Tax, Investing, and Legal Strategies for Medical Professionals

High-earning medical professionals eventually learn a hard lesson:

The more they earn, the more they pay in income taxes.

And since physicians and other medical professionals rank among some of the highest-paid individuals in the United States, they need tax planning and investment strategies that will protect their assets and build real generational wealth they can pass to their children and grandchildren.

Hard-working doctors and other healthcare pros can take advantage of all the tax deductions, tax credits and tax exemptions that Congress and the Internal Revenue Service (IRS) make possible to reduce their taxable income.

But there are also lesser-known strategies which, when leveraged correctly, can reduce your tax burden and deliver a sound financial plan that gives you what we call “time freedom.”

These include:

✅️ Setting up an S-Corporation and a Solo 401(K)
✅️ Setting up a 501(C)3 Non-Profit Private Foundation and investing in cash flow deals
✅️ Investing your tax savings in Short-Term Rentals or syndication deals that offer bonus depreciation

Here I’ll introduce some of the tax, investing and legal strategies our medical professional clients use.

Tax Strategies for Medical Professionals

As a busy healthcare professional, you work hard to provide quality care to your patients, juggle administrative work, and balance your work with life and demands at home.

That’s why working to optimize your tax situation is probably not at the top of your priorities.

Deep down, however, you know that tax planning should be a key component of your wealth management strategy.

If you are employed by a hospital, a private practice, or a government healthcare department, you’re probably a W2 worker. W2 employees are taxed on gross income first, meaning the IRS takes their cut before you receive your paycheck.

But if you’re a business owner or investor (with the correct structures in place), you can pay the IRS quarterly on your net income after expenses.

To put it another way, when investing through a properly structured entity, your investment income gets the same tax treatment as a business. This allows you to use your money before deducting taxes.

If you’re like most of our clients, you've been told there isn't much you can do to lower your taxes beyond taking deductions or using retirement vehicles like 401ks and IRAs.

This simply isn’t true.

That’s why finding the right CPA to work with is so crucial. You need someone who knows what they’re talking about. It's important to understand there are different tiers of CPAs:

Many CPAs don’t understand that it's possible to save outside the standard deductions. A high-level CPA is someone who earns a high income themselves, someone who has personally found a way to pay nearly $0 in tax by leveraging advanced strategies.

The right CPA helps our medical professional clients achieve and maintain tax rates in the 0-10% range. This accelerates your overall cash flow and net worth.

If you find a CPA with an MBA and who can perform Chief Financial Officer functions, even better— these folks will be able to help you navigate complex tax decisions and make it seem easy.

When you work with that level of CPA, you'll start to find creative (but completely legal) ways to save taxes, even if you're a medical professional with zero investment experience. And that savings can be invested in equally creative, equally overlooked ways.

Such as …

Investing Strategies For Medical Professionals

The median wage for medical professionals (everything from dental hygienists, physicians and surgeons, to registered nurses) was $80,820 in 2023—much higher than the median annual wage (for all occupations) of $48,060. (Source)

However, at a certain point these high-salary professionals realize they need to take steps to shelter their income from overtaxation. And while saving money on tax is important, but the real magic happens once our medical professionals start re-investing those tax savings into tax advantaged deals.

These include:

Private Foundations

A Private Foundation is a self-funded nonprofit organization that shelters income, allowing you to bypass traditional capital gains tax and take advantage of a much lower excise tax rate.

When using the Private Foundation for income sheltering and high-performance investments, the compounding effect can lead to much better returns than traditional investing.

The Private Foundation can even replace your W2 income with a director’s salary for managing the Foundation.

Depreciation Deals

Bonus depreciation is a tax incentive designed to stimulate business investment by allowing investors to accelerate the depreciation of qualifying assets, such as equipment, rather than write them off over the useful life of the asset. This strategy can reduce a company's income tax, which in turn reduces its tax liability.

Medical professionals can claim accelerated bonus depreciation as a limited partner when investing passively into a real estate syndication. As a limited partner (LP) passive investor, you get a share of the returns based on how much you invest.

Similarly, you get a share of the tax benefits as well, as documented by the Schedule K-1 you would receive each year. The K-1 shows your income for a particular asset. In many cases, particularly in the first year of the investment, that K-1 can show a loss instead of an income.

The magic of the K-1 is that it includes accelerated and bonus depreciation. In other words, even while you’re receiving cash flow distributions, the K-1 can show a paper loss, which in most cases means you can defer or reduce taxes owed on the cash flow you’ve received.

Cash Flow Deals

These deals don't offer tax benefits, but can generate so much income that they outperform potential tax savings. Investments in this category include things like algorithmic trading. You can invest in cash flow deals through a tax shelter, such as your Private Foundation, to get the initial tax savings as well as tax advantaged portfolio growth.

Legal Strategies For Medical Professionals

Estate planning is something everybody needs to do at some point. Lawsuits can happen to anyone, and high-net-worth medical professionals are especially at risk. All it takes is a car accident, an injury on your property, a contractual disagreement—and once somebody knows what you own, they can hire a good attorney to force you to settle out of court.

The way you protect yourself is to set up asset protection. Holding companies can shield anything of value, such as real estate properties and investments. Operating companies can be established for business activities like collecting rent, paying contractors, and signing contracts.

Trusts are a way to guarantee anonymity across all of your entities and assets. They allow you to look like a beggar on paper and transfer your assets anonymously to your heirs, taking the target off your back.

Here are a couple of other legal structures we help our clients set up:

S Corporations

Independent doctors or physicians can create S Corporations to handle their taxes. Unlike regular corporations (where profits get taxed twice), S corporations pass their income, losses, and deductions directly to their owners. An S Corp, or S corporation, is a “pass-through” entity, which means that the profits and losses of the business are passed through to the individual owners and are taxed at the owners’ personal income tax rates.

Instead of paying corporate taxes, each owner reports their share of the business’s money on their personal tax returns, paying taxes at their individual rates.

Solo 401(K)

What about retirement?

If you are a medical practitioner who works as an independent contractor, The Solo 401(k) is an ideal retirement plan because it lowers your taxable income and enables you to build up retirement funds through high contribution limits and almost limitless investment capability.

The Solo 401(k) is a qualified retirement plan, just like hospital-sponsored plans. You can contribute to the plan on a tax-deferred basis. You can also contribute Roth funds to the plan and invest tax-free. With some of the highest contribution limits, the Solo 401(K) lets medical professionals lower their taxable income and grow their retirement quickly.

To Wrap It Up …

Even medical professionals with no investments need entity structuring. Here is what a full legal diagram could look like, which includes asset protection structures, estate planning, and tax shelters.

As you accelerate your tax and investing approach, it's important to add in measures to prevent a catastrophic reset. We can show you how to save $20k or more in taxes during the first year, but you will want to set up additional tax and legal structures over time to continue to reduce your taxes down to the 0-10% range.

Without entities, this would be impossible.

It's also important to protect yourself from catastrophic events, no matter how unlikely, so that you don't have any major setbacks on your journey to time and financial freedom.

Solo 401k Custodian Duties

You’ve decided to save for the future using a solo 401k, and you’ve named yourself the solo 401k custodian. But what does that mean?

A solo 401k, also called a self-employed 401k, or an individual 401k, is a unique savings vehicle for small business owners without employees except for their spouses.

That makes a self-employed 401k a solid choice for real estate investors searching for a retirement plan similar to that in a larger corporation.

An individual 401k is similar to a standard 401k in that a person would contribute pre-tax earnings, and those contributions would be invested in other investment opportunities to grow. Those investments enjoy tax deferment until you retire and withdraw the funds.

A critical difference between a solo 401k and a traditional 401k is the role of a solo 401k custodian. This post will explain who can be a solo 401k custodian and their duties.

Who Can Be A Solo 401K Custodian?

You can be the custodian of your solo 401k. Section 401 of the IRS Code controls your ability to be the custodian.

A custodian is a person or entity with fiduciary responsibility or authority over the assets in the account.

The required custodian does not have to be a third party in a self-directed 401k plan. The requirement allows you more freedom to invest your money on your terms without a third party's permission.

The Employee Retirement Income Act of 1974 (ERISA) and the Pension Protection Act of 2006 provide the legal basis for small business owners to start and act as custodians of their solo 401k

You can be the trustee for a solo 401k; the tax code refers to where the assets are held rather than a third party in charge of funds.

For instance, you can have your solo 401k in cash in a bank, precious metals in a safety deposit box, real estate, or assets in a brokerage account. As the trustee of the solo 401k, you're the controlling party and decide where the money goes.

What Are The Duties Of A Solo 401K Custodian?

A trust must hold all your 401k assets in a trust, and the plan must name a trustee. The trustee can be you, and you'll be responsible for the following items:

Contributions
Investing the assets
Investment transactions
Paying taxes on distributions, fees, and maintenance expenses
Keep records for at least six years
Provide a written explanation for rollover or tax withholding

Crucial Events In A Solo 401K

As the trustee, you'll be responsible for the maintenance of the individual 401k. As the solo 401k custodian, you'll need to pay attention to specific benchmarks, including:

Exceeding $250,000
Expansion of business
Age limits

Exceeding $250,000

Your solo 401k custodian duties revolve mostly around keeping good records. Typically, you won't even have to file taxes on your plan.

The few administrative duties change when your plan hits the $250,000 benchmark. You must file a tax return when you hit that amount in the plan. For the tax return, remember these essential items:

File by July 31st
Use Form 5500-EZ

When Your Real Estate Business Grows

The solo 401k is crafted explicitly for self-employed people (like yourself) and their spouses. To qualify for this type of 401k, your business must:

Have 0 full-time employees
Part-time employees who work less than 1,000 hours per year

If your business scales to the point you need to hire a full-time employee (outside of your spouse), you no longer qualify for the solo 401k.

If you hire a full-time employee (other than your spouse), you have two options:

Keep the account open without the ability to contribute
Rollover the funds into another type of retirement plan

Should you close the account, you must inform the IRS via your final 5500-EZ form.

When You Hit The Age Limit

When you reach 72 years old, the solo 401k triggers a minimum required distribution. Even if you work well into your golden years, you'll be required to start making withdrawals from your solo 401k.

As the custodian, you'll need to ensure that you do the following:

Make the minimum distributions
Pay the appropriate amount of taxes on those distributions

Key Takeaways

A solo 401k is designed for small business owners to save using a 401k. Unlike most retirement plans, you can act as a solo 401k custodian.

As a custodian, you're responsible for the following:

Contributions
Investing the assets
Investment transactions
Paying taxes on distributions, fees, and maintenance expenses
Keep records for at least six years
Provide a written explanation for rollover or tax withholding

You'll also need to be aware of crucial benchmarks in the plan, including:

Exceeding $250,000
Expansion of business
Age limits

Ready to take the next step in securing your financial future? Book a free discovery call to see how we can customize a tax savings strategy for your real estate investment empire.

Buy Real Estate through a Solo 401K to Achieve Total ROI

Your Return on Investment (ROI) is the most vital metric to measure success. When you invest in real estate, you may be able to achieve total ROI with a Solo 401K.

Do strategic investments with high returns interest you? Then you're in precisely the right place. This article will cover investing in real estate using a Solo 401K.

What Is A Solo 401K?

Unlike a traditional 401K, a Solo 401K (or self-directed 401K) is designed specifically for self-employed individuals. To qualify for a Solo 401K, you must be the sole owner or operator of a business with no employees other than your spouse.

What Are Some Advantages of Investing Through My Solo 401K?

Your Solo 401K offers unique advantages that make it an efficient and powerful investing tool. For a real estate investor, those advantages include:

complete checkbook control
no need for a custodian to act on your behalf
you handle all transactions through your Solo 401K

Another key advantage of using your Solo 401K to invest in real estate is avoiding the Unrelated Debt-Financed Income (UDFI) tax. For a real estate investor, you do not have to pay the 40% UDFI tax on income or gains on your investment paid for by your Solo 401K.

Here are two scenarios that illustrate the advantages of investing through your Solo 401K.

Scenario 1: Bob uses a Solo 401k and invests $100,000 of Solo 401k funds to acquire a real estate property. Bob also secures a nonrecourse loan from a bank for $100,000 and purchases the property for $200,000.

Assume the property generated $10,000 of net income in a year after calculating all eligible deductions. The UBTI tax would not apply to any of the income or gains generated by the real estate investment!

Scenario 2: Bob uses a Solo 401k and purchases a property for $200,000. Bob then sells the property three years later for $400,000. The $200,000 earnings Bob captured are tax-free!

How Can I Achieve Total ROI with a Solo 401K?

Typically you cannot use a traditional 401K to invest in real estate. However, the Internal Revenue Service (IRS) allows Solo 401K holders to invest in:

foreign currencies
precious metals
private placements
real estate

The Solo 401K is a powerful investment strategy that you can use for total ROI. Here is how you would go about using your Solo 401K to invest:

Step 1: Open Your Solo 401K Connected To Your Business Entity

The process entails making sure that your Solo 401K account is the only entity associated with:

contracts
documents
escrow deposits
maintenance
property expenses
repairs

Step 2: Fund The Solo 401K

You can fund the Solo 401K and make contributions using:

pre-tax deposits
rollovers
Roth
transfers from other qualified plans
voluntary after-tax contributions

Step 3: Choose How You Want To Purchase The Property

Typically, you have three options when you invest with a solo 401K:

Cash purchases: are the most straightforward options in which you use funds from your account to purchase a property
Tenants-in-common: allow you to use both personal money and Solo 401K funds to invest in a property
Nonrecourse business loans: protect your assets from lawsuits, bankruptcy, and other potential risks

Step 4: Conduct The Transaction With Your Solo 401K

Your Solo 401K must be the purchaser of any investment property. If you use your name on any documents on the purchase, the IRS will prohibit the purchase. Conduct the transaction by having your Solo 401K:

make an offer
pay your deposit
close on the property

You are the trustee on the Solo 401K. As a real estate investor, you need to submit the purchase documents to your escrow agent. Store all the documents in a secure place.

How Can I Get Cash From My Solo 401K?

You can lend to yourself from the retirement plan, and the funds have no restrictions. You can take out half of your retirement account, or $50,000, whichever is lower.

For instance, if your retirement account had $75,000, you would be able to take out half of that amount, or $37,500. On the other hand, if your retirement account had $150,000, you would only be able to take out $50,000.

The loan money comes out of the fund as cash, but you must pay the retirement account back with interest. As long as you pay the market interest rate, you have the option to pay your loan back quarterly over five years.

For unique investing opportunities, check out our additional resources: Buy Tax Liens With Your Self-Directed IRA LLC OR Solo 401K.

Is A Solo 401K Plan Safe From Creditors?

Solo 401K plans do not automatically include protection from creditors. However, you do have protections under federal bankruptcy laws.

For non-bankruptcy creditors, protections fall at the state level. Solo 401K plans do not receive protection from the Employee Retirement Income Security Act (ERISA). State laws protect you in most cases subject to certain exceptions, such as child support.

Total ROI with a Solo 401K IS Possible

Investing in real estate may result in a total ROI with a Solo 401K.

There are some distinct and attractive advantages of investing with a Solo 401K:

complete checkbook control
no need for a custodian to act on your behalf
you handle all transactions through your Solo 401K

We covered four critical steps to investing with a Solo 401K:

connecting your 401K to your business
funding the retirement account with your contributions
choosing how to acquire the property
using your 401K for all transactions

Are you interested in learning more? Register for FREE Royal Investing Group Mentoring Wednesdays at 12:30 pm EST.

Roth Conversions to a Solo 401K to Offset Losses

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

What is a Solo 401k?

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

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

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

What is a Roth IRA conversion?

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

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

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

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

Why are Roth conversions a popular tax strategy?

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

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

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

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

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

How can I offset losses with a Roth conversion?

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

What is a net operating loss?

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

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

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

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

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

Imagine you're a sole proprietor who has a traditional IRA for self-employed individuals worth $300,000.
Your business experienced losses totaling $170,000 this year.
Your spouse's annual income was $75,000.
Both of you also reported $5,000 in income from interest and dividends, bringing your total income to $80,000.

The following example illustrates the calculation.

INCOME

Spouse’s wages
$75,000

Interest and dividends
5,000

Total income
80,000

DEDUCTIONS

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

NOL for tax year
(90,000)

Income from Roth IRA conversion
90,000

Net taxable income
0

This example is for illustrative purposes only.

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

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

Here's The Bottom Line

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

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

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

Tax-Free Real Estate Investing: How To Get Started

Scott Smith, Royal Legal’s founder, and lead attorney, recently sat down with real estate investor J. Darrin Gross to discuss tax-free investing on Gross’s Commercial Real Estate Pro Network Podcast.

The delightful discussion covered not only the possibilities of tax-free investing in real estate but also how real estate investors can protect their assets. You can click the link above to listen or read on to learn more.

Tax-Free Investing vs. Tax-Deferred Investing

“Tax-free” investing is better thought of as “tax-deferred investing.” Whether you invest in a traditional 401(k) that taxes withdrawals or a Self-Directed Roth IRA, which taxes funds before use, the tax doesn’t just disappear. It’s a question of when the tax is paid.

You can accelerate the growth of your retirement account using either a Solo 401(k) or a Self-Directed IRA. In a nutshell, with tax-deferred real estate investing, you lend yourself money from your own Solo 401(k) that doesn’t have to be repaid until you retire.

How does this work in terms of W2 income?

Anyone with a W2 (employer) income can create their own 401(k) or IRA account. But with non-W2 income, one can take advantage of creating a Solo 401(k) that allows you to defer taxes.

What is a Solo 401(k)?

If you have non-W2 earnings and can demonstrate that you’re an “active” investor, you may qualify for a Solo 401(k). If you structure an entity properly and demonstrate that you are active in its operations, multiple advantages become available. You have to be able to deposit up to $50,000 annually and be in a position to borrow up to 50% of that balance without creating a taxable event. Royal Legal Solutions helps clients set up a Solo 401(k) to run themselves.

What is the advantage of a Solo 401(k)?

The advantage is that you only have to pay it back by the time you retire. So, for example, you can take $50,000 and put it into your 401(k) tax-free and loan yourself $25,000 of that to invest in anything you want.

You still owe that money back to your 401(k), but you don’t need to pay it off until you retire. In the meantime, you’ve got $25,000 in tax-free money in your Solo 401(k) that you can invest immediately.

Does passive real estate qualify?

No, it’s not legal to set up a Solo 401(k) with passive income. But you can open up your own property management company. Doing this turns passive income into active income.

Setting up a property management company for a Solo 401(k)

You can establish an S Corporation to be your property management company. As the sole employee of that S Corporation, you can then set up a Solo 401(k). There are a few inexpensive legal steps to this process, and Royal Legal Solutions can help set up a Solo 401(k) for you. Note: If you borrow money from the S corporation (via a loan), you’re never going to have capital gains.

Do I need to be a real estate professional to have a Solo 401(k)?

No, you just need to be earning active income. The income cannot be classified as passive. But passive income is easily converted into active income by setting up a real estate company, which can then be used to establish your Solo 401(k). The restrictions are light - you just have to be the sole employee of your own company to meet the conditions of a Solo 401(k).

Once you have set up the company, you can channel $50,000 per annum of non-W2 income into the company. That amount pays into the Solo 401(k) up to the $50,000 mark, and all of that is tax-free for now.

The advantage of investing with pre-tax dollars instead of post-tax dollars can typically be a 20-30% bump, and that’s where the actual returns are. You get a pretty significant increase in your investment amount this way, without much risk.

Should I invest with a Self-Directed IRA?

Income from a Self-Directed IRA LLC is also tax-deferred, meaning real estate investments can be made tax-free. The tax is paid later instead of paying tax on the returns of a real estate investment. This allows investors to select the assets they want to invest in, except for “prohibited transactions,” such as collectibles and life insurance.

Tax-Deferred Investing: The Takeaway

Tax-deferred investing is important to real estate investors because it allows them the available funds to buy property from their own Solo 401(k) without paying back a loan to a bank or other financial institution. Essentially, you owe the money you’ve borrowed back to your retirement account, in effect turning yourself into your bank. The difference is that you are an active business, not a passive generator of income.

If you start with tax-deferred investing in your 30s and you don’t have to pay the loan you took from yourself back for another 35 years, your wealth curve will likely have been on an upper trajectory, making it easier to pay the loan back at retirement. Having money available makes a real difference to your ability to invest in real estate today for profit in the future. Unlike using a credit card, the debt here makes more money in the short term, which will pay down later debts more quickly.

Royal Legal Solutions: Helping You Grow Investments Tax-Free

Royal Legal Solutions has tax-saving strategies for everyday real estate investors. Royal Legal Solutions can help you form a legitimate strategy to protect assets. If you are a real estate investor anywhere in the United States and want to learn more about tax-free investing and tax-deferred investments, start with our investor quiz, and we'll help! We are the one-stop shop for tax, legal, and business advice for real estate investors everywhere.

Alternative Investments: The Hidden Path to Huge Tax Savings

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

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

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

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

What are alternative investments?

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

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

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

Low correlation to traditional stocks and bonds
Higher return potential than traditional investments
Higher minimum investment requirements
More complex structures
Unique risk profiles
Unregulated by the Securities and Exchange Commission (SEC)

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

What are the types of alternative investments?

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

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

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

venture capital
growth capital
buyouts

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

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

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

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

market indices
individual or baskets of stocks, bonds, and commodities
currencies
interest rates
combination of the above

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

What are the Tax Implications for Alternative Investments?

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

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

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

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

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

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

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

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

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

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

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

Keep more of your money with a Royal Tax Review

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

Why Your Self-Directed IRA Needs A Special Custodian

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

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

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

Not THAT kind of custodian ...

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

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

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

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

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

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

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

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

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

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

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

The Responsibilities Of A Self-Directed IRA Custodian

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

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

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

Record keeping.
Answering questions about your account.
Must be IRS approved.
Permitted to hold and custody IRA and 401k plan assets.
Subject to state regulation.
Review of your Self-Directed IRA assets.
Assisting in opening & funding your IRA account.
Making investments on your behalf (unless you choose to do so.)
Making distributions & paying expenses per your request.
Providing you with quarterly statements.
Reporting information required by the IRS and other governmental agencies.

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

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

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

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

You Should Work Directly With An IRA Custodian.

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

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

Solo 401(k) Compliance for Real Estate Investors

Don’t worry about Solo 401(k) compliance. Let our experts do it for you.

A Solo 401(k) can be a clever and efficient way to save for retirement. But what many plan owners don’t consider is the importance of their plan’s compliance with law and regulation.

Fortunately, Royal Legal Solutions can handle this for you. You don’t have to spend time learning the ins and outs of prohibited transactions or ever-changing legal requirements when our experts are on your team.

Solo 401(k) Compliance For Real Estate Investors can include a broad variety of services to ensure your plan isn’t running afoul of the law or regulations. Most of all, investors must avoid making prohibited transactions, which can incur costly penalties. Royal Legal Solutions offers a comprehensive subscription service to allow you to stay compliant.

Yes, you can, but we don’t recommend it. Unfortunately, non-compliance can be very expensive in fees and penalties and lost time. Since mistakes can be expensive and this subject is complex, many of our clients are relieved when professionals assume the responsibilities. And rightly so.

Hiring Royal Legal Solutions to handle your Solo 401(k) Compliance takes the hard work off your own plate. Our team is well versed in current regulations and performs regular research to stay ahead of the curve. To learn more you can check out our Solo 401(k) articles and videos. You may want to start with our Solo 401(k) For Real Estate Investors.

NOT AS SIMPLE AS IT SEEMS FOR REAL ESTATE INVESTORS

The factors to consider when checking for compliance are beyond most people’s common knowledge. You may actually be surprised about what you don’t know regarding the conditions for keeping your Solo 401(k) compliant.

Did you know that you need to update your plan at least every six years? Are you currently tracking all sources of income into the account? Do you know which form you need to file with the Department of Labor, and when? Do you know that your income can influence which form you need?

Is your head starting to spin from the very prospect of all this paperwork?

It’s okay if you answered “no” to any of these questions. These are things that all account holders should be doing, or having done for them by a firm like ours. Our attorneys and other seasoned legal pros have devoted years to studying the subject so you don’t have to.

MAKES SOLO 401(K) COMPLIANCE EASY

With our legal experts handling your solo 401(k)’s compliance, you don’t have to. We have the knowledge and skills to ensure your plan’s compliance, while you continue to focus on your other priorities.

For the absolute highest level of service, consider pairing the Solo 401(k) with the Royal Protection Plan, our option for investors who want all of the paperwork taken care of. Sit back, relax, and enjoy the convenience of our subscription format. You can put all of that paperwork out of mind and direct your time and attention back to running and growing your business.

WHAT’S INCLUDED IN SOLO 401(K) COMPLIANCE SERVICES?

FILING SERVICES
If you never want to stress your 5500 or 5500-EZ deadline again, our filing services are exactly what you need. Let our experts stay on top of your paperwork.

MONITORING FOR PROHIBITED TRANSACTIONS
The ins and outs of prohibited transactions can be deceptively complex. If you’d rather not worry about incurring the fees they cause, let our experts help out. We keep our eyes peeled to ensure your plan’s transactions are on the up-and-up. Of course, we are always here if you have a question about a given transaction.

ENTITY COMPLIANCE FOR SELF-DIRECTED IRAS AVAILABLE SEPARATELY
If all of this sounds wonderful but you’re using an IRA instead of a solo 401(k), we can also assist you with compliance for that retirement plan.

Investors love the Solo 401(k) for its asset protection and tax sheltering applications. Let Royal Legal Solutions show you why.

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

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

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

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

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

Tax Advantage of Retirement Tax Savings

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

That means you have a head start against the pirates.

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

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

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

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

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

The Difference 20 Percent Can Make

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

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

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

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

Keep more of your money with a Royal Tax Review

Everything You Need To Know About IRA & 401k Distributions

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

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

Options For IRA or 401(k) Distributions

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

You can report the distribution as ordinary income. Anyone who receives a distribution from a 401k or IRA can choose to pay ordinary income tax on the distribution—unless you have a Roth IRA.
You can roll over the distribution to a traditional IRA or other retirement plan. Rather than paying ordinary income tax on distributions from your retirement account, you can roll over into a traditional IRA or self-directed IRA, also known as a SDIRA or solo IRA. If the funds are distributed directly to you, you have 60 days to deposit them into another plan or an IRA. The portion that is rolled over will continue to be tax deferred and will be subject to all the rules of the new plan or IRA. See our article, How to Take Distributions From Your Self-Directed IRA for more information.
You can take advantage of forward averaging. You are eligible to use forward averaging if you satisfy all of the following:
- You were born before 1936.
- You have not used ten-year averaging on any distribution since 1986.
- You participated in your plan for at least five years.

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

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

Your distributions are taxable immediately. All distributions will be taxed in the year they come out of the plan. There is an exception when you roll over your distribution into another retirement plan or a traditional IRA or when your employer transfers the distribution directly into another plan or traditional IRA.
Your basis is not taxable. If you made contributions to an IRA or 401k and you were not permitted to take a tax deduction on your tax return, then you will have what is called "basis" for tax purposes. You will not have to pay taxes on those amounts a second time when you take the money out of your plan. However, if you have a traditional IRA every time you take a distribution, part of it is taxable and part of it is not.
You don't have to withdraw cash. When you take a distribution from an IRA, you may choose the assets you want to withdraw - you are not required to take cash.
You may not claim a loss. You may not claim a loss on your tax return for any loss incurred inside your IRA or 401k. Instead, you pay tax on each distribution based on the cash value or the fair market value of the property on the date it is distributed from the plan.

How Are Distributions From a Traditional IRA Taxed?

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

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

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

Qualified first time homebuyer distributions.
Distributions to the estate or beneficiary of an IRA contributor after the contributor's death.
Distributions not exceeding the deduction allowed to the taxpayer for the year for medical expenses.
Distributions to alternate payees under qualified domestic relations orders.
Distributions after the owner's “separation from employment” not exceeding amounts he or she pays for health insurance (assuming the owner has received 12 weeks of unemployment compensation and not been employed for a period of more than 60 days since receiving unemployment compensation.)
Distributions to an IRA contributor after age 59 1/2 or on account of his or her disability.
Distributions not in excess of the owner's “qualified higher education expenses” for the taxable year.
A series of substantially equal periodic payments, regardless of the taxpayer's age when they begin.
A distribution on account of the IRS. (Levies, etc.)

Options For Receiving Distributions Before Retiring

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

Pay ordinary income tax. (Unless you have a Roth, but there will be some sort of tax still.)
Roll over your distribution: If you have not yet reached age 59 and 1/2 and you receive a distribution from a qualified plan, you can roll over the distribution into a traditional IRA or another retirement plan to continue deferring tax.

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

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

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

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

Let's start with distributions from traditional IRAs and 401(k)s. The first five questions will relate to these traditional accounts. If you have either a Roth account (IRA or 401k), you can skip to number 6 on the list below.

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

Traditional IRA and 401k Accounts

1. Early Withdrawal Penalty.

A distribution from your traditional IRA or 401k before you reach the age of 59 1/2 will cause a 10% early withdrawal penalty on the money distributed. And yes, you're paying taxes too, so you're losing a big chunk of money if you withdrawal early.

Let's say you take a $5,000 distribution from your traditional IRA at age 50. You will be subject to a $500 penalty and you will also receive a 1099-R from your IRA custodian. You will then need to report $5000 of income on your tax returns.

Long story short: Don't withdraw early unless you really need the money.

2. Required Minimum Distributions (RMD).

But whether you need the money or not, at age 70 1/2, your friends at the IRS will force you to begin taking distributions from your retirement account. Unless you're still employed.

Your distributions will be subject to tax and you will also receive a 1099-R of the amount of money distributed which will be included on your tax return. The amount of your distribution is based on your age and your account’s value.

For example, if you have a $150k IRA & you've just hit the age of 70 1/2, your first RMD would be $5,685 (3.79% of $150k).

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

Unfortunately, money from your traditional retirement account is subject to tax at the time of distribution. With this in mind, it would be wise of you to be careful about how much money you take out in one year. Why? Because a large distribution can push your distribution income and your other income into a higher tax bracket.

Let's say you have employment or rental/investment income of $100,000 yearly. That would mean you're in a joint income tax bracket of 15% on additional income.

However, if you take $100,000 as a lump sum that year this will push your annual income to $150K and you will be in a 28% income tax bracket.

If you chose to instead break up that $100K over two years, then you could stay in the 15% to 25% tax bracket. This way, you reduce your overall tax liability.

Long story short: When it comes time for you to start enjoying retirement, don't take out too much money or the IRS will be enjoying it instead.

4. Distribution Withholding.

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

In the case of an early distribution from your IRA, a 10% withholding for the penalty amount can be made.

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

Roth IRAs are popular for a reason. When you have tax losses on your tax return, you may want to consider using those losses to offset income that would arise when you convert a traditional IRA or 401k to a Roth account.

When you convert a traditional account to a Roth account, you pay tax on the amount of the conversion. This is usually worth it, because you’ll have a Roth account that grows entirely tax free which you won't pay taxes on when you distribute the money.

Interesting fact: Some tax savvy people use tax losses so that they end up paying less in taxes later on.

Tips For Roth IRAs and Roth 401(k)s

6. Roth IRAs Are Exempt from RMD.

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

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

Yea, tax code can be confusing. "Designated" Roth 401k accounts are subject to RMD. These kinds of Roth accounts are part of a 401k/employer plan, which is where the word "designated" comes from.

Anyway, so how do you avoid this you may ask? By rolling your Roth 401k funds over to a Roth IRA when you reach the age of 70 1/2.

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

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

9. Tax-Free Distributions of Roth IRA Earnings.

However, in order to take a tax free distribution from your Roth IRA, you must be age 59 1/2 or older and you must have had your Roth IRA for five years or longer.
As long as those two criteria are met, all amounts (contributions and earnings) may be distributed from your Roth IRA tax free.

Note: If your funds in the Roth IRA are from a conversion, then you must have converted the funds at least 5 years ago and must be 59 1/2 or older in order to take a tax-free distribution.

10. Delay Your Roth Distributions.

Don't be so quick to use the funds in your Roth account. It's usually better to distribute and use other funds and assets that are at your disposal. Why? Because those funds aren’t as tax efficient while invested.

Long story short: Roth retirement accounts are the most tax efficient way to earn income in the U.S if you use them right. Learn even more from our other article on the lesser-known benefits of Roth accounts.

That's all folks. As always, if you have any questions, please don't hesitate to ask in the comments below.

Solo 401(k): What To Know About Your Eligibility, Rules & Regulations

The solo 401(k) or self-directed 401(k)—or what the IRS calls a one-participant 401(k)—is an increasingly popular way to save for retirement, diversify retirement assets, and protect them from creditors. Fortunately for us savvy savers, the rules about eligibility and what you can do with your account are right there in black in white. Back in 1978 when the IRS under the Carter administration amended the Tax Code to allow for Solo 401(k)s, the eligibility criteria and defining features of the structure was set in ink and have changed little since.

Are You Eligible For a Solo 401(k)? Find Out Now

The Solo 401(k) has clear eligibility criteria. You must have two things:

“The presence of self-employment activity.” Our friendly Legalese Translator wants everyone to take note of the wording here because it’s about to become important. Note that it doesn’t say “100% of income derived from self-employment.” But people make these assumptions.
“The absence of full-time employees.” Again, the wording matters. You, of course, may work for yourself. You can even have independent contractors.

Partners, fortunately, may be included in your plan as well, but typically, the Solo-K is just that: a one-person affair. Fortunately,

The Solo 401(k) Rules Every Saver Should Know: The Real Deal on Prohibited Transactions

Although we’ve taken a deep dive into prohibited transactions before, questions about this issue are perennial. Although the reality is there are many possible iterations of what a prohibited transaction could look like, there are some general guidelines you can use to help you remember the basics. Broadly speaking, these are the kinds of transactions a Solo 401(k) can never engage in without running the risk of penalties:

Self-dealing transactions. Your Solo-K can’t do business with you or any businesses you own. Doing so, or attempting to, is called “self-dealing.” It’s against the rules because of the many obvious opportunities one would have for corruption if doing business with yourself weren’t prohibited. Investors especially are already known for bending the rules, and prohibited transaction principles against self-dealing prevent plenty of scandalous possibilities.
Transactions with disqualified persons. Disqualified persons is a term coined by the Department of Labor, which makes these rules. They have a lengthy list, but the idea is people particularly close to you transacting with the plan are also against the rules. Your Solo-K or Self-Directed IRA can’t do business with, say, your spouse, children, other relatives, and even certain business partners. If you’re unsure if someone or their business is disqualified, talk to an attorney or CPA before making the transaction.

In fact, as a general rule, it’s better to be safe than sorry when it comes to prohibited transactions. Because you can’t just be granted absolution: usually prohibited transaction penalties are unavoidable after the fact. The best thing to do if you have any doubt in your mind about whether a transaction is against the rules is to ask an expert, or at the very least, someone more familiar with the subject than yourself. Prohibited transactions are best when avoided altogether.

How to Keep Your Solo 401(k) Compliant

Anyone with a Solo 401(k) should be aware of compliance requirements. You have to keep your plan compliant and avoid making transactions you’re not allowed to (known as prohibited transactions) if you want to avoid costly penalties. It’s yet another responsibility that comes with the freedom you get to enjoy with a Solo-K. Self-directed investing can make your retirement dollars work far harder for you, but only to the degree, you manage it properly.

A professional can be helpful here, but some of the basic things to concern yourself with about 401(k) compliance are things you can learn and do now. Here are just a few of the issues you need to be aware of:

Make sure you keep Uncle Sam in the loop. The IRS requires you to update your plan formally every six years.
Keep excellent books so all income is reported correctly.
Avoid prohibited transactions at all costs.
Keep up with your paperwork, which includes filing a 5500 or 5500-EZ with the Department of Labor. Fun fact: the DOL is the agency that also gifted us the prohibited transaction rules.
Separate 401(k) funds from other plans and participants in your life. For optimal asset protection, keep things compartmentalized.

There are other considerations, and remember, since you’re flying custodian-free, it’s all on you. For this reason, many investors choose to get professional help with 401(k) compliance, and you can find full-service law firms and 401(k) specialists. Be sure to vet the credentials of anyone you entrust with your retirement finances. You want someone with real experience or easily verified licensing (lawyers and CPAs, for example, are easy to check up on).

Bottom Line: Knowledge is Power with the Solo 401(k)

The more you know about your Solo K responsibilities and obligations, the more likely you are to leverage this vehicle successfully. Enjoy harnessing the unique benefits, and don’t be afraid to call upon your investing network or a pro if you’re lost. It’s okay to not know everything. Fortunately for us all, these rules and laws are well documented and easy to access on the Department of Labor and IRS websites. Now that you know what to watch out for and how to comply, you can start developing a wealth-building strategy to diversify your retirement dollars and maximize them into your golden years. Happy saving.

Solo 401k: The FAQs

The Solo 401(k) can certainly stir up some confusion. In fact, the whole world of self-directed investing can. So in the interest of saving your precious time, and helping you maximize every single one of your retirement dollars, we’re collecting our FAQs about the plan to answer more of your questions in one place. Let’s look at some of our most common ones.

FAQ #1: Why Is The Solo 401(k) Better Than a Normal Traditional 401(k)?

First of all, it isn’t always. The Solo 401(k) is only better for some people, namely the people that qualify because of self-employment income. So if that doesn’t apply to you at all even through your investments, you’re both ineligible for the Solo 401(k) and unlikely to benefit. But because you’re here reading through the Royal Legal Library (Thanks, by the way! Stay as long as you like and learn all you want for free here!), we’ll assume you’re either an ass-kicking entrepreneur or real estate investor like our clients, or someone who got here because you need this info. Or maybe you just want to be the smartest investor at the room at your next meet-up or have a pal who could use this down the line. So here’s why the Solo 401(k) is better for some investors.

Note From Your Friendly Legalese Translator: We’ve actually got a hack real estate investors can use to structure REI income for a Solo 401(k) eligibility. FAQ #5 below spells out details. But for now, understand that us asset protection pros create structures and help you understand the legal narrative around your plan. The legal narrative matters for you and explaining your structure to someone like, say, Uncle Sam. That’s the only person, other than your own paid helpers, you EVER should have to explain to other than a Judge. If you (against sane legal advice) volunteer info to others, you at least want to tell the same story that you tell the Taxman. Your legal structures do most of the work, but understanding the legal narrative, or the story we tell about these structures in simple terms helps you really understand and exploit them. Knowing the story matters for your Solo-K or any legal tool.

The solo 401 (k) certainly is better for self-employed people and many investors. If you’re among them, you can confirm personal suitability with your attorney, CPA, or other financial advisor. But the most basic reason it’s “better” for these folks is it gives them an option at all. In the bad old days, there wasn’t a good vehicle for stashing retirement savings.

But things got really awesome for investors when some regulations relaxed in the 2000s, even though the Solo 401(k) was created under the Carter Administration. You know, the one you may remember from not remembering much of if you’re a Millennial, or if you’re more experienced, you may think of him as that unfortunate peanut farmer from Georgia who was trying to hammer out the Iranian Hostage Crisis while you were getting your ass-kicking real estate business going. You can thank that Southern-accented, now nearly 100-year-old peanut farmer’s staff for the Solo-K, no matter what you think of the man himself. Carter’s people made this kind of investing a possibility, and one of his Presidential predecessors even the Millennials like our Legalese Translator remember allowed regulations to loosen further. Between them both, and just for the record, each was of a different party, all of us can now enjoy Solo-K’s with Checkbook Control based just on having a real estate portfolio and appropriately arranged structure.

FAQ #2: What’s Checkbook Control?

You’ll see mention of Checkbook Control neatly scattered throughout virtually anything you read about the Solo 401(k). Of course, not everyone neatly explains the details as we do here in Royal Legal Land. Checkbook control isn’t just an ad keyword or some kind of marketing term, it’s actually the feature linked to the account’s most obvious benefit: the ability to go beyond the world of traditional financial products.

Checkbook control is the feature that enables you to enjoy the full liberties of a self-directed account. These words can be confusing, because they evoke the image of an actual checkbook, so think of “checkbook” as shorthand for “your entire account.” Checkbook control actually refers to the power you get to make nontraditional investments restricted only by Tax or Labor Code law. So you may find it easier to remember like this: it’s called checkbook control because you get to control your investments yourself. Self-directed 401(k)s come with Checkbook Control usually, but you want to be sure. A plan without checkbook control would be extremely limited. Note that you can also get this feature on other types of accounts like the self-directed IRA and its Roth version.

FAQ #3: How Do I Use My Real Estate Business for Solo 401(k) Eligibility?

Here’s the hack we’ve been teasing. You really can structure your real estate business accounts to justify Solo 401(k) eligibility. Remember, the accounts for businesses with sole owners. If that’s not how your REI assets are currently structured, it’s surprisingly easy to do. Most investors with LLCs or unused Series are able to tweak these structures, or you can create an entirely new business with an attorney’s help to ensure you’re complying with the requirements.

But yes, it’s possible to arrange your REI assets and flow of income from these investments to qualify for a Solo-K. And we haven’t even gotten into the details of how you make even more money for your portfolio by using your Solo 401(k) to make real estate investments, but this dream’s real too.

Now, this trick won’t work if, say, you need to own a corporation for your business or MUST have full-time employees (see our piece on eligibility if you’re unclear why: it’s one of the two main criteria). But for those without such complications, the Solo-K can be the easiest qualified retirement plan to form as well as one with the most perks just for REIs.

FAQ #4: How Much Can I Contribute to My Solo 401(k), and Can I Exceed These Limits?

As of 2019, the time of this writing, contribution maxes are higher than ever. Savers under 50 years old can contribute $56,000 for the year. Those above 50 may make an additional $6,000 in catch-up contributions or a total of $62,000 for Tax Year 2019.

You generally can’t go beyond the limits because there are provisions for catch-ups, which the Taxman sees as a “good reason” to let someone stash an extra 6k (for now). That person 51 or older is nearing the end of their career and gets to squirrel away some more. The spirit of the catchup contribution is also to help those folks who didn’t start saving early enough: they may be earning more and can “catch up” at the end of their working lives. We encourage everyone to start saving as young as possible and make sure our top ten retirement savings tips for any age are free to you.

Just to compare the Solo-K to its more common employer-sponsored sister, the Solo-K tops the Traditional in terms of your contribution abilities. For Tax Year 2019, a Traditional 401(k) account’s contribution limits sit firmly at $19,000 for savers under fifty. Those 51 and over get the wiggle room for catch-ups just like the Solo-K holder. That’s nearly ⅓ of the Solo-K’s capacity, and remember that’s an annual figure. A Solo-K alone can hold enough for most of us to retire with everything we need if not in style.

You may have noticed we’re hung up on the year, but that isn’t because maximums go up automatically or anything. They may not change at all, but if they’re going to, it will be for the new tax year. Maximum contributions for the 401(k) tend to rise over time in fairly small increments of $5,000-$6,500 (though that’s still way higher than limits for IRAs or their increased amounts). All retirement savers can remember these rules update annually and make a habit of checking for the “new” numbers around the first of the year. That way, you can save all year long, squeezing every ounce of power out of that Solo-K.

FAQ #5: Should I Max Out Solo 401(k) Contributions? Can I Max Out More Than One Retirement Plan?

We encourage retirement planners to max out their plans when possible. Whether it’s possible for you depends on your other expenses and personal details. Maxing out isn’t necessarily in everyone’s best interest, but it is best to max out contributions to any accounts you can afford to. A retirement penny saved can turn into a retirement dollar earned when you fully leverage every fraction of that cent with a Solo 401(k).

And if you have multiple accounts? You may indeed max them all out. We have some investors who just pick the order of importance in case they ever need to scale back savings, too. For example “If there’s an emergency, I’ll prioritize my Solo-K, then my self-directed Roth IRA, than my Traditional IRA, then my spouse’s plans.” We do recommend coming up with emergency plans of this kind just in case.

Heck, even if you need to scale savings down for a month or two because of a real deal crisis, at least you’ll know your plan and not compromise the diversified portfolio if you know which accounts are most beneficial. In the example, the accounts were prioritized in order of freedom and max contribution amounts, so feel free to borrow that template for your own use.

Investors Love The Solo 401k: Here's Why

The self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—isn’t all that different from a "regular" 401(k) on paper.

Its name actually derives from the fact that it is a “one participant" retirement plan. But solo 401(k)s offer a whole new level of freedom as far as investing your retirement dollars goes. The seasoned investor can use their knowledge to get an edge. He or she may develop a diverse retirement portfolio that includes nontraditional assets, including real estate.

Our clients love the solo 401(k) for many reasons, but these are some of our favorites.

Sweet Freedom: Invest Where Your Expertise Lies

The solo 401(k) with checkbook control has the ability to break free of the world of traditional investing. You can diversify your retirement dollars across almost anything when you use this type of account. In fact, the IRS only prohibits three specific types of investments:

S-Corporation Stock
Collectibles
Life insurance policies

Beyond these three things, the sky’s the limit. So you’ll have to find another place to stash your classic cars (may we recommend an asset-holding structure such as the series LLC?). But aside from these three off-limits categories, that leaves literally everything else on the planet that one can invest in.

So if you’re a commodities or crypto genius, maybe this is the plan for you. You can invest in these nontraditional assets only with self-directed accounts. The checkbook control feature of such plans gives you this liberty.

The fact that you can invest in real estate with a solo 401(k) is a major draw of this self-directed account for our real estate investor clients. Whether you’re just starting out or have been in the game for a long time, many investors and entrepreneurs who are solo 401(k) eligible use the plan to make real estate investments.

Here’s an educational resource you can use to learn more about the benefit of buying real estate with a self-directed 401(k).

The Solo 401(k)’s Tax Benefits: Just The Highlights

There are a host of benefits exclusive to the 401(k), and tax perks make up the bulk of them. Savvy investors can use their knowledge of the plans tax benefits to purchase tax-advantaged real estate, defer income.

Deferred income benefits. Your solo 401(k)can’t do business with you or any businesses you own. Doing so, or attempting to, is called “self-dealing.” It’s against the rules because of the many obvious opportunities one would have for corruption if doing business with yourself weren’t prohibited. Investors especially are already known for bending the rules, and prohibited transaction principles against self-dealing prevent plenty of scandalous possibilities.
Access for self-employed people. Prior to one-participant accounts, self-employed people didn’t have many options for retirement savings at all.
Viable for real estate business profit savings
Capital gains deferrals. Prohibited transaction penalties are something to look out for.
Tax benefits for contributions. There are many possible ways the solo 401k can reduce your taxable income, but you’re also eligible for other perks like the easy Savers Credit. Learn more about how you can save on your self-directed 401(k) come Tax Season.

Savings Benefits: Sky High Contribution Limits

Unlike the self-directed IRA, the solo 401(k) has remarkably high contribution limits. While at the time of this writing IRA contributions max out at $5,500 (or $6,500 for workers at the eligible age for catch-up contributions), you can contribute up $60,000 to your solo 401(k) if you’re under fifty. If you’re over, you get an extra $6,000 allowance for catch-up contributions.

Flexible Lending Options

While 401(k) and asset protection experts may debate the wisdom of taking advantage of this feature, you can indeed borrow up to 50% of your 401(k) for essentially any reason. Many real estate investors use this perk as a way to finance their investments.

The reason actually borrowing from your 401(k) is a dice-roll is if you do make a bad deal, your retirement account is what really suffers. Recovering isn’t always easy, and real estate investors can mismanage funds by say, over-investing in a single property, neglecting due diligence with their 401(k) investments, or failing to request the proper professional help before making moves with their plans. Don’t be one of them.

The smart investor, on the other hand, can use this feature for a tax-friendly, easy loan: the self-directed 401(k) loan. Applied wisely, it can multiply your funds. The outcome really depends on your investing ability, which is both a blessing and a curse with self-directed investing. But hey, that’s the price of freedom.

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

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

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

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

What is Checkbook Control?

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

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

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

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

What is a Trustee for a 401(k)?

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

What Does This Mean For Your Retirement Account?

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

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

Charitable contributions are a popular strategy among the wealthy for lowering tax payments. But this method isn't exclusively for the Michael Dells and Kim Kardashians of the world. Investors from all income levels, including you, can use it too.

But even savvy investors don't always know that charitable gifts can be made from retirement accounts. So whether you simply want to donate money from your 401(k) to a cause close to your heart, save on your taxes, or both, this article is for you. Read on to learn more about your options for giving charitable gifts with your Self-Directed 401(k).

Why You Should Consider Giving Your Retirement Funds to Charity

The funds in IRAs and 401ks are among the most heavily taxed that the average investor will hold, and redirecting them towards charity can make a meaningful difference. Charitable donations help you save money by reducing your taxable income. This is why many highly wealthy individuals give in large quantities. Sure, many of them are philanthropic at heart, but there is also a distinct tax advantage to donating. The higher your taxable income, the greater your tax responsibilities when Uncle Sam comes around to collect his bills.

Giving to charity also qualifies you to receive a Charitable Gift Tax Credit. Literally anyone can take advantage of this. Generally, the credit is computed by taking the market value of an item or actual amount of cash donated, then subtracting the percentage of your tax bracket.

Strategic donations can lead to thousands returning to your pocket. Of course, there are limits: you cannot donate more than half of your income in a given year. Similarly, for these benefits to apply, you must itemize each donation.

What Options You Have For Giving to Charity

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

Real Property Gifts (includes real estate, stocks, etc.)
Trusts (Charitable Remainder Trusts, Charitable Lead Trusts, and more)
Charitable Sales
Deferred or Traditional Charitable Annuities
Life Estate Gifts
Retirement Plan Asset Gifts (including the Self-Directed 401(k) plan)
Life Insurance Gifts

Which Options Are The Most Beneficial?

While any of these options is certainly beneficial and altruistic to the receiving organization, smart investors may be wondering which will benefit their own bottom lines. You may be surprised to learn that retirement and life insurance donations are among both your strongest and lesser-known gift choices.

Many potential donors do not know much about life insurance or retirement plan asset gifts simply because charities are less likely to request them. Many nonprofit organizations have a need for immediate cash that is simply not addressed with these types of donations. They are nonetheless useful for the charities--and you.

Ways to Give To Charity From Your 401(k)

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

Option 1: Donate Directly From the Plan

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

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

Naming the charity of your choosing as a beneficiary works the same way as designating any other beneficiary. However, this option has the added advantage of allowing plan funds to pass through to the charitable organization completely tax-free. If you have tax-deferred funds, this is actually the smarter expense than passing those same funds on to your heirs.

Your heirs would have to pay the taxes, but the charity does not. Though this may not directly benefit you as much, it is certainly the most efficient use of money that would otherwise be gifted to the U.S. Government. That you can control the funds by selecting any qualifying charity means you have the luxury of supporting a cause you truly believe in.

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

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

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

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

Sole Proprietorship Solo-K Deadlines

Elective Deferrals

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

Profit-Sharing Contributions

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

S-Corp or C-Corp Solo-K Deadlines

Elective Deferrals

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

Profit-Sharing Contributions

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

Royal Legal Solutions Can Help You Understand Your Deadlines

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

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

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

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

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

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

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

How Do Investors Partner With a Retirement Plan?

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

How Profits Are Treated

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

How Depreciation is Treated

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

What Impact Does Depreciation Have on Taxable Income?

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

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

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

Set Up Your Solo 401(k) Today

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

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

Keep more of your money with a Royal Tax Review

2018 401(k) Contribution Limits

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

A Quick Note

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

2018 Contribution Limits for 401(k) Accounts

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

Employee Elective Deferrals: Employee elective deferrals are the contributions you make with your pre-tax dollars. Also known as employee contributions, these funds are pulled directly from your paycheck and deposited in your 401(k) account per your instructions. For individuals under the age of 50, the contribution limit for this has increased. In 2018, you can increase your contribution from $18,000 to $18,500. That is a $500 increase for your future!

Catch-Up Contributions: A catch-up contribution is for individuals who are looking to save a bit more for their golden years. For those over 50, at which point the IRS permits you to make catch-up contributions, the limit has not changed. (For those who do not know, a catch-up contribution allows you to increase your total limit by $6,000 each year.

Total Annual Maximum Contributions: Some individuals have multiple types of 401(k) accounts. If this is you, then you should be aware of the total annual maximum contribution limit. (This limit is the total you can contribute between all of your accounts.) This limit did increase for 2018 from $54,000 to $55,000. For those over the age of 50, however, your catch-up contribution adds that additional $6,000 to this and gives you a new maximum of $61,000.

Other Types of Accounts

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

Stay Informed

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

401(k) Contribution Limits In 2018

A Quick Note On Retirement Accounts

2018 Contribution Limits for 401(k) Accounts

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

Employee Elective Deferrals: Employee elective deferrals are the contributions you make with your pre-tax dollars. Also known as employee contributions, these funds are pulled directly from your paycheck and deposited in your 401(k) account per your instructions. For individuals under the age of 50, the contribution limit for this has increased. In 2018, you can increase your contribution from $18,000 to $18,500. That is a $500 increase for your future!

Catch-Up Contributions: A catch-up contribution is for individuals who are looking to save a bit more for their golden years. For those over 50, at which point the IRS permits you to make catch-up contributions, the limit has not changed. (For those who do not know, a catch-up contribution allows you to increase your total limit by $6,000 each year.

Total Annual Maximum Contributions: Some individuals have multiple types of 401(k) accounts. If this is you, then you should be aware of the total annual maximum contribution limit. (This limit is the total you can contribute between all of your accounts.) This limit did increase for 2018 from $54,000 to $55,000. For those over the age of 50, however, your catch-up contribution adds that additional $6,000 to this and gives you a new maximum of $61,000.

Other Types of Retirement Accounts

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

Stay Informed On Contribution Limits For 401(k) Accounts

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

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

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

What is a Solo 401(k)?

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

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

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

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

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

For individuals you will also need to fill out:

A brokerage account application
A designated beneficiary form
A power of attorney form

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

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

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

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

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

Death or Terminating Your Solo 401(k)

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

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

401K Plan Loans — Why 72(p) Can Assist Your Investments

People often wonder if they can borrow money from their 401(k) plans. The answer is yes, but there are a number of things to bear in mind when you do.

Firstly, the money that was paid into your 401(k) is your money, but it was allowed to accrue interest tax-free. In addition, money that you paid into the fund was tax-deductible. In order to enjoy that tax-deferred or tax-free status, you have to comply with specific IRS regulations.

When you take out a car loan, what happens when you don’t pay it back? They come and they repossess the car, of course.

Now, what happens if you default on a loan from your 401(k)?

The IRS will consider the 401(k) “distributed”. That means they assume you cashed out your account. Not only is the entire fund now voided, but you face a 10% penalty for cashing out early. You may also be forced to pay an additional capital gains tax.

Guidelines for Executing a Loan with Your 401(k)

401(k)s are not like savings accounts where you simply withdraw money and pay it back whenever. You must draw up a legally executable contract and that contract must follow IRS guidelines. The repayment plan must also conform to IRS guidelines. In other words, it’s risky to borrow against your 401(k), but it can be done, and safely.

401(k) Loan Limits

No loan taken from a 401(k) is allowed to exceed either $50,000 or half the vested balance, whichever is lower.

401(k) Loan Repayment Limits

The loan must be repaid over a period of no more than 5 years. Exceptions are made for loans used to purchase homes.

401(k) Loan Repayments and Interest

You can’t just float yourself an interest-free loan. The loan must be repaid on (at least) a quarterly basis with a legitimate interest rate attached to it. The loan must be 1% over prime and there must be an agreed upon amortization schedule.

Section 72(p) regulations are not meant to hurt you. They’re meant to help you. When you borrow against your 401(k) you are using tax-exempt monies that the IRS and the government have allowed you to set aside for your retirement. If you could just take money out of the fund then that would defeat the entire purpose of it.

Logistically, you’re borrowing the money from yourself and then paying it back with interest. Technically, however, you are borrowing money from a fund that enjoys tax-free or tax-deferred status. There are conditions for enjoying those exemptions.

Our recommendation is to tread lightly and know what you’re getting into before executing the loan. If necessary, have someone help you with the process.

Solo 401k Contribution Limits: What The Self-Employed Need To Know

Real estate investors, like anyone else, need peace of mind and financial security by the time they retire. Luckily, there are a lot of great retirement plan options available today. The most well known types include an individual retirement account (IRA) or a 401(k) plan as offered by an employer. These plans allow account owners to invest in mutual funds, bonds and stocks.

However, did you know both types of accounts come with another option? A self-directed IRA (SDIRA) or self-directed 401(k) plan offers many more investment options than regular IRA or 401(k) accounts do. This includes real estate, life insurance, private placements, precious metals, renewable energy sources and much more.

With such great avenues of investment available to you, it makes sense to want to be able to maximize your contributions. After all, the more money you put into your retirement account, the more you have available to invest and increase your growth potential. This is where the self-directed, or solo, 401(k) really stands out. In fact, unlike your other retirement accounts, a solo 401(k) has an annual contribution limit that can be five to ten times higher. How is this possible? Let us take a look at solo 401(k) contribution limits and types of contributions allowed.

Contribution Limits

The Internal Revenue Service (IRS) regulates the contribution limits for retirement or investment accounts. For a SDIRA, and most other retirement accounts for that matter, the IRS only allows you to contribute up to $5,500 each year. If you start making contributions to your 401(k) account at the age of 30, based on an average return on your investments, this means you will likely only receive $1,000 a month once you retire.

Based on your current cost of life expenses and standard of living, will a $1,000 monthly distribution be enough based on retirement at the age of 65? Most likely, it will not. In contrast, however, a solo 401(k) has a much higher maximum contribution limit. In fact, as of 2017, the IRS allows you a maximum annual contribution of up to $54,000 for anyone under the age of 50. If you are older than 50, this limit is even higher.

Types of Contributions

The contribution limits alone are among the solo 401(k) benefits. However, a solo 401(k) also offers flexibility when it comes to how those contributions are made. Like an IRA or SDIRA, you can make traditional (pre-tax) or Roth (post-tax) contributions. A solo 401(k) also permits account owners to make a combination of employee deferral contributions and profit-sharing contributions.

Employee Deferral Contributions

As of 2017, the IRS has set the maximum employee deferral contribution limit to $18,000 for a solo 401(k). As the name implies, this type of contribution is one made as an employee. This is the most commonly understood type of contribution; it is the same type of contribution you can make to an IRA, SDIRA, 401(k) or other retirement account. The limit is just higher for a solo 401(k).

Profit-Sharing Contributions

Profit-sharing contributions, on the other hand, are the employer or business owner side of the house. With a solo 401(k), the IRS allows you to contribute up to 25% of your annual business income up to $54,000.

It is important to note that your maximum contribution limit is a combination of the employee deferral contributions and your profit-sharing ones. Therefore, if you make a $18,000 employee deferral contribution, you can only supplement it with a $36,000 profit-sharing contribution. However, you can mix and match these contributions to reach that $54,000. If you want to contribute less through your employee deferral investments, you can increase your profit-sharing contributions to reach that $54,000 limit.

Important Things to Note

There are a few things you should note when it comes to your solo 401(k) contributions, however.

Incorporation Status

Your incorporation status affects the percentage of profit-sharing contributions you can make. If your company is considered a non-pass through entity, such as an S- or C-Corporation, the IRS allows you to contribute 25% of your net W-2 income. However, if you have a pass through entity, such as a sole proprietorship or limited liability company (LLC), the IRS formula is much more complicated. (If this is you, our professionals can help you understand how different pass through entities affect your profit-sharing contributions.)

Playing Catch-Up

The IRS allows you to make catch-up contributions if you are over the age of 50. Catch-up contributions increase your employee deferral contributions by $6,000. This means you can contribute $24,000 to your solo 401(k) instead of just $18,000. When combined with your profit-sharing contribution, this gives you a new maximum limit of $60,000 instead of $54,000!

Multiple 401(k) Plans

If you have both a 401(k) account through your employer, as well as a solo 401(k) account through your side hustle, your employee deferral contributions of both can not go beyond the $18,000 limit. However, the employer contribution to the 401(k) and your profit-sharing contribution to the solo 401(k) do not affect each other. For example, if you make the maximum $18,000 contribution into your 401(k) account and your employer matches this, you have a total $36,000 contributions. However, if your solo 401(k) side business nets you a $200,000 income, you can still contribute up to 25%, or $50,000, of this. Total, this gives you $86,000 in contributions you can use for investments.

Self-Employment Activity

Contributions to your solo 401(k) can only be made in relation to your self-employment activities. You cannot take money from your day job and contribute it to your solo 401(k).