Why You Need a Real Estate Corporation

Real estate is usually a sound investment. I would remiss if I didn’t use the word “usually” considering the little hiccup we experienced in 2008. Investing in real estate is sound, but you need to know pay attention to what way the wind is blowing.
Still, real estate is a good investment 99.9% of the time. Just make sure you consider the following:
You’re liable for your property. You need protection. You will most likely use an umbrella insurance policy or an LLC to protect yourself.

Insurance vs. LLC: Which is Better?

An umbrella policy adds additional coverage to the insurance you already have.
Now, if Demi Moore has 100k worth of liability coverage and business general liability is 500k, than a $1M umbrella policy is going to give you 1.1 M in pool liability coverage and 1.5M of general business liability coverage.
So, an umbrella policy doesn’t insure anything that isn’t insured. It’s more like a top up on a half full tank.
Let’s say you provide home appliance repair services and somebody sues you for a failed repair. If your general liability doesn’t cover those repairs, you’re umbrella policy is about as useful as that appliance you failed to repair. So, in short, don’t get an umbrella unless you’ve already got your rubber boots: You’re umbrella won’t keep your feet dry when the flood of litigation comes.
LLCs are 100% necessary if you want to keep your feet dry. Your business assets are at risk in a lawsuit, but if you don’t have an LLC, you could lose your home. Don’t get caught barefoot in a flood. Make sure you have your coverage.
The cost of an LLC is a few hundred dollars. You’ll pay yearly fees as well. $50.00 to $200.00 a year is the average, but it’s different in every state. You are going to pay monthly for an umbrella policy. About $1200.00 a year will get you a million in coverage. Umbrella policies have benefits such as attorneys that will be appointed to defend you, but they also have exclusions. You have to know what they are. An umbrella won’t save you from the storm if it’s full of holes.
Now for the million dollar question:

What Type of Company Structure is Best For You?

Well, it depends on what you own. If you have multiple units or commercial property, you want a lot of coverage because you have a lot of tenants. Tenants are people, and people can be very stupid. On the other hand, if you only have a single family, one policy might be enough.
You’re going to have to do some homework here and consider the risks. Bottom line, if you own property, you are going to face catastrophes. Be prepared. When the storm passes, you’ll be dry as a bone.
If you need specific advice on the best method for forming your real estate corporation, schedule your personal consultation today.

4 Pet Law Facts Animal Owners Should Know

I once owned a pit bull named Jackson. He went down a bad path. He was a product of public obedience school. I was too busy with my legal career to notice that Jackson was out on the corner hustling with local thugs.
Every night I went to bed thinking: "Please, don’t make me financially responsible for my pet’s poor life choices. Please."
There are a lot of situations where pet law can get rough. Pet custody is fiercely contested in divorces. Your pet might go down a bad road like mine did. And heaven help you if yours commits the greatest crime in the canine criminal code: biting somebody. You will also have to make provisions for your animals after you’re gone.
Pets are beloved family members, but there are some legal realities that you need to be aware of if you are a pet owner. To that end, here are a few Pet Law fundamentals.

1. Pets are property, and "duds" happen. 

If life sells you a lemon, trade it in for an orange. Or at least something that isn't dying. It may not be the kindest idea, but if you purchase a pet with an illness or a disease, you can return it for a full refund in 21 states. Then you just have to live with the knowledge that Snowball is going to be left on a rock to be consumed by an eagle. Circle of life.

2. Laws regulating the treatment of pets vary from state to state.

All laws regulating pet care can be reduced to one Elvis Presley maxim: don’t be cruel. Don’t leave you dog outside in a hurricane. Don’t leave them in a hot car. And of course, no dog fighting. I thought this one was common sense, but it seems necessary to say it out loud because Michael Vick did 18 months for it. If dog fighting gets you off, you might also want to consider a psychiatrist. You’re a sadist.

3. Pet custody issues are real: understand them.

Look, you love your dog and so does your wife. You might love it more than your car but less than your boat. You might love it more than your children but less than your dinner. To be frank, the law doesn’t care. Pets are considered property no matter how meaningful deep attachment to them may be.
So, in the event of a divorce where pet ownership is in dispute, the court has to consider a number of factors similar those that would be considered during a child custody hearing. Of course there are differences, since you legally own your dog. You don't own your kids. That’s why you can’t put them to work in your salt mine.
Still, the rubric for pet custody and children is similar. The court considers who took care of the pet and who can pay for it. If it is a family pet, it will likely end up wherever the children go. Either way, this is going to be in the judge’s hands. If pet custody is important to you, prepare your case.

4.  Include your pet in your estate plan.

So, you’ve been dead for a week. Your dog has finished mourning at your grave and now he needs to eat. Who is going to feed him?  If you want your pet taken care of after your passing, you can state in your trust or will what provisions you are leaving behind for its care. You can create a "pet trust" to outline the care of your pet after you are gone.

There is good chance there is someone in your life who will take the pet for free because generally speaking we all no at least one person who isn’t completely heartless. If you don’t, I’m sorry that you are dying alone, but cheer up! You can see to your pet’s care either way. Leona Helmsley left millions of dollars to her dog. I mean, none of it was spent on her dog, but if the dog one day developed the powers of speech through the integration of silicon-based microprocessors and the carbon-based canine brain, he might say something like, “You know what I want to do? I want to take LADY to TONY’s for a nice plate of spaghetti.” If that were to happen, TRAMP could afford to take his girl for a nice dinner and a bottle of Chianti.
If you want your pet to fill the void left by your absence with a jettsetting, playboy lifestyle and a solid gold grill, you can leave them your entire estate. Tony will appreciate the business.
Do you have questions about pet ownership or pet law? Fire away in the comments below. Better yet, let Royal Legal Solutions help you. Whether you want to protect a show dog or racehorse as an asset or incorporate your emotional support peacock into your estate plan, we've got you covered. Our nonjudgmental, empathetic attorneys are pet parents themselves. Schedule your consultation today.
 

Pet Ownership Laws & How They Can Bite You In The Assets

I once owned a pit bull named Jackson. He dropped out of obedience school and went down a bad path. I was too busy with my legal career to notice that Jackson was out on the corner hustling with local thugs.

Every night I went to bed thinking: "Please, Lord. Don’t make me financially responsible for my pet’s poor life choices. Please."

There are a lot of situations where our furry and feathered friends run afoul of pet ownership laws. Pet custody is fiercely contested in divorces. You will also have to make provisions for your animals after you’re gone.

Your pet might go down a bad road like mine did. And heaven help you if yours commits the greatest crime in the canine criminal code: biting somebody. 

Pets are beloved family members, but there are some legal realities that you need to be aware of if you are a pet owner. These legal risks also may apply if you are a landlord or property owner and your tenant's dog bites someone. To that end, here are a few pet law fundamentals.

pet ownership laws: bird law

Laws regulating the treatment of pets vary from state to state

All laws regulating pet care can be reduced to one Elvis Presley maxim: don’t be cruel. Don’t leave your dog outside in a hurricane. Don’t leave them in a hot car. And of course, no dog fighting.

I thought this one was common sense, but it seems necessary to say it out loud because Michael Vick did 18 months for it. If dog fighting gets you off, you might also want to consider a psychiatrist. You’re a sadist.

Whether you're a dog owner or a property owner with "animal-friendly" policies, know the laws regarding animal treatment where you live and do business.

Pet custody issues are real: understand them

Look, you love your dog and so does your wife. You might love it more than your car but less than your boat. You might love it more than your children but less than your dinner.

To be frank, the law doesn’t care. Pets are considered property, just like any other asset, no matter how meaningful or deep your attachment to them may be.

So, in the event of a divorce where pet ownership is in dispute, the court has to consider a number of factors similar those that would be considered during a child custody hearing. Of course there are differences, since you legally own your dog. You don't own your kids.

Still, the rubric for pet custody and children is similar. The court considers who took care of the pet and who can pay for it. If it is a family pet, it will likely end up wherever the children go.

Either way, this is going to be in the judge’s hands. If pet custody is important to you, prepare your case.

pet ownership laws: pit bull with kissesInclude your pet in your estate plan

So, you’ve been dead for a week. Your dog has finished mourning at your grave and now he needs to eat. Who is going to feed him?  

If you want your pet taken care of after your passing, you can state in your trust or will what provisions you are leaving behind for its care. You can create a "pet trust" to outline the care of your pet after you are gone.

There is good chance there is someone in your life who will take the pet for free because, generally speaking, we all know at least one person who isn’t completely heartless.

If you don’t, I’m sorry that you are dying alone, but cheer up! You can see to your pet’s care either way. Leona Helmsley left millions of dollars to her dog.

If you want your pet to fill the void left by your absence with a jettsetting, playboy lifestyle and a solid gold grill, you can leave them your entire estate. Tony will appreciate the business.

Don't Get Left Holding The Bag If Your Tenant's Dog Bites Someone

What happens when your tenant’s dog bites a neighbor? Generally, the dog owner is the one liable for injuries.

However, there are instances in which the landlord or property owner can be legally responsible. For example, if the landlord has been made aware of a dog having an aggressive streak and failed to take appropriate measures, he or she could be facing a lawsuit.

Remember: One lawsuit can wipe your real estate investments if your investing business is established as a sole proprietorship. It may be a legal and easy way to structure your business, but it does little to protect you and your assets. The neighbor’s lawyers can see all of your investments, and you can be sued for everything you have.

It doesn’t matter if you’re just starting out in property investing or if you have been doing this for decades, you can keep more of what you earn through legal tax strategies and entity structures that shield your assets from unexpected lawsuits.

Interested in learning more? Read Renting To Tenants With Dogs: What Landlords Need To Know About Liability and Dog Bites and Landlord Liability: Know Where You Stand.

Wrapping It All Up

Most lawyers will give you cookie-cutter advice. You should learn from lawyers who are also property investors and who know how to protect you from any opportunistic lawsuits while making sure you pay no more tax than you really need to. Find someone who can legally structure a range of real estate investments to make sure your real estate investments or business are protected from unfair taxes or lawsuits.

Do you have questions about pet ownership or pet law? Fire away in the comments below. Better yet, let Royal Legal Solutions help you. Whether you want to protect a show dog or racehorse as an asset or incorporate your emotional support peacock into your estate plan, we've got you covered.

Moving Money Overseas? Tax Information For U.S. Expats

There are a lot of reasons for U.S. citizens to move money or other assets overseas. In many cases, there are clear advantages to moving overseas completely. But there are clear tax obligations for American citizens. 

But before you or your money leave the USA, there are a few tax and legal consequences you need to be aware of. Remember: If you're an American citizen, it doesn't matter where you go in the world. You can't outrun the taxman.

Tax Reporting Obligations for U.S. Citizens

If you (or your money) are moving overseas, there will be lots of tax forms to be filed annually. The bureaucracy is a thick fog that conceals many rocks for you to dash your financial ship against. The government will beat you down with forms, so file carefully and stay on top of your paperwork.

If you're a U.S citizen, Uncle Sam wants to know about your foreign assets, investments and bank accounts. In fact, Uncle Sam says that you have two legal obligations. Let's review them.

Obligation #1: Disclose Foreign Bank Accounts and Assets

First, if you’re a U.S. citizen, you need to declare all foreign bank accounts if they total more than $10,000 (all foreign accounts are combined to reach the $10,000 threshold) and you must report any foreign asset (e.g. foreign stock, company ownership, etc.) whose value is $50,000 or greater.

The form required to be filed annually to disclose foreign bank accounts in excess of $10,000 is known as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The form filed annually to disclose foreign assets with a value in excess of $50,000, is IRS Form 8938, Statement of Specified Financial Assets. The first obligation U.S. citizens have to their home country is the disclosure of foreign bank accounts and foreign assets.

Obligation #2: Pay Your Federal Income Taxes On Foreign Income

As a U.S. citizen, you are required to pay U.S. federal income tax on the foreign income you receive. The U.S. taxes its citizens on income no matter whether it was earned in the U.S. or abroad. That's one of several reasons our GNP is so high.

So, even if you make money outside the U.S., as a U.S. citizen, Uncle Sam says that you are still required to pay federal tax on that income. If you paid foreign income taxes to the country where the income was derived and if that country has a tax treaty with the U.S., then you’ll typically receive a credit in the U.S. for the foreign taxes paid, which reduces the amount of federal taxes owed in the U.S. You can look online for a current list of countries who have a tax treaty with the U.S.

Some U.S. citizens presume that if they leave the U.S. that they are no longer subject to federal income tax in the U.S. But this is not the case. Uncle Sam wants your (his) money. Failure to comply could result in a nasty tax dispute. And who has the time or energy for that?

Even if you relocate to a foreign country and no longer earn income from the U.S. you are still subject to U.S. tax your foreign income (and potential state income tax depending on your state of residence).  There's one last question on this topic some rebels or activists in the crowd may be wondering about.

Can I Avoid Paying Taxes While Living Abroad?

The only way to keep Uncle Sam out of your pockets, (AKA the tax jurisdiction of the United States), is to renounce your U.S. citizenship. However, this is a costly and expensive process with numerous tax repercussions.

Here's a common example that demonstrates how the disclosure and income tax reporting requirements work:
Say you have a bank account in Luxembourg with a balance of $99,999. That account generates income of $10,000 this year. Let's say that the $10,000 in income resulted in taxes owed to Luxembourg of $1000 and that you reported and paid the tax to Luxembourg.

In addition to compliance with Luxembourg law, you would need to file FinCEN Form 114 (FBAR) to disclose the foreign bank account. The FBAR form filing is due by June 30 for the prior year’s accounts. You would also need to file IRS Form 8938, since the account was at or over $50,000. Form 8938 is due with the filing of your federal tax return.

In addition to the two disclosure forms that are filed in the U.S., the $10,000 of income from your Luxembourg account must be reported as taxable income on your income tax return (form 1040).

The $1000 paid in tax to Luxembourg will be credited to you as the tax owed to Uncle Sam because Uncle Sam and Luxembourg have a tax treaty.

Conclusion

All U.S. citizens are subject to federal income tax regardless of where they live or do business. Even if you no longer earn income in the U.S., Uncle Sam wants his money. Even if you renounce your citizenship (which is expensive and has a whole host of tax repercussions), Uncle Sam can and will get his money.

(On a related note, see Why Ordinary People Set Up Offshore Bank Accounts).

You are required to pay federal income tax on foreign income you receive. This means the U.S. taxes the income that you earn, even if you earn every penny abroad. If you pay taxes in the country where you are earning income and there is a tax treaty with the US, you’ll receive a credit in the U.S. for foreign taxes paid.

These are just the basics; there are many special rules and numerous exceptions to the filings you read about here. If you plan on leaving the U.S. or moving assets outside the U.S., you should seek out experienced professionals to assist you with U.S. tax reporting obligations.

Color inside the lines of the law, and you can avoid paying a hefty cost.

Keep Your Individual 401k Compliant: 5 Steps For Self-Employed Investors

Investors love the self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—because it’s perfect for businesses with sole owners. These retirement plans offer serious benefits. These are like self-directed IRAs made just for investors and the self-employed.

This may seem like a dream come true, but when you’re busy investing or running a business, the management of a 401k can get overlooked. Mistakes can be costly. Making sure your plan is compliant comes down to five easy steps.

1. Update Your 401k Account on Time

Updates are required by the IRS every six years. If you don’t update them, you’ll face costly fines and possibly even plan termination. Just like your phone, if it’s out of date, you are vulnerable to all kinds of attacks. Fortunately this one is straightforward. If your plan is out of date, get it updated.

2. Keep Track of Your Funds

Your income sources must be accounted for. My friend’s wife used to make contributions to one of his accounts, but he tracks everything to the letter. Make a spreadsheet in Excel. Those night classes you took are good for something and excel feels is feeling so neglected.

3. Separate Your Funds By Plan and Participant

If two people are contributing to one account, make sure they contribute from their own accounts. Also keep Roth accounts in their own space separate from traditional funds. By now, you’re more organized than the foreman at an ant farm, and you have to be. There is a lot to keep track of.

4. File a 5500 with The Department of Labor

Yes, another form. I often wish I’d gone to art school, but then I remember that artists fill out less forms because they have no money.

There are two situations that demand a 5500 for your individual 401k. First, if you have more than $250,000, start stretching your writing hand. Second, if you terminate a plan, regardless of assets, you need to file a 5500. You have to do this annually, so make sure you have enough money in the plan to make it worth it.

You can opt for a 5500-EZ. This is, as you might suspect, an easy file version of a 5500. This has to be filed by mail. If you opt for a 5500-SF you can do it online through the Department of Labor. This is obviously more convenient.

Online filing can be tracked immediately. The SF skips portions of the 5500 like an EZ. Opt for the SF and get the best of both worlds if you qualify for EZ filing.

*See Form 5500 EZ Filing Requirements For Solo (One Participant) 401(k) Holders for more information.

5. Document Contributions and Rollovers

If you make contributions or roll over funds from an IRA or 401k into your individual 401k, you need to state that the rollover is coming from another retirement account. The company rolling over the funds will issue a 109d9-R to you. It states that the source of the roll over so you don’t get taxed on it. Unless you like paying tax. If that’s the case, you’re on the wrong website.

If you are making new contributions to an individual 410k, track them on personal and business tax returns. If you’re an s-corp, employee contributions show up on your W-2 and your employer contributions will show up on your 1120S s-corp return, unless you are the sole proprietor, in which case your contributions show up on your personal 1040 on line 28.

Head spinning yet? Yes, this portion of tax law is confusing. You may be better off with a professional, but if you can make sense of it, you will save yourself a lot of money.

In short, be updated and organized to keep your enemies at the IRS from sticking you with non-compliance. If you suspect you are out of compliance, meet with your attorney or CPA and get that treated before it is malignant.

To give you a sense of what is at stake, the penalty for not properly filing a 5500 is $25.00 a day to a maximum of $15,000.00 on your return. A mistake made on a filed return might keep you from retiring at all. See to the boring stuff. Get your paperwork done. Be up to date. The rewards are worth it. 

As always, if you're struggling to manage your retirement plan, get professional help. Royal Legal Solutions has experts and attorneys who can help you decide which of the many retirement options is best for you.

How to Fund Your Business with Self-Directed IRA Investors

Private companies need start-up funding.
There are trillions of dollars in retirement plans across the United States. These funds can be invested in your business.
Most entrepreneurs and investors don’t know this. Which is a shame, because everybody who owns a retirement fund is a potential source of financing. Most people who have a retirement account don’t actually know what their retirement package is invested in. This is an untapped resource just waiting for your pitch.
Industry surveys show that there are over one million self-directed retirement accounts invested in private companies, real estate, venture capital, private equity, hedge funds and start-ups.

Investing with Self-Directed IRA Funds

 
So how can you tap this wellspring? If you ask your CPA or your lawyer, they’re going to tell you that it’s possible but inadvisable. This is because they don’t have any idea how to do what you are asking them to do, or they are too shortsighted to see why you want to. Your financial adviser is going to tell you this is a bad idea because he doesn’t get the fee that he collects on your mutual funds, annuities and stocks. I’m not going to tell you this is a conflict of interest, but it does lower your adviser's motivation for alternative investments. He’s trying to make money too after all.
There are different sets of risks in private investment, so self-directed IRA investors need to be strategic. Keep a diverse profile. Don’t hitch your entire wagon to an unproven company. There will be tax and legal issues, so make sure you get help when and where it is necessary.
Selling corporate stock or LLC units to self-directed IRAs can generate capital in exchange for stock or equity in other companies. You can offer shares or units in your retirement account without going public.
This was what employees at Google, PayPal, Domino’s, Sealy, and Yelp did. They invested their self-directed IRAs before their companies were publicly traded and made enough money to retire very nicely.
Popular investment options include:

You must be in compliance with state and federal securities laws when raising money from investors.

Avoiding Prohibited Transactions/UBIT

Be careful to avoid prohibited transactions. For example, you cannot invest your retirement money with close family members. If an error occurs, an investor will have their ENTIRE ACCOUNT DISTRIBUTED. Don’t make this mistake.
You may also be subject to an Unrelated Business Income Tax. A UBIT applies to an IRA when it receives business income. Learn more from our previous article about the UBIT.
Generally, IRA’s and 401k’s don’t pay tax on gains because they’re considered investment income. When you wander outside of standard investments, such as mutual funds and annuities, you may find yourself in the cold wilderness outside of investment income parameters. UBITs are very costly at 39.6% of $12,000 of taxable income. That’s steep.
The most common situation where a self-directed IRA will be subject to a UBIT is when the IRA invests in a business that does not pay corporate tax.
If you are trying to raise capital from retirement funds, you should have a section in your documents that notifies people of potential UBIT on their investment. This doesn’t cost you, but it does cost the investor, and at 39.6% you might do some damage to someone’s retirement plans if you aren’t clear with them.
If the investment from a self-directed IRA was via a note or debt instrument, then the profits are considered interest income. This income is always considered investment income, which is not subject to a UBIT.
Many companies raise capital from IRAs for real estate or equipment purchases. These loans are often secured with the assets being purchased. In this case, the IRA ends up earning interest like a private lender.
So, to Recap (because that was a lot!)
There are trillions of dollars in retirement plans across the U.S.
These retirement accounts can be used to invest into your private company, start-up or small business.
You must comply with the prohibited transaction rules.
Anyone can invest into your company, except you & your close family members.
There may be UBIT, depending on the structure of the company.
UBIT usually arises within IRAs that operate businesses structured as LLCs where the company doesn’t pay a corporate tax on their net profits. This income gets passed down to IRA owners & can cause UBIT liability.
Retirement account funds can be a huge source of funding and investment for your business, so it’s worth the time and effort to learn how to access them as investment capital. Just make sure you follow the rules.
How you handle your retirement money matters at money matters.

Finding a Trustee For Your Estate Plan

Finding a trustee for your estate plan is tricky. If you choose someone who isn’t up to the task, you won’t be around to correct them.

On the surface, the job is simple. You name which assets go to whom and under what conditions. The trustee just has to execute. So, as with any trust designed to protect your investments, you need a trustee you can, well, trust. You may also want to see our Trustee Vs. Executor article.

In order to pick the right person, consider the following:

What Will My Estate's Trustee Do?

  1. The trustee will make the funeral arrangements with the help of the family. The hardest part about this is managing a grieving family. If your son or daughter doesn’t do well with grief, you may want to consider someone else.
  2. Your trustee will inform your family members and your heir of your estate plans. This is just like in the movies where the deceased leaves behind a video. The trustee puts in the video and the eccentric old billionaire announces that to get his money you have to do something hilarious like defeat his greatest enemy in mortal combat, or solve a terrific riddle that leads you to a treasure buried on an island off of Nova Scotia. No? Maybe that’s just my grandmother, who wasn’t a billionaire, but she was crazy.
  3. Your trustee pays people. Dying is expensive. Make these arrangements ahead of time. By the time your trustee steps in, all he should be doing is signing checks in accordance with your carefully laid plans.
  4. After the dust settles, the trustee determines what assets you still have and how to distribute them. Might be a good idea to include “well- organized” on your list of desirable trustee qualities. With that in mind, you should have selected a beast of a bean counter to execute your will. Someone meticulous, organized, and financially sound. It won’t hurt if they’re funny either. Your family might need a laugh while they divide up what remains of your life in the days and weeks after your death.

Now that you have found a trustee who can educate and entertain, you need to make a plan for your estate. Once again, you need to choose the right trustee for the job.

Here are a few things to consider.

How Big is Your Estate?

If it’s not extremely large, you can probably entrust its distribution to a family member. Unless of course merciless thieves populate your family, in which case you may need outside help. Sometimes family member receive a small honorarium for their services, but this job is largely pro bono. That’s right, you can keep taking advantage of your family even after death.

Now that’s a haunting.

When an estate is worth over 10M, you may want to name a company or a bank as the trustee. Absolute power corrupts absolutely and every family has a Mr. Burns buried somewhere, just waiting to get their hands on the cash so they can “release the hounds."

If you appoint a company or bank, this will cost…a lot. This means it’s only practical for larger estates. It’s also a lot to hoist off on your daughter, even if she is majoring in finance.

You may also want to appoint a non-family member or friend as a trustee simply so that your estate doesn’t tear the family apart. It can get ugly when one family member is dividing up wealth amongst the others. See: KING LEAR.

Does Your Trustee Have Solid Financial Skills?

This one should seem obvious, but a lot of people make posthumous financial decisions with their heart instead of their head. Whether it’s your wife, your child, or a friend, you need to make sure that your trustee is organized, responsible, and financially sound.

What Are Your Family Dynamics?

Families are made up of people and people get into disagreements. They are flawed units made up of flawed people. Every gold digger and delinquent in the world belongs to somebody’s family. If you have any in yours, keep them away from your finances when you’re gone.

Are You Compensating Your Trustee?

Generally, family members act as trustees without compensation, but you can leave them a little something for their trouble. A little bonus out of the estate might motivate them to do a better job. You’re son also tends to do a better job on the lawn when he’s receiving an allowance.

Conflict of Interest

If you are naming a child as a trustee, you are probably naming them as an heir as well. Don’t sweat this one too much. The trustee is bound to the terms of the trust, so if you are thorough, there is very little that can be done to abuse the trustee position for personal benefit.

Co-Trustees

Sometimes it’s important that several people are trustees. Once again, family members are people, and people are petty. You don’t want to bruise egos that are in the middle of grieving.

Multiple trustees are fine, but make sure that you are specific about authority and responsibility. Your death might leave a financial rat’s nest. One monkey will take long time to untangle it. If you involve multiple monkeys you might turn your funeral into a mud-slinging contest. When you're estate planning, you can be the circus ringleader who prevents these issues. 

Most people will name a child as trustee. Siblings and close friend of the family are common choices where the children are too young. Keep in mind; this is more than just the distribution of your wealth. This is the evolution of your legacy. Make sure you have chosen the right captain to steer the ship.

Take care of your family’s future. Choose a capable trustee. For much more information and a look at things from the trustee's point of view, read up on trust executor duties.

Disinheriting Your Heirs: Your Legal Options

Disinheriting an heir is something most of us hope we never have to do. It’s sad, but it happens. Sometimes you grow estranged from an heir. Other times, the heir may be on a path to self-destruction that you don't want to aid and abet. 
Not all circumstances are this dire. Occasionally, an heir surpasses you financially so they won’t benefit as much from an inheritance as the family artist who is still paying off his American Studies degree.
Whatever your hilarious or tragic reason might be, removing an heir from your estate is fairly straightforward. Emotionally, this move can be devastating to your personal life and tear your family apart. But legally it’s a piece of cake. The following will outline the disinheriting process, but also present legal alternatives to disinheriting.


Why You Will Need to Legally Disinherit An Heir

Unless you specifically state otherwise in a legally binding document, the state is going to assume that you intended your spouse, and then your children to be your heirs. You know, because they assume you love your family. If you think about it, that is the appropriate default setting.
So, if you want to cut an heir out of an inheritance you’ve got to really mean it. You can't undo this move from beyond the grave.
It is important to complete an entire list of your children in the estate plan and to specify any child who will not be an heir. This will make for a wonderful and dramatic moment suitable for a movie:
The estranged youngest son shows up on the day of his father’s death. After comforting his mother and arguing with his brother, his father’s will is read aloud in father’s study.  As the grieving family gathers around, the executor reads in a loud, authoritative voice: “…and to my youngest son Samuel, I leave nothing.”
The son lowers his head. His sister tries to comfort him. He dashes from the room. It’s the sweetest revenge of all: revenge from beyond the grave!
In all seriousness, I know what a tragic situation disinheriting can be. That's why I'm going to share another, less final option below.


What To Do If You Don't Want to Disinherit Your Heir: Use Stipulations in Your Will

If you want to leave something for a lost or wayward child, you can always attach a few strings to an inheritance. In this way, you take a family tragedy and turn it into a hilarious, heart-warming comedy.
Now, you cannot just attach any stipulation you can think of to an inheritance. Everything has its limits. For instance, you cannot ask an heir to commit a crime. You cannot subject them to anything torturous, no matter how personally entertaining you might find those posibilities. If you want to make your heir miserable, you’ll have to double up on the emotional torture while you’re still alive. Disinheriting isn't the best option for haunting beyond the grave. Not that we recommend a life spent in resentment for anyone.
You also cannot ask an heir to divorce their partner. This topic is kind of a "fan-favorite," and comes up all the time. Most of us tolerate our children, but you may not relish the prospect of sharing your money with your money-grubbing in-laws. Nonetheless, most courts view such a request as a violation of public policy because it promotes divorce.
We'e previously covered how to use wills and trusts instead of disinheriting your heirs. I recommend you read that as well if you're considering this process.
 

Why You Need a Lawyer's Help With Estate Planning for Your Heirs

You should talk to a lawyer about what kinds of stipulations you can place on an inheritance. You might demand that your heirs do something with their lives, from maintaining stable employment to educating themselves, before they can access what you leave behind. This will teach them to fish for themselves before you give them all of your catch.
If you need help disinheriting, adding stipulations to your will, or otherwise planning your estate, contact us today. At Royal Legal Solutions, our experts can help with all phases of the estate planning process.
 

How to Protect Your Reputation in the Digital Economy

Bad reviews hurt a business. If you own the business that they hurt your soul. Nonetheless, Platforms like Yelp are the gatekeepers to quality now You have to accept that not everyone is going to like what you are doing.The good news is that you can protect your business against untruthful, inflammatory remarks. There is a point at which negative reviews become defamation.
There have actually been hundreds of lawsuits over negative reviews posted in online forums, but few people take action.
The first amendment only protects the truth. No one has the right to tell lies about you or your business. If a negative review in any public platform is negative AND untruthful, you can sue for damages. That is the definition of libel.
Now, you are going to have to prove that a negative comment was untrue if you are going to silence it. If a customer says that they were served a cold bowl of soup, you’re going to have a hard time proving the remark untrue. I suppose maybe the customer’s bowl of soup could have spilled on someone else who is suing you because the soup was too hot. If they have burn scars, you might be able to disprove that the soup was cold.
This is an insane example, but it demonstrates a case where a business is actually damaged by a negative review that you be proven untrue. This is grounds for a Defamation Lawsuit.
There are two types of defamation. We mentioned libel. Libel is the act of defaming someone by telling nlies about him or her, in the written form. This includes online reviews.
The second type of defamation is slander, which is spoken defamation.
You see a lot of slander during political campaigns.
The reason the top brass isn’t busy suing one another is because defamation is tricky business.
In order to win a defamation lawsuit you must prove the following:
a) That a statement was made.
b) That it was published for others to see (comments, reviews, etc).
c) That the statement caused you injury (emotional distress, loss of business, etc).
d) That the statement was false.
Awards in a defamation lawsuits generally require the offending party to remove false statements. Damages might be awarded for lost profits or injury.
You really need to pick your battles carefully though. You can spend a lot of money silencing negative reviews that may not actually be costing you anything. It’s also difficult to prove that the offending party is lying.
My personal advice to business owners who are on the receiving end of negative or untruthful reviews is that you respond to it once and only once. It’s enough to show that you are a business owner who cares. It allows anyone who reads the review to hear your side. Reach out to the customer directly if it’s possible and figure out if you can resolve their issue. Maybe you can get a negative review taken down just by showing a potential client that you want to do better by them. That’s how you win over people whom you disappointed, and we all have off days.
Now, if you’ve taken these steps and you are unable to resolve a negative and untrue comment or review that is causing your business injury, you can file a lawsuit against the perpetrator.
Just remember that lawsuits are a long and costly process. Don’t drag yourself into a fight if there aren’t sticks or stones involved. If the injury is real and the comment is false, take legal action. Just be sure you’re in a fight over something that matters, because that’s what matters at Money Matters.

Real Estate Contingencies: A Beginner's Guide

The paperwork piles up fast in real estate. Like a nasty rodent problem, you need to stay ahead of it.

Real estate contingencies are an important part of your real estate contract. They provide protection like a suit of armor. Here’s how to use them.

What Are Real Estate Contingencies?

A contingency clause says that your purchase is contingent on a number of conditions specified.

So, if the buyer insists on having a complete roof repair and rodent inspection, they are going to write those contingencies into the contract. If they buy the property and find mice playing in the halls and the shingles falling from the eaves, the contingencies haven't been honored.

These are a few of the contingencies you might want to consider in a purchase agreement.

#1 Appraisal Contingency

Simple enough. Your purchase is contingent on an appraisal that evaluates the property at or above the purchase value.

#2 Financing Contingency

The purchase in contingent on the buyer obtaining financing terms acceptable to a the buyer. Make sure your purchase agreement specifies that you must obtain acceptable financing. If your contingency simply says you will purchase upon obtaining financing, you could find yourself in trouble if the financing offers unfavorable terms. For example, if all you can afford is 7% on your financing, put 7% into your contingency as your acceptable financing rate for purchase.

This may sound confusing, but it’s actually pretty simple. If you can’t afford the financing, don’t buy. Make sure your contracts say as much.

#3 Inspection Contingency

Get your property inspected and make sure that you approve of its condition before purchase. If you’re buying a fixer-upper, make sure that you aren’t putting more into repairs and than you can afford. Don’t buy a money pit. Buy a money-maker. You can ask the owner to make repairs or lower his price as contingencies.

More About Contingency Clauses

#1 Earnest Money

Make sure your contract states clearly that you get your contract money back if the owner fails to address any of your contingencies. If you don’t do this, you are going to risk losing a lot of cash.

#2 Don’t Miss Deadlines

These clauses almost always have a deadline so give yourself enough time to meet them.

You need time to obtain financing. You need time to properly inspect the property. You time to review the seller’s disclosure documents. Two-week deadlines are the norm, but this is often ridiculous for anybody who actually plans to exercise any due diligence.

If deadlines are approaching and you need more time, ask the seller for an extension. If the seller refuses, haul out your contingency and drop it on the table like a hot mic.

#3 Get it in Writing

Make sure that you are communicating via whatever format is required by the contract and its contingencies. You need a hard copy, not a digital one. The pen is mightier than the sword, and in this case, the printer is mightier than the screen.

Telephone calls and emails will not invoke contingencies unless a contract permits emails as notice. Make sure everything is in writing and sent to the seller on a date that can be tracked.

Contingencies are sometimes the difference between buying a sound investment or a money pit. If you don’t have contingencies, you may be forced to buy a property at a loss or lose your earnest money.

Real Estate Contingencies Protect Your Ass

Don’t get caught with your pants down. Contingencies are like a pair of suspenders that will keep you from exposing your bare ass to the world.

Real estate buyers should always use contingency clauses. Your purchase contracts are only as good as the contingencies you’ve written into them, as they dictate the terms of your purchase. If you don’t have them, you may find yourself spending a lot of time and money before your investment pays off.

When a friend purchased his fishing business, the wharf on the property had to be completely replaced. My friend wrote in a contingency that made the owner finish the task so that he could be on the open water on day one, generating a return on his investment right away.

If you handle your contingencies right, you should be able to open for business the day your receive the deed to the property.

Keep your pants up when you purchase real estate. Start with our investor quiz and we'll help with contingencies or any of your other investing needs. 

Real Estate Contingencies: A Guide For Buyers

The paperwork piles up fast in real estate. Like a nasty rodent problem, you need to stay out ahead of it.
Contingency clauses are very important to your real estate contract because provide they protection. Think of them as a suit of armor. Or a glue trap, if you prefer.

Here’s how to use real estate contingencies to your advantage.

A Beginner's Guide to Real Estate Contingencies

When Randy purchased his fishing business, the wharf on the property had to be completely replaced. Randy wrote in a contingency that made the owner finish the task so that he could be on the open water on day one, generating a return on his investment right away.

If you handle your real estate contingencies right, you should be able to open for business the day your receive the deed to the property.

A contingency clause says that your purchase is contingent on a number of conditions specified. So, if like my friend Randy, you insist on having a wharf replaced (or, more likely, a complete roof repair or rodent inspection), you are going to write those contingencies into your contract.

If you buy property and find that Ratatouille is cooking pasta in a kitchen full with water up to your ankles, then you haven’t been careful about your contingencies.

Real Estate Contingencies: RatThese are a few of the contingencies you might want to consider in a purchase agreement:

Appraisal Contingency

Simple enough. Your purchase is contingent on an appraisal that evaluates the property at or above the purchase value.

Financing Contingency

The purchase is contingent on the buyer obtaining financing terms acceptable to the buyer. Make sure your purchase agreement specifies that you must obtain acceptable financing. If your contingency simply says you will purchase upon obtaining financing, you could find yourself in trouble if the financing offers unfavorable terms. For example, if all you can afford is 7% on your financing, put 7% into your contingency as your acceptable financing rate for purchase.

This may sound confusing, but it’s actually pretty simple. If you can’t afford the financing, don’t buy. Make sure your contracts say as much.

Inspection Contingency

Get your property inspected and make sure that you approve of its condition before purchase. If you’re buying a fixer-upper, make sure that you aren’t putting more into repairs and than you can afford. Don’t buy a money pit. Buy a money-maker. You can ask the owner to make repairs or lower his price as contingencies.

Interested in learning more? Check out our articles, How To Assign A Real Estate Contract and Real Estate Contingency Clause Examples: How Buyers Avoid Getting Burned.

Other Things to Remember About Contingencies

1. Earnest Money: Make sure your contract states clearly that you get your contract money back if the owner fails to address any of your contingencies. If you don’t do this, you are going to risk losing a lot of cash.

2. Don’t Miss Deadlines: These clauses almost always have a deadline so give yourself enough time to meet them.

You need time to obtain financing. You need time to properly inspect the property. You time to review the seller’s disclosure documents. Two-week deadlines are the norm, but this is often ridiculous for anybody who actually plans to exercise any due diligence.

If deadlines are approaching and you need more time, ask the seller for an extension. If the seller refuses. Haul out your contingency and drop it on the table like a hot mic.

3. Get it in Writing: You need a hard copy, not a digital one. The pen is mightier than the sword, and in this case, the computer is as well.

Telephone calls and emails will not invoke contingencies unless a contract permits emails as notice. Make sure that you are communicating via whatever channel is required by the contract and its contingencies.

Make sure everything is in writing and sent to the seller on a date that can be tracked.

The Takeaway

Contingencies are sometimes the difference between buying a sound investment or a money pit. If you don’t have contingencies, you may be forced to buy a property at a loss or lose your earnest money.

Don’t get caught with your pants down. Real estate contingencies are like a pair of suspenders that will keep you from exposing your bare ass to the world. Real estate buyers should always use contingency clauses.

Your purchase contracts are only as good as the contingencies you’ve written into them, as they dictate the terms of your purchase. If you don’t have them, you may find yourself spending a lot of time and money before your investment pays off.

Keep your pants up when you purchase real estate. Contact Royal Legal solutions for help with contingencies, or any of your other investing needs. Set up your personalized real estate consultation in minutes with our online tool.

 

College Savings: Coverdell Education Savings Account Vs. 529 Plan

So, your little angel has graduated. The dream has come true. 

They are finally getting the hell out of your house. 

Let’s be real, though. They  aren’t going to last a second out there among the piranhas. You’ll sleep a little easier if you can give them a little leg up. To that end,you may want to start a college savings account.

Planning for college is tricky. Especially where your taxes are concerned. Here’s what you need to know.

There are two types of accounts that you can open to help your child graduate without a crippling amount of debt. 

You can reduce your decision between these account options to two accounts to one question: Do you want control over your investment options or tax-free contributions? 

Coverdell Education Savings Account 

A Coverdell Education Savings Account is set up to cover a child’s secondary education. The growth on your contribution is tax-deferred until the funds are spent. If they are spent on education, they are tax-free.

There is no tax deduction for the amount you contribute to a Coverdell, but you have some fantastic investment options and you can opt to self-direct. The rules are similar to those that cover an IRA.

 Coverdell has the following rules and benefits:

Coverdell Rules

Coverdell Benefits

529 Plan Account

The 529 Plan is invested in a state-managed fund and may be eligible for a state income tax deduction (contributions are tax deductible in 35 states). Money contributed to your 529 Plan account is invested into a state managed fund. A 529 has the following rules and benefits:

529 Rules

529 Benefits

College Savings Account Recap

Planning financially for college can be tricky, especially when it comes to taxes. As you can see, the main difference between the two accounts is that Coverdell accounts have the benefit of allowing you to decide how your contributions will be invested, but the money is not tax deductible.

On the other hand, contributions to a 529 Plan account must go to a state run fund, but that money is usually eligible for tax deductions.

 

Choose Royal Legal Solutions For Your 401k

Lots of companies claim to be 401k experts. You know what the difference is between us and them?
We’re actual tax attorneys. That’s right. Instead of having your finances planned by some guy with a printed certificate from an online university, you’ll get a real tax lawyer, as in an educated and trained tax professional. Some other Solo 401k providers will offer you Employee Retirement Income Security Act guidance that they are not qualified to give.
We also work with sharp, detail-oriented CPAs to ensure your compliance Additionally, we offer lots of free educational information on your part in keeping your 401k compliant.
 

Why You Don't Want To Skimp on Retirement Planning

Other companies will tell you that you don’t need a tax attorney or specialized professional to establish a 401k plan. They’re right. You technically don't. But if you want to save money and stay off the IRS naughty list, you want to get your 401k done and managed right. That's what Royal Legal Solutions can help you do.
The problem with trying to save money initially is that you'll end up paying to repair the damage in the long run. If you're unfortunate enough to hire a less-than-stellar outfit to create and manage your 401k, you'll end up needing an attorney to clean up the mess eventually. We’re just trying to save you that first costly step. Pass on the amateurs. Go with the pros at Royal Legal. Unless you enjoy extra attention from Uncle Sam.

401ks Work Best For You With Qualified Professional Assistance

The Solo 401k plan is based on the rules of the Internal Revenue Code. This is a complicated document that tax professionals are paid to understand. Royal Legal’s experts know the code inside and out. They make it work to your best financial advantage every time.
Royal Legal will help you retire earlier and wealthier. Other providers forget about you once your retirement plan has begun. You’ll be able to consult with our expert navigators when you get lost in some of the murkier waters of investment and retirement planning.

How Royal Legal Solutions Helps You Retire Wealthier

We take care of your annual maintenance so that you’re investment plan maximizes growth and always remains in compliance with IRS regulations.
We’ve helped thousands of people across North America achieve great success with their Solo 401ks. Call Royal Legal Solutions today for your personal retirement planning consultation. Let us help you achieve your financial goals.

Attorney Client

Attorney Client Privilege: Talking to Your Lawyer.
“I said Luca Brasi sleeps with the fishes and I want to know if my IRA is updated”.
If you tell this to your lawyer, he will probably call the police and turn you in yourself unless you have millions of dollars. Lawyers tend to be unscrupulous where money is concerned. Just ask anybody with money.
Now, while I’m sure very few of you are in the “murdering for the mob” business, so the parameters of attorney client privilege are undoubtedly less exciting in your financial parlance.
The point remains the same though. You should know what information is protected by attorney client privilege and what information is not. Violating the privilege might lead to catastrophe, or it might just be embarrassing. Either way, knowing when to keep your mouth shut is a handy skill that you need to learn.
Attorney client privileged information is that information that a lawyer is not required to give to anybody. Not the plaintiff who is suing you. Not your creditors. This information is even protected from government agencies except in more extreme scenarios, such as mob killings.
However, like so many legal concepts, attorney client privilege is multi-faceted. There are some common mistakes thattyou can make that will compromise your protection. If you fall under these exceptions, your confidential information can be opened up. Even if you’re squeaky clean, you aren’t going to like it when the IRS gives your finances a prostate exam.
If there was a third party present, attorney-client privilege is compromised. Anyone from your financial advisor, to your accountant, to your dear old mother who spends her days in chair by door waiting for you to get a phone call because it’s her primary form of entertainment. Your attorney may not have to talk, but there is nothing keeping your accountant from getting a subpoena, and there is nothing keeping Grandma from gossiping on bridge night.
So, you can do like mobsters do and keep your mob shut, or you can have your lawyer hire third party professionals like accountants. Your attorney can extend attorney-client privilege to other unscrupulous sorts, but you my friend, cannot. This is called a “Kovel” hiring and its origins are worth a read if you like legal history. You should really know
something about this. In recent cases the IRS has been dissolving extensions of attorney-client privilege and I’d hate to give you advice that gets you caught with your pants down.

So, in the meantime, be a gangster and keep your mouth shut.
Attorney Client privilege isn’t a carte blanche either. Only legal advice is protected. Companies with in in-house legal teams can struggle with this.
My man Randy had an employee at his old company who was a lawyer that handled assets. So, if Randy has a chart that organizes the company’s holdings that he gives to his lawyer, he knows that the chart is admissible. Even if it weren’t, once his employee shows it to every accountant and property manager who needs to see it, attorney client
privilege is meaningless.

The solution here is a lot like the last one. Stay-tight lipped. If you have documents that you only want to share with your lawyer, have your lawyer identify them as “Attorney Client Privileged” and keep them out of the hands of non-lawyers. Always tell your attorney what information is privileged when you share it so they can proceed accordingly.
In short, keep everyone on a need to know basis. When you give your attorney privileged information, keep it privileged through the endless web of secrets and lies that is financial law.
Cheers. This has been a Money Matters Matter.

How to Get Out of Annuities

Annuities promise some pretty amazing things including a lifetime of income for you and your partner. They also carry some very sizable fees. There are some benefits, such as no maximums on annual contributions and tax deferral, but they aren’t right for a lot of investors.

What is an Annuity and How Do I Get Out of One?

An annuity is a contractual agreement with an insurance company. You invest money with the company and they agree to pay you a specific amount of money over your life. Like most investments, you give up some money now and the insurance company will pay you later.
Most people who own an annuity with an IRA are seeking a new investment plan for those retirement dollars. Dumping annuities is harder to do than selling mutual funds or stocks. Which is a problem for those people who are realizing that their annuity isn’t working for them they want had hoped.

Cancelling Annuities: Beware the Surrender Penalty

You can cancel your annuity, but will be subject to a surrender penalty. There is no way around it. You get penalized if you take out your investment early, so short of taking a hefty financial hit, you have to wait for the time to elapse. During this surrender period they penalty usually will go down. It can as high as 10% at ten years, but the penalty will decrease by 1% a year until it reaches 0. Like so many things retirement related, you may have to practice some patience again unless you think an alternative investment is really worth taking the loss.
If you do bite the bullet and cancel, your funds need to stay within your IRA to avoid taxes and penalties with the IRS. You could get smacked with a double whammy here so keep that money where it’s going to grow.
A lot of people have found themselves stuck with annuities that aren’t working for them. It’s not an easy choice to make, but if you think it’s worth it, you can get out. Follow these tips to mitigate the loss if you want to increase the return on your investment.

Bottom Line: Know What You're Investing In

In the future, make sure you understand an investment before you make it.
If you're unsure of an investment, there are a number of questions to ask about potential investments. Doing your homework can save you a lot of money and grief. When in doubt, get an opinion from a qualified expert now so you won't regret your investment later.

11 Crucial Questions to Ask About New Investments

You want to hear a horror story?
As early as 1999 a forensic accounting and financial fraud investigator named Harry M. Markopoulos told the Security and Exchange Commission that it was legally and mathematically impossible to for Barry Madoff to deliver the gains he was promising.
He was ignored.
When it turned out that Madoff was a crook, people lost millions in the largest Ponzi scheme of all time.
Investment is a gamble, and where there are gamblers there are crooks. These are shark-infested waters.
How do you spot a deal that’s too good to be true even when the SEC can’t?
Well your first clue is that the deal looks too good to be true (see: BUBBLE).
You also need to understand the SEC isn’t there to look after your interests and they are guessing at all of this data the same way you are. You need to protect yourself against crooks.
Here are the 11 questions you need to ask of a potential investment opportunity if you want to avoid being a sucker.

1. Does This Help Me Diversify?

Diversity. The first commandment. This is sort of a reverse-engineered security system. If you own investments in a lot of places, if one of them turns out to be a junk, you aren’t sunk.
This doesn’t really protect your swimmers from sharks, rather, it makes sure that you have so many swimmers in the water that if you lose a few, your species will carry on. Again, think survival. If a swimmers breaks away to look for big opportunities in uncharted waters, afford to lose him. This way, you can take risks in a calculated way to maximize returns and give yourself lots of security against unforeseen economic shocks.

2. Am I Caving to Pressure?

We learn this one in high school. If you’re being pressured to do something that you don’t think is good for you, don’t do it! This is such an old scam it’s a cliche. They use this bogus trick in every finance movie from Wall Street to the Wolf of Wall Street. In Boiler Room you watch a man’s life come undone because he invests with crooks following a classic scene in which the protagonist pressures him to buy big into stocks that are a scam.
This one is easy, if you’re being pressured to buy, it’s too good to be true. Hard Pass.

3. What Evidence Do I Have?

Don’t invest in anything until you see evidence. Would you invest in stocks sold on real estate in heaven? I know you’re a believer, but don’t be a sucker.

4. Is it in Greek?

If you don’t understand the business model, the revenue stream or the way in which the business generates a return, don’t put your money in. If you can’t make sense of it, it’s because it doesn’t make sense.

5. Am I Being Asked to Accept a Shady Commission?

If you’re told you can receive commissions for bringing in other investors, you’re being taken for a ride. You need to be licensed to receive commissions on investments.
You aren’t allowed to sell side bets in a casino unless you are the casino. The world of high finance is greedy. If the investment is sound, they don’t need help selling it. This is illegal, which means the business in unscrupulous. They will screw you over.

6. Can I Get a Deed or Trust?

Always collect a paper trail. If you lend somebody money, get it in writing. If these guys disappear, it will be hard to get anything back. It will be impossible without documentation. If a company doesn’t have letterhead, then it’s not a legitimate company.

7. Is This Business on File with the SEC?

You can get in touch with the SEC and make sure they've filed. And you should.
Once again, legitimate businesses take legitimate steps to be legitimate. Trustworthy companies are going to be transparent companies. You want outlines of the investment’s projected growth and the use of funds; you want to know what the managing company’s president ate for lunch. Make sure the company clearly outlines what you are entitled to as an investor.

8. Background Check: Are These People Credible?

You need to do more than a Google search here. Investigate the people who are handling your money. Banks do a credit check. So should you. Find out whom they’ve worked for. Get a damn resume!
You need to be vigilant. This is your ship and as the captain, you’re going to sink with her. It’s not unreasonable to want to who is managing your funds, unless they have something to hide. If a bank won’t clear them, it means they aren’t safe.

9. What Do the Experts Think?

Time to call in the cavalry. If you’ve done your due diligence and you’re ready to veto an investment, you need to get a real pro to look at it next. A real tight lawyer. The kind of person who likes saving money the way you like spending it.
Two heads are better than one and even if an investment is tight, there still might be some nonsense in the fine print. Spend a few dollars and get a pro to double-check your work. Some of these guys write insane salaries into their contracts so make sure your lawyer has your best interest at heart. Don’t use your money to make money for other people.

10. What Does a Veteran Investor Think?

As long as you’re getting a second opinion from your lawyer, why not get a more experienced investor to take a look as well. They will see things you cannot see. They will ask questions you will not ask. They may even want to buy in. If they think it is worth investing in, there’s a good chance they are right.

11. Don’t Invest What You Can’t Lose.

Okay, this isn't so much a question as it is a strong suggestion. No matter how well you play your cards, you can still lose to the luck of the draw. Don’t invest money you cannot afford to lose. A pushy salesmen trying to take your life’s savings is a conman. Invest with someone who understands your interests and your limits.
Bottom Line: If you do not know what you are doing, you don’t want to be sitting at the table. Gamble within your means. If you want to play a little home game with low stakes, that’s exactly where you should start. Only sharks survive among sharks. You can sharpen your teeth, but it takes time. Be patient. LEARN. Get help. If, after that, an investment still confuses you, it’s time to cash in your chips and walk away.

Protect Yourself from Swimming Pool Liabilities

For those that don't remember, we're going to start with a real case that was all over the news. You may have even heard about it at the time.

We're doing this to make some general points about the risks all pool owners face. Being rich and famous won't save you from an improperly maintained or managed pool. It sure didn't help Demi Moore.

Swimming Pool Lawsuit Case Study: What Happened to Demi Moore

Demi Moore’s assistant had a pool party in 2015 at Demi Moore’s California home where alcohol was served. Somebody drowned. It was an unfortunate accident and Demi Moore, who wasn’t even at the party, was quickly swimming in litigation. 

It sounds so ridiculous it could be the plot of one of Demi’s erotica thrillers.

There are carefully outlined state safety regulations that you have to comply with if you don’t want to end up on the witness stand with Tom Cruise screaming at you. In most states you are responsible for keeping your pool reasonably safe.

It doesn’t matter that it was Demi’s assistant who held the party. Demi owns the pool. Demi is responsible.

Understanding How Swimming Pool Lawsuits Happen 

There are two ways you can be considered too lazy, cheap or careless to own a pool under the law:

#1 You violate a local pool safety law

In this case, you’re strictly liable, like Demi Moore.

The solution here is simple. Bring your death trap up to code. Find out what the law is and comply. Build a fence and put on a pool cover. These are the basics.

# 2. Your pool is deemed “unsafe”

This is trickier, from a liability standpoint. Broken fences, rusty nails, lack of depth markings, and more can make a pool unsafe. Once again, this varies, but I’m sure through the use of the computer you are using to watch this video, you can figure out your local regulations. Better yet, contact an asset protection attorney to help you understand them.

Here’s another issue, and this one is key. If you party by your pool and your friends enjoy drinking cocktails, you may want to consider hiring a lifeguard for the afternoon. Preferably a sober lifeguard.

It’s a small expense that may keep somebody alive. If the conditions at the party are deemed unsafe (SEE: Rooftop cannonball championships) you might be on the hook.

Remember, like Demi, you might be liable even if you are not at the party so be sure that there are safety measures in play. It’s the summer time, so party hard. Just don’t end up paying for it.

In short, if you own the pool, you are responsible for its compliance with safety regulations. Landlords must keep this in mind when considering tenants. But you also have to make sure that everything you own is up to those same safety standards. Sorry fellas, but it’s not all collecting rent checks. Even trespassers can hold you liable if they get hurt in your unsafe pool.

How to Prevent Swimming Pool Lawsuits

Here’s a short summary of what you need to do if you want to avoid fishing dead bodies out of your pool and the costly lawsuits that come with it.

1. Comply with all safety requirements for your city and state. If you can’t afford them, you can’t afford a pool. But you’re a good little saver. Maybe next year.
2. Include a clause or separate pool disclosure and waiver. This is a tip for landlords or investors with rental property. Taking a few minutes to do this could save your ass in court. That way if some fool wants to work on his swan dive after his tenth martini, he’s already assumed the liability at least in part.

Your waiver should include the following:

Asset Protection with Royal Legal Solutions Can Keep You Above Water

Losing your investment, as noted above, is terrible. Losing your house is much worse. When it comes to owning a pool, be PROACTIVE with your liability before you have to be REACTIVE to a lawsuit.

Yes, there is work, responsibility and expense here, but you need to own a pair of big boy trunks before you go swimming in liability. Royal Legal Solutions can help you address legal matters relating to  your pool and construct an asset protection plan that keeps you out of court. If you would like advice on how to navigate this issue or begin protecting your assets like the pros, send us a message take our quick investor quiz for landlords and investors.

A Series Of Landmark Prohibited Transaction Cases, Part Three: The Kellermans

This article is part 3 of a series with the goal of educating you, the Self-Directed IRA LLC investor, on how to successfully invest and avoid triggering prohibited transactions.

If you've read parts 1 and 2, get ready for something completely different. The case we're going to go over today is about bankruptcy, something I hope you never go through!

Oddly enough, with Self-Directed IRA LLCs, you have a bit of an advantage as far as protection from creditors is concerned. But as you will find out by the end of this article, once you go in too deep, there's no way out.

The Beginning: The Kellermans File For Bankruptcy

The Kellermans, for whatever reason, decided to file for voluntary Chapter 11 bankruptcy. Prior to filing for bankruptcy, Barry Kellerman created an IRA, which as of October 27, 2008, had a reported value of $252,112.67.

The named administrator of the IRA is Entrust Mid South LLC. The IRA is Self-Directed by Barry Kellerman, who made all of the decisions related to the issues raised in the objections.
At the start of their case, the Kellermans valued their IRA at $180,000.00 and claimed the entire fund as exempt under the Bankruptcy Act.

The trustee in the bankruptcy case against the Kellermans objected to the Kellermans’ claimed exemption in the IRA on the basis that it was no longer exempt from taxation as of the commencement of the case and is not eligible for exemption.

The trustee alleged that the IRA lost its exempt status in 2007 because Barry Kellerman directed the IRA to engage in prohibited transactions involving disqualified persons.

The Kellermans' LLC and Its Alleged Prohibited Transactions

The alleged prohibited transactions involved the 2007 purchase of four acres of real property located near Maumelle, Arkansas. Panther Mountain Land Development LLC helped setup the purchase.

Barry Kellerman and his wife each own a 50 percent interest in Panther Mountain. To effect the acquisition and development of the four-acre property, the IRA and Panther Mountain formed a partnership whereby the IRA contributed property and Panther Mountain contributed property and cash.

The purchase took place to assist in the development of two nearby tracts of approximately 80 and 120 acres owned by Panther Mountain. Controlling the 4 acre tract assisted in the development of the other Panther Mountain properties.

The Plot Thickens

Interestingly enough, Panther Mountain filed its own Chapter 11 bankruptcy on September 20, 2009 after the Kellermans filed for bankruptcy on June 3, 2009.

Even more interesting is that the Kellermans admitted that they are “disqualified persons". Specifically, Barry Kellerman is the beneficiary of the IRA and a fiduciary because he exercises “discretionary authority” and “discretionary control” over the IRA as the owner.

Dana Kellerman qualifies as a “member of the family” as the wife of Barry Kellerman. Panther Mountain is a “disqualified person” according to 4975(e)(2)(G) because Barry Kellerman asserts a 50 percent membership interest. Likewise, the Entrust Partnership is also a disqualified person according to subsection 4975(e)(2)(G).

Remember: in this case it is already clear that a prohibited transaction occurred. The debtors are only seeking bankruptcy protection.

The Court Rules Against The Kellermans

Based on the Kellermans' admittance and the court's findings on disqualified persons, all that remained was a determination of whether a prohibited transaction occurred that terminated the tax exempt status of the IRA.

The court concluded that in 2007, Barry Kellerman engaged his IRA in transactions including the purchase of the real property with IRA funds and the cash contribution of $40,523.93 made by the IRA to the Entrust Partnership.

Both collectively and individually, both the non-cash contribution and the cash contribution are prohibited transactions with disqualified persons according to IRC Sections 4975(c)(1)(B), (D), and (E), which rendered their IRA non-exempt.

Hidden Details

What was not stated above is that, during Panther Mountain's own bankruptcy filings, (which were happening around the same time) they made it seem as if they were using the Kellerman IRA as a lending source for the purchase and development of property.

So then, the real purpose of these transactions was to directly benefit Panther Mountain and the Kellermans in developing both the four acres and the properties owned by Panther Mountain.
Here's a shocker. The Kellermans each owned a 50 percent interest in Panther Mountain and stood to benefit substantially if the four acre tract and the adjoining land were developed into a residential subdivision.

Case Outcome & Summary

The Kellerman case involved a construction company's owners, the Kellermans, who were also LLC co-owners. They were denied a claim for bankruptcy estate exemption for Mr. Kellerman’s Self-Directed IRA.
The court found that Mr. Kellerman who, along with his wife, were disqualified persons who had engaged in prohibited transactions by:

  1. By directing their IRA to deliver property as a non-cash contribution to an IRA and LLC.
  2. By making cash contribution to partnerships to develop property.

You can view the full case here.

What Real Estate Investors Can Learn From The Kellermans 

This case is a clear example that using retirement and personal funds together in the same transaction can trigger a prohibited transaction.

The Kellermans entered into a transaction with their IRA funds, which involved a disqualified person, in this case Panther Mountain. Because they did that, they then had the burden of proving the transaction didn't violate any of the self dealing or conflict of interest prohibited transaction rules under IRC Section 4975.

A burden that, as this case shows, can be difficult to prove.

So here's the lesson we've all learned from the Kellermans: Using retirement funds and personal assets in the same transaction can potentially trigger the prohibited transaction rules.

Don't end up like the Kellermans!  If you're interested in learning more about Self-Directed IRA LLCs, we have many free resources for you to read about investing with these entities. If you're going to set up your own, get the job done right: contact Royal Legal Solutions now.

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

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

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

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

1. To Purchase Non-Traditional Assets

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

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

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

2. Checkbook Control

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

3. Asset Protection

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

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

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

4. To Pool Assets with Other Investors

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

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

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

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

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

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

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

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

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

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

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

What Can't You Purchase With An IRA?

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

What Are The Most Popular Self Directed IRA Investments?

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

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

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

What are the Prohibited Transaction Rules?

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

Who are Disqualified Persons?

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

The Bottom Line

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

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

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

Are You Eligible For a Solo 401k? What About Your Employees?

Chances are if you're reading this you've probably heard of a solo 401k, which our friends at the IRS call a "one participant 401k." But what about solo 401k eligibility? Before you waste 5 minutes of your life reading my masterpiece, I'd like to let you know: if you're not self employed you aren't eligible for a solo 401k.

I know, some people just got their hearts broken. It'll be okay, trust me. You've got options. And you can read about the Roth IRA and conventional IRAs/401ks from our previous posts on the subjects. Anyway, for those of you who are self employed and interested in learning more about solo 401ks, read on.

Solo 401k Basics

The solo 401k was born out of the Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA. The idea is to give kick-ass entrepreneurs who'd rather work for themselves than "the man" an opportunity for tax-deferred retirement savings.

With that introduction out of the way, you should know there are some limitations to solo 401k eligibility.

What Are The Limitations Of a Solo 401k?

A solo 401k is limited to companies with one employee (you as the owner) although if you have a spouse then he or she can also contribute to the plan. Partners or shareholders can be included in the plan as well.

Your company can have part-time employees who are excluded from the plan, as long as they work less than 1,000 hours a year, or belong to a union or are non resident aliens.

But if your company takes on full time employees who aren't married to you (the boss), then your solo 401k will unfortunately have to be converted to an old-school 401k plan.

The solo 401k plan is available to anyone who is already a business owner or who will be establishing a sole proprietorship and does not have, or plan to have, full time employees.

The solo 401k is great for consultants, freelancers, home businesses, and independent contractors. So now I bet you want to know about the contribution rules huh. As a good host, I must oblige my audience.

Solo 401k Contribution Rules

If you're under the age of 50, you can make a max contribution in the amount of $18,000. This amount can be made before or after tax.

On the profit sharing side, your business can also make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to $36,000. That comes out to a combined max of $54,000.

Note: If you're over the age of 50, the contributions are the same, except you can contribute $6,000 extra.

The 2 Kinds Of Solo 401k Contributions

The solo 401k plan accepts two types of contributions: salary deferrals and a profit sharing contribution. Both are tax deductible and grow tax-deferred until withdrawals.

You can withdraw money from your solo 401k penalty free after you turn 59 1/2. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals must begin at the age of 70 1/2--but this rule doesn't apply if you go Roth style.

To fund a solo 401k, you can rollover funds from your previous retirement plans, IRAs etc,  by setting up a Trust account for the solo 401k and directly transferring your funds from the old custodian to the trust bank account.

A Trustee needs to be designated to hold the assets of your solo 401k, preferably you. However, if you do serve as Trustee, you cannot legally benefit directly from the trust, enter into a transaction with the trust, or use the trust as your personal fund.

Since a solo 401k is an IRS qualified retirement plan, it has to have a written 401k plan document that establishes the provisions of the plan. It's a lengthy document which will explain how the plan works and operates.

For example, the plan document will explain how you are able to borrow up to 50% or $50,000 (whichever is greater) from your solo 401k tax free, and literally for free. You pay interest, but the interest is paid into your account, so you're really paying yourself.

What Are The Technical Requirements For a Solo 401k Plan?

Great question! To be eligible for a solo 401k plan you must meet two eligibility requirements:

Allow me to explain these two lines in detail.

The Presence of Self Employment Activity

This basically means you should be the owner/operator of one of the following: sole proprietorship, LLC, C Corporation, S Corporation, or Limited Partnership where the business intends to generate revenue for profit and make contributions to the solo 401k plan.

There's no set amount of revenue for profit you should be generating. In most cases the IRS will consider you eligible if your business is legitimate and run with the intention of generating profits. You can be self employed either part time or full time, and even have another job somewhere else.

You can also participate in an employer’s 401k plan alongside your solo 401k. But if you choose to do this, your contribution limits will not be raised. (So a few thousand dollars contributed to your employer 401k will mean a few thousand dollars less you can contribute to your solo 401k.)

The Absence of Full-Time Employees

As you already know, a solo 401k is available to self employed individuals or small business owners who have no other full time employees.

The following types of employees are excluded from solo 401k coverage:

If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will have to include them in any plan you set up. You can get around this by employing independent contractors.

Once you have a solo 401k, you'll be able to invest in anything from real estate to cryptocurrency and more!

IRA & Real Estate Investments: What You Need To Know

If you don't have a self-directed IRA LLC, you've probably at least heard about them. Especially if you're a regular reader of this blog. Once you start looking for ways to invest your retirement funds outside of Wall Street, you'll realize there is no better way to do it than with an IRA-owned LLC.

The cost to establish a self-directed IRA LLC varies on where you go, but it usually will cost between a few hundred to about a thousand. Once you establish an LLC, a bank will serve as your custodian, which means you pay less fees and gain the ability to quickly invest your retirement money in anything except collectibles and life insurance.

We're talking about using the IRA for real estate investments, but the following are some other kinds of investments that can be made with your self-directed IRA LLC:

As you can see above, using a self-directed IRA LLC to make investments allows you to make traditional as well as non-traditional investments, such as real estate or cryptocurrency, in a tax efficient manner.If you'll direct your attention below, you can read about the most popular reasons to purchase non-traditional assets with your self-directed IRA LLC.

The Ability To Invest In What You Understand

One of the oldest pieces of advice in the world of investing is "invest in what you know". The chances are you've probably never met the person managing that mutual fund, or the CEO of that company doing an IPO next week.
Compare them to Real estate. You grew up around real estate. Remember when you bought your first home? Real estate is the one form of investing the average American knows about more than any other.
Real estate is just like any other form of investing, it's not without risk, but many retirement investors feel more comfortable buying and selling real estate than they do stocks.

Diversification

This is a no-brainer. You're always going to hear people talking about the importance of diversity. But the truth is there isn't much diversity on Wall Street. When you get a self-directed IRA LLC you won't just be thinking outside the box, you'll also be investing outside of it too!

Cryptocurrency

Cryptocurrency is one of the fastest growing investments. As of if this writing, the value of Bitcoin continues to skyrocket. For years it has been speculated that the price would crash, but so far it hasn't. With a self-directed IRA LLC, you can jump on the band wagon and cash in on the profits.

Loans & Notes

If you used a self-directed IRA LLC to loan money to a friend, all interest received would flow back into your IRA tax free. Whereas, if you lent your friend money from personal funds (non-retirement funds), you would pay taxes on the interest received.

Inflation Protection

Inflation can have a drastic impact on your retirement portfolio because it means a dollar today may not be worth a dollar tomorrow. Inflation increases the cost of things, so not only is your money worth less, everything also cost more.
Investing in real estate can provide natural protection against inflation, as rents tend to increase when prices do, acting as a hedge against inflation. People will always need homes to live in.

Just remember, being protected against inflation can mean the difference between retiring and working the rest of your life.

Hard Assets

Hard assets are things we can see and touch, like real estate and gold. They're considered non-traditional investments as well. Do you know what it feels like to drive by a building or property you own with your family, point to it, and say "We own that?" Once you invest in hard assets, you will!

Tax Deferral

Tax deferral literally means that you are putting off paying tax. Tax deferral means that all income, gains, and earnings, such as interest, dividends, rental income, royalties or capital gains, will grow tax free until you withdrawal (or distribute) the funds.

This means you can grow the money in your retirement account at a much faster pace and retire many years earlier. And, when you withdraw your IRA funds in the form of a distribution after you retire, you will likely be in a lower tax bracket and be able to keep more of what you saved.

Real Estate & Raw Land

Okay so I know I already mentioned real estate, but there's more you should know about using a self-directed IRA LLC.

Real estate is the most popular investment made with a Self-Directed IRA. Let's look at an example to see why.
Let's say you purchased a piece of property with your Self-Directed IRA for $200,000 and later sold the property for $150,000, the $50,000 gain would be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and, depending what state the property is in, state taxes.

Private Companies

With a self-directed IRA LLC you are permitted to purchase an interest in a privately held business, unless it's held by an S corporation.

Note: Remember to avoid the triggering a prohibited transaction!

Stocks, Bonds & Mutual Funds

By now you know that you can invest in just about anything. The advantage of using a self-directed IRA LLC is that you are not limited to investing only in traditional Wall Street investments. 

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 401k or IRA you should weigh the following tax options:

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 401K, the following income tax rules apply.

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:

 

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:

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.

Clash Of The Titans: IRA Vs 401K

You've probably heard a lot about 401ks and IRAs. But do you know how they compare to each other? More importantly, how do you know which is better for you?

401ks are usually employer-sponsored retirement accounts. Unfortunately, not everyone has access to those. Meanwhile, anyone can open a Roth IRA or Traditional IRA. To get the most benefits possible, you should max out contributions to both accounts if you're able to.

But maxing out both may not be an option for you. So the real question here is, should you contribute to your IRA or 401k first?

I'll give you two answers, one will be a short "quick version" while the other will be a detailed comparison and contrast analysis via chart below (as in, the actual "Clash of the Titans" you came here for.)

Let's start with the quick and dirty version.

The Quick Answer: IRA Vs. 401k

The account you should contribute to first depends heavily on whether your employer offers a 401k with a company match. Scroll to the option that applies to you.

Contribute to your 401k only to the point where your employer will no longer continue matching your contributions. This way, you can get as much free money as possible. Then consider an IRA.

Start with an IRA first. Opening one is free. After contributing up to the limit, contribute to your 401k for the pre tax benefit it offers.

 

A Detailed Comparison of The 401k, Traditional IRA, and Roth IRA: Clash Of The Titans

 

  401k

 

Traditional IRA Roth IRA
contribution limit $18,500 for those under age 50.

$24,500 for those age 50+.

$5,500 as a combined IRA limit. $6,500 for those age 50+.
Pros Employer contribution match. (If offered.)
Higher annual contribution limit.
Contributions lower taxable income in the year they are made.
Eligibility is not limited by income.
Able to borrow up to $50,00 or 50% of your 401k's value, whichever is greater.
Large investment selection.
If deductible, contributions lower taxable income in the year they are made.
Large investment selection.
Qualified withdrawals in retirement are tax free.
Contributions can be withdrawn at any time.
No required minimum distributions when you retire.
Cons No control over plan and investment costs.
Limited investment selection.
Distributions in retirement are taxed as ordinary income, unless a Roth 401k.
Required minimum distributions start at age 70 1/2.
Contribution limits are lower than a 401k.
Deduction phased out at higher incomes if you or your spouse are covered by a workplace retirement account.
Distributions in retirement are taxed as ordinary income.
Required minimum distributions begin at age 70 1/2.
Contribution limits are lower than a 401k.
No immediate tax benefit for contributing.
Ability to contribute is phased out a higher incomes.
Bottom line Fund a 401k first if your company is willing to match your contributions. Fund an IRA first if your 401k doesn't offer a match or if you can't get a 401k.

If you max out your IRA, start funding your 401k. Are you not sure which IRA is best for you?

If you plan on being in a higher tax bracket when you retire, choose a Roth. (Yea. I know that isn't the easiest thing in the world to predict.)

Keep reading to read more useful information about IRAs and 401ks, along with the conclusion to this article. Spoiler alert: we are going to discuss a nontraditional option that you might consider--especially if you're a real estate investor.

  401k Traditional IRA Roth IRA
Tax treatment of contributions Contributions made with pretax dollars, which reduces your taxable income on a dollar for dollar basis. Some employers offer a Roth 401k option, funded with after tax dollars.
Investments in the account grow tax deferred. If Roth 401k, investments grow tax free.
Contributions are deductible. Higher income and participation in a workplace retirement account (for you or your spouse, if married filing jointly) may reduce or eliminate deduction.
Investments in the account grow tax deferred.
Contributions are not deductible.
Investments in the account grow tax free.
Investment options Limited choice of investments.

Some plans have a brokerage option with access to investments outside of the plan.

Any investment available through your account provider (stocks, bonds, mutual funds, etc.).
Taxes on withdrawals after age 59 ½. Distributions are taxed as ordinary income. If Roth 401k, distributions are tax free. Distributions are taxed as ordinary income. Distributions are tax free as long as the account has been open for at least five years.
Early withdrawal rules before age 59 ½. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Contributions can be withdrawn at any time without taxes or penalties.

Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes.

Best Practices For Traditional 401ks and IRAs

If you've got enough money, max out both. Otherwise, fund your 401k to the point where you max out your employer contributions for the year, then max out your IRA. And if you have a lot of money to invest, consider establishing a Self Directed IRA LLC.

Note: You may also want to check out our related articles:

What Is a Self-Directed IRA LLC & Should I Get One?

A Self Directed IRA LLC offers the same benefits as a Traditional or Roth IRA, but with even more investment opportunities available for you to choose from, such as real estate, along with asset and liability protection up to one million dollars.

Fair warning though, a Self Directed IRA LLC requires more involvement on your part and is not intended for passive investors. I'll tell you this though. If you're already investing in real estate with your personal funds, there's no reason for you not to get a Self Directed IRA. If you're considering this option, you may find our previous article on investing in real estate with your Self-Directed IRA LLC helpful.

If you still have questions about IRAs, 401ks, or lesser-known retirement options, feel free to ask them below or contact us.