Your Self-Directed IRA: Asset & Creditor Protection

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

Protecting Your Retirement Assets

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

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

Federal Bankruptcy Protection for Your IRA

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

Protection From Other Creditors

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

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

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

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

Royal Legal Solutions Helps You Protect Your Assets From Creditors

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

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

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

What is a Self-Directed IRA?

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

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

What is a Solo 401k?

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

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

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

  1. Reach your Max Contribution Amount Quicker.

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

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

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

  1. Roth Feature Options.

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

  1. Tax-Free Loan Options.

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

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

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

  1. Open the Account at Any Local Bank.

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

  1. No Need for the Cost of an LLC.

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

  1. Better Creditor Protection.

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

  1. Easy Administration.

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

  1. Flexible Structure.

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

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

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

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

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

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

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

IRA Rollovers to the Self-Directed Roth IRA

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

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

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

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

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

Roth IRA Conversion Taxes & Penalties

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

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

How To Convert Into a Self-Directed Roth IRA

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

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

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

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

Reporting a Roth IRA Conversion on Your Taxes

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

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

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

Direct Rollover to a Self-Directed Roth IRA

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

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

Indirect Rollover to a Self-Directed Roth IRA

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

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

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

 

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

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

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

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

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

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

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

Tips For Self-Directed IRA LLC Investing

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

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

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

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

Why Would You Need a Loan in the First Place?

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

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

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

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

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

What Is a Non-Recourse Loan?

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

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

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

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

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

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

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

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

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

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

How to "Escape" UBTI/UBIT Tax

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

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

 

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

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

  1. Supercharge Your IRA.

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

  1. Grow Your Retirement Money Tax Free.

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

  1. Flexibility.

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

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

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

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

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

Solo 401k Features and Benefits

1. Easy to maintain.

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

2. Freedom of choice and tax-free investing.

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

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

3.You can get a loan.

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

4. No Custodian fees.

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

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

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

5. High contribution limits.

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

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

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

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

6. Contribution options.

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

7. Roth contributions.

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

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

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

9. Exemption from UDFI tax.

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

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

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

10. Rollover options.

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

Still Using an IRA?

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

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

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

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

History of the Solo 401k 

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

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

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

Who Is The Solo 401k Best For?

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

The solo 401k plan allows you to:

Benefits of The Solo 401k

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

Simple Administration

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

Roth After-Tax Benefit

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

Borrow up to $50,000 Tax-Free

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

Buy Real Estate With Leverage Tax-Free

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

No Need to Establish an LLC

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

Protection From Creditors

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

More Options to Maximize Your Investments

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

Freedom Of Choice

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

Quick List of Reasons to Choose the Solo 401k

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

 

Do You Know About The Plan Asset Rules?

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

Plan Asset Rules: The Basics

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

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

 
 

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

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


Why You Want To Avoid Triggering Plan Asset Rules

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

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

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

Plan Asset Rule Examples

Scenario One:

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

Scenario Two:

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