The 5 Best Investments in My Self-Directed IRA

For those that have taken the plunge and rolled their IRA over into a self-directed IRA, a number of investment options are now at your fingertips. The question then becomes: what should you invest in? While the answer is going to differ depending on your own personal interests and acuities, these are some of the most exciting options available.

#1. Real Estate

Real estate is hot right now and the market for the right kind of investor is fantastic. It’s going to take a willingness to get your hands dirty. There are a number of dilapidated or run-down properties that are not up to rental codes all across the country. But the property itself has never been more valuable. Anyone willing to restore the property to livable conditions can make a killing flipping it or renting it out.

IRA money can provide the starting capital to do this, especially when combined with a non-recourse loan. Non-recourse loans require that you only provide 35-50% of the money down. A savvy investor can use that to stretch their IRA capital across multiple properties.

#2. Business Equity

Investors looking to purchase equity in a business can make excellent returns to fatten their IRA. The one restriction is that the business must be a completely separate venture from yourself and certain family members. That also means that there are restrictions on your personal involvement in the business. You may also be required to pay UBIT (unrelated business income tax). You’ll want to make sure that a financial advisor or lawyer oversees the legalities, but a number of individuals are using their IRA to successfully invest in business equity.

#3. Private Lending for Real Estate Ventures

Any means of jumping on the real estate bandwagon right now is a smart move. This is largely because there is such a huge demand for housing and rental properties. It remains a huge need for many areas, so even those that aren’t willing to deal with restoring the properties themselves, overseeing the repairs, or dealing with tenants can still make a good amount of money simply lending to those who will.

#4. Cryptocurrencies

Despite their reputation for volatility, many believe that cryptocurrencies are the wave of the future. The reason for this is that the distributed ledger technology on which they are based provides a decentralized approach to preventing counterfeiting. While most cryptocurrencies are tied to the relative success of Bitcoin, many others are attempting to fix the many serious problems that Bitcoin has. Investing in these ventures through ICO’s is a high-risk high-reward prospect that, if successful, will pay off major dividends.

#5. LLC Shares

Investing in shares of LLCs provides an excellent opportunity for passive income. Again, it’s a matter of doing the research and vetting the company, but for those that want to take a hands-on approach to their IRA, it also provides an excellent opportunity to see steady returns. You’ll want an attorney to take a look at the operating agreement so that it doesn’t conflict with federal restrictions on IRAs, but if set up properly, it will give you the opportunity to earn a solid passive income.

Self-Directed IRA Investments in Cryptocurrency

At Royal Legal Solutions, we stay on top of all investment trends. One of the fasted growing trends today related to cryptocurrencies. Let’s take a look at this often confusing topic.

What is Cryptocurrency?

Cryptocurrency, in particular Bitcoin, was invented in 2009 created by Satoshi Nakamoto. In its most simplistic form, cryptocurrency is considered to be a digital currency that is used in virtual exchanges. While there are many types of cryptocurrencies available today, the most common to be used is Bitcoin. Bitcoin uses cryptography as a means of securing and verifying transactions. Cryptography is also used to control the creation of Bitcoins, and other digital currencies, through virtual databases that permit changes only when very specific conditions have been fulfilled.

Does the IRS Allow for Cryptocurrency Investments?

Current laws do not prohibit the use of cryptocurrencies. In fact, tax regulations from the Internal Revenue Service (IRS) do not dictate what you investments you can make with your retirement accounts, within the scope of allowable categories. (For example, your individual retirement account allows for investments into anything that could be considered stocks, bonds or mutual funds. Other types of retirement accounts allow for further options as well.) They do however prohibit two very specific types of investment activities:

Cryptocurrencies clearly do not fall into the life insurance category. With names like “Bitcoin”, there was some initial confusion regarding the collectibles classification. Because it is digital, and based on a 2014 notice from the IRS, rest assured that cryptocurrencies do not fall into the collectibles category either. Instead, the IRS identifies them as property, which is allowable under certain IRA plans.

Self-Directed IRAs and Cryptocurrencies

Cryptocurrency gains are well documented and come with potentially high-returns for your IRA. By turning a portion of your self-directed IRA (SDIRA) portfolio into a cryptocurrency investment is a modern way to further diversify your investments. (Please note, because cryptocurrency is still considered a fledgling investment, only a small percentage of your portfolio should be converted to help decrease risk and protect your net worth.) When it comes to taxation on your cryptocurrency investment, IRS property regulations apply. That means that investing in, through buys or sales, cryptocurrency will not prompt unrelated business income taxes or other similar taxes.

Find a Custodian

IRS regulations require the use of a custodian or trustee for a SDIRA. While you retain control of your SDIRA, the custodian can help you facilitate exchanges at your request and ensure you do not violate any tax codes while doing so. However, because of the complexities of such a new investment capital, not all firms will allow these kinds of investments. Finding a trusted and knowledgeable custodian will go a long way in simplifying your cryptocurrency conversion and investment process. The experienced professionals at Royal Legal Solutions can help. Not only have we worked with investors new to the cryptocurrency scene, but also we have extensive experience with SDIRA custodial services in general.

Cryptocurrency investments may not be for everyone. However, the experts at Royal Legal Solutions can help explain how they work as well as what options are available. Ultimately, the decision to invest is up to you as the account owner, but we are here to help you gain a better understanding of investment opportunities and the regulations you need to know before investing.

What Would You Do With $100,000 in Your Self-Directed IRA?

One hundred thousand dollars is a nice sum to have in your IRA, but let’s face it. It doesn’t go as far as it used to, and it’s likely to stretch even less by the time you’re ready to retire. Often the returns on conservative investments such as CD’s, money markets, and bonds barely outstrip the rate of inflation. Inflation provides a constant pressure on the value of your money, so it ends up being that if it’s not making a decent return, you’re actually losing money. For savvy investors, using their IRA creatively can result in huge returns.

Self-Direct Your IRA

Self-directed IRAs are becoming increasingly popular and for good reason. They provide IRA holders with numerous options and open up investment opportunities that traditional IRAs can’t. At the same time, they provide a unique advantage: IRAs are tax-deferred.

How can you turn your IRA into a serious investment vehicle?

There are a number of custodians that specialize in self-directed IRAs. It will cost more than a traditional IRA, but on the same token, it provides you with unlimited investment opportunities on which to cash in. In other words, it’s an expenditure that can show huge dividends.

So the first step is rolling your current IRA over into a self-directed IRA.

What Can You Do With More Control over Your IRA?

One of the best options available right now is real estate. In terms of houses, most folks know that it’s a seller’s market. But rental properties are appreciating in value as well. In fact, many housing markets are currently failing to meet the demands of renters. It’s a huge opportunity for developers, but it’s also a huge opportunity for individuals that are willing to renovate dilapidated properties.

This affords different kinds of investors different kinds of opportunities, and IRAs can provide the starting capital on which to make that journey.

One possibility that is often overlooked: non-recourse loans. These can be used to purchase a property with somewhere between 35%-50% of the money down. This allows those without $100,000 in their IRA to invest in a decent property or those with more to invest in several. Either can use the money generated by rent to pay off the remainder of the loan.
Alternatively, those that are looking for a passive way to earn can use the money to furnish real estate investors in the purchasing of property that can then be renovated and rented out.

Real estate is a hot market right now because the demand is higher than supply. Fixing up properties that have fallen into neglect is an opportunity to cash in on a market that has shown great performance over the past few years.

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.

What Exactly is a Rollover IRA?

IRA Rollovers can be deposited into an IRA from another retirement fund, for instance: 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.

The Benefits of an IRA Rollover

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.

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.

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.

IRAs Have Lower Fees

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

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:

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.

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:

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.

Self Directed IRA Business Trust FAQs

Investing in an Individual Retirement Account (IRA) is a great way to start saving for your golden years. Whether you are interested in a Self-Directed IRA (SDIRA), 401(K), or other IRA plan, investment professionals at Royal Legal Solutions can help. Below is a list of the most frequently asked questions we receive from people looking to learn more about investing in their future.

General SDIRA Questions

While SDIRAs have been around for decades, they are not the most well-known means of saving for your retirement. As a firm that specializes in SDIRAs, Royal Legal Solutions is here to help you understand how these types of investment accounts work.

How is a SDIRA different from other retirement plan options?

IRAs, 401(K)s, and SDIRAs are all used to earmark funds you intend to use during your retirement. At their core, each is a vehicle that is used to promote savings and investments that become available to your upon retirement. The majority of these accounts allow for unhindered growth as the invested funds and their earnings are generally tax-deferred. Each allows for investments in publicly traded securities and derivations of them, including stocks, bonds and mutual funds. However, that is where a SDIRA distinguishes itself. SDIRAs allow you to invest in much more than that. These alternative assets, like real-estate, precious metals, and renewable energy, allow for you to have a much more diverse portfolio. IRAs and 401(K)s are typically held at banks, insurance companies, or general investment firms and managed primarily by investment professionals.

Investment firms that offer custodial management of your SDIRA, on the other hand, tend to specialize specifically in these types of accounts. Also unlike IRA and 401(K) accounts, you control every aspect of your SDIRA. The investment professionals who retain custodial-only access are simply there to ensure you do not unintentionally break rules set out by the IRS.

What is the typical timeline to open a SDIRA or 401(K)?

At Royal Legal Solutions, opening a new SDIRA or 401(K) is easy. On average, the account process can take between two days and three weeks. The main drivers that dictate this timeline are how you plan to fund your account and, if you have a current retirement plan, who the custodian is. Our investment professionals strive to make this process as easy and quick as possible. We know every day it takes to set up your account is another missed opportunity to grow your finances.

Does having a SDIRA make me more likely to be audited by the IRS?

Currently, the IRS cannot legally target taxpayers for audits based on the type of investment accounts they have. In 2015, the IRS began asking for additional information on IRA reports in the form of Form 5498. However, because not all investors digitally submit their reports and the IRS cannot presently support manual submissions, targeting SDIRA owners would be considered a discriminatory practice. While this may change in the future, a SDIRA will not trigger an audit.

My current CPA believes there is an incurred 39% tax if I switch to a SDIRA and has warned against doing so. Is this true?

Your CPA is likely not as familiar with the SDIRA process as a specialized firm would be. They may also be under the assumption that you are attempting to take an early distribution from your current IRA in order to fund your SDIRA. This is untrue. Opening a SDIRA is typically considered a custodian-to-custodian transfer of your current IRA. Because of this, the startup process and investments are non-reportable and non-taxable.

Funding My IRA

IRAs, the tax regulations that govern them and investment complexities can give anyone a headache. Our professionals are here to help make sure your IRA experience runs smoothly.

Can I claim all of my IRA contributions?

You can contribute to your IRA account. However, if you have an IRA account through your employer, you may not be able to deduct the total of your traditional IRA contributions due to IRS threshold constraints. The investment professionals at Royal Legal Solutions can work with you to help determine the best way to save you money while investing in your future.

How can I transfer funds into my new account?

There are two ways to roll funding between your accounts. For a non-taxable and non-reportable option, you can elect to make a direct custodian-to-custodian transfer from your old account to your new one. You may also opt for a distribution-and-rollover transfer. These events are reportable, but are not taxable when the old funds are rolled into a new account within 60 days of distribution from the previous custodian.

How long does a transfer take?

For the custodian-to-custodian option, a transfer may take between seven and twenty days. If you are considering a distribution-and-rollover method, it only takes a couple business days for your bank to transfer the distribution to your new IRA.

How do 401(K) rollovers works?

We will provide you with the necessary information you need to initiate a 401(K) rollover. As the plan owner, you must provide this information to your plan administrator to start the rollover process.

What is the difference between an indirect and direct rollover?

Indirect rollovers occur when the funds from your current plan are distributed directly to you. A 20% tax withholding fee will be taken from your total by your administrator. Once you deposit your distribution, you have up to 60 days to invest any percentage of those funds into your new IRA or 401(K) without an additional penalty tax. Direct rollovers bypass these taxes. With these, your current administrator issues your funds directly to your new plan.

Managing My IRA

Whether you are new to investing or just want expert assistance, Royal Legal Solutions keep our costs affordable to ensure your investment funds go where they are supposed to: towards your future.

What rules apply to an LLC I invest in?

If your investments include owning a percentage of an LLC, all transaction must meet IRA guidelines. When LLC returns are distributed to investors, including you,  they need to be issued at the same time and pro-rata.

How much can I contribute annually to my IRA?

Contributions to your IRA and 401(K) are subjected to annual limits as dictated by the IRS. For IRAs, if you are under the age of 50, your annual maximum contribution is $5,500. If you are 50 or older, your annual contribution is capped at $6,500. Simplified Employee Pension IRAs are different and have an annual limit of $54,000. The 2018 solo 401(K) contribution limit is $55,000.

What is a RMD?

RMD, or Required Minimum Distribution, is the lowest amount of money you are obligatory to withdraw from your retirement account once you reach the age of 70.5. (Roth IRAs differ. They do not require any withdrawals until after the owner has died.) Your RMD is calculated by the IRS-published life expectancy factor and your balance as of 31 December of the previous year. RMDs are calculated on an annual basis with the first one starting on 01 April once you turn 70.5. You are required to withdraw your annual RMD amount by 31 December every year.

Do I pay taxes on RMDs?

Yes, the account owner is taxed at their income tax rate when they withdrawal their RMD.

What if I fail to withdraw my RMD that year?

Regardless of whether the IRA is yours or you inherited it, failure to withdraw the designated RMD by 31 December will result in a 50% penalty fee.

Business Trust For Self Directed IRA With Checkbook Control

The most exciting aspect for owners of a Self-Directed IRA with checkbook control is to have more direct authority and oversight over the investment and management decisions regarding the funds and investments held in the retirement account. The driving factor is to avoid having to submit documentation for each investment transaction or transfer of funds to the IRA custodian for their review and approval. This review process can take up to 2-3 days and moreover, the custodian usually charges a fee for (1) this review and approval process and (2) the transfer of funds to the investment. Ouch! Why waste your retirement funds on such administrative overheads?

How Self-Directed IRA Business Trusts Work

One way to achieve greater discretionary and more immediate control over the funds in your self-directed IRA is to form an IRS-approved legal entity into which the funds of the IRA are invested and you as the IRA owner and the manager/trustee of that legal entity, can assume direct control over those funds by your management role with that entity. Business trusts and limited liability companies (“LLCs”) are the two types of entities typically selected for this purpose for which the self-directed IRA would transfer the funds for investment. With a Business Trust the IRA owner will serve as the Trustee. With a LLC, the IRA owner will serve as the Manager.

With a Business Trust the Checkbook IRA account makes an investment in the trust by acquiring 100% of the “beneficial interests” of the business trust. Acquiring the beneficial interests of the business trust is similar to an IRA account acquiring the “membership interests” of a limited liability company or shares of a corporation. Essentially, the term “beneficial interests” is the title for the “equity interests” in the business trust that are acquired when the investment is made in a business trust.

By acquiring 100% of the “beneficial interests” of the business Trust, the IRA account has now become both (i) the “trustor,” or “settlor,” of the business trust (i.e. the party that has transferred assets into the business trust) and (ii) the “beneficiary” (i.e. the party that holds the “beneficial interests” of the business trust).

We believe that the Business Trust is a better type of entity to choose for your self directed IRA with checkbook control for the following reasons and as illustrated here.

No Public Filing Preserves Your Full Confidentiality

When an LLC is formed, it must (1) Name and Agent for Service Of Process in the Articles Of Organization and (2) File the Articles Of Organization with the Secretary of State in the state of organization. The IRA owner is typically going to list himself or herself as the Agent. Once the filing is complete, the LLC and all details of the owner become public record and there goes the confidentiality of the owner. If there are substantial funds in the LLC transferred from the self-directed IRA, this transparency could compromise the privacy for the owner.

In contrast, there is no public filing requirement when forming a business trust. The Declaration of Trust, or Trust Agreement, remains a private and confidential document. Moreover, while the IRA owner will typically serve as the trustee of the business trust, there is no automatic publication of the name of trustee. Thus there is a higher level of privacy and confidentiality available with a business trust.

A 'True' Disregarded Entity

Both a business trust and an LLC will be classified for tax purposes as a partnership under federal and state income tax regulations. If classified as a partnership, then the business trust and LLC must file income tax returns with the IRS and the respective state agency. However, an entity classified as a partnership that has only one owner will be “disregarded as an entity separate from its owner.” Once classified as a “disregarded entity” then that entity will not have to file federal income tax returns.

A limited liability company with just one member will be classified for federal and state income tax purposes as a “disregarded entity.” With this classification, the LLC will avoid having to prepare and file a federal income tax return. But not so at the state level, at least not in California. Despite being a “disregarded entity” for California state income tax purposes, the LLC must still comply with California return filing requirements because this is method for the LLC to pay the California minimum franchise tax imposed on LLCs.

In contrast, if a business trust has only a single holder of its “beneficial interests,” it will then be classified as a “disregarded entity” and, as a result, not have to file either a federal or state income tax return. Thus the fees and costs of preparing a state income tax return, as well as a federal income tax return, are avoided.

No Registered Agent Needed In A 'Foreign Jurisdiction'

Making investments in commercial and residential real estate is quite common by owners of a Self-directed IRA with checkbook control. If that real estate investment is in a property in a state that is different than the state where the LLC is formed, then the LLC would have to file appropriate documents in that foreign state in order to "qualify to do business" in that state. For this purpose, unless the IRA owner/LLC manager has someone they know in that state, who is willing to serve as the registered agent for the LLC in that state, the LLC owner would need to hire an independent registered agent in that state just to remain compliant. Although the fees for such registered agents are in the low $100s, it is an annual expense nonetheless from your retirement funds - unnecessary overhead which can legally be avoided.

But if a Business Trust as the holding entity for the Checkbook IRA is used to make these real estate investments in states other than the IRA owner’s state of residence, there is no requirement or need to hire an agent in that “foreign” state. This is because the business trust does not have to file any documentation to “qualify to do business” in that state in order to purchase real estate for investment purposes. Thus you as the IRA owner can avoid having to pay the fees typically required with such filing as well as avoiding having to pay any annual fees to an agent in that state. These all add up in the long run as hard money that go directly to increase your account balance.

No Franchise Tax

As Wikipedia states so correctly, "Franchise tax is a tax charged by some U.S. states to corporations with a nexus (aka a filing obligation) with those states. The common feature of a state's franchise tax is that it is not based on income. "This is a mandatory requirement for any LLC that wants to be "qualified to do business" in that state. Depending on the state, these fees can be quite high, which erodes the funds in your Checkbook IRA account year after year or as long as your LLC wants to remain “qualified to do business” in that other state.

There is no such franchise tax requirement for Business Trusts.

As you can understand when a Business Trust is used as the holding entity for a self directed IRA with checkbook control, you as the Trustee and Owner can enjoy the best of both worlds - freedom to invest, divest, manage any qualified investments at any time from your retirement funds and also be able to prevent unnecessary overheads from fees, taxes and expenses with full confidentiality.

Getting Started With A Self-Directed IRA Trust

My specialty is in structuring companies to protect and hide assets in anticipation of litigation. 100% of my clients are real estate investors, and I am an investor myself. Whether you are looking to protect your personal assets, set up a self-directed IRA, or need estate planning, I can help. 

Self-Directed IRAs: Frequently Asked Questions (FAQ)

Self-Directed IRAs offer investment freedom, but they require some explanation. Here are the answers to the most common questions we receive regarding Self-Directed IRAs.

1. What Is a Self-Directed IRA?

A self-directed IRA account allows the IRA to invest funds anywhere allowed by law.
The main reason most people don’t use Self-Directed IRAs is that the large financial institutions that administer most U.S. retirement accounts don’t think it's a good idea to hold real estate or non-publicly traded assets in retirement plans.

2. Can I "Roll Over" or Transfer My Existing Retirement Account to a Self-Directed IRA?

This depends on your situation:

Your Situation: Transfer/Rollover
I have a 401k or other
company plan with a current
employer.
____________________________________
No, in most instances your current
employer’s plan will make it impossible
until you reach retirement age.
____________________________________
I inherited an IRA and keep the
account with a brokerage or
bank as an inherited IRA.
____________________________________
Yes, you can transfer to a self-directed
inherited IRA.
____________________________________
I have a Traditional IRA with a
bank or brokerage.
____________________________________
Yes, you can transfer to a self-directed
IRA.
____________________________________
I have a Roth IRA with a bank
or brokerage.
____________________________________
Yes, you can transfer to a self-directed Roth IRA.
____________________________________

I have a 403(b) account with a
former employer.
____________________________________
Yes, you can rollover to a self-directed
IRA.
____________________________________
I have a 401k account with a
former employer.
____________________________________
Yes, you can rollover to a self-directed
IRA. If it is a Traditional 401k, it will be a
self-directed IRA. If it is a Roth 401k, it will be a self-directed Roth IRA
____________________________________

3. What Can I Invest in With a Self-Directed IRA?

The most popular self-directed retirement account investments include:
Rental real estate.
Secured loans to others for real estate (trust deed lending).
Private small business stock or LLC interests
Precious metals, such as gold or silver.
Cryptocurrency

You May Not Invest In:

Collectibles such as artwork, stamps, coins, alcoholic beverages, or antiques
Life insurance
S-corporation stock
Any investment owned by someone in your close family.

4. What Restrictions Are There on Using a Self-Directed IRA?

When self-directing your retirement account, you must be aware of the prohibited transaction rules found in IRC 4975. These rules don’t restrict what you can invest in, but whom your IRA may transact with.
The prohibited transaction rules restrict your retirement account from transactions with someone who is disqualified. Disqualified persons include: the account owner, their spouse, children, parents, and certain business partners.

On the other hand, your retirement account could buy a rental property from your distant cousin, college roommate, friend, or a random third party.

5. Can My Self-Directed IRA Invest in My Personal Company, Business, or Deal?

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

6. What Is Checkbook Control?

Many self-directed retirement account owners, particularly those buying real estate, use an IRA LLC, also known as a “checkbook-control IRA”, to hold their retirement assets so that they have fast access.

7. Can I Get a Loan to Buy Real Estate With My IRA?

Your IRA can buy real estate using its own cash and a loan or mortgage. To do this, you must obtain a non-recourse loan.

A non-recourse loan is made by the lender against the asset. In the event of default, the sole recourse of the lender is to foreclose and take back the asset. The lender cannot pursue the IRA or the IRA owner for any deficiency.

8. Are There Any Tax Traps I Should Know About?

The Unrelated Business Income Tax, or UBIT, applies when your IRA receives unrelated business income. If your IRA receives investment income, that income is exempt from UBIT tax. Investment income exempt from UBIT includes the following:
Real Estate Rental Income: Rent from real estate is investment income and is exempt from UBIT.
Interest Income: Interest and points made from money lending is investment income and is exempt from UBIT.
Capital Gain Income: The sale, exchange, or disposition of assets is investment income and is exempt from UBIT.
Dividend Income: Dividend income from a C-Corp, where the company pays corporate tax, is investment income and exempt from UBIT.
Royalty Income: Royalty income derived from intangible property rights, such as intellectual property, oil, gas, or mineral leasing activities is investment income and is exempt from UBIT.
So, make sure your IRA receives investment income as opposed to “business income”.

9. What Is Unrelated Debt-Financed Income (UDFI)?

If an IRA buys an investment with debt, then the income attributable to the debt is subject to UBIT. This income is referred to as “unrelated debt-financed income” (UDFI), and it triggers an UBIT tax. This often occurs when an IRA buys real estate with a non-recourse loan.

For example, let’s say an IRA buys a rental property for $100,000, and that $40,000 came from the IRA and $60,000 came from a non-recourse loan. The property is now 60% leveraged, and as a result, 60% of the income is not a result of the IRA's investment, but the result of the debt invested. This debt is not retirement plan money, so your friends at the IRS will require you to pay tax on 60% of the income. So, if there were $10,000 in net rental income on the property then $6000 would be subject to UBIT taxes.

10. Should I Use an Individual 401k Instead of A Self-Directed IRA?

This is where things get interesting.

An individual 401k is a great self-directed account option, and can be used instead of an IRA for persons who are self-employed. If you are not self-employed, then the individual 401k may not work for you.
If you are self-employed and you want to maximize your contributions the individual 401k has much higher maximum contribution amounts: $54,000 annually versus $5,500 annually for an IRA. That’s a significant difference.

A self-directed IRA is a better option for someone who has already saved for retirement. Some funds can be rolled over and invested in a self-directed IRA.

If you are going to carry debt and you are self-employed, you are much better off choosing an individual 401k over an IRA. Individual 401ks are exempt from UDFI tax on leveraged real estate.

There are a lot of things to consider when rolling funds into an IRA. If you have additional questions, feel free to reach out to us.

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

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

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

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

What To Know About Buying Your Retirement Home With Your SDIRA

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

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

Beware of Prohibited Transactions

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

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

Be Smart About Distributions and Taxes

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

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

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

Do Your Homework Before Buying

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

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

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

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

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

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

Let's go over the biggest perks below.

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

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

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

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

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

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

Popular Types of IRA-Funded Real Estate Investments

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

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

The Differences of Investing With a Self-Directed IRA LLC

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

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

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

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

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

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

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

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

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

Royal Legal Solutions Can Guarantee Your Tax Efficiency & Compliance

Tax-Free Investing: Be happy like this man

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

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

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

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

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

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

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

1. To Purchase Non-Traditional Assets

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

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

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

2. Checkbook Control

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

3. Asset Protection

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

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

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

4. To Pool Assets with Other Investors

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

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

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

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

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

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

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

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

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

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

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

What Can't You Purchase With An IRA?

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

What Are The Most Popular Self Directed IRA Investments?

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

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

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

What are the Prohibited Transaction Rules?

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

Who are Disqualified Persons?

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

The Bottom Line

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

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

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

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

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

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

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

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

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

Probably not.

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

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

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

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

How does it work?

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

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

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

What is a Self Directed IRA?

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

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

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

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

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

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

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

There are many investment options available. Popular ones include:

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

What You Need to Know: Prohibited Transactions

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

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

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

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

What You Need To Know: UBIT Tax

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

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

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

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

When should an investor anticipate paying UBIT?

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

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

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

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

Are you an LLC wanting to raise capital?

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

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

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

Recap (because that was a lot!)

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

The bottom line

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

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

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

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

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

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

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

Steps To Getting the RMD Penalty Waived

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

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

Step #1: Take The RMD

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

Step #2: Complete Section IX Of Form 5329.

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

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

Step #3:  Attach a Missed RMD Letter of Explanation

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

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

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

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

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

Showing Good Faith Gets You The Waiver

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

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

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

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

Conclusion

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

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

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

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

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

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

 

 

7 Benefits Of The Self-Directed IRA

The benefits of the self-directed IRA include absolute freedom & control to decide how you invest and what you invest in. When you think about it, this is a privilege the average investor lacks.

IRA stands for Individual Retirement Account, and it's a great way to save for your retirement. A lot of people think an IRA itself is an investment - but it's just the vehicle in which you keep stocks, bonds, mutual funds and other assets. A self-directed individual retirement account (SDIRA) is a special IRA that can hold a variety of investments types normally prohibited from regular IRAs.

While there are many advantages to this powerful investment tool, we've taken the time to list some of our favorites. Below you can read about the top seven exclusive & cost effective benefits of the self-directed IRA LLC.

Benefit #1: Tax Advantages

With a self-directed IRA LLC, you have all the tax advantages of traditional IRAs, as well as tax deferral and tax free gains. All income and gains generated by your IRA investment will flow back to your IRA tax free.
What this means is that you'll experience tax free growth.

Instead of paying tax on the returns from your investments, tax is paid only at a later date when a distribution is taken, leaving your investment to grow tax free.

Benefit #2: Investment & Diversification Benefits

What about self-directed IRA real estate? Your choices include real estate & private business entities. Once again, you can do this tax free.This will also enable you to build a solid portfolio that'll generate beefy returns in both good times and bad times.

Benefit #3: Access

The benefits of the self-directed IRA LLC include having direct access to your IRA funds. This  allows you to make an investment quickly and efficiently. There is no need to obtain approvals or send money to an IRA custodian.

Benefit #4: Speed 

With a self-directed IRA LLC, whenever you find an investment that you want to make with your IRA funds, simply write a check or wire the funds straight from your LLC bank account to make the investment. Other retirement accounts usually have to talk with their custodian first, which can cause a delay.

Benefit #5: Lower Fees

Another advantage to a self-directed IRA LLC account is that you can save a lot of money on custodian fees.
You will not be required to pay custodian transaction fees and account valuation fees. (Which can add up to be thousands of dollars over the years.)

Benefit #6: Limited Liability

By using a self-directed IRA LLC, your IRA will benefit from the limited liability protection afforded by using an LLC. With an LLC, all your IRA assets held outside the LLC will be "shielded" from attack.

This is especially important in the case of IRA real estate investments. This is an area where many state statutes impose an extended statute of limitation for claims arising from defects in the design or construction of improvements to real estate.

Benefit #7: Asset & Creditor Protection

By using this distinct category of retirement account, you will be protected for up to $1 million in the case of personal bankruptcy. Most states will also protect a SDIRA from creditors.

The Bottom Line: The Self-Directed IRA Makes Sense

The self-directed IRA LLC is like an IRA on steroids. If you want to take control of your finances, consider this legal entity for your real estate investments (or other assets).
 

Common Self-Directed IRA Prohibited Transactions: A Quick List

If you own an IRA account, you've probably read or heard a lot about prohibited transactions. If you haven't, that's okay.

Let's just say you don't want to get caught being involved in one.

This is vital information for anyone who invests with a Self-Directed IRA, so read on.

Direct Prohibited Transactions

The types of transactions that could fall under the prohibited transaction rules can be grouped in three different categories: Direct, Conflict of Interest, and Self-Dealing.

The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person” can take on many forms. Here are some more examples.

The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”.

The direct or indirect transfer to a “disqualified person” of income or assets of an IRA also constitutes a prohibited transaction. In real life, this might look like any of these examples:

Conflict of Interest Prohibited Transactions

A “Conflict of Interest Prohibited Transaction” often involves one of the following:

Self-Dealing Prohibited Transactions

Self-dealing refers to the direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the IRA in his/her own interest or for his/her own account.

Hopefully this article helps you, feel free to bookmark it as it sure to prove useful to you in the future if you plan on investing using a Self-Directed IRA.

If you have any questions about investing with a Self-Directed IRA, please contact Royal Legal Solutions today.

The 5 Most Common IRA Contribution Questions

What's up with the individual retirement account (IRA)? I seem to always be answering random questions. Like why this Roth guy gets talked about all the time? Or what's the maximum IRA contribution level? Or whether it's possible to get a tax deduction, pretty please! Don't worry folks, I've got you covered.

Question #1: Is my IRA contribution tax deductible?

The answer is: it depends. Your eligibility depends on your income, marital status, employment benefits and more. Depending on those variables, you'll be placed into one of three categories.

No Tax Deduction

Contributions to a Roth IRA aren’t deductible. Not ever.

That said, contributing to your Roth account is still a solid plan. Just make sure your modified adjusted gross income (MAGI) isn’t higher than the Roth contribution limit.

Also, if you're looking for tax deductions, then consider maximizing out your 401(k) or 403(k). These plans accomplish much the same thing as traditional IRAs in terms of taxation.

Limited Deduction

There are two scenarios where your contributions may be limited.

  1. If you or your spouse are covered by a retirement plan at work
  2. If you or your spouse fall outside the allowed income range

Remember, the IRS frequently updates income ranges, so double check the date before assuming you're good to go. Better yet, consult an attorney.

Full Tax Deduction

You can deduct the full contribution amount from your taxes if both of the following things are true.

  1. Neither you nor your spouse have an individual retirement account through your employer.
  2. Your income(s) falls under the IRS cutoff point.

See above for information on income ranges.

Question #2: Can I contribute to an IRA if my retirement plan is covered through work?

Yes! You can still contribute if your employer sponsors your retirement plan. This holds true even if the plan is a SEP or SIMPLE IRA. However, be aware that there is a maximum contribution limit. Also, whether or not you can deduct the full contribution amount depends on a variety of factors which were covered in the first question.

What about if you aren't covered by an employer retirement plan? You can still contribute to an IRA. Plus your contributions are fully deductible as long as your MAGI doesn’t exceed $60,000.

Question #3: Can I establish a self-directed IRA if only my spouse has earned income for the year?

Yes. If you file a joint return, you and your spouse can each contribute, even if only one of you has taxable compensation, regardless of which of you earned the compensation.

The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return and cannot exceed the maximum IRA contributions for the year ($5500 in 2017 or $6500 if over the age of 50).

Question #4: How can I contribute to my Roth IRA account if I earned too much money in 2017?  

The IRS has set the contribution cutoff at $181,000 for the year 2017.

If your modified adjusted gross income is below the cutoff point and you file a joint return, you can make a Roth IRA contribution. However, if you earned more than that during the year, you will see your maximum Roth IRA contributions reduced or completely eliminated.

One way to "get around" the Roth income threshold rules is to make an after-tax contribution and then convert it into a Roth IRA. Since the traditional contribution was made after-tax there would be no tax on the Roth IRA conversion.

Fun fact: This tactic was made possible when the IRS removed the income level restrictions for making Roth conversions in 2010.

Question #5: Can I contribute to my Individual Retirement Account after I turn 70½?

It depends on which type of IRA you’re using.

You won’t be able to make regular contributions to a traditional IRA in whichever year you turn 70½. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA. This is always true, regardless of your age.

Our 3 Most Popular Self-Directed IRA Investments

The self-directed IRA, also known as a SDIRA or solo IRA, allows you to use your retirement funds to make almost any type of investment on your own without requiring the consent of a custodian.

Using a self-directed IRA to make investments means you get tax-free gains on investments you know and understand. With a traditional IRA, you're most likely investing in stocks and mutuals fund run by someone you don't know, paying lots of fees and dealing with rules that are hard to understand.

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.

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.SDIRA Investment #1: Cryptocurrency

Surprised? Cryptocurrency is all the rage now. Speculations about an imminent crash have been going on for years, but it hasn't come yet.

Even though Bitcoin is called cryptocurrency, in the eyes of the IRS, Bitcoins and other cryptocurrency are not considered currency. Which means you have more than a few excellent & barely taxed investment opportunities as far as Bitcoins go.

The most popular cryptocurrencies with our clients are Bitcoin (BTC, 1 bitcoin = $17,876.20 in Nov. 2020) and Ethereum (ETH, 1 Ethereum = $475.11 in Nov. 2020). Other popular cryptos include:

Cryptocurrency investments, such as Bitcoin, are risky and highly volatile.  Any investor interested in learning more about Bitcoin should do their diligence and proceed with caution. You may want to brush up on your history to learn what happens to people who invest in things like Bitcoin.

SDIRA Investment #2: Real Estate

You don't have to invest in bank CDs, the stock market, or mutual funds. Few investors realize that the IRS has always permitted real estate to be held inside IRAs. Probably because the people on Wall Street wouldn't want to lose your business.

The IRS lets you make almost any type of real estate investment, aside from any investment involving a "disqualified person". These include children, parents or businesses you own.

Using a Self-Directed IRA LLC to purchase real estate allows you to earn tax-free income/gains and pay taxes at a future date (in the case of a Roth IRA the income/gains are always tax-free), rather than in the year the investment produces income.

The following 5 real estate investments are popular with our self-directed IRA clients:

 

SDIRA Investment #3: Hard Money Lending

A Royal Legal Solutions Self-Directed IRA with traditional IRA or Roth IRA funds can be used to make secured or unsecured loans to anyone who is not a disqualified person (children, parents, etc.). Since most banks require good credit scores and take too long reviewing financial statements, tax returns and business plans, there is a growing need for quick & easy financing for many individuals. These individuals include: small business, investors, and real estate developers and builders for their real estate projects.

The following hard money lending investments have been popular with our Self-Directed IRA clients:

With a Self-Directed IRA LLC you have virtually unlimited opportunities to make traditional as well as alternative investments, such as real estate, in a tax efficient manner.

 

Did You Know There Are 3 Different Kinds Of Self-Directed IRAs?

Investors who want more options for their retirement investments LOVE the Self-Directed IRA.

This type of retirement investment account allows you to have more control over how your funds are managed. You may already know about the SDIRA, but you may not know they are not created equally.

Traditional IRA accounts can hold traditional investments, such as bonds or managed funds. The IRS also allows you to use IRA funds to invest in real estate, gold, private business and more. And the good news is, these investments can be tax-free.

Many traditional IRA custodians claim to offer a Self-Directed IRA. They probably do. But what that means is you will need to pay transaction fees and get their approval to make other types of investments.  

The Self-Directed IRA LLC offers greater freedom than its traditional counterpart. How it works is fairly simple. An LLC is established, owned by your IRA account and managed by you. You can easily keep your Self-Directed IRA LLC funds with a passive custodian, such as a bank. That means you don’t have to pay fees or ask anyone for permission to invest in real estate, precious metals, cryptocurrency and other nontraditional assets.

Let's take a look at the ...

three most common types of Self-Directed IRA accounts

#1 Self-Directed IRA from a Financial Institution

These types of accounts are easily the most popular type of Self-Directed IRA. Accessibility is a major reason for this type being the most common. It’s offered by most major financial institutions.

With this type of Self-Directed IRA, you can only make IRA investments offered by the financial institution. Which usually include stocks, bonds, and some less common options. However, you're still fairly restricted. Even though they are technically Self-Directed, you are limited in terms of investment options. When you use a Self-Directed IRA from a financial institution, that institution typically does not allow you to make any non-traditional investments, such as real estate.

Which makes you wonder why the bank or other institution places such restrictions in the first place. The plain and simple truth is that they just aren't required to. Simply because they offer the Self-Directed version of an IRA doesn't mean they're forced to give you total freedom of investment. Many financial institutions limit the types of investments account-holders can make beyond even what the IRS permits.

You won't, for instance, be able to hold real estate with this option. In fact, most banks and other financial groups are inclined to limit the IRA account's investments to only the products it offers itself.

So now, the reason might be obvious to you.

A financial institution can’t make any extra money or collect fees for items it doesn't offer. If an investor were to want to pull funds from their IRA for nontraditional investments, the group loses out on the opportunity to profit off of that investor. It's pretty cynical, but it's true.

#2 Self-Directed IRA from a Custodian

This option gives you greater freedom of investment than the first. "Custodian-controlled" simply means that an IRS-approved IRA administrator will facilitate any transactions involving the IRA. All legitimate IRA custodians are FDIC insured. Unlike a financial group, custodians earn their profits through fees from creating or managing IRA accounts. They don't offer investment products, and therefore don't have the incentive to limit your investment options as harshly as financial institutions. When you use this type of account, the custodian holds the IRA funds until, at your direction, will then invest the IRA money on your behalf.

Not as “self-directed” as it claims to be.

Any time you want to make an investment or contribution you have to use a custodian, which involves annual fees, time delays, and transaction fees. In other words, you’re not in control. You can’t even pay an IRA transaction expense without having to pay a custodian to do it for you.
So to summarize the above, if you’re really trying to get control over your investing without having to pay lots of fees, you don’t want a custodian-controlled self-directed IRA.

#3 The Self-Directed IRA LLC

No one knows how long the Self-Directed IRA LLC has been in use, but it wasn't until 1996 during the case of Swanson vs. Commissioner that they became widely known. Wider general use is an even more recent phenomenon.

In 1996 the tax court set a precedent which would forever permit a new type of self-directed IRA structure known now as the Self-Directed IRA LLC, which is much simpler (and cheaper!) than investing through a regular custodial controlled self-directed IRA account.

The Self-Directed IRA LLC vs. A Custodian-Controlled Self-Directed IRA: 6 Aspects Compared.

#1 Access

The Self-Directed IRA LLC allows you to sit in the pilot's seat of your investment portfolio. You don't need anyone's permission to make the types of investments you want to make. The funds will be overseen by a passive custodian, such as a local bank, instead of at a custodian you have never worked with before.

#2 Time

When you find an investment that strikes your fancy, you can make the payment immediately and directly. Since custodians make you obtain permission or approvals, these processes take up time. This won't be a concern with a Self-Directed IRA LLC.

With no custodian to wait around for, you' are able to act decisively when the right investment opportunity presents itself.

#3 Lower Fees, Higher Profits

When you use a Self-Directed IRA LLC, you'll be free of the costly fees you'd ordinarily pay a custodian. You won’t be paying transaction fees, annual fees, or any other fees other IRA holders pay.

#4 Asset Protection and Limited Liability Protection

By using a Self-Directed IRA LLC, you receive an additional layer of liability protection, just as if the investments were held in a Traditional LLC.  IRA real estate investments are also more protected from lawsuits. State laws can leave IRA-funded property vulnerable, but the LLC structure will secure your properties against directly-related lawsuits.

#5 Creditor Protection

Self-Directed IRAs also protect you from creditors, to the tune of $1 million. Also, most states will protect a Self-Directed IRA from creditors’ claims against you outside of bankruptcy.

#6 Privacy Protection

With a Self-Directed IRA LLC, your investments will be made in the name of the LLC. But with a custodian controlled SDIRA, your name is available to anyone seeking to locate you.

Did You Know There Are 3 Different Kinds Of Self-Directed IRAs?

Investors who are successful and want more options for retirement investments are wise to take advantage of the Self-Directed IRA. This type of account allows you to have more control over your retirement funds. You may already be somewhat familiar with this option. But what you may not know is that not all Self-Directed IRAs are created equally.

Most people are aware of the fact that Traditional IRA accounts can hold traditional investments, such as bonds or managed funds. What’s not as well-known is that the IRS also allows you to use IRA funds to invest in real estate, gold, private business and more tax free.

Many traditional IRA custodians claim to offer a Self-Directed IRA. They probably do. But what that means is you will need to pay transaction fees and get their approval to make other types of investments.  
The Self-Directed IRA LLC offers greater freedom than its traditional counterpart. How it works is fairly simple. An LLC is established which is owned by your IRA account and managed by you. You can easily keep your Self-Directed IRA LLC funds with a passive custodian, such as a bank. Which means you don’t have to pay fees or ask anyone for permission. Let's take a look at the three most common types of Self-Directed IRA Accounts.

1. Self-Directed IRA from a Financial Institution

These types of accounts are easily the most popular type of Self-Directed IRA. Accessibility is a major reason for this type being the most common. It’s offered by most major financial institutions.
With this type of Self-Directed IRA, you can only make IRA investments offered by the financial institution. Which usually include stocks, bonds, and some less common options. However, you're still fairly restricted. Even though they are technically Self-Directed, you are limited in terms of investment options. When you use a Self-Directed IRA from a financial institution, that institution typically does not allow you to make any non-traditional investments, such as real estate.

Which makes you wonder why the bank or other institution places such restrictions in the first place. The plain and simple truth is that they just aren't required to. Simply because they offer the Self-Directed version of an IRA doesn't mean they're forced to give you total freedom of investment. Many financial institutions limit the types of investments account-holders can make beyond even what the IRS permits.

You won't, for instance, be able to hold real estate with this option. In fact, most banks and other financial groups are inclined to limit the IRA account's investments to only the products it offers itself.

So now, the reason might be obvious to you.
A financial institution can’t make any extra money or collect fees for items it doesn't offer. If an investor were to want to pull funds from their IRA for nontraditional investments, the group loses out on the opportunity to profit off of that investor. It's pretty cynical, but it's true.

2. Self-Directed IRA from a Custodian

This option gives you greater freedom of investment than the first. "Custodian-controlled" simply means that an IRS-approved IRA administrator will facilitate any transactions involving the IRA. All legitimate IRA custodians are FDIC insured. Unlike a financial group, custodians earn their profits through fees from creating or managing IRA accounts. They don't offer investment products, and therefore don't have the incentive to limit your investment options as harshly as financial institutions. When you use this type of account, the custodian holds the IRA funds until, at your direction, will then invest the IRA money on your behalf.

Not as “self-directed” as it claims to be.

Any time you want to make an investment or contribution you have to use a custodian, which involves annual fees, time delays, and transaction fees. In other words, you’re not in control. You can’t even pay an IRA transaction expense without having to pay a custodian to do it for you.

So to summarize the above, if you’re really trying to get control over your investing without having to pay lots of fees, you don’t want a custodian-controlled self-directed IRA.

3. The Self-Directed IRA LLC

No one knows how long the Self-Directed IRA LLC has been in use, but it wasn't until 1996 during the case of Swanson vs. Commissioner that they became widely known. Wider general use is an even more recent phenomenon.

In 1996 the tax court set a precedent which would forever permit a new type of self-directed IRA structure known now as the Self-Directed IRA LLC, which is much simpler (and cheaper!) than investing through a regular custodial controlled self-directed IRA account.

The Self-Directed IRA LLC vs. A Custodian Controlled Self-Directed IRA: 6 Aspects Compared.

Access.

The Self-Directed IRA LLC allows you to sit in the pilot's seat of your investment portfolio. You don't need anyone's permission to make the types of investments you want to make. The funds will be overseen by a passive custodian, such as a local bank, instead of at a custodian you have never worked with before.

Time.

When you find an investment that strikes your fancy, you can make the payment immediately and directly. Since custodians make you obtain permission or approvals, these processes take up time. This won't be a concern with a Self-Directed IRA LLC.
With no custodian to wait around for, you' are able to act decisively when the right investment opportunity presents itself.

Lower Fees, Higher Profits.

When you use a Self-Directed IRA LLC, you'll be free of the costly fees you'd ordinarily pay a custodian. You won’t be paying transaction fees, annual fees, or any other fees other IRA holders pay.

Asset Protection and Limited Liability Protection.

By using a Self-Directed IRA LLC, you receive an additional layer of liability protection, just as if the investments were held in a Traditional LLC.  IRA real estate investments are also more protected from lawsuits. State laws can leave IRA-funded property vulnerable, but the LLC structure will secure your properties against directly-related lawsuits.

Creditor Protection.

Self-Directed IRAs also protect you from creditors, to the tune of $1 million. Also, most states will protect a Self-Directed IRA from creditors’ claims against you outside of bankruptcy.

Privacy Protection.

With a Self-Directed IRA LLC, your investments will be made in the name of the LLC. But with a custodian controlled Self-Directed IRA, your name is available to anyone seeking to locate you.

To learn more about a Self-Directed IRA LLC, call Royal Legal Solutions today at (512) 757–3994, or use our web tool to set up your Self-Directed IRA LLC consultation.

Do You Need An IRA Custodian?

Every IRA is required to have a custodian. But not everyone needs or wants the services of a custodian. Most of the time investors are forced to use custodians due to the way traditional IRAs are set up.

A custodian is someone you need to finalize your deals. You might even have a custodian choose your investments for you. And if that's the case, you want to make sure you have a custodian who knows the prohibited transaction rules inside and out.

Keep in mind, not all IRA custodians are created equal and the IRS isn't lenient. If your custodian breaks the prohibited transaction rules with your IRA funds, you're the one they'll penalize, not your custodian.

The Self-Directed IRA Custodian

As I said earlier, not everyone wants or needs an IRA custodian. And that's where the self-directed IRA comes in. Investors with self-directed IRAs can take on the responsibilities of a custodian.

Yes, that's right, these investors volunteer to do more work. The benefits of doing your custodian's job include the following:

But you can't just become your own IRA custodian right away. You'll need to know the IRS's prohibited transaction rules. Unless you want to pay a steep penalty tax.

When you're your own custodian, you can also get an attorney who's familiar with the IRS's rules to look over your deals for you. An attorney will be able to make sure your deals are in compliance with IRS rules and not disqualified transactions.

Always remember, with an IRA custodian you get what you pay for. Same thing with an attorney. If you plan on investing purely by yourself, make sure you know what you're getting yourself into. The IRS isn't known for being lenient.

If you need assistance managing your retirement account or reviewing your IRS compliance, schedule your consultation with our online tool.

Your IRA Isn't As Safe As You Think It Is: Protect Your IRA

People will tell you that your IRA is safe. I mean come on, it's a retirement account. Yet in reality, they're wrong. Your IRA isn't safe.

The only protection you get by default with an IRA is that it's separate from your personal assets. What this means is someone can't sue you and your IRA at the same time. They'd have to choose to sue either you or your IRA.

But that doesn't make your IRA safe from litigation, especially if your IRA is invested in a lawsuit-prone asset class such as real estate. Also, your IRA is exposed in the sense that it can be disqualified if any of its transactions aren't IRS-approved.

The last thing you want is for the IRS to disqualify your IRA. The penalties are extremely costly.

How Do You Protect Your IRA's Assets?

There are two things you can do to protect your IRA.

The first thing you can do is split your IRA into multiple accounts. Doing this would limit your exposure. For example, if someone sues one of your properties, or if the IRS disqualifies one of your IRA's, the damage would be limited to only one IRA.

The second thing you can do is set up a self-directed IRA with an LLC. I personally like to use a series LLC.  What this allows you to do is take each different asset belonging to your IRA and put it into its own "series." Each series functions as its own LLC.

Let's say someone then sues one of your IRA held assets, which happens to be in a series. Worst case scenario, you lose the lawsuit. In that lawsuit only one of your assets would be affected. The majority of your IRA holdings and wealth will be protected.

Protect Your IRA Properly

By default your IRA is largely unprotected. This means that until you implement asset protection your IRA is exposed to attack, either by the IRS or someone else. If you've invested into multiple properties with your IRA I recommend implementing an asset protection right away.

I hope this information was useful to you, if you have any questions feel free to comment and ask me. Check out my other blogs to learn more about asset protection. If you need help setting up a Self-Directed IRA LLC or asset protection plan, schedule your personal consultation today.