Crowdfunding Real Estate: Is it A Safe Investment Strategy?

As with anything new that breaks from tradition, crowdfunding real estate investments stokes fear in some. We find many of the more irrational fears to be iterations of Internet-phobia backed by little evidence. Some people simply hear words like “Internet-based” and assume risk without actually getting the facts about crowdfunding for investors. The truth is, as usual, more complex. Like anything in the world of real estate or investing, crowdfunding is not without risks. But those risks can be mitigated, and there are also benefits to using crowdfunding platforms.

What is Crowdfunding? How Does Crowdfunded Real Estate Investing Work?

Crowdfunding is a concept you may already be familiar with through sites such as GoFundMe, Kickstarter, and certain charity platforms. If not, these are sites that allow a person’s social network to contribute toward a pre-selected cause, whether that’s helping a friend repair a car or kicking in on another’s healthcare costs. The same principle can be applied in real estate since 2012 legislation made some critical changes in law that permit crowdfunded real estate investing.

Prior to that point, investors were usually career pros who had plenty of capital that many Americans simply don’t have access to. Crowdfunding has helped change this trend by opening up real estate.

As you many have gathered, this more open market makes it possible for more people to invest. With crowdfunding, you don’t need a lot of money to invest in a portion of a property. Other benefits include the fact that more established crowdfunding platforms are highly transparent, allowing you to do your own due diligence more easily, though many services give you a boost by also thoroughly vetting the investments listed. Crowdfunding allows for easy and flexible diversification. You can easily get in on a broad variety of types of assets, strategically spreading out your wealth and creating a safety net.

Risks of Crowdfunded Real Estate Investment Plans

Regular readers may recall that the only two ways to lose money in real estate are bad deals and lawsuits. Essentially, most of the risk of crowdfunding is that investors could make bad deals. The reason why actually has nothing to do with crowdfunding specifically. Any investor can make a bad deal for any number of reasons, regardless of how it’s funded.

Another frequently expressed risk is that the investors who are getting into the market via crowdfunding platforms won’t be as knowledgeable, and therefore, more likely to make bad deals. Neither problem is insurmountable.

How to Address the Major Risks of REI Crowdfunding

Let’s take a closer look at the knowledge concern. Fortunately, you can always do things to increase your level of knowledge about this or any subject, and you’re actually already doing it right now for free. Keep reading. Perform your own research, talk to investors who have used the tactics and tools you’re thinking about using yourself, and vet potential platforms carefully. Due diligence is ultimately your responsibility. If still in doubt, contact an expert for help. Taking all these steps thoroughly and in earnest will close knowledge gaps.

As for making good deals, experience is a fine teacher, but mentors help too. Having a qualified team of experts on hand to look at your deals, assist with business structures, and develop tax strategies can also be incredibly valuable.  Our skilled real estate attorneys can assist you with all of this and the legal structures that will best protect your new assets.

Retirement Plan Options: All About Indexed Universal Life Insurance

When making business decisions that affect your long-term goals, like what types of investments to make with your retirement dollars and which vehicles to use, it really is best to be aware of all of your options. We frequently talk about the Solo 401(k) and Self-Directed IRA as tools for funding your retirement. But what about life insurance? And what about the stock market? What if we told you there is a tool that allows to to reap some benefits of both? It's called Indexed Universal Life Insurance--and some investors have found it a useful addition to their retirement plans.

What Is Indexed Universal Life Insurance?

Indexed Universal Life Insurance (IUL) plans are a variety of permanent life insurance plan that features a cash-building element. One primary benefit of these plans is that the policy holder gets some of the gains of being associated with the stock market without all of the risk Wall Street is famous for. This is in no small part because of how these policies are designed. IULs earn in part because they are directly linked to a market index, such as the Dow or the S&P 500.  Any gains remain within the policy, albeit a cap rate will limit how much you can make. However, you are protected during a particularly bad year for your index with an IUL. The worst case scenario with these plans is that you make nothing, but you never actually lose money no matter how poorly your index performs. The protection of your principal is actually derived in part from the same cap rate that limits your gains.

How much money do policyholders stand to make? Historically, returns run between 5-9%. The S&P Index has actually returned at 9-11%, but the upside limit on UILs stems from the account's cap rate. For this reason, many advisors argue that the UIL can make a wise addition to a retirement or estate plan once more traditional and self-directed accounts are maxed out.

Tax Benefits of Indexed Universal Life Insurance (IUL) Plans

There are three key tax benefits of IULs. First, you may pay into the policy with pre-tax or after-tax funds. Withdrawals from the policy may be made tax-free if you are under 59 1/2. Such withdrawals are regarded as loans, with your death benefit serving as collateral. Any funds paid out to the beneficiary are also tax-free, including normal benefits upon your passing. This is true regardless of their value.

Ask the Experts at Royal Legal Solutions About Your Retirement Planning Options

Regardless of where you are in the retirement planning process, Royal Legal Solutions an assist you. We have extensive experience educating investors about self-directed investment options. Many of our investor-clients love our Solo 401k information, product, and compliance services. Our Self-Directed IRA services can also be helpful for retirement planning, as the SDIRA is yet another vehicle that allows you to diversify and take total control of your investments. To determine which of the available retirement planning strategies are best for you, consult with one of our experts at Royal Legal Solutions. You may also contact us with any questions you may have about your options.

Three Quick Estate Planning Tips to Avoid Later Problems

Approximately half of Americans fail to make an estate plan, which can be a major mistake. Real estate investors have even more to lose without thoughtful estate planning. So what are some of the tools that we use for an effective estate plan? What can you do today to make life easier for your heirs once you are gone?

Read on to learn about three tips that you can use now.

Get Your Estate Planning Paperwork in Order

This first tip pertains mostly to individuals who have already established an estate plan, or are using legal structures to protect real estate. You want to make sure all of your documents--deeds, trusts, and life insurance--match up with your estate plan. If you designated one person as the beneficiary of a land trust, for instance, naming another person in your estate planning documents will not "cancel" the original beneficiary designation. Taking the time to line up all of your legal documents with your wishes now will help ensure that they are carried out. Similarly, you want to keep your estate plan updated. Any time you buy or sell a major asset, you should update your estate plan.

Stay Out of Probate Court

Probate Court can be a miserable, emotionally experience for everyone involved. The good news is that you can spare your family from ever having to handle probate with a single document: a revocable living trust. Some people believe a will alone is sufficient, but this is a myth. A will must go through probate court. To make things easier on your grieving family, set up a living trust. You may specify in this document which assets go to whom. Some investors use this in conjunction with a "pour-over will" to easily transfer ownership of a business.

Use Trusts Strategically in Your Estate Plan

Trusts are a critical part of estate planning, particularly if you have children or other under-age benefeciaries. A trust allows you to designate funds for a particular individual. As an added bonus, when assets are transferred to heirs over the age of 18, the heir receives the benefits of asset protection and creditor protection. Such benefits are not available to heirs receiving assets in a Probate Court context.

Bottom Line: Get Professional Estate Planning Help and Use All of Your Tools

If the discussions about the finer points of Probate Court and the different types of trusts make your head spin, that's okay. That's where attorneys come in. When planning your estate, you will always want the guidance of an experienced lawyer familiar with these issues and more. If you have many assets or a high net worth, getting professional help is even more important.

 

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

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

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

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

Checkbook Control

What is Checkbook Control?

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

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

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

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

What is a Trustee for a 401(k)?

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

What Does This Mean For Your Retirement Account?

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

 

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

Charitable contributions are a popular strategy among the wealthy for lowering tax payments. But this method isn't exclusively for the Michael Dells and Kim Kardashians of the world. Investors from all income levels, including you, can use it too. But even savvy investors don't always know that charitable gifts can be made from retirement accounts. So whether you simply want to donate money from your 401(k) to a cause close to your heart, save on your taxes, or both, this article is for you. Read on to learn more about your options for giving charitable gifts with your Self-Directed 401(k).

Why You Should Consider Giving Your Retirement Funds to Charity

The funds in IRAs and 401ks are among the most heavily taxed that the average investor will hold, and redirecting them towards charity can make a meaningful difference. Charitable donations help you save money by reducing your taxable income. This is why many highly wealthy individuals give in large quantities. Sure, many of them are philanthropic at heart, but there is also a distinct tax advantage to donating. The higher your taxable income, the greater your tax responsibilities when Uncle Sam comes around to collect his bills.
Giving to charity also qualifies you to receive a Charitable Gift Tax Credit. Literally anyone can take advantage of this. Generally, the credit is computed by taking the market value of an item or actual amount of cash donated, then subtracting the percentage of your tax bracket.
Strategic donations can lead to thousands returning to your pocket. Of course, there are limits: you cannot donate more than half of your income in a given year. Similarly, for these benefits to apply, you must itemize each donation.

What Options You Have For Giving to Charity

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

Which Options Are The Most Beneficial?

While any of these options is certainly beneficial and altruistic to the receiving organization, smart investors may be wondering which will benefit their own bottom lines. You may be surprised to learn that retirement and life insurance donations are among both your strongest and lesser-known gift choices.
Many potential donors do not know much about life insurance or retirement plan asset gifts simply because charities are less likely to request them. Many nonprofit organizations have a need for immediate cash that is simply not addressed with these types of donations. They are nonetheless useful for the charities--and you.

Ways to Give To Charity From Your 401(k)

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

Option 1: Donate Directly From the Plan

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

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

Naming the charity of your choosing as a beneficiary works the same way as designating any other beneficiary. However, this option has the added advantage of allowing plan funds to pass through to the charitable organization completely tax-free. If you have tax-deferred funds, this is actually the smarter expense than passing those same funds on to your heirs. Your heirs would have to pay the taxes, but the charity does not. Though this may not directly benefit you as much, it is certainly the most efficient use of money that would otherwise be gifted to the U.S. Government. That you can control the funds by selecting any qualifying charity means you have the luxury of supporting a cause you truly believe in.
 

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

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

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

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

Sole Proprietorship Solo-K Deadlines

Elective Deferrals

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

Profit-Sharing Contributions

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

S-Corp or C-Corp Solo-K Deadlines

Elective Deferrals

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

Profit-Sharing Contributions

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

Royal Legal Solutions Can Help You Understand Your Deadlines

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

Benefits of a Self-Directed Roth 401(k)

Real estate investors are typically excellent candidates for self-directed retirement accounts, in no small part because of their experience with evaluating investment opportunities. But there is a world of options: Self-Directed IRAs, 401(k)s, and of course, the Roth options for both. To make the best choice for your situation, you must understand your options. Today, we are going to focus on the Self-Directed Roth 401(k) and its many benefits. Read on to learn the reasons many investors love Roth accounts and whether this option is the retirement plan for you.
Flexibility With Your Investments
The Self-Directed Roth 401(k) featuring Checkbook Control gives investors more leeway to invest in what they understand. Rather than being confined to traditional investment choices like stocks, bonds, or whatever financial products a custodian happens to be pushing, you can invest your retirement funds into nearly any type of asset you wish. These can include nontraditional investments as diverse as real estate, lending transactions, and even the various cryptocurrencies. While there are three types of assets Roth accounts cannot invest in, that leaves literally everything else in the world as an option.

Multiple Contribution Options

Roth accounts are famous for their ability to grow your retirement assets tax-free. Why? Because you typically pay taxes on the "front end," meaning that your contributions have already been taxed. When retirement rolls around, you take your distributions totally tax free. You've paid the piper at that point.
While this is reason enough for many investors to be crazy about Roth-style accounts, the Self-Directed Roth 401(k) also allows you to make pre-tax contributions. That's right: you can truly have it both ways. Of course, there's a caveat. If you choose to make traditional tax-deferred contributions, you may, but you must place them inside of a Traditional 401(k) first. Then, they can be converted into the Roth account, or you can simply allow both accounts to grow. Our experienced professionals can help you with this process and judgment call.

Ability to Make Higher Contributions At Once and Overall

Total plan contributions for Self-Directed Roth 401(k)s are much higher. You can contribute a whopping $50,000 annually--or $55,000 if you're over 50. That's over twice what the IRS allows for IRAs.
We should also note that the Self-Directed Roth 401(k) blows any IRA's individual monthly contribution limits out of the water. Traditional IRAs limit you to a measly $5,500 if you're under 50, and $6,500 if over 50. Although, if you're going to do an IRA at all, we highly recommend the Self-Directed Roth IRA. Learn more from our previous educational article on the benefits of converting your retirement account to a Roth. These perks will also apply to your Self-Directed Roth 401(k).

Exemption From Income Limitations

You want to contribute the maximum amount possible to your account, don't you? Of course you do! That's why it's a huge advantage that this type of account is exempt from the Modified Gross Income (MGI)  limitations. We've written about the MGI limits before if you want more details. But the short version is this: your income will not limit your contributions. This simply isn't the case with Roth IRAs.
And remember: these aren't all of the advantages, just four of our favorites. When in doubt, reach out to the pros. Royal Legal Solutions can help you establish your 401(k) and ensure its compliance.



Beneficiary Mistakes — Self-Directed 401(k) or IRA

Designating a proper beneficiary is essential for retirement account holders to guarantee their interests will be served. Whether you're using a Self-Directed IRA or 401(k), you want to ensure that you are doing the most you can for the appropriate beneficiary. Other investors have made critical errors in judgment on this subject, but you can fortunately learn from their mistakes. Today, we are going to talk about major mistakes investors make regarding their Self-Directed 401(k) or IRA's beneficiary, and how to avoid making them yourself.

Mistake #1: Naming Your Child as Your Beneficiary

Most people immediately want to name their child as a beneficiary. This is only natural, but if your child happens to be a minor, things can get extremely complicated. Run this scenario through your head: if you're hit by a bus tomorrow, will your 8-year-old know what to do regarding your retirement account? Do most 8-year-olds even know what an IRA or 401(k) is, let alone how to responsibly direct one?
Even if your little angel is a MENSA-qualified financial prodigy, it is nearly impossible that a court would allow your tiny genius to directly receive your plan's benefits.
Some investors believe they can avoid this issue by simply designating their child as a secondary beneficiary, with their spouse as the primary. But if something should happen to both you and your spouse, you're still going to run into the problems above. Fortunately, there is a simple solution for these situations: appoint a guardian to represent your minor child's interests in your plan. Note that you'll want to do this yourself. If you don't, the judgment call will be up to the court. Make the choice while you can so you know your child will be protected by a person you trust.

Mistake #2: Bungling The Beneficiary Form

There are several ways your beneficiary designation form can actually sabotage the person it is intended to help. The most obvious of these is lacking one altogether. But let's assume you did everything correctly when filling out and filing the form. Don't skip this next critical step: let your beneficiary (and ideally your attorney) know where it is.

If you don't, you're adding even more troubles to your already grieving loved ones. We recommend that you not only provide copies of your form to all interested parties, but that you also keep an additional copy in a home safe or safety deposit box. Anyone who needs the form, from your professionals to your heirs, should be notified ahead of time of the copy's secure location.

Solution: Help Your Beneficiary Efficiently in Other Ways

Of course, when you name a beneficiary, you are hoping that he or she will actually benefit from your account and its investments. While they likely will, we have found that there are limits on how much a Self-Directed IRA or 401(k) can actually do for your chosen party. To be precise, there's one big limit: Uncle Sam.
Uncle Sam likes his money. He will always get it. And getting it from your retirement account upon your passing is child's play for Uncle Sam. Every dime that goes to him is essentially coming out of your beneficiary's pocket. That brings us to one of the most common-sense ways to look after your loved ones: life insurance.
Life insurance is an incredibly valuable tool, particularly if you have children. Yes, you will pay premiums for the policy, and they may be expensive. But in the event of your death, the benefits will pass directly to your heirs without the Taxman getting in the way.
 

How a 401(k) Affects Real Estate Investors on Tax Day

You are probably already familiar with the benefits of a 401(k) for retirement planning. But did you know that using this type of account can also help you save on your taxes? In fact, there are multiple tax benefits to taking advantage of the 401(k). Read on to learn about some major ways to save on Tax Day.

401(k) Tax Credits

That's right: you can actually get a tax credit just for contributing to your 401(k). The Retirement Savings Contribution Tax Credit, also known as the Saver's Credit, is intended to ease tax burdens for workers with moderate or modest incomes. But if you meet the eligibility requirements, you can receive a credit up to $2,000. Married couples filing jointly may benefit even more, as their maximum credit is $4,000.

401(k) Contributions Can Lower Your Tax Bracket

Whether you are using a traditional 401(k) or the Solo 401(k), any pre-tax contributions you make are automatically going to lower your tax liability. How does this work? In simple terms, the contributed funds are being pulled from your paycheck before you even receive it. You're already receiving less on your paycheck, but this is actually an advantage when Tax Season comes. The IRS essentially acknowledges the loss you take from these withholdings. They're counting the money you actually receive, meaning your taxable income is lower. Thus, your tax obligations are also lower.
Smart investors in any tax bracket can take advantage of the rewards of making pre-tax contributions. Larger contributions lower your taxable income further. This means, if you contribute enough to the account, you can potentially lower your tax bracket--and enjoy massive savings on your taxes.

Roth 401(k)s Save You Money in The Long Run

There are many reasons to love a Roth 401(k). Roth retirement accounts in general come with many benefits, namely that contributions to the account are tax-free. Distributions won't be taxed when you take them, either. You can also take advantage of strategically timing your Roth contributions to relieve tax obligations.
Using a Roth 401(k) offers a multitude of exclusive benefits in both the short and long term. If you are having a low income year, are early on in your career, or expect to retire in a higher tax bracket than your current one, the Roth 401(k) is seriously worth considering. Check out our previous educational article to help determine if converting your 401(k) to a Roth plan is right for you.

Royal Legal Solutions Helps Our Clients Use 401(k)s to Save on Taxes

Retirement accounts can be intimidating, even for seasoned investors. Since we all must take accurate tax filing seriously to avoid penalties, savvy investors choose to get some help from the pros. The tax and retirement professionals at Royal Legal Solutions can help you get the most savings possible out of your 401(k). We offer a variety of retirement planning services to ensure you are using the correct types of accounts for your circumstances. And, of course, we can advise you on how to get the most tax benefits out of your retirement account.
 

Self-Directed 401(k) Contribution Limits: What Investors Have To Know

Every year, the IRS updates contribution limits for the various types of retirement plans. If you want to ensure that you are getting the most out of your plan, you need to know the self-directed 401(k) contribution limits.

This issue is particularly pressing for plan holders over 50, who are allowed to contribute more than younger individuals in the early stages of their working lives. Wherever you are in your career, it is helpful to know the most current information to effectively plan for retirement.

Elective Employee Contributions

The contribution permitted from the employee to the plan is now $18,500 for those under age 50. This is a $500 increase from the 2017 limits.

Catch-Up Contributions

If you are over the age of 50, you have the option to make "catch up" contributions to maximize your retirement savings. There was no increase in catch up contribution limits for 2018. The limit remains the same as it was in 2017: $6,000.

Total Annual Maximum Self-Directed 401(k) Contributions

Total Annual Maximum Contributions take into account all possible sources of plan income. The new limit is $55,000. This is an increase of $1,000 from the 2017 maximum. For those over 50 who choose to make a catch-up contribution of $6,000, the limit is $61,000. You can learn details about why taking advantage of this maximum is a good idea from our educational article on the Solo 401(k)'s unique features.

Health Savings Accounts (HSAs)

Many investors who want to maximize their savings take advantage of HSAs alongside their 401(k). If you are among them, then you may want to know about the new HSA maximum contributions. The new limit for individual HSAs is $3450, which is $50 more than was permitted in 2017. Family HSA plans also saw in increase of $150 from last year, up to $6900.

What About IRAs?

At the time of this writing, contribution limits for IRAs have remained unchanged for several years. The most recent increase was in 2013. If you're using an IRA, the contribution limits remain the same as they did last year: $5,500 for individuals under 50, and $6,500 for individuals over 50. For many people planning their retirement, this is yet another compelling reason to look into the Self-Directed 401(k).

 

Which Self-Directed IRA Transactions Trigger the UBTI Tax?

Designating funds for your retirement is a great step if you are planning for your future. You probably already know about the 401(k) and the individual retirement account (IRA). These plans allow owners to invest in various stocks, bonds and mutual funds.

But for those of us who want a little more, there's another option: a self-directed IRA (SDIRA). These plans, which can be traditional or Roth accounts, allow for much more diversified investments. In fact, you can invest is almost anything, including real estate, precious metals, renewable energy and private placements.

SDIRAs and UBTI Tax

Establishing a limited liability company (LLC) in the name of your SDIRA makes a lot of sense. It helps to isolate and protect your investment funds. It also provides you with a level of anonymity that many owners find beneficial.

IRAs and SDIRAs are typically exempt from the Unrelated Business Taxable Income (UBTI) tax. This rule, as established by the Internal Revenue Service (IRS) in 1950, was introduced as a means of preventing tax-exempt businesses from unfair competition related to their profits.

Most passive investments made with your SDIRA LLC are considered tax exempt. However, real estate in particular can trigger the UBTI tax. Why? UBTI taxes are generally applied to incomes generated by “any unrelated trade or business” that is “regularly carried on” by an organization that would be subjected to the tax. To better understand this, let us take a look at the main components of this regulation.

What Does 'Trade or Business' Mean In Relation to UBTI?

The Internal Revenue Code (IRC) Section 162 defines “trade or business” as profit-oriented activities that involve regular actions by a taxpayer. There are very few cases in which activity needs to be attributed to a trade of business, however. This is because most expenses that are incurred from the profit-oriented activities of a taxpayer can be listed as deductibles under IRC 212.

What Does 'Regularly Carried On' Mean In Relation to UBTI?

For an activity to be considered “regularly carried on”, it is compared to those activities of a competitive, taxable business. There are some nuances to this. A short-term activity are typically tax-exempt if a similar commercial occurs all year. An example of this would be an ice cream stand operated by a tax-exempt organization during a state fair. Seasonal activities, however, are likely to be subjected to the UBTI tax. Intermittent activities are typically exempt if they are done so without the same type of promotional actions taken by a commercial enterprise.

UBTI Tax Triggers

It is important to identify and quantify the types of activities your SDIRA LLC has used to generate profits. This will help you to determine whether the activity and its profits are exempt or not. As previously stated, most passive transactions associated with your SDIRA LLC would not be subjected to the UBTI tax. However, there are several that could.

Legal Examples

There are plenty of examples of taxpayers butting heads with the IRS. Let us take a look at two examples that resulted in very different court rulings.

Invest with a Professional

Finding the right plan can be hard. However, when you open an account with a reputable professional, like IRA Business Trust, our experts go to work for you. Not only do we handle any documents and tax forms you may need, but also as experts, we understand where the IRS draws a line. Your SDIRA is a vital part of your future. To find out more about opening a SDIRA, forming an LLC, or understanding UBTI, contact us today!

Does the Manager of a 401(k) LLC Need a Real Estate License?

LLCs are magnificent legal creatures with a number of fantastic uses. One potential use is that they can act as an investment vehicle for your 401(k). They can also hold other LLCs. It is by no means out of the ordinary to establish a separate LLC for each property held in the 401(k).

However, some folks wonder if they’re going to buy property with their 401(k) LLC, do they need to have a real estate license. The short answer is: no.

Why You Don’t Need a Real Estate License to Buy Real Property for your 401(k)

Not only do you not need a real estate license to purchase real estate with your 401(k), but if you use your real estate license to purchase property, it could be flagged as a prohibited transaction by the IRS.

Retirement accounts such as 401(k)s and IRAs are prohibited in investing in businesses that you are receiving a profit from or properties that you yourself (or your family members) derive a benefit from.

Being both the manager of the 401(k) LLC and simultaneously executing transactions with your real estate license on behalf of the 401(k) would be red-flagged by the IRS as a prohibited transaction.

What If You Execute Transactions with Your Real Estate License for Another LLC of Which You are an Employee?

Even then, the answer is no. Neither an owner of real estate nor a principle of an LLC needs to have a real estate license to execute trades related to real property. That includes selling, leasing, or renting.

Even those who have an LLC business that is not related to their 401(k) LLC would not necessarily need a real estate license for the purpose of executing trades.

Why not?

Well, the answer is sort of simple. An employee who is executing trades, managing properties, showing houses, or otherwise engaged in real estate transactions would need a real estate license. You as the owner or principle, however, do not.

Basically, because you own the property or the company that owns the property, no one really cares if you have a real estate license or not. In fact, if you’re using your real estate license to execute trades from your 401(k) it would probably work your disadvantage since it would be a conflict of interest according to IRS rules.

If you’re still fuzzy about the issue, it’s always best to contact a tax professional.

How to Protect Your IRA in Two Steps

How to Protect Your IRA in Two Steps

People will tell you that your IRA is safe and they're wrong. Your IRA is only safe from a lawsuit against you and somebody coming after your IRA. If your IRA is invested in an asset class such as real estate where it can be sued, the IRA itself is exposed. Your IRA is exposed in the sense that it can be disqualified. If any of the transactions of the IRA are exposed.

There's two things that we do. The first thing that we do is, we can split up multiple IRA accounts. That way if any one type of investment is disqualified or has some type of issue that the IRS would look at? This limits your exposure, because it's only that one account that we have to worry about.

The second thing that you could do is set up a self-directed IRA with an LLC. I like to do it with a Series LLC. What that allows us to do is if you look at our videos regarding the Series LLC structure, we can take each different asset belonging to the IRA and put it into its own series.

That way if there's an issue with asset A, it doesn't affect asset B, C, D, etc. And this way, if you have one property that has a lawsuit against it, somebody can't take your entire IRA amount. They could only take a very limited amount of that structure.  Be sure that your IRA is properly structured with asset protection, because it's not by default the safest way to do it.

My name is Scott Smith, I'm an asset protection attorney with real estate. I'm a real estate investor myself, and I want to help you. Click here to set up a consultation today!

Roth IRA: Top Benefits You Should Know For Retirement Planning

The Roth IRA is a beauty. Everyone should be buying these beasts. By the time you're done reading this, you will know the primary benefits.

Roth IRA Benefit #1: Massive Tax Savings

A Roth IRA is bought with income that has already been taxed. You can write this off in the year you pay those taxes. The genius of the Roth IRA is that you don’t pay tax ever again. You don’t pay tax on the growth or the withdrawal. This is a wonderful long-term investment plan.
What you don’t know, because you aren’t paid to know, is that there are a whole host of ancillary benefits that ride the coattails of these beauties.
So, if the first reason to buy an IRA isn’t enough, here are some of the other beautiful features of this beast.

Roth IRA Benefit #2: Exemption from Required Minimum Distributions

 
First, your traditional retirement plan is subject to Required Minimum Distributions (RMDs).
When you get up to seventy and half years old, you have to take distributions and you have to take tax on them from traditional IRA’s. Roth IRA’s can just keep growing. Maybe you remember my friend Randy. He’s making enough money off of his fishing business that he’d just as soon leave his money in the bank. He can keep accruing growth for a dream vacation, or to leave a nest egg for his family.
A surviving spouse can keep feeding a Roth IRA or combine it with an existing Roth IRA. You cannot do this with a traditional IRA account. A non-spouse beneficiary cannot continue to grow the account, but they can delay the Required Minimum Distributions. For five years, they can ride those tax-free returns. As a second option, you can choose a lifetime expectancy distribution. Setting aside the morbid reality that this requires you to consider your own mortality, this will provide the best option for a non-spouse beneficiary who wants to keep as much money as possible in the Roth IRA where it will continue to grow tax-free.

Roth IRA Benefit #3: No Early Withdrawal Penalties

Finally, Roth IRA owners are not subject to the 10% early withdrawal that is comprised of contributions or conversions. Randy, because he’s a genius, took care of his money early. When he hit fifty-six it was time to go fishing. He never took the ten percent hit because he planned for his early retirement with a Roth IRA.
Randy couldn’t touch his growth or earnings if he wanted to avoid the taxman. He had to wait five years for the conversions, but he took a lot of investment capital out, tax free, then reinvested it in a new business to further insulate him against the government’s sticky fingers.
There are definitely some requirements to qualify for an Roth IRA, but you can convert existing funds and get started right away.
Let your money grow in a Roth IRA. Be a beast, and your retirement will be a beauty.
If you're considering going the Roth route, get a professional opinion. Schedule your personal retirement consultation today.

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.

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.

IRA Rollovers, Explained

An IRA rollover is a transfer of funds from one retirement account a traditional IRA or Roth IRA.

IRA Rollovers are defined as tax-free transfers of retirement from one type of investment account to another. Rollovers were originally introduced to increase the mobility of qualified plan funds for employees moving from one job to another.

You can find the basic provisions governing rollover transfers here. These provisions cover transfers from one IRA to another, transfers from qualified pension, profit-sharing, stock bonus, and annuity plans to IRAs, and transfers from IRAs to qualified plans.

There are a few rare exceptions to the rollover rules. For example, in certain situations, an IRA can make a rollover distribution to a health savings account (HSA).

In other words, if you receive a distribution from a qualified plan (such as a 401(k)), you might decide to put some or all of the distribution amount into an IRA. The IRA that receives the qualified plan distribution is called a rollover IRA.

You can do this either through a direct transfer or via check. If you do a rollover via check, your custodian will write you a check, which you will then deposit into the other account.

How Often Can I Do a Rollover?

The privilege of rolling over from IRA to IRA may be exercised only once in a 12-month period.

Can You Rollover Funds From a Traditional IRA to Another Traditional IRA?

Yes, as long as the money being moved is withdrawn from your old account and deposited in another account within 60 days. Failing to follow this rule can cause your rollover to lose tax-deferred status and cost you big time.

This rule operates on an all or nothing basis. The entire amount received from your old IRA must be transferred to the designated IRA. If you pocket anything, the rollover rule does not apply, and everything received from the old IRA, including any amount transferred to another IRA, is treated as a taxable distribution.

What If I'm Transferring Property That Isn't Money?

If property other than money is received from your old IRA, that property, (not substitute property of equal value or the cash proceeds of the property's sale), must be included in the transfer to the new IRA.

Note: According to our friends at the Tax Court, the rollover contribution must be of cash if the distribution is in cash.

Can I Rollover Funds From a Qualified Plan to a Traditional IRA?

Yes. A qualified plan (or annuity participant) can roll over any distribution other than a distribution that:

 Note: An employee's surviving spouse may also roll over a similar distribution received on account of the employee's death.

Can a Traditional IRA be Rolled Into a Qualified Plan?

Yes. Within 60 days after the distribution, an IRA can be rolled into an eligible retirement plan for the distributee's benefit.

The term “eligible retirement plan” includes:

A rollover contribution must include the entire amount received in the distribution, but it may not exceed the portion of the distribution that, in the absence of the rollover, would be included in the distributee's gross income.

Can I Rollover a Traditional IRA I inherited?

No, usually. A taxpayer whose interest in an IRA is as a beneficiary of the person who created the IRA is usually denied the privilege of rolling over tax free from the IRA to another type IRA or a qualified plan or tax deferred annuity.

Rare exception: a surviving spouse may roll over to another IRA but not a qualified plan.

So why isn't this usually allowed? Because the tax allowances for IRAs (including an IRA’s tax exemption) are intended to encourage saving for the retirement of the contributor and surviving spouse.

Blame Congress. They're the ones who decided it was inappropriate to allow the tax exemption to be prolonged by rollovers after the contributor has died and the account has passed into the hands of a person other than a surviving spouse.

Are There Reporting Requirements For Traditional IRA Holders?

Yes. But don't worry, it's not that bad! (Hopefully you have someone else doing the paperwork for you.) Individuals maintaining IRAs and surviving beneficiaries under IRAs must usually file an annual information return on Form 5329.

Also, an individual maintaining an IRA must make an information filing for each year in which a nondeductible IRA contribution is made or a distribution is received from an IRA.

The filing, which must be included with the individual's return for the year, must disclose the following:

What Will The IRS do if You Fail To File Properly?

A $50 penalty is assessed for not filing, unless you can justify why you didn't. Also, because non-deductible contributions are recoverable tax free upon distribution, the IRS will want $100 if these contributions are overstated in the return and you, the taxpayer, cannot justify the overstatement.

I hope this article answered any questions you may have had. If you have any questions about IRA rollovers feel free to ask me, I'd love to help you.

 

10 Tips To Help You Boost Your Retirement Savings (At Any Age!)

It's never too early or too late to start saving for your retirement. If you are just starting out, focus on saving as much as you can now. And If you are nearing retirement, consider increasing contributions to your savings or delaying Social Security.

This might surprise you, but the earlier you start saving, the better. Even at the age of twenty, $1000 invested every year will earn you as much as if you were to invest $5000 monthly at the age of 50.

And even if you began saving late or have yet to begin, it's important to know that you are not alone. This article will offer you some tips to start increasing your retirement savings.

Remember, it's never too late to get started. You know what they say, better late than never!

Consider the following tips, which can help you boost your savings-no matter what your current stage of life-and pursue the retirement you envision.These pieces of advice will help you boost your savings so when you retire you'll be able to live the life you want or even leave a lasting legacy.

  1. Start saving now!

Time is a precious commodity, and nothing makes your invested dollars more valuable than compound interest. Compound interest will allow your investment to grow without costing you anything. That's why $10,000 today has the potential to be worth $30,000 in ten years.

  1. Set A Goal!

Setting a goal gives you something to strive for. Ask yourself, why do you want to save money for your retirement? Once you figure out why, make it your goal and you'll never lose sight of it!

  1. Put Your Money In A 401k If You Can.

Many employers offer traditional 401k plans. 401ks allow you to contribute pre-tax money, which can be a significant advantage.
Let's say you're in the 20% tax bracket and plan to contribute $100 per pay period.

Since that money comes out of your paycheck before taxes are assessed, your take home pay will drop to $80. That means you can invest more of your income now without lowering your standard of living.

Your employer may also offer a Roth 401k, which uses income after taxes rather than pre-tax. You should consider what your income tax bracket will be in the future when you reach retirement to help you decide whether this is the right choice for you.

  1. Meet Your Employer's 401k Match.

Many employers will not only offer you a 401k, but they'll even offer to match your 401k contributions (for every $2 dollars you contribute they might contribute $1, etc). Make sure you contribute at least enough to take full advantage of the match.

For example, your employer may offer to match 50% of your contributions up to 5% of your salary. That means if you earn $100,000 a year and contribute $5,000 to your retirement plan, your employer would contribute another $2500.

That's free money. Don't miss out!

  1. Open An IRA. (Individual Retirement Savings Account)

I realize not everyone is lucky enough to have a 401k option. But anyone, including you, can establish an IRA to help build savings for retirement.
You have two options: Traditional IRAs, where your money will grow tax free until you decide to start taking distributions and Roth IRAs, where you pay taxes upfront on the money you contribute instead of later when you retire.

Traditional IRAs are great for those who don't have as much money to invest with initially. Meanwhile Roth IRAs are a good route to go if you plan on being in a higher tax bracket then you are now upon retirement.

  1. Take Advantage Of "Catch-Up" Contributions.

One of the reasons it's important to start saving early if you can is that yearly contributions to IRAs and 401(k) plans are limited.

So what's the good news? Once you reach age 50, you’re eligible to go beyond the normal contribution limits with catch-up contributions to IRAs and 401ks.

If you haven't been able to save as much as you would have liked, catch-up contributions can help boost your retirement savings. Take a look at the chart, below, for contribution limits for individuals over the age of 50.

  1. Automate Your Savings.

Make your retirement contributions automatic each month and you'll be able to grow your retirement savings without having to think about it. Ever. Or at least until you retire.

  1. Cut Down On Expenses.

Are you going to out to eat every day? That could cost you thousands of dollars a year. Even if it's just a cup of coffee from Star Bucks. Also, try lowering your insurance premiums or your premium channel subscriptions. You can negotiate for lower rates, believe it or not!

  1. Save Extra Money.

Did you get any extra money? A raise at work, a winning lottery ticket, unexpected gift? Don't just spend it. Save it instead.

I know as well as you do that it can tempting to take your tax refund or salary bonus and splurge on designer fashions, a vacation or a car. But the question is, do you want to live better now or later when you retire?

  1. Delay Taking Social Security.

I know, who would think of doing such a thing? Age 62 is the earliest you can begin receiving Social Security benefits, but for each year you wait (until age 70), your monthly benefit will increase by the hundreds, adding up to several extra thousand dollars per year.

That's all for our top ten retirement tips. If you have questions, fire away in the comments below. If you're wondering what the best plan for your circumstances is, schedule your personal retirement consultation with 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!

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.

 

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

To whoever is reading this: Congratulations! You've probably either lived long enough to retire or you're almost there. But before you "cash out" and get your money via distributions, you may want to check out this article first.
And whether you're getting ready to retire or you have a long way to go until you can, the information below can benefit everyone. Let's start with distributions from traditional IRAs and 401ks. The first five questions will relate to these traditional accounts. If you have either a Roth account (IRA or 401k), you can skip to number 6 on the list below.

Traditional IRA and 401k Accounts

1. Early Withdrawal Penalty.

A distribution from your traditional IRA or 401k before you reach the age of 59 1/2 will cause a 10% early withdrawal penalty on the money distributed. And yes, you're paying taxes too, so you're losing a big chunk of money if you withdrawal early.
Let's say you take a $5,000 distribution from your traditional IRA at age 50. You will be subject to a $500 penalty and you will also receive a 1099-R from your IRA custodian. You will then need to report $5000 of income on your tax returns.
Long story short: Don't withdraw early unless you really need the money.

2. Required Minimum Distributions (RMD).

But whether you need the money or not, at age 70 1/2, your friends at the IRS will force you to begin taking distributions from your retirement account. Unless you're still employed.
Your distributions will be subject to tax and you will also receive a 1099-R of the amount of money distributed which will be included on your tax return. The amount of your distribution is based on your age and your account’s value.
For example, if you have a $150k IRA & you've just hit the age of 70 1/2, your first RMD would be $5,685 (3.79% of $150k).

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

Unfortunately, money from your traditional retirement account is subject to tax at the time of distribution. With this in mind, it would be wise of you to be careful about how much money you take out in one year. Why? Because a large distribution can push your distribution income and your other income into a higher tax bracket.
Let's say you have  employment or rental/investment income of $100,000 yearly. That would mean you're in a joint income tax bracket of 15% on additional income.
However, if you take $100,000 as a lump sum that year this will push your annual income to $150K and you will be in a 28% income tax bracket.
If you chose to instead break up that $100K over two years, then you could stay in the 15% to 25% tax bracket. This way, you reduce your overall tax liability.
Long story short: When it comes time for you to start enjoying retirement, don't take out too much money or the IRS will be enjoying it instead.

4. Distribution Withholding.

Most distributions from an employer 401k or pension plan will be subject to a 20% withholding, unless you're at the age of 59 1/2. This withholding will be sent to your friends at the IRS in anticipation of tax and penalty that will be owed.
In the case of an early distribution from your IRA, a 10% withholding for the penalty amount can be made.

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

Roth IRAs are popular for a reason. When you have tax losses on your tax return, you may want to consider using those losses to offset income that would arise when you convert a traditional IRA or 401k to a Roth account.
Whene you convert a traditional account to a Roth account, you pay tax on the amount of the conversion. This is usually worth it, because you’ll have a Roth account that grows entirely tax free which you won't pay taxes on when you distribute the money.
Interesting fact: Some tax savvy people use tax losses so that they end up paying less in taxes later on.

Tips For Roth IRAs and Roth 401ks

6. Roth IRAs Are Exempt from RMD.

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

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

Yea, tax code can be confusing. "Designated" Roth 401k accounts are subject to RMD. These kinds of Roth accounts are part of a 401k/employer plan, which is where the word "designated" comes from.
Anyway, so how do you avoid this you may ask? By rolling your Roth 401k funds over to a Roth IRA when you reach the age of 70 1/2.

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

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

9. Tax Free Distributions of Roth IRA Earnings.

However, in order to take a tax free distribution from your Roth IRA, you must be age 59 1/2 or older and you must have had your Roth IRA for five years or longer.
As long as those two criteria are met, all amounts (contributions and earnings) may be distributed from your Roth IRA tax free.
Note: If your funds in the Roth IRA are from a conversion, then you must have converted the funds at least 5 years ago and must be 59 1/2 or older in order to take a tax-free distribution.

10. Delay Your Roth Distributions.

Don't be so quick to use the funds in your Roth account. It's usually better to distribute and use other funds and assets that are at your disposal. Why? Because those funds aren’t as tax efficient while invested.
Long story short: Roth retirement accounts are the most tax efficient way to earn income in the U.S if you use them right. Learn even more from our other article on the lesser-known benefits of Roth accounts.
That's all folks. As always, if you have any questions, please don't hesitate to ask in the comments below.
 

The Not-So-Well-Known Benefits of Roth IRAs

Many investors and financial professionals are familiar with the primary benefits of a Roth IRA: that after you pay taxes on the money going into the Roth IRA that the plans investments grow tax free and come out tax free.  That being said, there are so many more benefits to the Roth IRA that need to be noted. I’ll note just three.

Benefit #1: Roth IRAs are not subject to RMD.

Traditional retirement plan owners are subject to regulations known as Required Minimum Distribution rules which require the account owner to start taking distributions and paying tax on the distributions (since traditional plan) when the account owner reaches the age of 70 ½. Not being subject to RMD rules allows the Roth IRA to keep accumulating tax free income (free of capital gain or other taxes on its investment returns) and allows the account to continue to accumulate tax free income during the account owner’s life time.

Benefit #1: Your Roth IRA Can Outlive You

A surviving spouse who is the beneficiary of a Roth IRA can continue contributing to that Roth IRA or combine that Roth IRA into their own Roth IRA.  Allowing the spouse beneficiary to take over the account allows additional tax free growth on investments in the Roth IRA account. A traditional IRA on the other had cannot be merged into an IRA of the surviving spouse nor can the surviving beneficiary spouse make additional contributions to this account.
Non spouse beneficiaries (e.g. children of Roth IRA owner) cannot make additional contributions to the inherited Roth IRA and cannot combine it with their own Roth IRA account. The non-spouse beneficiary becomes subject to required minimum distribution rules but can delay out required distributions up to 5 years from the year of the Roth IRA account owner’s death and is able to continue to keep the tax free return treatment of the retirement account for 5 years after the death of the owner. The second option for non-spouse beneficiaries is to take withdrawals of the account over the life time expectancy of the beneficiary (the younger the beneficiary the longer they can delay taking money out of the Roth IRA). The lifetime expectancy option is usually the best option for a non-spouse beneficiary to keep as much money in the Roth IRA for tax free returns and growth.

Benefit #3: Roth IRAs Don't Have Early Withdrawal Penalties

Roth IRA owners are not subject to the 10% early withdrawal penalty for distributions they take before age 59 ½ on amounts that are comprised of contributions or conversions. Growth and earning are subject to the early withdrawal penalty and to taxes too but you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted without paying taxes or penalties (note that conversions have a 5 year wait period before you can take out funds penalty and tax free).
Roth IRAs are a great tool for many investors. Keep in mind that there are qualification rules to being eligible for a Roth IRA that leave out many high income individuals. However, you can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a backdoor Roth IRA) as the conversion rules do not have an income qualification level requirement on converted amounts to Roth IRAs. This conversion option has in essence made Roth IRAs available to everyone regardless of income.