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

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

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

Why You Should Consider Giving Your Retirement Funds to Charity

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

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

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

What Options You Have For Giving to Charity

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

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

Which Options Are The Most Beneficial?

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

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

Ways to Give To Charity From Your 401(k)

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

Option 1: Donate Directly From the Plan

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

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

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

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

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

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

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

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

Sole Proprietorship Solo-K Deadlines

Elective Deferrals

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

Profit-Sharing Contributions

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

S-Corp or C-Corp Solo-K Deadlines

Elective Deferrals

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

Profit-Sharing Contributions

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

Royal Legal Solutions Can Help You Understand Your Deadlines

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

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.

Income generated by the actions of a trade or business that would be considered active but the IRS;
Income that is generated by a convenience store;
Income generated by a manufacturing company;
Business income that is generated by an LLC that is used as a pass through entity;
Income that is generated by a business that is owned by your SDIRA LLC and you, the plan owner, are an investor;
Unrelated Debt Financed Income (as defined by IRC Section 514(e));
When a nonrecourse loan is used to purchase property; or
Income generated by a real estate investment, which is treated as a business inventory vice an investment.

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.

Brown v. Comm., 143 F.2d 468 (5th Cir. 1944): In this case, the taxpayer (Brown) inherited 500 acres of land from a deceased relative. This land was used for grazing purposes only and, as such, was considered tax-exempt. After taking ownership of the property, the taxpayer decided to sell it. They listed it with a real estate broker. The broker was instructed to subdivide the property into lots and develop the land for sale by the tax-exempt organization. The broker did as directed. Streets were constructed, wells were installed, gas and electric lines were laid, and storm sewers were put in. Every year, between 20 and 30 lots were sold. In this ruling, the court found that the lot sales were being conducted regular course of business. The court ruled in favor of the IRS.
Farley v. Comm., 7 T.C. 198 (1946): In this case, the taxpayer (Farley) owned a tract of land that was being used as a part of his nursery business. Without further developing the land, the taxpayer sold off 25 lots for residential development. Unlike the Brown case, the court ruled in favor of the taxpayer. Because the taxpayer did not further develop the land, the court viewed it as a “gradual and natural liquidation of an asset”.

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!

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:

Is part of a series of payments over a period of at least 10 years
Is a distribution required by the minimum distribution rules.
Is a hardship distribution.

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:

Qualified pension.
Profit sharing.
Stock bonus.
Annuity plans.
Tax deferred annuities.
Eligible deferred compensation plans maintained by state and local governments and their agencies.

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:

The amounts of the non-deductible contributions for the year.
The distributions received from IRA's during the year.
The total balance in all of the taxpayer's IRAs at the end of the year.
Other information the Treasury might require by regulation (this varies).

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.

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:

The "presence" of self employment activity. (You must be self employed.)
The "absence" of full time employees. (It's gotta be all you, baby!)

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:

Employees under 21 years of age.
Employees who work less than 1000 hours a year.
Union employees.
Non-resident alien employees.

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!

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.

If your employer offers a 401k with a company match.

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.

If your employer doesn’t offer a company match.

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.

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

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

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

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

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

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

Steps To Getting the RMD Penalty Waived

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

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

Step #1: Take The RMD

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

Step #2: Complete Section IX Of Form 5329.

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

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

Step #3: Attach a Missed RMD Letter of Explanation

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

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

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

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

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

Showing Good Faith Gets You The Waiver

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

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

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

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

Conclusion

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

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

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

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

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

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

How The IRS Can Take Your IRA Money: Taxes and Distributions

You're probably already aware of some of the countless ways the IRS tries to get your money. Here in the land of the free and the IRS, we all are. Let's talk about how you can give them less and pocket more using your IRA.

How Uncle Sam Gets Your IRA Money: Taxes and Distributions

Consider the main ways the IRS gets its hands on your IRA's dollars.

Distributions from a 401k to you, the owner, are subject to a 20% withholding tax.
Meanwhile, distributions from an IRA are not subject to a withholding tax.

As a result, any money distributed from your 401k to you will be reduced by 20%. That 20% will be sent to the IRS in expectation of the taxes that will be due from you come time for distribution.

However, any money distributed from an IRA is not subject to the 20% withholding as you can opt-out of withholding. This legit loophole is just one of the advantages of using an IRA in retirement instead of a 401k. What this means is the money distributed from an IRA can be received by you in full.

Remember, the tax owed on a distribution from an IRA or 401k is identical. The difference between the two is when you are required to pay the IRS. Regardless of which you use, you will receive a 1099-R from your custodian/administrator. But in the 401k distribution, you are required to set aside and effectively pre-pay the taxes owed.

Example of Bypassing Withholding Tax on your IRA/401k

Okay so, what is the use of information if you never learn how to apply it. (College anyone?) Let’s walk through a common situation to illustrate the above information you just learned.

John is 65 years old and has successfully grown his 401k to a nice amount. He's decided to retire (finally) and enjoy his life the way it was meant to be, on a beach somewhere. He wants to take $500,000 from his 401k. He contacts his 401k administrator and is told that on a $500,000 distribution they will send him $400,000 and that $100,000 will have to be sent to the IRS for him to cover the 20% withholding requirement.

But wait. John just read this article, he knows that the 20% withholding requirement does not apply to IRAs. John decides to rollover/transfer the $500,000 from his 401k directly to an IRA.

Once the funds arrive at his IRA, John takes the $500,000 distribution from the IRA. There is no 20% withholding tax so he actually receives $500,000 in total. John will still owe taxes on the $500,000 distribution from the IRA and he will receive a 1099-R to include on his tax return.

All in all, John has given himself the ability to access all of the money distributed for his retirement account without the need for sending money to the IRS at the time of distribution.

There you have it, folks. Don’t take distributions from a 401k and then voluntarily donate money to the IRS when you can roll over/transfer those 401k funds to an IRA and receive all of your money without a 20% withholding.

For more information on making your retirement dollars work harder for you, contact us with any questions. Feel free to look around at our many other articles on 401ks, IRAs, the self-directed IRA LLC, and of course, the mighty Roth IRA. Which choices will be best for you depends on many factors, but you can save a lot of time and money by getting advice from our legal and tax experts. Take our tax discovery quiz and schedule your personal retirement consultation today, and live large in the long run.

How To Get Out Of The Annuity You Bought With Your IRA

Did your adviser tell you how great annuities are, and how they can guarantee a life time of income for you and your spouse? Yep, they tell everyone that. But the truth is, most people eventually want to learn how to get out of an annuity.

Ways to Get Out of an Annuity

After you've retired and decided your annuity isn't as great as you thought it would be, there is a good chance you will ask these three questions:

What's an annuity? (It's okay, most people don't know.)
Can I cancel it and get my money back to invest in something else?
Are there any penalties if I cancel? If so, how do I get around them?

Most people who own an annuity with an IRA are seeking to use those retirement plan dollars in a new investment opportunity with the goal of increasing returns. However, getting rid of an annuity owned by your IRA isn’t as easy as selling a mutual fund or stock investment.
Let's begin with the big questions here, the ones you already asked by being interested in this article. But first thing's first. Let's define annuities.

What is an Annuity?

The annuity you own is a contract with an insurance company. By signing this contract you agreed to either invest a lump sum or a series of payments with an insurance company.
In doing so, the insurance company agrees to pay a specific amount of money to you over your life. There are many variations of annuities. But the simple explanation is you give up money now to an insurance company and they promise to pay you money later. The longer you wait to get paid the more they will pay you later.

Can I Cancel My Annuity and Get My Money Back?

You can cancel your annuity, but you may be subject to a surrender penalty. Unfortunately there is usually no way around this penalty. Most annuities have a surrender penalty where you, the owner of the annuity, get penalized for requesting a return of the investment within a certain period of years of the initial investment.
This time period is known as the "surrender period". The surrender penalty on a 10 year surrender time period is usually 10% and decreases by 1% each year thereafter until it goes to zero after 10 years.
For example, if you invested a lump sum of $150,000 into an annuity and one year later (in year 2) you wanted to get your entire $150,000 back, you would be subject to a 9% surrender penalty of $13,500.
You would get back $136,500, but would forfeit the rest. Some penalty schedules are worse than others and they all vary. The surrender schedule is in your annuity contract documents and can also be requested at any time from the company holding your annuity.

How Do I Avoid Paying Taxes When Cancelling My Annuity?

Once you cancel an annuity owned by your IRA, the funds need to stay within your IRA in order to avoid taxes and penalties from your friends at the IRS. You can request the annuity company to transfer the IRA annuity cash balance over to a new IRA custodian of your choosing. Most investors find self-directed IRA the best method for this.
Once you’ve taken these steps, you’re retirement plan funds will be in an IRA and available to invest in stock, cryptocurrency, (link to cryptocurrency article here, "internal" links improve SEO) real estate, mutual funds, bonds and all other investments available to IRA holders.
If you have any questions about your annuity, please don't hesitate to ask me personally. You can reach out in the comments or contact me directly. I'd love to help! If you're ready to get out of your annuity, learn more about your retirement planning options, or take your retirement investments to the next level, schedule your consultation today.

Who Can Help You Establish Your Solo 401k Retirement Savings Plan?

Yes, it's true. There are plenty of other legal firms and experts that can help you set up your self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k).

So what separates Royal Legal Solutions from the competition? In short, our experience as actual tax attorneys with the credentials you want from experts.

Warning Signs: Things to Watch Out For in a 401k Provider

Of course, we don't expect you to simply take our word for it. Here are some things to be wary of when you're shopping around for a solo 401k provider:

The people involved in drafting your solo 401k Plan documents & advising you are not educated or trained tax attorneys. In some cases, they may not even be any type of tax professionals.
Many times, a salesperson or representative of a solo 401k Plan provider will offer you tax or ERISA (Employee Retirement Income Security Act) guidance with respect to a 401k Plan feature or an investment, while lacking the knowledge or expertise to do so.
Some companies may even tell you that you don’t need a trained tax attorney or specialized 401k plan tax professional to help you establish the plan. Most of the time, this is just not true.

Unfortunately, many of our clients come to us after another one botches the job. Royal Legal Solutions has had to help many individuals who worked with a number of these companies. Why? Because these individuals made their "friends at the IRS" unhappy due to their improper plan contributions or with their prohibited transactions.

Royal Legal Solutions Ensures Tax Compliance

The Solo 401k Plan is based on the rules found in the Internal Revenue Code, which can be complicated to someone without a tax professional background. This is why it's strongly advisable to work with a Solo 401k Plan provider like Royal Legal Solutions.

When you come to Royal Legal Solutions, you will be working directly with a 401k Plan tax professional that has been specifically trained on the special tax aspects of the solo 401k Plan.

We can guarantee your plan will remain in full IRS compliance and that you will not be engaging in any plan activities not approved by the plan or the IRS.

**We can help you retire earlier & richer.**

Most solo 401k Plan providers have already forgot about you once your plan has been established. But not us. As you begin administering your solo 401k Plan, you'll be able to consult with our trained 401k plan tax professionals.

Royal Legal Solutions can also take care of the annual maintenance of your solo 401k Plan. Proper maintenance is crucial in making sure your solo 401k Plan remains in IRS compliance. We'll also ensure that the IRS respects all your plan contributions and investment gains.

Is Your Individual 401k Compliant? Here's What You Should Know

Many investors prefer the individual 401k because it's specifically designed for small businesses with no employees. Individual 401ks offer cost effective and tax efficient investment benefits. Think of it as a Self Directed IRA made just for investors & the self employed.

It's like a dream come true right? However, a lot of individual 401ks are not correctly managed, which leads to costly penalties or even plan termination. If you have an individual 401k, you want to make sure it is managed correctly. Here's 5 things you need to ask yourself to make sure your 401(k) is compliant and keep it that way.

Has Your Individual 401k Plan Been Updated?

Your friends at the IRS require your individual 401k plan to be updated at least once every 6 years. If you’ve had your plan over 6 years and you’ve never updated it according to new IRS guidelines, it's not compliant and when that audit comes in the mail you will be subject to costly fines and even plan termination.

If your plan is out of date, the smartest thing you can do get it updated to guarantee its compliance with new IRS guidelines.

Are You Keeping Track of Your Plan Funds?

Your individual 401k plan funds must be accounted for and identify the different income sources for each member of the plan. Let's say two spouses are contributing Roth 401k employee contributions and the company is matching the contributions. In this situation, you need to be tracking these four different sources of funds, and you must have a written record documenting these different types of funds.

Are Your Plan Funds Being Separated by Both Source and Participant?

You must use separate bank accounts for the different participants’ funds and also separate traditional funds from Roth funds. You must properly track and document investments from these different fund sources so that returns to the individual 401k are properly credited to the proper investing account. Yep, there's a lot to keep track of!

Do You Need to File a Form 5500?

Yea that's right, another form. There are two situations where you usually have to file a Form 5500 for your individual 401k. First, if your individual 401k has more than $250,000 in assets. And second, if the individual 401k plan is terminated (regardless of total assets). If either of these instances occur, then you will need to file a Form 5500 to the IRS annually.
Individual 401ks can file what is known as a 5500-EZ. The 5500-EZ is an easy to file version of the standard Form 5500. Unfortunately, the Form 5500-EZ cannot be filed electronically and must be filed by mail. Individual 401k owners have the option of filing a Form 5500-SF online through the Department of Labor (DOL).

The online filing is a preferred method as it can immediately be filed and tracked by the plan owner. Actually, if you qualify to file a 5500-EZ, the IRS/DOL allow you to file the Form 5500-SF online but you can skip certain questions so that you only end up answering what is on the shorter Form 5500-EZ.

Are You Correctly Accounting for Contributions and Rollovers?

If you’ve rolled over funds from an IRA or other 401k to your individual 401k, you should’ve indicated that the rollover or transfer was to another retirement account. So long as you did this, the company rolling over the funds will issue a 1099-R to you, but will include a code on the 1099-R indicating that the funds were transferred to another retirement account, and that the amount on the 1099-R is not subject to tax. If you’re making new contributions to the individual 401k, those contributions should be properly tracked on your personal and business tax returns. If you are an S-corp, your employee contributions should show up on your W-2, and your employer contributions will show up on your 1120S S-corp tax return. If you are a sole proprietor your contributions will typically show up on your personal 1040 on line 28.

Keep Your Friends at the IRS Happy

It's important to make sure you are updating your plan and complying with these rules on an annual basis. If you suspect that your individual 401k retirement plan is out of compliance, meet with your attorney or CPA immediately to make sure everything is okay. The penalty for not properly filing Form 5500 is $25 a day up to a maximum penalty of $15,000 per return not properly filed. Don’t lose your hard earned retirement dollars over a simple form folks!

Using Your Self-Directed IRA LLC For Hard Money & Peer To Peer Lending

A Self-Directed IRA LLC is a great way for hard money and peer to peer lenders to generate tax deferred & tax free returns.
Most financial institutions continue to require good credit history. They also take a couple weeks to review financial statements, tax returns and business plans, which can be a problem in the real estate business. (Think of deadlines, etc.)
Because of this there is a growing need for quick financing for many individuals, small business and investors. Real estate developers and builders for their real estate projects are a massive piece of this growing population.

What is Hard Money Lending?

A hard money loan is where a lender allows a borrower to receive funds secured by real property. Hard money loans are often used in the real estate business. Interest rates vary, but are often higher than normal business loans.
Due to the limited amount of financing available to most individuals and small businesses, many hard money lenders are eager to use their IRA or 401k funds to make loans and generate tax-deferred income or gains.

What is Peer to Peer Lending?

Peer to peer lending is a method of debt financing that enables individuals (such as yourself) to borrow and lend money without the use of a financial institution as an intermediary.
Peer to peer lending removes the middleman (banks, etc.) from the process. But it also involves more time and risk than using a bank. However, the advantages include more money for investors and more control.
The average American is looking to have more control over the loan process without the high transaction fees. As a result, a growing number of peer-to-peer lenders are eager to use their IRA or 401k funds to make loans and generate tax deferred income or gains.

How To Use Your Retirement Funds To Lend

A Self-Directed IRA LLC offers you the ability to use your retirement funds to make almost any type of investment on your own without requiring the consent of any custodian or person. (Not to mention, tax benefits!)
The most notable advantage to using your Self Directed IRA LLC to make loans, whether peer to peer or hard money, is that you can make the loan by simply writing a check.
Also, all income and gains associated with a Self-Directed IRA loan would grow tax-deferred. Learn more details from our previous article on investing with your Self-Directed IRA LLC.

The Self-Directed IRA LLC Lending Advantages

With a Self-Directed IRA your funds can be used to make secured or unsecured private loans to small business owners or home builders.
Then there's also the LLC advantage, which mind you is extremely helpful, but there are a few cost associated with setting one up.
The Self-Directed IRA LLC involves the establishment of a limited liability company (LLC) which is owned by your IRA and managed by you or any third party you choose. If you want a third party to manage it, you can.
As manager of the IRA LLC, you will have total control over your IRA assets to make traditional as well as non-traditional investments, such as hard money and peer to peer loans.
If lending or making other nontraditional investments with your retirement dollars appeals to you, schedule your personal Self-Directed IRA LLC consultation today.

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

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

History of the Solo 401k

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

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

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

Who Is The Solo 401k Best For?

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

The solo 401k plan allows you to:

Roll over your existing IRA or 401k plan funds tax-free into a new solo 401k plan and use those funds to make tax-deferred investments, such as real estate.
Borrow up to $50,000 as well as make annual plan contributions up to $60,000. (More than 9 times the amount of an IRA contribution.)

Benefits of The Solo 401k

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

Simple Administration

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

Roth After-Tax Benefit

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

Borrow up to $50,000 Tax-Free

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

Buy Real Estate With Leverage Tax-Free

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

No Need to Establish an LLC

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

Protection From Creditors

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

More Options to Maximize Your Investments

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

Freedom Of Choice

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

Quick List of Reasons to Choose the Solo 401k

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

Don't need to pay a custodian.
Have the ability to make maximum contributions 9 times higher than the traditional IRA holder.
For 2017, you can contribute up to $54,000 per year or $60,000 if you are over age 50. If your spouse is involved in the business, they can contribute an additional $54,000 (or $60,000 if they are over the age of 50) per year.
Can make investments without having to wait for someone else.
Can invest in real estate, private companies, precious metals, and virtually anything else.
You can borrow up to $50,000 from your solo 401k plan for any purpose.
Gain control of your retirement funds.
Can diversify your retirement portfolio.
Serve as trustee of your solo 401k plan.
Make Roth contributions to your solo 401k plan.
Use non-recourse leverage to purchase real estate without penalty or tax.
Maintain a qualified retirement plan and help save for the future.
Access your retirement funds to make the investments you want when you want tax free.
Grow your retirement funds tax free.