.

But if you’re a smart real estate investor, you’re probably interested in knowing how to invest your retirement funds in real estate, right? A Self-Directed IRA (SDIRA) opens up investment options like real estate, precious metals, renewable energy sources and more.

What are the best Self-Directed IRA options? It depends on what investments you’re trying to buy. The SDIRA gives investors access to many different types of investments.

In this article, we’ll show you how that works and give you an overview of the best self-directed IRA options for your particular scenario.

What’s the Difference Between an IRA and a Self-Directed IRA?

The difference between an IRA and a Self-Directed IRA, in short, is what you’re allowed to buy using the IRA. This depends upon the IRA “custodian,” which is just another word for the financial institution that manages the IRA. When you open up a SDIRA, you can get many more options than when you open up a normal IRA.

Most brokers, financial planners and attorneys aren’t familiar with the tools that give you "checkbook control," letting you choose your investments yourself. 

Let's start with the basics ...

What’s an IRA? What Can You Buy with an IRA?

An IRA, in case you didn’t know, is an individual retirement account

It might refer to a traditional IRA, SEP-IRA, Roth IRA, or something else. IRAs can help investors save on their tax bill, either by lowering their taxable income and letting the gains grow tax-deferred or by paying taxes upfront and withdrawing the gains tax-free come retirement.

Typically, if you’ve opened up an IRA through your employer to get a match on your contributions, your employer will restrict the types of investments that you can make using that IRA. Usually, you can only buy low-risk investments—or ones that major lenders can easily collect money on through management fees (even if they’re low management fees, like for index funds).

Here’s a short list of assets that you can buy using an IRA:

If you’re interested in investing in different assets, that’s where a Self-Directed IRA comes in.

Here are the 3 most popular types of investments for our Self-Directed IRA clients. Reach out and we can help you decide whether or not they have a place in your portfolio.What’s a Self-Directed IRA? What Can You Buy Using a Self-Directed IRA?

If you’re self-employed or you have an old IRA from a previous employer, then you can open up the self-directed version. This will greatly expand your investment possibilities. For example, here’s a short list of assets that you can buy that you typically wouldn’t be allowed to buy using an employer-sponsored active IRA:

With a traditional IRA account, making specific investments means directing the custodian to execute a specific transaction. There are custodian fees involved (assuming your IRA custodian even approves the purchase), and there are delays that can cost you the investment in certain time-sensitive cases..

An SDIRA is a checkbook control IRA, meaning you can take over some of the responsibilities of the custodian. You do not need the consent of a custodian to execute a purchase.

What CAN’T You Do With a Self-Directed IRA? 

There are some things you need to know before opening an SDIRA: the investment isn’t allowed to be used for personal use. It’s called “self-serving,” and it’s explicitly banned by the IRS.

What does that mean? Isn’t everything “personal use?” Not really.

If you’re looking to use a Self-Directed IRA to buy your next vacation house or to buy a property for a loved one, for example, you’re going to possibly open up your entire IRA to taxation. Additionally, you can forget about DIY. If you work on the property yourself, that’s technically considered “self-serving” (or “self-dealing”). All business expenses need to stay inside the IRA.

You also can’t invest in collectibles or life insurance using a SDIRA. If you’re interested in using a Self-Directed IRA to fund those investments, you’re out of luck.

Altogether, managing a Self-Directed IRA can be difficult—but for some investors, the difficulty is more than worth it. The only problem is finding a custodian who will allow you to make your own investments without constantly checking in with them. 

Luckily, Royal Legal Solutions offers you that freedom and independence. When you want to make a new real estate investment using your IRA, we make it as simple as writing a check.

Buying Real Estate with a Self-Directed IRA

When you buy real estate with cash, you get the benefits of depreciation (and other deductions) on your tax bill. That means real estate can potentially save you quite a bit of money in taxes.

However, when you buy real estate using a Self-Directed IRA, all of your gains could potentially be tax-free. Although you won’t get the benefit of depreciation, you can possibly earn real estate investment income through your IRA that can then grow tax-deferred (or tax-free, in the case of a Roth) forever.

Buying real estate with a Self-Directed IRA, then, can be incredibly lucrative.

Self-Directed IRA Options

At Royal Legal Solutions, we offer two products for investors who are looking to buy real estate using a Self-Directed IRA: the SDIRA-owned Business Trust and the SDIRA-owned LLC.

Asset protection is an added bonus of these structures; opening a business trust or LLC with your SDIRA allows you to shield your account assets and personal assets from lawsuits and bankruptcy rulings.

Checkbook ControlSelf-Directed IRA-Owned Business Trust for Real Estate Investors

When you exercise "checkbook control" over your own retirement accounts, what you are doing is using a business structure that is owned by the IRA to execute transactions. Since you are authorized to act on behalf of that entity, you essentially have complete control of your IRA.

The self-directed IRA-owned business trust for real estate investors can give you the benefits of owning real estate through a land trust along with the benefits of buying real estate with an IRA.

You’ll be able to diversify your portfolio while shielding your investment from possible litigation. You get to keep your anonymity while we ensure that your retirement/investment account is in line with everything the IRS demands, so you can focus on the investment itself.

Self Directed IRA-Owned LLC for Real Estate Investors

The self-directed IRA-owned LLC is another great option for real estate investors and anyone looking to invest in assets that you typically wouldn’t be able to purchase using a traditional IRA.

The IRA will own the LLC and you’ll be set up as the manager of the LLC.

Unlike with a business trust, you’ll have to pay for a registered agent fee because the IRS demands that you have an agent representing the LLC.

Self-Directed IRA Options: Choosing the Best Investment Plan

The best SDIRA options depend on what you’re looking to invest in, as well as your individual risk tolerance. 

Again, with a traditional IRA, you only have access to certain assets (like stocks or bonds). With an SDIRA, you can invest in real estate, tax liens, gold, cryptocurrencies, and more.

If you’re a real estate investor, you might want to look into our SDIRA-owned business trust or SDIRA-owned LLC. They give you access all of the benefits of using a SDIRA (earning money completely tax-free or growing it tax-deferred) while protecting your anonymity and minimizing your exposure to litigation.

 

Thinking About Buying Real Estate with Your IRA? Read This First

Thinking about buying real estate with your IRA? Read this before you do.

An individual retirement account (IRA) typically offers massive tax-saving benefits while you’re planning for your retirement, like tax-deferred growth or tax-free withdrawals after a certain age—and they can even allow you to lower your taxable income.

So, naturally, just about every personal finance guru will give you the same advice when it comes to withdrawing money from your IRA before retirement: Never do it.

So why is buying real estate with your IRA any different?

First, you’re not actually withdrawing money from the account. If you’re a responsible real estate investor, you can use your IRA in a way that allows you to utilize the account’s tax-saving benefits, potentially saving you thousands, if not tens of thousands, of dollars.

But there are drawbacks (which we'll cover below).

Second, using your IRA to fund a real estate investment isn’t all that different than using your IRA to purchase any other investment, like bonds or shares, but you need to know how to do it responsibly so you don’t end up disqualifying your IRA.

In this article, we’re going to explain how to go about buying real estate with an IRA.

real estate iraHow to Buy Real Estate with a Self-Directed IRA

Using a self-directed IRA for real estate can be a bit more complicated than opening your Vanguard account and buying VTSAX.

Most financial institutions won’t allow real estate investors to use their IRA to purchase real estate, since it doesn’t generate any income for the bank. So, you’ll have two options:

  1. “Custodian controlled’ self-directed IRA
  2. “Checkbook controlled” self-directed IRA

What is an IRA Custodian?

A custodian is any financial institution that the Internal Revenue Service has approved to take care of an IRA. As we mentioned before, most custodians restrict the use of the IRA for certain investments.

Custodians for self-directed IRAs, though, work differently. The SEC defines self-directed IRAs custodians very succinctly:

“A self-directed IRA is an IRA held by a custodian that allows investment in a broader set of assets than is permitted by most IRA custodians.  Custodians for self-directed IRAs disclaim most duties to investors, and may allow investors to invest retirement funds in “alternative assets.’”

What does this all mean in layman’s terms? If you want to set up a self-directed IRA for real estate, you have to go with a bank that’s going to allow you to do that.

What is a Checkbook-Controlled IRA?

On the other hand, if you go with a checkbook-controlled IRA, you’re setting up a real estate IRA LLC for, of course, the purpose of buying and holding your real estate, and then you’re using the funds from your IRA to invest in that LLC, which is then investing in the property you wish to purchase.

In this case, the IRA needs 100% ownership over the LLC, but it opens up the possibility for making quick cash deals using the money in your IRA.

Can an IRA Be Held in a Brokerage Account?

Since we’re on the topic of alternative investments that you can make with your IRA, you might be wondering, “Can an IRA be held in a traditional brokerage account?”

The simple answer is yes. You can hold an IRA in a brokerage account, but the IRA is its own account. Most of the time, when you open a brokerage account—or any additional account within your current brokerage—they’ll typically ask you whether or not you want to open it as a traditional (taxed) account or a tax-deferred IRA (or a Roth, or SEP, or any of the other types of IRAs).

6 Things to Keep in Mind While Using a Self-Directed IRA to Buy Real Estate

Finally, here are some important things to keep in mind if you’re interested in using an IRA to buy a property:

  1. You can’t mortgage a property using the funds in your IRA. Since you can’t borrow money against your IRA, you’ll need to make the purchase in cash using the funds that you have available.
  2. Your IRA needs to be large enough to cover the investment’s ongoing expenses. Not only do you need enough money to cover the down payment and closing costs, but you also need to make sure you have enough money in the IRA to keep running the business before it starts generating income itself (if ever). Crunch the numbers on the property taxes, special assessments, HOA fees, home insurance, and maintenance. Make sure you have enough stashed away in the IRA to cover those costs.  
  3. You can’t personally use the investment. If you’re looking to use your IRA to purchase a primary residence (or a vacation home or anything for your relatives), you’re out of luck. It needs to be strictly arm’s length, and you can’t receive any direct or indirect benefit from it.
  4. You can’t withdraw any of the gains from your IRA until you’re 59.5 years old without incurring penalties—and that number may go higher in the coming years.
  5. As soon as you reach 70.5 years old, you’re required to start taking required minimum distributions regardless of whether or not you need them (unless your IRA is a Roth). This could cause you to sell your IRA-funded property in a down market.
  6. If you break any of the IRS’s rules on managing your IRA, you subject the entire IRA to taxation.

The Takeaway

In this article, we examined the relationship between the IRA and real estate. This includes opening up a self-directed IRA with a custodian (a financial institution) that will allow you to use the IRA for “alternative investments” and to set up a real estate IRA LLC so that you can then buy that LLC through your IRA, which is known as a “checkbook-controlled IRA.”

Sometimes it might sound like a bunch of alphabet soup, but if you’re an experienced real estate investor who doesn’t need access to the gains until you’re past 60 or so, you can save a bundle on your tax bill by using your IRA to fund your real estate investment. It’s really no different than using your IRA to fund any other investment, it’s just a bit different than what most investors use the account to do.

Remember, though, there are some drawbacks. First off, depending on the real estate you’re looking at, you’ll need quite a bit of money inside the IRA to start, and this can take some time to build up. Second, you can’t use the property yourself, or for your relatives. Finally, if you break any of the IRS’s rules, you could possibly subject your entire IRA to taxation, so make sure you know what you’re doing by working with an experienced professional.

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.

Investing In Promissory Notes With Your Self-Directed IRA

IRAs allow you to make tax-deferred investments while working, so you'll reap the rewards when you retire. A custodian typically puts your money in mutual funds, stocks and bonds. 

The self-directed IRA allows you to bypass the custodian, take charge of your retirement savings, and put your money into a wide range of investments, including real estate and cryptocurrency. You can also use your self-directed IRA to invest in promissory notes, including mortgage notes and trust deeds.

Financial advisors will usually steer you away from alternative assets and towards Wall Street investments, but if you're a smart real estate investor, don't you want control over how your IRA is invested?

If you invest in promissory notes and other alternative assets using IRA funds, all income is tax-deferred until you choose to take a distribution. This keeps more money in the account and increases the effect of compounding. And with a Roth IRA, there will never be an income tax since contributions are taxed on their way into the account.

The self-directed IRA lets you put promissory notes to work for you. Let's take a closer look.

What Are Promissory Notes?

Good question! Promissory notes are legally-binding IOUs that borrowers sign when they take out loans. Essentially, it's a promise to pay back the lender. 

Most promissory notes will list the terms of the loan, such as:

After a borrower issues a promissory note, the lender will keep it until the last payment is made. When the loan is entirely paid, the lender will mark the note "paid in full" and return it to the issuer. 

What Are Real Estate Notes?

Real estate or mortgage notes are promissory notes associated with real estate purchase loans and secured by the property. When a borrower takes out a home loan, the lending institution will typically require them to sign a promissory note and a mortgage agreement. It will be a deed of trust in some states rather than a mortgage, but they're pretty much the same thing (for our purposes, at least). 

While promissory notes outline the terms of the loan, a mortgage or deed of trust secures the loan with the purchased real estate. After the loan is executed, the lender will record their lien on the property by filing the mortgage. Promissory notes don't get filed, so the lender will hold onto it until the loan's paid in full.

Performing Versus Non-Performing Notes

There are two categories of real estate notes you should know about: performing and non-performing. The distinction between the two types of promissory notes is relatively simple. If the borrower makes their payments on time, and the loan has never been in default, the note is "performing." When the loan is in default or the borrower is late on payments, the note is called "non-performing." 

Both performing and non-performing promissory notes can be purchased, traded, sold, or transferred at any time before they are paid off. If you buy real estate notes, you will acquire the right to receive all future payments on the loan. In other words, you're investing in debt, not property.

Why Should I Invest In Promissory Notes?

The appeal of promissory notes varies with your investment strategy. People looking for a truly passive investment should consider performing real estate notes. Being a performing noteholder is basically just an upgrade from being a landlord. Since you own the debt, not the real estate, you don't have to handle tenants or repairs. Your only responsibility is to collect mortgage payments each month.

Investing in non-performing notes, on the other hand, can be a much wilder ride. While this route is not all that passive, you can make a lot of moolah through non-performing notes. Since the borrowers aren't paying, you can usually acquire these types of notes at a hefty discount, leaving plenty of room for profits.

While there are various strategies for investing in non-performing notes, the most common are:

No matter what strategy you choose, investing in real estate notes is an excellent way to diversify your retirement portfolio.

How Do I Invest In Promissory Notes With My Self-Directed IRA?

While investing in notes with your self-directed IRA may sound complicated, it's actually pretty straightforward. 

Step One — Open A Self-Directed IRA

I'm sure I don't have to tell you this, but, just in case, if you don't currently own a self-directed IRA, the first thing you need to do is get one.

Step Two — Purchase Or Create A Promissory Note

Once you find a note you want to invest in, you'll use your IRA to purchase it. You can also create your own promissory notes by lending out funds from your IRA and collecting interest.

Step Three — Do Paperwork

You'll need to fill out some paperwork and provide an original copy of the note to your bank. Take note — your IRA must be listed as the lender instead of you personally.

Step Four — Make Money

That's pretty much the entire investment process. Once you've secured the note and the bank has processed your paperwork, you're officially a promissory note investor!

Important Considerations

As always, when investing with your self-directed IRA, some due diligence is required. You should always thoroughly review the existing legal documents, information on the property, and the borrower's financial background before investing in a note. 

Once you have added notes to your IRA, you should also engage a third-party loan servicing company. Having a servicer deal with your loans eliminates the possibility of engaging in prohibited transactions by providing services to your retirement plan. While there may not be any issues with you handling certain aspects of servicing the loan yourself, hiring a third-party to manage your notes is your safest bet.

 

What's The Difference Between A Roth IRA And A 401(k)?

Sometimes saving for retirement seems more complicated than it should be, and even more so when you work for yourself. There are a seemingly endless number of retirement accounts to choose from, and you want to make the best decision for your future (and for your family's security).

As a self-employed real estate investor, we know you like to make smart money moves, and we're committed to helping you make that happen. So let's talk about two of the most common types of retirement savings plans: what’s the difference between Roth IRA and 401k?

What You Need To Know About Roth IRAs

Roth IRAs are a type of Individual Retirement Account (IRA), a retirement savings account you can use to invest in common securities such as stocks, bonds, certificates of deposit, and mutual funds. A traditional IRA allows you to contribute to your account with pre-tax moolah, but you'll have to take required minimum distributions (RMDs) once you turn 72, and pay taxes on the money you receive.

With a Roth IRA, you pay your taxes up-front and then invest. Because Uncle Sam already got his cut, you won't be required to take RMDs. You also don't have to pay taxes when you choose to take distributions, as long as you're older than age 59½, and you've had the Roth IRA for more than five years.

Roth IRAs are an exceptional choice if you're self-employed or if your employer doesn't offer a 401(k) plan. Even if you have a 401(k), you can use a Roth IRA to increase your retirement savings once you hit your 401(k) contribution limit.

Income and Contribution Limits

Unfortunately, the government puts income limits on who can invest in a Roth IRA and contribution limits on how much you can invest. 

If you're married and file taxes jointly, you can't use a Roth IRA if your combined modified adjusted gross income (MAGI) is $206,000 or higher. Roth IRAs are also unavailable if you're single and your MAGI is $139,000 or more.

If you meet the income requirements, you can open a Roth IRA, but you can't contribute more than $6,000 each year, or $7,000 if you are 50 or older.

Self-Directed Roth IRAs

A self-directed IRA (SDIRA) is a type of IRA that enables you to make investments that a regular IRA won't allow. While IRAs can only accommodate common types of securities, an SDIRA can hold a much broader array of investment options.

Investments types available for SDIRAs but not regular IRAs include:

An SDIRA is administered by a custodian or trustee, but you'll manage the account directly. (That's why they call it a "self-directed" account.) An SDIRA is available as either a traditional IRA or a Roth IRA and is an attractive choice for savvy real estate investors who want to use a tax-advantaged account.

What You Need To Know About 401(k)s

A 401(k) is a retirement savings plan that employers can offer, but there's also a variation for you self-employed folks out there. As with a traditional IRA, a 401(k) allows you to invest pre-tax money in mutual funds, and then you'll pay taxes on your distributions. 

401(k)s are usually funded through paycheck deductions from your gross pay. Many employers will also match contributions you make to your 401(k), which allows you to invest even more. You should always take advantage of an employer match if one's available: it's free money!

Contribution Limits

Like the Roth IRA, 401(k)s also have contribution restrictions. There are personal contribution limits and a total contribution limit for combined individual and employer contributions.

The annual 401(k) personal contribution limits for 2020 and 2021 are:

The annual 401(k) total contribution limits for 2020 and 2021 are:

Solo 401(k)s

A Solo 401(k) is a 401(k) plan for self-employed people and their spouses. Solo 401(k)s follow the same rules as an ordinary 401(k) plan, but are only available to business owners with no employees. A significant advantage of the Solo 401(k) is that you can contribute to the account as both an "employee" and an "employer." 

What Is The Difference Between Roth IRA And 401(k)?

When comparing Roth IRA vs. 401k, the main difference is the tax benefits offered. With a Roth account, you pay taxes now and then take tax-free distributions later in life. A 401(k)s allows you to contribute pre-tax money, reducing your taxable income and giving you a tax break now, but you'll have to pay taxes when you take distributions.

The differences between Roth SDIRAs and Solo 401(k)s are even more apparent.

Roth SDIRAs allow you to invest in diverse types of assets, including real estate. Unfortunately, income and contribution limits can limit a Roth SDIRA's effectiveness as an investment tool.

Solo 401(k)s are much more limited in the type of investments you can make, with your choices usually restricted to various mutual funds. However, you can invest much more money each year since you can contribute as both the employee AND the employer. 

Given the advantages and disadvantages of these retirement plans, your best course of action may just be to invest in both. There's no rule that you can only pick one! You can even convert your IRA or 401(k) into a Roth account if you change your mind later. Creating a diverse retirement savings plan can help you maximize your investment opportunities and better prepare for your future.

Calculating RMD For An Inherited IRA

If a loved one passes away and you are the beneficiary of their IRA, you might not know what you need to do next. The IRS has a lot of complicated rules about inherited IRAs, and you can be subject to large penalties if you don’t follow them.

While it’s always a good idea to get tax advice from an attorney or accountant, we’ve put together a handy guide to help you figure out what you need to do to stay on the IRS’s good side when calculating RMD an inherited IRA. That's the "required minimum distribution," and it can get confusing!

Note: The information here pertains to Charles Schwab, eTrade and Ameritrade IRAs .... or even an inherited self-directed IRA (SDIRA) ... But, as always, you should check with someone on our team for the solution that will apply to you and your situation.  

What Is An IRA?

Let’s start from the beginning. An IRA, which is short for Individual Retirement Account, is a retirement savings account that is not provided by your employer. You open the account yourself and can contribute up to $6,000 a year of pre-tax income, or $7,000 a year if you're 50 or older. Yes, that means you don't get taxed on the money you invest in your IRA.

But since Uncle Sam is involved, of course you know there must be a catch. A traditional IRA allows you to make pre-tax contributions, but you will be subject to required minimum distributions after you turn 72, and any withdrawals you take will be taxed as ordinary income after age 59½. Since you're skipping taxes now and paying them later, traditional IRAs are called "tax-deferred retirement accounts".

Another type of popular retirement account, the Roth IRA, is NOT a tax-deferred account. With Roth IRAs, you pay your taxes up-front by investing post-tax dollars, so you aren't subject to required minimum distributions later in life.

How Do Required Minimum Distributions Work?

While you can invest pre-tax funds in an IRA, you'll eventually have to pay taxes on that income. For this reason, the IRS is going to start making you take money out of your account once you turn 72, so that they can tax you on your distributions. However, if you're still working, you can get out of taking distributions until you retire.

These mandatory annual withdrawals are fittingly called required minimum distributions, or RMDs for short. Your RMD requirement is calculated based on your age and the amount of money in your account.

Before 2020, the RMD age for IRAs was 70½, but when the SECURE Act passed in 2019, they raised the age to 72. If you turned 70½ before January 1, 2020, you may be subject to RMDs. A tax advisor can tell you if you are required to take RMDs now or when you turn 72.

If you try to skip an RMD, you can receive a whopping 50% tax penalty from the IRS. However, you may be able to receive an RMD Penalty Waiver to avoid IRS penalties under certain circumstances.

Inheriting IRAs

Upon an IRA owner's death, the remaining balance of the account will be inherited by their designated account beneficiary. The rules are different for spouse beneficiaries and non-spouse beneficiaries, so we'll talk about them separately.

A quick note before we get into the nitty-gritty of calculating these things. These rules apply to BOTH traditional IRAs and Roth IRAs. While the original account owner was not required to take RMDs from their Roth IRAs, if you inherit a Roth IRA and transfer the assets into an Inherited Roth IRA, you will be required to take RMDs. However, as long as the funds have been invested in the Roth IRA for at least five years, your RMDs will not be taxed.

Spouse Beneficiaries

If you inherit an IRA from your spouse, you have three options:

If you decide to treat the IRA as your own or roll over the balance into your own IRA, you would simply follow the regular RMD rules for your IRA. If you choose to transfer the balance into an inherited IRA, your RMD amount will be based on your age and be recalculated each year.

Non-Spouse Beneficiaries

If you inherit an IRA from someone who is not a spouse, you cannot roll the inherited balance into your own IRA and must transfer the balance to an Inherited IRA. 

If The Original Account Owner Died Before January 1, 2020

If the original account owner died before January 1, 2020 and was younger than 70½, you have two options:

However, if the original account owner was 70½ or older at the time of death, then you must receive RMDs over your lifetime.

If The Original Account Owner Died On January 1, 2020 Or Later

If the original account owner died on January 1, 2020, or later and you are not an eligible designated beneficiary, under the 10-year rule instituted by the SECURE Act, you must deplete the account within 10 years.

Eligible designated beneficiaries include:

Under the SECURE Act, eligible designated beneficiaries still have the option to take RMDs based on their life expectancy.

How To Calculate RMD For Inherited IRAs

RMDs for Inherited IRAs are calculated based on two factors:

Your life expectancy factor will be recalculated each year based on the IRS Single Life Expectancy Table. This table provides a life expectancy factor based on your current age. The older you are, the lower your life expectancy factor will be.

Once you determine the life expectancy factor for your age, you can do the following calculation:

Account Balance ÷ Life Expectancy Factor = RMD

You can also use an online RMD calculator to determine annual RMDs for you. We've linked a few good ones below:

Investment Options for Your Self-Directed IRA

One of the best things about rolling over your retirement assets into a self-directed IRA is that it opens up a wide range of investment options—including our favorite, real estate.

Typically, IRA investment options are limited to stocks, mutual funds and bonds. Holders of a self-directed IRA, however, can also invest in:

With all those options, more and more individuals are converting their traditional IRAs to self-directed IRAs to take advantage of a very favorable market. There are, however, certain rules and restrictions that need to be followed in order to enjoy tax-free and tax-deferred status.

Investment Restrictions for Self-Directed IRAs

The IRS does not list what self-directed IRAs are allowed to invest in. On the other hand, it provides a detailed list of prohibited transactions and specifies what individuals are not allowed to invest in. Generally speaking, you cannot directly benefit from any investment you make with your IRA. For those that own property, the property must be held in the name of the IRA trust and not your own. Rent, for example, would be paid directly to the trust.

In addition, you can not hold property in your IRA that either you or your family members benefit from. This includes homes, businesses, and loans. You can’t borrow against your IRA to start your own business. Generally speaking, if you or your family reap immediate rewards from the holding of an asset in your IRA, that is disqualified.

While certain assets are restricted by the IRS, the IRS is most concerned with who is benefitting from the holding of the assets in an IRA. If it’s you or a member of your family, that will raise their eyebrows.

Investment Possibilities With Your Self-Directed IRA

Self-directed IRAs significantly expand your options. They also afford you all the benefits that IRAs have to offer. What are some of those options and benefits?

Tax Deferral

Both traditional and self-directed IRAs enjoy tax-deferred status. Roth IRAs are essentially tax-free. Due to this preferred tax status, the IRS insists that certain rules are followed. Nonetheless, returns and contributions to non-Roth IRAs are tax-deferred. You won’t begin paying a dime in taxes until you begin taking distributions.

Roth IRAs, on the other hand, are taxed on their way into the account. You won’t pay taxes on either distributions or gains. Contributions to the Roth, however, are not deductible. There are also limitations on what you’re allowed to contribute depending on how much you make in a year. This is something to bear in mind when considering a Roth IRA.

Real Estate

Real estate is one under-utilized option for self-directed IRAs. So long as the real estate is property of the IRA trust, any money that the real estate generates is allowed to be entered in your IRA tax-deferred. This can include rent or gains from the sale. One restriction, however, is that neither you nor anyone in your family is allowed to reside in or take advantage of the property in any way. That would create a conflict of interest and potentially void your IRA.

Stocks, Bonds, and Mutual Funds

IRAs are set up to receive passive income from such things as dividends. In fact, the IRS prefers that you pad your IRA with passive earnings. Traditional or non-self-directed IRAs relied on bonds and mutual funds to accrue value. You can still invest in stocks, bonds, and mutual funds, but with a self-directed IRA, you can choose which ones you invest in.

Precious Metals

While the IRA expressly prohibits the use of your IRA to invest in collectibles, there are certain kinds of coins that gain their value intrinsically from what the coin is made of. Instead of being an investment in the coin, it’s considered a precious metal investment. The U.S. government mints such coins for this express purpose. So do most major countries across the globe. These coins are largely considered an acceptable form of investment for your IRA.

Tax Liens

Another interesting option for your self-directed IRA is tax liens. Essentially, the government will sell liens on real estate where the owners have failed to pay property taxes. They will recoup their money in this manner. Meanwhile, interest is building on the unpaid taxes. If the owner fails to pay at all, the real estate will become property of the IRA. For the last decade or so, tax liens on real estate have become a very lucrative investment. With your self-directed IRA, you can reap the rewards tax-deferred.

Private Businesses

This is a bit tricky, but it can be done. You’ll need to bear in mind that you cannot purchase an interest in any business belonging to “disqualified” persons. This basically includes anyone in your family or yourself. The IRA can own an interest in a business and have profits paid to the account, but the disqualified persons statute of the IRC must be abided absolutely. Otherwise, you risk the IRS considering the transaction a distribution thus voiding the IRA entirely.

Loans and Notes

You can purchase notes or make loans using your IRA. However, the same rules concerning disqualified persons still apply. Likewise, you can’t borrow against your IRA.

Foreign and Cryptocurrencies

The IRS permits investors to use their IRA to invest in both foreign currencies and cryptocurrencies. Cryptocurrencies have made a lot of headlines recently, but the jury is still out on whether or not they constitute a good long-term SDIRA investment. It seems that if the technology to process transactions improves over the next few years, as everyone expects it will, then cryptocurrencies could represent a major disruptive technology that would change the face of global commerce forever.

Foreign currencies also represent an excellent investment option as they offer easier liquidity than stocks or bonds.

The Bottom Line

Self-directed IRAs have many advantages, not the least of which is that they allow tax-deferred earnings and unmatched investment options. Using your self-directed IRA to secure your future has never been easier or more effective.
 

 

The Real Threats to Your Self-Directed IRA & How to Defend Against Them

One of the many reasons real estate investors love the self-directed IRA (SDIRA)  is the control they have over both their assets and participation with traditional custodians. But many investors are also aware of the SDIRA’s relative security as an asset protection tool. If you weren’t aware of this benefit before, you are now. 

Don’t make the same mistakes other investors make. Watch out for threats to your SDIRA’s security. If you establish an SDIRA, it’s smart to do what you can to protect it; read on to learn how.

How Safe Is Your Self-Directed IRA?

When pros like attorneys discuss self-directed IRAs being “safer” than other investment vehicles, they’re referring to safety in two senses of the word. Your SDIRA isn’t “safe” from any type of attack, but it does protect you legally:

So, this article isn’t intended to suggest IRAs are inherently risky, just to remind you how not undermine its protections. The sticky reality is that for real estate investors, self-directed IRAs can be riskier when they own assets (including REI property) that have liabilities attached.

Your Biggest Threat: Prohibited Transactions Explained

The biggest way you can be a danger to yourself and your self-directed IRA is by performing prohibited transactions. The prohibited transaction rules are a gift from our buddies at the Department of Labor. Basically, there are things you can’t do in a business context with your SDIRA:

  1. Self-dealing is the term for doing business with yourself via your self-directed IRA or other qualified retirement plan (QRP). You can’t do this, frankly, because of too many opportunities for corruption.
  2. Disqualified People.The DOL isn’t dumb. They disqualify certain individuals, namely relatives, spouses, and other types of people you might form “sweetheart deals” with like business partners. So to keep everyone playing fair, plan participants can’t allow their plan to make transactions with anyone the DOL labels a “disqualified person.” Expect to pay hefty penalties if you do.

For your convenience, we’ve compiled an educational resource about avoiding prohibited transactions, complete with examples. Our prohibited transaction resources can help you educate yourself to the point you avoid engaging in such transactions with your self-directed IRA. The only downside to the SDIRA’s freedom from custodians is such freedom means you are responsible for dodging prohibited transactions.

How to Protect Your Self-Directed IRA

You have additional options for protecting your IRAs. For those of us concerned about our real estate assets, the liability-limiting powers of the SDIRA LLC offer an elegant fix.

Consider a Self-Directed IRA LLC for Liability Protection

The ideal legal tool for a long-term SDIRA owning REI is the SDIRA LLC. This variation of the retirement plan is hybridized into an entity, a more secure option for investors.

The SDIRA LLC is an alternative to the IRA Business trust, another option for IRA-owned entities. Real estate investors are attracted to the LLC option because of its strong liability protections. Using an SDIRA LLC gets investors the flexibility to buy real estate with IRA funds and the protection of an LLC, or the best of both worlds.

Advantages of a Self-Directed IRA

If you are looking to save money for your golden years, it is likely that you have heard of an individual retirement account (IRA). These accounts allow you to invest your pre- or post-tax dollars in mutual funds, stocks and bonds. However, if you are looking for more – you might want to consider opening a self-directed IRA, also known as a SDIRA. These special retirement accounts allow you to invest in alternative assets.

Advantages of a Self-Directed IRA

The advantages of a SDIRA go beyond those of a simple IRA account. Below are just a few of the reasons we recommend a SDIRA account to anyone interested in opening a retirement account.

Diversify Through Alternative Assets

One of the greatest draws of a SDIRA are the alternative assets you can invest in. Real estate, precious metals, and renewable energy sources are just a few of the options available to SDIRA owners. Private placements, foreign currency and many other things are also allowable investments. (In fact, the Internal Revenue Service (IRS) actually allows you to invest in much more than it restricts with a SDIRA!) Because of the greater investment options available to you, you have a greater likelihood of reaping a larger reward.

Tax-Advantage Account Rewards

A SDIRA is considered to be a tax-advantage account. If you open a traditional SDIRA, with pre-tax dollars, you can invest in alternative assets with tax-deferred dollars. This means you have more money to start your investment with. If you open a Roth SDIRA, with post-tax dollars, you can reap tax-free profits. Because you already paid taxes on these dollars, the growth and profits are potentially tax-free. (Speak with one of our experts today to learn more about what the different types of accounts can mean for your future!)

Asset Protection

Opening a SDIRA with a reputable firm, like Royal Legal Solutions, can ensure you know the best way to protect your assets. For example, Royal Legal Solutions makes it easy for you to open a business entity, such as a limited liability company (LLC) or business trust, with your SDIRA. By forming a SDIRA LLC or series LLC, you can shield your account assets and personal assets from lawsuits and bankruptcy rulings.

Total Control

The IRS specifies that any self-directed account is the responsibility of the account owner. This means you make all of the decisions. While your custodian acts on your direction, you can gain even more control. Through opening a LLC or business trust in the name of your SDIRA, you also gain checkbook control. This means you can make investments instantaneously without running it through your account custodian. Think that house at the end of the street is a great investment opportunity? All you need is SDIRA checkbook control. 

 

Investing in Domestic and Foreign Real Estate with Your IRA Business Trust

Most people know that an individual retirement account (IRA) allow plan owners to invest in mutual funds, stocks and bonds. An IRA can certainly grow your contributions and create a nice nest egg for your golden years. However, what many do not know, is that there is a way to invest in much more! A self-directed IRA, also known as a SDIRA or solo IRA, gives you total control over your plan. It also allows for investments in alternative assets, like real estate, precious metals, private placements and renewable energy sources. While you can invest in almost everything with a SDIRA, real estate tends to be one of the biggest draws.

Full Checkbook Control

Many SDIRA plan owners establish a limited liability company (LLC) or business trust in their account’s name. This gives them full checkbook control. (When you establish a LLC of IRA business trust, you can open a banking account to help you better access your SDIRA finances.) With many properties being listed as foreclosures, short sales and estate sales – the atmosphere is ripe for low cost investments with the potential for significant returns.

Generate Income, Avoid Taxes

When you open a traditional SDIRA, you make pre-tax contributions. These dollars, and any profits generated by them, are taxed later, when you begin to take distributions. However, if you open a Roth SDIRA, you use post-tax dollars to make contributions. This means your gains and later distributions are made tax-free. For both traditional and Roth accounts, profits generated by a SDIRA-owned property flow right back into the account. When compared to a regular fixed-income, using your SDIRA to invest in real estate can generate profits that are two to eight times higher. Whether you rent or sell your SDIRA property, you can substantially increase your retirement account funds through real estate investments.

Real Estate at Home or Abroad

Not only can you use your SDIRA to invest in real estate in the United States, but you can also invest in foreign properties as well. This is true of both residential and commercial properties. There are plenty of reasons to invest in property, aside from the potential profits.

The truth is, property in general goes up in cost every year. In addition to that, your property taxes will as well. If you invest in property today, you can avoid having to pay a higher cost later. Depending on when you use your SDIRA to purchase the property, you may even have the home completely paid off before you reach 59 ½. If you rent out the property before then, you can also generate a profit that may: a) pay for the mortgage, allowing you to continue to grow your funds elsewhere without having to spend them on the residence or b) pay for the mortgage and generate additional income.

Why Choose a Roth SDIRA?

As previously stated, you can use a traditional or Roth SDIRA to invest in real estate. However, you should note some differences. Traditional SDIRAs are tax-deferred. This means you will have to pay taxes on your distributions. If you plan to take residence in a SDIRA-purchased property once you turn 59 ½, you will owe taxes. While this is still a smarter home-investment than buying a new home outright when you turn 59 ½, a Roth account will let you avoid this. True, property taxes are owed every year regardless of how you came to own the real estate. However, the asset’s value is not subjected to income taxes with a Roth SDIRA.

Finding the Right Firm

SDIRA accounts are not available through most mainstream investment firms. An Royal Legal Solutions, however, is available to anyone. Our professionals are able to support plan owners all over the world. We understand that you worked hard for the money you contribute to your retirement account.

 

As experts, we strive to provide you with quality support and professional custodial services. We have years of experience helping our clients understand tax laws, preparing documents, and providing trustee services. If you would like to learn more about retirement accounts, investment options, or checkbook control, please contact us today.