Investing in Domestic and Foreign Real Estate with Your IRA Business Trust

Most people know that an individual retirement account (IRA) allow plan owners to invest in mutual funds, stocks and bonds. An IRA can certainly grow your contributions and create a nice nest egg for your golden years. However, what many do not know, is that there is a way to invest in much more! A self-directed IRA, also known as a SDIRA or solo IRA, gives you total control over your plan. It also allows for investments in alternative assets, like real estate, precious metals, private placements and renewable energy sources. While you can invest in almost everything with a SDIRA, real estate tends to be one of the biggest draws.

Full Checkbook Control

Many SDIRA plan owners establish a limited liability company (LLC) or business trust in their account’s name. This gives them full checkbook control. (When you establish a LLC of IRA business trust, you can open a banking account to help you better access your SDIRA finances.) With many properties being listed as foreclosures, short sales and estate sales – the atmosphere is ripe for low cost investments with the potential for significant returns.

Generate Income, Avoid Taxes

When you open a traditional SDIRA, you make pre-tax contributions. These dollars, and any profits generated by them, are taxed later, when you begin to take distributions. However, if you open a Roth SDIRA, you use post-tax dollars to make contributions. This means your gains and later distributions are made tax-free. For both traditional and Roth accounts, profits generated by a SDIRA-owned property flow right back into the account. When compared to a regular fixed-income, using your SDIRA to invest in real estate can generate profits that are two to eight times higher. Whether you rent or sell your SDIRA property, you can substantially increase your retirement account funds through real estate investments.

Real Estate at Home or Abroad

Not only can you use your SDIRA to invest in real estate in the United States, but you can also invest in foreign properties as well. This is true of both residential and commercial properties. There are plenty of reasons to invest in property, aside from the potential profits.

The truth is, property in general goes up in cost every year. In addition to that, your property taxes will as well. If you invest in property today, you can avoid having to pay a higher cost later. Depending on when you use your SDIRA to purchase the property, you may even have the home completely paid off before you reach 59 ½. If you rent out the property before then, you can also generate a profit that may: a) pay for the mortgage, allowing you to continue to grow your funds elsewhere without having to spend them on the residence or b) pay for the mortgage and generate additional income.

Why Choose a Roth SDIRA?

As previously stated, you can use a traditional or Roth SDIRA to invest in real estate. However, you should note some differences. Traditional SDIRAs are tax-deferred. This means you will have to pay taxes on your distributions. If you plan to take residence in a SDIRA-purchased property once you turn 59 ½, you will owe taxes. While this is still a smarter home-investment than buying a new home outright when you turn 59 ½, a Roth account will let you avoid this. True, property taxes are owed every year regardless of how you came to own the real estate. However, the asset’s value is not subjected to income taxes with a Roth SDIRA.

Finding the Right Firm

SDIRA accounts are not available through most mainstream investment firms. An Royal Legal Solutions, however, is available to anyone. Our professionals are able to support plan owners all over the world. We understand that you worked hard for the money you contribute to your retirement account.

 

As experts, we strive to provide you with quality support and professional custodial services. We have years of experience helping our clients understand tax laws, preparing documents, and providing trustee services. If you would like to learn more about retirement accounts, investment options, or checkbook control, please contact us today.

Avoid IRA Early Withdrawal Penalty With Substantially Equal Periodic Payments (SEPP)

In a perfect world, when you open an individual retirement account (IRA), you won't make withdrawals before the age of 59 ½.

However, life does not always go according to plan.

Sh*t happens.

In most cases, if you withdraw funds from your IRA before the age of 59 ½, the Internal Revenue Service will consider it an early distribution. That means your funds are subjected to regular income taxes as well as an additional 10% penalty.

However, this is not true in all cases.

You down with SEPP?? (Yeah you know me) ...

Substantially Equal Periodic Payments (SEPP)

If you are facing a short-term financial crisis, an early IRA withdrawal should not be your first course of action. However, if you are considering using your retirement account, the substantially equal periodic payment (SEPP) gives you the chance to take an early distribution without having to pay hefty taxes.

But you have to make sure you understand the SEPP rules.

Understanding Rule 72(t)

Rule 72(t) refers to code 72(t), section 2, which specifies exceptions to the early-withdrawal tax that allow IRA owners to withdraw funds from their retirement account before age 59½, as long as SEPP regulations are met.

To take advantage of this rule, you must take at least five substantially equal periodic payments (SEPPs), and the amount of the payments depend on the your life expectancy (calculated by IRS-approved methods). These payments must thus occur over the span of five years or until the owner reaches 59½—whichever period is longer.

There are some things to know before you opt for using the SEPP method for an early IRA distribution. These include:

IRS-Approved SEPP Calculations

The IRS has three approved ways of calculating your SEPP amounts. All three can result in varying payments. By offering these various calculation methods, the IRS allows you to pick the repayment plan that works best for you. These options include Amortization, Annuitization, and Required Minimum Distribution (RMD) methods.

Reach out if you want to know more. We can answer your questions!

What Happens When an IRA Plan Owner Dies?

We all make contributions to our individual retirement accounts (IRAs) with the intention of using those funds once we reach the age of 59 ½. However, death does not always go according to plan.

Note: The information here pertains to Charles Schwab inherited IRAs, an eTrade inherited IRA, Ameritrade .... or even an inherited self-directed IRA (SDIRA) ... But, as always, you should check with someone on our team for the solution that will apply to you and your situation. 

What Kind of IRA Have You Inherited?

When an IRA plan owner dies, the account is passed to his or her beneficiary. Often, this is a spouse or family member, but not always. When no beneficiary is named for the plan, the account will go through probate court.

I've you've inherited an IRA, you should note what type of plan you are receiving. In a traditional account, contributions are made with pre-tax dollars. This means that any withdrawals will be subject to income taxes. For inherited traditional IRAs, you must also start taking required minimum distributions (RMDs) by the age of 70 ½. (You should also note that you cannot contribute to an inherited traditional IRA after the age of 70 ½ either.) For Roth accounts, however, the contributions were made with post-tax dollars. Because the IRS cannot tax money twice, qualified withdrawals from these accounts are generally tax-free. Roth accounts also do not have RMDs and there are no age limitations imposed on contributions.

Please see our article, Calculating RMD For An Inherited IRA, for more.

The Beneficiary Options

What happens to the account once it is passed to a beneficiary depends on who receives it. Spouses have the most options. As a spouse who inherits their significant other’s IRA, you can:

Non-spouses do not have these options. They cannot rollover the funds or continue to contribute to the account. In fact, the only option available to non-spouses are RMDs. If the original account owner had already started taking RMDs, the non-spouse must continue them. If they have not, the non-spouse inheritor must start taking RMDs by 31 December the following year after the original owner died. (You should also note that, as a non-spouse beneficiary, you have five years to cash out the entire IRA.)

An Expert You Can Trust

The professionals at Royal Legal Solutions understand how hard the loss of a loved one can be. After all, we have families as well. Our experts can help provide you with options and professional assistance during this trying time. With years of experience, we understand tax laws that may affect your RMDs and account options. If you would like to learn more about setting up your own retirement account or what to do with one you have inherited, please contact us today.

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!

The Self-Directed IRA Plan Asset Rules

When you open an individual retirement account (IRA), you do so as a way of saving for your golden years. An IRA allows you to invest in mutual funds, stocks and bonds. However, a self-directed IRA, also known as a SDIRA, permits much more.

With your SDIRA, you can invest in real estate, private placements, precious metals and more. In fact, with a SDIRA, you can invest in almost anything. However, there are some rules. The Department of Labor (DOL) established the Plan Asset Rules as a way to define what is considered an IRA asset. By understanding this rule, you can avoid participating in a prohibited transaction.

Plan Asset Rules

The Plan Asset Rules are also referred to as “Look-Through” Rules. Two main things can trigger the Plan Asset Rules. These are:

Exceptions to the Plan Asset Rules

There are certain exceptions to the DOL Plan Asset Rules. We noted the rules as they apply to an operating company—a partnership or limited liability company (LLC) that typically engages in the development of real estate as well as venture capital or companies that provide various goods and services. When it comes to an operating company, if the plan does not own 100% of the partnership or LLC, then the DOL rules do not apply.

However, you should still review and understand prohibited transactions as defined by the IRS. These transactions can cause the IRS to treat your actions as an early distribution. This will result in penalties! The Plan Asset Rules will also not apply if the operating company, or the interests of the partnership or membership, are publicly offered. The same is true if the interests are registered under the Investment Company Act of 1940.

Impact and Consequences

In reality, many of your investments will not trigger the DOL’s Plan Asset Rules. Direct purchases of real estate, precious metals and many other types of transactions performed on behalf of your plan will not trip the Plan Asset Rules. In fact, even if it otherwise would, as long as a disqualified person does not participate in the transaction, you will not trigger these rules.

Violating the DOL’s Plan Asset Rules does come with consequences. However, when you establish a SDIRA with a reputable law firm, avoiding these consequences is easy.

A Few Exceptions to the Early IRA Withdrawal Penalty.

An individual retirement account (IRA) is set up to assist you with saving money for your golden years. The Internal Revenue Service (IRS) permits you to begin making withdrawals from your account at the age of 59 and ½. Nevertheless, you can take withdrawals prior to this if you are willing to pay a penalty. For early distributions, the IRS makes you pay a 10% penalty fee. Depending on the amount you are withdrawing, this can be a hefty penalty. However, you are exempt from this in some instances.

IRS-Approved Exceptions

In order to withdraw from your IRA free of a penalty, you must meet one of the below exceptions.

For some of these exceptions, certain qualifications or rules will apply. For example, when you purchase your first home using money from your IRA, there is a lifetime distribution limit of $10,000. The funds must also be used within 120 days after you have withdrawn them. Additionally, the funds must only be used on the first home and the buyer is the IRA account owner, their spouse or an ancestor.

Royal Legal Solutions

If you hold an account with a reputable firm, like Royal Legal Solutions, you have already made your first great investment choice. By allowing us to help you with your IRA, you can take advantage of any of our great services. Our professionals want the best for you and your account. We understand IRS, state and federal regulations that may apply to your account. By using Royal Legal Solutions to start your retirement account, you can feel secure in knowing we will help keep you from violating these regulations. Contact us today to find out more about the services Royal Legal Solutions provides.

Calculating Tax on UDFI from IRA Investments

Your individual retirement account (IRA) is typically considered to be tax-exempt. However, when your IRA borrows money in a non-recourse loan, the owner must file the Internal Revenue Service (IRS) Form 990-T and a Schedule E. They also must report the income generated by the loan as it may be subject to taxes.

Filling Out the Form

Unrelated Debt Financed Income (UDFI) is generated when an IRA borrows money to purchase real estate. UDFI also requires the account holder to file Form 990-T with the IRS, similarly to UBIT.

You will find eight columns under Section E of IRS Form 990-T. These are as follows:

Column 1.   During the year, if there was an outstanding loan on the property owned by the IRA, that property would be considered debt financed. This is true even if the property is sold at a gain before the end of the taxable year.
Column 2.   Income cannot be taxed twice. If your IRA generated an income via a business investment through the use of a limited liability company (LLC), this income cannot be taxed again.
Column 3.   These are your deductions.
Column 4.   The average acquisition indebtedness can be tricky to calculate. Start with figuring out which months your IRA owned the property during the year. Once you do this, figure out the outstanding principal debt on the first of each of those months. Add them together then divide that sum by the number of months.
Column 5.   Section 1011 of the IRS Code can help to explain how to find the adjusted basis for the debt financed property owned by your IRA. Once you determine this value, you would need to adjust it for the depreciation of the previous tax years.
Column 6.   To find the value of column 6, simply divide column 4 by column 5.
Column 7.   Calculating the amount of income generated by your debt-financed property can be confusing. First, divide the property’s average acquisition indebtedness for the tax year by the property’s average adjusted basis. Once you have this number, multiply it by the property’s gross income. (This percentage cannot exceed 100%.)
Column 8.   Sum up your total deductions from column 3. Multiply this by your response to column 6.

Unrelated Business Taxable Income (UBTI) Tax Rate

Your self-directed IRA (SDIRA) is subject to the IRS UBTI tax rates. Why? Because the IRS treats your SDIRA as a trust. For 2020, these rates are:

We Can Help

When you have an account with Royal Legal Solutions, you can rest assured that your IRS forms are filed correctly. Not only do we help you understand the regulations and requirements of the IRS, but we will handle the paperwork for you. After all, these forms can be tricky and sometimes complicated. Let us help. Contact the professionals at Royal Legal Solutions today to find out more about what we can do to make your IRA ownership easier.
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Beneficiary Options for an Inherited IRA

When you open an individual retirement account, also known as an IRA, it is supposed to help you save for your golden years. After all, an IRA gives you the opportunity to grow your savings until you retire or reach the age of 59 ½. However, in some cases, the funds in your IRA may outlast you. When an IRA owner passes before all of the funds have been depleted, the remaining balance is passed to their designated account beneficiary. Should this happen, the beneficiary has a few options they should consider.

Open an Inherited IRA

The first option is an inherited IRA. This account will allow you to distribute the funds, although they will be taxed. (Withdrawals from an inherited IRA account are subject to your normal income tax rate.) When you open an inherited IRA account, you will have a required minimum of withdrawals you must make. The balance of the inherited IRA account and your life expectancy determines this. If the original IRA owner passed before the age of 70 ½, you may delay withdrawals for up to five years.

Take a Lump Sum

If you would prefer to cash out the IRA account you inherited, you have that option as well. As with the inherited IRA account, a lump sum withdrawal will be taxed like your normal income would be. If the IRA has a large balance, it is important to realize that this may push you into a new tax bracket. With it will come higher tax rates.

Transfer the IRA

In the event that you inherit an IRA from your spouse, you have the option to transfer the balance into your own account. This is known as “assuming ownership.” Unlike the inherited IRA account, you are able to make withdrawals when you deem it necessary. As with a normal IRA, there are penalties if you withdraw funds prior to turning 59 ½. (Penalties are currently 10% for early withdrawals.)

Roth IRA

The above options apply to traditional IRAs and Roth IRAs. There is one obvious difference however. Roth IRAs are opened with post-tax dollars. Because of this, they are typically not taxed. If you opt to take withdrawals from an IRA you inherited and are over the age of 59 ½, you can do so without owing any taxes. However, if you are under the age of 59 ½, you will need to pay an early penalty tax on any investment gains you withdrawal.

Royal Legal Solutions and Your Beneficiary

At Royal Legal Solutions, we make IRA account ownership easy. When you open an account with us, we strive to make it as painless as possible for you and your designated beneficiary. We understand the impact the loss of a loved one can have. Because of this, we do our best to provide your beneficiary with the same support, professional feedback, and quality account policies that we gave to you.

Does the Manager of an IRA LLC Need a Real Estate License?

No.

Blog over.

Just kidding, but the answer is correct. The logic behind this is fairly straightforward, but there are some things that need to be explained.

Why an IRA LLC Manager Does Not Need a Real Estate License

Some people have to have a real estate license to work in the business. For instance, a real estate agent needs a real estate license. Someone who oversees the management of rental properties needs a real estate license. If the principal function of your job is the sale, management, renting, or leasing of a real estate property, then you need a real estate license.

However, if you own a company that performs these services, are performing these services for yourself, or are the principle in an LLC that performs these services, you have no need for a real estate license.

This is what you need to understand.

If you do have a real estate license and manage a self-directed 401(k) or self-directed IRA, it can actually trigger a prohibited transaction. In other words, the IRS will flag the transaction as illegal for the purposes of tax-deferral.

The IRS lists several kinds of transactions that are expressly forbidden for IRAs to execute. For example, you cannot own a business with your IRA that either you or a close family member runs or operates. You cannot own property with an IRA that either you or close family members rent or reside in. You cannot directly benefit from business transactions executed by your IRA. The only benefit you get is when it’s time to distribute the holdings. That would be when you reach the ripe old age of 59 ½.

Suffice it to say, having a real estate license and using your IRA to execute real estate trades could be seen as a conflict of interest. Not only do you not need it, but you don’t necessarily want it.

Dealing with Real Estate Held in Your IRA LLC

If you own real estate or you’re a principal of an LLC that owns real estate, you do not need a real estate license. If you’re an employee of that LLC whose duties include managing, selling, showing, renting, or leasing that real estate, then you do need a real estate license.

Basically, the rules that relate to all businesses held in an IRA are the same for real estate holdings. If you own an interest in a business through your IRA, then you are prohibited from the management or being involved in the day to day operations of that business.

What you can do, is hold real estate in your IRA and then earn a passive income from rent or the sale of the property. You can still use your IRA LLC to hire a property manager or have the IRA custodian handle expenses directly.

If you still have questions about this, it’s best to contact an IRA or tax professional.

How to Take Distributions From Your Self-Directed IRA (Without Screwing It Up!)

There are going to be times when you’re required to take a distribution from your self-directed IRA. Whether the IRA was inherited or you’ve reached the maximum age, the IRS mandates that distributions be taken in order to satisfy the tax-deferred or tax-free status of the retirement account. This is generally known as an RMD (required minimum distribution).

Now, the RMD needs to be distributed from your account the exact same way that it’s reported to and enforced by the IRS. It also needs to be drawn directly from the IRA, not from the IRA Trust or the IRA LLC.

The question is: is there any way around that?

Most of us have a healthy skepticism toward anyone who claims to have found a legal loophole to what the IRS expects. On the other hand, what the IRS expects is not necessarily legally enforceable.

Taking Distributions from the IRA Trust or LLC?

It may not be readily apparent to anyone but a financial advisor, a tax attorney, or your IRA custodian for that matter, but IRA Trusts and LLCs are not themselves the retirement accounts. The LLC or trust is merely the means by which the IRA makes investments. It’s a vehicle. This distinction is useful because some IRA custodians believe that you can take distributions directly from the trust or the LLC.

But that’s not how distributions are taken.

Nonetheless, there is no specific law barring the practice. So the question then becomes: how would the IRS respond to an IRA owner receiving distributions, approved by the custodian, from the IRA LLC or Trust?

That’s just it. No one really knows. The fact is, distributions are supposed to be taken directly from the IRA. Not the trust and not the LLC. So why some custodians would risk distributing from investment vehicles is beyond me.

Still more baffling: what is the potential benefit of distributing through the LLC or trust? I can’t seem to find one. Maybe it’s less paperwork.

So why risk it?

Taking Distributions Safely

There are certainly times when custodians do things that the IRS doesn’t necessarily approve of, but there’s generally a potential payoff and a very good reason for fighting that battle. The IRS is the authority but they are still beholden to the law. They enforce the law, they don’t create or interpret it. Nonetheless, you want to pick your battles.
Safely taking a distribution from your IRA entails going through the process aboveboard. The process is as follows:

  1. Complete a deposit form that sends IRA Trust or LLC funds back to the custodial account.
  2. Take distribution.

See? It’s really not that hard, and the best part is, it won’t flag the IRS into looking more deeply into your investments.

Your Self-Directed IRA: How NOT To Run Afoul Of The IRS

If you are researching the legalities of using their self-directed IRA  for different kinds of investments, you’ll be happy to know that there aren’t very many prohibited investments. On the other hand, individual retirement accounts (IRAs) were designed as vehicles for passive earnings and more specifically, for retirement security. There is some wiggle room here, but you don’t want to cross the line with the IRS.

Passive earnings can include things like rent, interest, the appreciation in value of real estate, stocks, or bonds, dividends, monies being paid off on a debt, and so on. There are, however, key restrictions you should know. Bear in mind that the IRS expressly prohibits certain kinds of transactions from making their way into your IRA trust.

Why the IRS Prohibits Active Earnings from an IRA

An IRA is designed for the express purpose of being a retirement account, not necessarily a tax loophole. Consider what would happen if individuals put their homes or their businesses into their IRA. The government would never collect a dime in taxes. The IRS, therefore, prohibits IRA holders from using their IRA to claim tax-deferred or tax-free status on their own personal ventures.

Self-directed IRAs allow individuals to claim tax-deferred and tax-free status, but they saddle those same individuals with a handful of rather complicated guidelines that must be followed. Failure to follow these guidelines can enable the IRS to revoke the IRA’s tax-preferred status.

The remainder of this article, then, will inform you as to what, precisely, those restrictions are and how they can be avoided.

Prohibited Investments for Your Self-Directed IRA

There are generally two kinds of investments prohibited for IRAs. Those that fail the metric for passive income, and those in which you are conflicted out of tax-preferred status. We’ll take a look at them one by one here.

Life Insurance Policies

Life insurance policies, generally speaking, cannot be held in an IRA. This includes:

Since IRAs are meant to act as a retirement fund, this makes a certain kind of sense. There is, however, one exception known as the incidental benefit rule. There are some qualified plans that are allowed to purchase a small amount of death benefit insurance, but the payoff does not constitute any form of lucrative investment, so it’s not really worth investigating.

Collectibles

In order to enjoy tax-deferred status, the IRS mandates that you defer any form of use or enjoyment from the investments held in your IRA. Any collectibles, antiques, sports memorabilia, or fine art that you purchase or possess can, thus, not be held in your IRA.

You may be wondering if coins fit the definition of a collectible. The answer is mostly. There are certain kinds of coins that are issued by the government as precious metal investments. While you would be prohibited from investing in antique coinage, you are not prohibited from investing in precious metals. Therefore, coins that are minted for their value as a precious metal are excluded from the collectible restriction.

Real Estate that You or Your Family Personally Use

Despite what you may think, real estate has become a very popular investment vehicle for self-directed IRAs. The one major restriction is that you cannot directly benefit from the real estate. That is to say, neither you nor your family can personally reside on the real estate. This is considered a prohibited transaction and it conflicts you out of tax-preferred status.

How does this work?

You yourself cannot receive the benefits of the property. You personally cannot collect rent. The rent must be paid directly to the IRA trust. In order for that to work, it must be held in the trust’s name and not your own.
Furthermore, you can’t purchase your primary home or a vacation home using your IRA. Nor can you purchase or sell property to members of your family.

Nonetheless, real estate is becoming an attractive option due to recent booms in the market.

Derivative Trading

There are a number of other prohibited transactions to be aware of. Those (generally) include any kind of derivative trade that has undefined risk. Again, the function of an IRA is retirement security so, more often than not, speculation of this sort is prohibited.

Business Interests

You can invest in business interests. However, you cannot be engaged in the management or running of the business in any way. Some folks want to use their IRA to start their own small business or use their IRA as collateral for a loan to start their own business. This is a prohibited transaction.

What Happens if I Engage in a Prohibited Transaction Using My IRA?

Essentially, if you use your IRA to engage in a prohibited transaction, the IRS will treat your IRA as if it were distributed. In other words, they will say you’ve cashed out your IRA. They will then subject you to:

In other words, the penalties are severe and it’s not something you want to experience.

A Checklist for Acceptable Investments

In order to avoid the steep penalties for triggering a prohibited transaction and an IRS reprisal, you should ask yourself the following questions:

While the Internal Revenue Code is not necessarily accessible to laypeople, there is plenty that an individual with solid common sense can take away from these general principles. For the most part, those who use their IRA as a retirement account or operate it within the acceptable parameters which govern its tax-preferred status aren’t going to have very much to worry about.

One last thing worth noting is that there is some wiggle room in terms of the language that provides exceptions for certain kinds of investments. These types of transactions, however, should not be executed without the oversight of a competent retirement planning professional.

Estate Planning Opportunities With a Self-Directed Roth IRA LLC

Roth IRAs, while primarily used for the purposes of retirement, can also be useful for estate planning. The main difference between a Roth IRA and a traditional IRA is that distributions from a Roth account are not taxed. Contributions to the Roth are taxed.

Furthermore, traditional IRAs may be converted to Self-Directed Roth IRA accounts. The question then becomes: How can you use this to your advantage in terms of estate planning?

Understanding the Estate Tax

There’s no way around the fact that an IRA, regardless of the kind, is included as a part of the owner’s estate. When the IRA is inherited, the beneficiary is required to include each distribution as part of their yearly income tax. The distributions can be stretched out for the individual’s entire life expectancy, but yearly distributions are mandatory.

Estate Planning Benefits of Converting to Roth IRA

If you decide to convert a traditional IRA to a Roth IRA, you will have to pay taxes on the amount going into the account, since Roth accounts tax contributions and not distributions. You also don’t have to convert the entire account over to the Roth, but whatever you convert will be taxed, so bear that in mind.

Nonetheless, there are significant benefits to converting to a Roth in terms of estate planning. Some of the major ones are:

Distributions Are No Longer Taxable

You’re going to be basically paying off the taxes on behalf of those who will inherit the account when you convert it to a Roth. In fact, you can leave this as a notice upon your passing to pay off the taxes for the conversion and that would reduce the amount of taxes you would pay on your estate. Each time your beneficiaries take a distribution, the money would not be taxed.

You Are Not Required to Take Roth Distributions During Your Lifetime

With a traditional IRA, you must begin receiving distributions once you hit 70 ½ years of age. Not so with a Roth IRA.

Growth Is Not Taxable

Traditional IRAs have tax-deferred status. Roth IRAs are essentially tax-free. The longer the IRA has had time to mature, the better the potential payoff. The growth of the IRA is tax-free and so are the distributions, giving you and your heirs non-taxable income for the remainder of your lives.

It’s a Great Time to Convert

The new Tax Cuts and Jobs Act has made converting from a traditional to Self-Directed Roth IRA historically cheaper than it’s ever been before. It’s a great time to take advantage of low tax rates in order to save money on the cost of converting.

Executing a Stretch

To execute a stretch, simply pass the IRA to the youngest person in your family. A good example is a grandchild. Since the value of the distribution is prorated over the course of the child’s life, it stands a good chance of being less than account’s annual earnings. Another option would be leaving the Roth IRA to a spouse who would not be required to take any distribution at all. When the spouse passes, the Roth can then be handed over to the youngest child in the family.

Self-Directed IRAs: Your Tax Questions Answered!

The maximum contribution for a self-directed IRA remains $5,500 per year for those who are under 50 years of age and $6,500 per year for those who are 50 or over.

Roth IRAs can also be limited depending on your income. For a Roth IRA, the more you make, the less money you are allowed to put into the account. That amount diminishes until you’ve crossed a threshold which limits your contributions to zero dollars per year.

Are My Contributions Still Tax-Deductible?

It seems like each time a new president takes office and passes their tax plan, there ends up being a great deal of confusion over what you can or cannot claim. While it’s true that the Tax Cuts and Jobs Act limits the amount of deductions you can claim in property taxes, retirement accounts were left largely untouched.

So the answer for now is yes, you can still claim contributions to your retirement accounts on your taxes, but there are other changes to the tax code relevant to IRAs that are no longer deductible. Those include:

My Employer Offers a Retirement Plan, But I Want to Start My Own. Now What?

You are still allowed to make the maximum contribution of $5,500 per year to your self-directed IRA. This is true regardless of whether or not you have an employer-sponsored retirement plan, even if it is an IRA. There may, however, be a limitation regarding whether or not you’re allowed to claim these funds as a deduction on your tax return.

I Filed a Joint Return with My Spouse, But Only One of Us Works. Now What?

Both you and your spouse can make separate contributions to your IRA regardless of the fact that only one of you works and thus has taxable revenue. So long as the combined amount does not exceed the limit of $5,500, Uncle Sam doesn’t care where the money came from. You can also write off the contribution on your joint tax return.

I Filed a Joint Return with My Spouse. How Does This Affect Our Roth IRA?

Roth IRAs are capped for both single and married couples. For married couples, the threshold begins at $181,000 of cumulative gross income. Once that threshold is crossed, the amount you are allowed to contribute diminishes until it reaches zero. The IRS provides a formula for calculating this amount.

Converting a Traditional IRA to a Roth IRA

Before 2018 there was a loophole that allowed people to make contributions to their traditional IRA and then characterize the account as a Roth IRA. The Tax Cuts and Jobs Act closed this loophole, at least partly. You can no longer convert your traditional IRA back to a Roth. Nonetheless, the new tax bill lowered the amount of taxes you would have to pay in order to transfer funds from a traditional IRA to a Roth.

Remember, Roth IRAs are built on contributions that are taxed on their way in, while traditional IRAs are taxed on their way out. In order to convert the account, you will need to pay taxes on the entire contents of your traditional IRA. For some, this will be worth it. For others, not so much.

Investment Options for Your Self-Directed IRA

One of the best things about rolling over your retirement assets into a self-directed IRA is that it opens up a number possibilities in terms of investment options. Typically, IRAs avail their holders to a small set of options, usually mutual funds and bonds. Holders of a self-directed IRA, however, can invest in:

With all those options, more and more individuals are converting their traditional IRAs to self-directed IRAs to take advantage of a very favorable market. There are, however, certain rules and restrictions that need to be followed in order to enjoy tax-free and tax-deferred status.

Investment Restrictions for Self-Directed IRAs

The IRS does not list what self-directed IRAs are allowed to invest in. On the other hand, it provides a detailed list of prohibited transactions and specifies what individuals are not allowed to invest in. Generally speaking, you cannot directly benefit from any investment you make with your IRA. For those that own property, the property must be held in the name of the IRA trust and not your own. Rent, for example, would be paid directly to the trust.

In addition, you can not hold property in your IRA that either you or your family members benefit from. This includes homes, businesses, and loans. You can’t borrow against your IRA to start your own business. Generally speaking, if you or your family reap immediate rewards from the holding of an asset in your IRA, that is disqualified.

While certain assets are restricted by the IRS, the IRS is most concerned with who is benefitting from the holding of the assets in an IRA. If it’s you or a member of your family, that will raise their eyebrows.

Investment Possibilities With Your Self-Directed IRA

Self-directed IRAs significantly expand your options. They also afford you all the benefits that IRAs have to offer. What are some of those options and benefits?

Tax Deferral

Both traditional and self-directed IRAs enjoy tax-deferred status. Roth IRAs are essentially tax-free. Due to this preferred tax status, the IRS insists that certain rules are followed. Nonetheless, returns and contributions to non-Roth IRAs are tax-deferred. You won’t begin paying a dime in taxes until you begin taking distributions.

Roth IRAs, on the other hand, are taxed on their way into the account. You won’t pay taxes on either distributions or gains. Contributions to the Roth, however, are not deductible. There are also limitations on what you’re allowed to contribute depending on how much you make in a year. This is something to bear in mind when considering a Roth IRA.

Real Estate

Real estate is one under-utilized option for self-directed IRAs. So long as the real estate is property of the IRA trust, any money that the real estate generates is allowed to be entered in your IRA tax-deferred. This can include rent or gains from the sale. One restriction, however, is that neither you nor anyone in your family is allowed to reside in or take advantage of the property in any way. That would create a conflict of interest and potentially void your IRA.

Stocks, Bonds, and Mutual Funds

IRAs are set up to receive passive income from such things as dividends. In fact, the IRS prefers that you pad your IRA with passive earnings. Traditional or non-self-directed IRAs relied on bonds and mutual funds to accrue value. You can still invest in stocks, bonds, and mutual funds, but with a self-directed IRA, you can choose which ones you invest in.

Precious Metals

While the IRA expressly prohibits the use of your IRA to invest in collectibles, there are certain kinds of coins that gain their value intrinsically from what the coin is made of. Instead of being an investment in the coin, it’s considered a precious metal investment. The U.S. government mints such coins for this express purpose. So do most major countries across the globe. These coins are largely considered an acceptable form of investment for your IRA.

Tax Liens

Another interesting option for your self-directed IRA is tax liens. Essentially, the government will sell liens on real estate where the owners have failed to pay property taxes. They will recoup their money in this manner. Meanwhile, interest is building on the unpaid taxes. If the owner fails to pay at all, the real estate will become property of the IRA. For the last decade or so, tax liens on real estate have become a very lucrative investment. With your self-directed IRA, you can reap the rewards tax-deferred.

Private Businesses

This is a bit tricky, but it can be done. You’ll need to bear in mind that you cannot purchase an interest in any business belonging to “disqualified” persons. This basically includes anyone in your family or yourself. The IRA can own an interest in a business and have profits paid to the account, but the disqualified persons statute of the IRC must be abided absolutely. Otherwise, you risk the IRS considering the transaction a distribution thus voiding the IRA entirely.

Loans and Notes

You can purchase notes or make loans using your IRA. However, the same rules concerning disqualified persons still apply. Likewise, you can’t borrow against your IRA.

Foreign and Cryptocurrencies

The IRS permits investors to use their IRA to invest in both foreign currencies and cryptocurrencies. Cryptocurrencies have made a lot of headlines recently, but the jury is still out on whether or not they constitute a good long-term investment. It seems that if the technology to process transactions improves over the next few years, as everyone expects it will, then cryptocurrencies could represent a major disruptive technology that would change the face of global commerce forever.

Foreign currencies also represent an excellent investment option as they offer easier liquidity than stocks or bonds.

The Bottom Line

Self-directed IRAs have many advantages, not the least of which is that they allow tax-deferred earnings and unmatched investment options. Using your self-directed IRA to secure your future has never been easier or more effective.
 

 

Using a Self-Directed Roth IRA LLC to Purchase Real Estate

An individual retirement account (IRA) is a well-known and popular means of saving for your golden years. A lesser-known option, called a self-directed IRA (SDIRA) is another option. A Self-Directed Roth IRA is something else entirely, which we'll get to in a minute.

While an IRA permits account owners to invest in mutual funds, bonds and stocks, a SDIRA allows for even more. Precious metals, real estate, private placements, and mortgage notes, for example, are all allowable investments through the use of a SDIRA.

What is a Self-Directed Roth IRA LLC?

As with an IRA, SDIRAs can fall into various categories. A traditional SDIRA is funded using pre-tax dollars. These contributions, which are typically deducted from your pre-tax earnings, are considered to be “tax-deferred.” This means that taxes are paid on your distributions instead. A Roth SDIRA, however, is funded via post-tax dollars. Because these dollars are already taxed, taxes are not paid on any earnings, returns or distributions. Many financial experts advise investors to establish an entity, such as a limited liability company (LLC), to help protect their SDIRA investments.

Advantages of a Self-Directed Roth IRA LLC

The primary advantage of using your self-directed Roth IRA LLC to invest in, or purchase, real estate is largely related to taxes. Because you already paid taxes on the funds being used in your SDIRA, you do not subjected to taxation on any income or gains made with those finances. In doing this, your eventual distributions are much higher than they would be with a traditional account, which would have taxes deducted when being withdrawn.

By forming a self-directed Roth IRA LLC, you gain checkbook control over your finances. You also help to ensure lawsuits, bankruptcies, and other financial obligations are only payable from the account that was the subject of the court ruling.

Types of Real Estate Investments

One of the biggest reasons for opening a SDIRA relates to the opportunity to invest in real estate. In fact, you can use your self-directed Roth IRA LLC to invest in both domestic and foreign real estate. This includes:

Structuring and Investing with Your Self-Directed Roth IRA LLC

Using your self-directed Roth IRA to invest in real estate is quite similar to how you would personally purchase properties. First, if you obtain the help of reputable professionals, like those at Royal Legal Solutions, you can receive professional help with establishing your LLC. Because your custodian has experience with these types of entities, they can ensure the right documents are filed with the correct government bodies and all fees are paid in a timely manner. A custodian can also help to ensure you structure your LLC in a way that is optimal for real estate investments. This include using your SDIRA funds to make 100% of all investments, partnering with non-disqualified persons, or using your LLC’s finances to make all of your investments.

Choosing the Right Self-Directed IRA Custodian

There are many firms available today to help you establish and manage an individual retirement account (IRA). However, if you are interested in opening a self-directed IRA (SDIRA), you will need to find one of the few firms that have qualified custodians on their staff. Because a SDIRA offers both more freedoms, but also larger risks, hiring a reputable custodian is highly advised. These custodians are employed by specialized firms, like Royal Legal Solutions, and thoroughly understand the regulations established by the Internal Revenue Service (IRS). They can ensure your SDIRA is executed per your personal directions.

Do you think you can handle it yourself? Let us start with taking a look at the IRS regulations you may or may not be aware of.

SDIRA Tax Regulations

Under the Internal Revenue Code (IRC), the IRS establishes regulations that govern taxable incomes, exemptions, and much more. While these codes can be restrictive, they do not dictate what you can invest in with finances from your SDIRA. However, they do spell out what you legally cannot invest in. Under Section 408 and Section 4975, the IRC establishes the definition of a “disqualified person” and a “prohibited transaction.”

Prohibited transactions come in all shapes and sizes. For example, you are not allowed to lend money or provide any form of credit from your SDIRA to a disqualified person and vice versus. This means, you cannot borrow money from your SDIRA to purchase a home for yourself. You also cannot provide goods, services or facilities to a property owned by your SDIRA. If the pipes burst, your SDIRA account must hire a professional with its funds. Additionally, a disqualified person cannot use or benefit from the asset itself or any income it generates. Therefore, you cannot spend the night in the timeshare your SDIRA account owns. Prohibited transactions also include earning a salary for managing the properties owned by your SDIRA and loaning money from your SDIRA to a business you, or another disqualified person, owns.

Your Responsibilities

As noted above, a SDIRA is different from an IRA. While there are small differences, the two largest are the choices you have for investments and your level of control. A SDIRA is not limited to mutual bonds, stocks and bonds, as an IRA is. Instead, SDIRA owners can invest in real estate, precious metals, mortgage notes, private placements, renewable energy sources, and more. These options allow you to diversify your portfolio in a way a normal IRA will not. They can create much higher returns, however, they are also much riskier. As the SDIRA owner, you also have more controls, and therefore, more responsibilities. The SDIRA owner is responsible for all investment decisions. They must be diligent in their research, observations, monitoring and understanding of potential and actual investments. Because a SDIRA owner is liable for the decisions made regarding their account, they also must ensure they provide clear, understandable directions to their custodian.

Role of the Custodian

Your custodian performs actions on your behalf. If you do not yet have a SDIRA, they will assist you in opening an account and help you transfer funds into it. When you decide on your investments, your custodian will invest on your behalf. Per your request, they will make any distributions or pay for expenses, such as paying a plumber to fix the toilet in your SDIRA-owned rental property. As a reputable and knowledgeable professional, your custodian can also help to answer any questions you have about tax regulations and SDIRAs. They will also provide the IRS, or other government agencies, with any legally required reports on your behalf. This includes the IRS-required Form 1099R and Form 5498.
Terms and expectations of your custodian’s responsibilities should be made clear when you elect to hire them. Most firms require custodians to provide clients with quarterly financial statements regarding their SDIRA. Your custodian should also keep you informed of any business policies, fees, or regulations that will affect your account.

While there are several things your custodian will do, there is one major thing the IRS expressly prohibits them from doing. A SDIRA custodian cannot legally provide advice related to finances, such as investments or taxes.

Royal Legal Solutions

Royal Legal Solutions is one of those firms that can provide you with reputable, qualified custodians. Your SDIRA comes with plenty of opportunities to advance your retirement finances. It also comes with greater potential to unintentionally violate tax regulations. Hiring a custodian can help ensure your account does not do this. When you hire a custodian, make sure their fees and responsibilities are clearly established upfront.

Self-Directed IRA for Tax Liens/Deeds

One of the most underutilized ways to invest using your self-directed IRA is to purchase tax liens and deeds. Any assets purchased with your IRA are, as always, tax-deferred. As more people come to realize that liens and deeds are a lucrative option, they’re becoming more popular as an investment. Still, there are a number of investors out there who haven’t even considered the possibility using their IRA this way.

Tax liens and deeds themselves became popular around 2009 right after the housing bubble burst. Numerous foreclosures led to vacant houses which, in turn, led to unpaid property taxes. Even amid the chaos of that period, savvy investors saw an opportunity.
So how does that work?

Purchasing Tax Liens for Profit Using Your IRA

The mechanics of the process may differ slightly from one state to the next. However, the process has more similarity than difference between states. Generally speaking, a tax collector will auction off a lien on the property for the cost of the unpaid property taxes or some portion of them. Some states auction to the highest bidder, while others use a bid-down process on the amount of interest.

Deeds, on the other hand, transfer ownership of the property directly to you. The tax collector uses the money they receive on the purchase of the real estate to pay off the delinquent taxes. You can use your IRA to purchase tax liens and deeds and reap the rewards tax-deferred.

Tax Liens and Deeds are Low Risk and High Reward

Let’s say a property owner falls behind in the payment of their property taxes. After a certain period of time has lapsed, or after a certain amount of money is owed, (this number will differ from state to state) the government will force the sale of or put a lien on the property. This will be done through auction.

The actual value of the property is fairly irrelevant. Although, for obvious reasons, there will likely be more competition for liens and deeds on highly valued property rather than lower valued property. In either event, properties can sometimes be purchased in this fashion for only a few thousand dollars.

While the particulars differ from state to state, tax liens generally have precedence over other liens, even mortgages. If the owner defaults on their payment, the property becomes yours. If they don’t, then you receive the interest. It’s hard to go wrong with that arrangement.

How to Purchase Tax Liens and Deeds Using Your IRA

There is no special method for purchasing tax liens or deeds using your IRA. First, of course, you will need to roll over your funds into a self-directed IRA. For those who have chosen to be their own custodian, the process simply involves finding out when and where the auctions will be, purchasing the tax lien, and then ensuring that it’s held in the IRA trust where it will not be taxed.

For those with an established custodian, speaking to them about your interest in investing in tax liens is the first step. All payments for the lien or deed must be executed by the IRA’s custodian.

Interested in Using Your IRA to Invest in Tax Liens?

You should be! They offer a very low-risk investment with a very high payout potential that can grow tax-deferred until you’re ready to retire.

How to Use a Business Trust With a Self-Directed IRA

An individual retirement account, or IRA, is a vital way to save for your future. An IRA allows account owners to invest in stocks, bonds, and mutual funds. While those avenues can create a large nest egg, a self-directed IRA, also known as a SDIRA, gives investors a range of options that are worth looking into.

Investment Opportunities with a SDIRA

A SDIRA has many benefits, including investment opportunities in real estate, foreign currency and precious metals. For many, however, the opportunity to invest in real estate is one of the biggest draws. When the decision is made to invest in real estate, you can choose between two options:

While it is ultimately your choice, most experts agree that establishing an entity is the best way to protect your finances and identity from potential issues and lawsuits.

Entities and SDIRAs

As the owner of a SDIRA, there are several types of entities you can create. A business trust is one option. With a business trust, when you invest in a property’s title, you are investing in the “beneficial interest” of the entity. Often, a SDIRA owner acquires 100% of the beneficial interests of a business trust. When this occurs, the SDIRA becomes both the “trustor” and “beneficiary” of the business trust.

It is important to remember that the IRS has many complex regulations that govern a SDIRA account. While you, the owner, are the account manager, it is always a good idea to get professional legal help to ensure you do not violate any regulations.

How to Use Your Business Trust

Establishing your business trust is fairly easy. In fact, while state laws and banking institutions may have their own rules, the process can be typically broken down into four steps.

Step 1: Establish the “Declaration of Trust”

Unlike many other entity options, you do not have to publicly file when you form a business trust. This helps to protect the confidentiality and identity of the owner. Therefore, the first step of forming a business trust is to prepare a document known as the “Declaration of Trust”. Often referred to as a trust agreement, this document’s establishes the purposes and objectives of the trust itself. Making appropriate investments that are for the exclusive benefit of the SDIRA is, of course, the purpose of the business trust. The trust agreement will also establish the rights and duties of the beneficiary and trustee. Typically, both the beneficiary and trustee will be given broad powers. Because the SDIRA itself is the beneficiary, the trustee will be granted independent authority to make investment and management decisions. Doing so means that, if you want to make an investment, you do not need the approval of your custodian to do so. (This is particularly important because your custodian is prohibited by the IRS from making financial decisions regarding your SDIRA.)

Step 2: Obtain an EIN

Once you have create the trust agreement, you will want to file for a tax identification number, also known as an EIN. This number, provided by the IRS, is required. In today’s world, you can easily file the required SS-4 Form online to request your EIN.

Step 3: Open a Bank Account

After you obtain an EIN, your business trust should establish a bank account. This bank account, opened in the name of the business trust itself, will authorize the trustee to be the signor. As you are filing for an account on behalf of a business trust, the bank will require that you fill out a “Certification of Trust.” This form establishes several things: you are the trustee, there is a Declaration of Trust, and you have the authority to open the account. In providing a Certification of Trust, you do not have to provide the actual trust agreement. In the end, opening a bank account in the name of your business trust will give you complete checkbook control over investment decisions.

Step 4: Transfer the SDIRA Funds

Finally, you would provide your custodian with the directions necessary to transfer the funds from your SDIRA account to the business trust’s bank account. For most account owners, a wire transfer of the funds is the preferred method and can be quite easily accomplished.

Business Trust Taxation Classifications

When it comes to filing tax returns, a business trust is classified as a partnership, which is subject to both federal and state income taxes. However, if you are the sole owner and investor of the beneficial interests, the business trust becomes a “disregarded entity.”

As such, the business trust becomes exempt from filing federal or state income tax returns. Additionally, there are no franchise taxes for a business trust. Avoiding a franchise tax, which is typically charged by a state in order to gain approval to do business within its borders, means you keep more money in your account for investment purposes.

Tax regulations can be quite complicated and hard to understand, which is why hiring a custodian is highly recommended.

Your SDIRA, Your Business Trust, Your Future

Establishing a SDIRA is a great financial decision for those who want to invest in more than just stocks, bonds, and mutual funds. With the increased potential for diversity and higher returns, SDIRAs are becoming increasingly popular.

However, as with most things in life, higher rewards often come with bigger risks. When investing in real estate, establishing an entity will help protect your confidentiality, finances, and investment potential.

Managing Your 'Checkbook Control' IRA Means Ditching The Custodian

Among the many different kinds of IRAs that you can now open, add a self-directed IRA with full checkbook control. What is that, you ask? Traditional self-directed IRAs require that you run all investments through a custodian. Real estate and others who want to control their financial destiny can opt for a self-directed checkbook control IRA and bypass that requirement—saving themselves thousands of dollars in custodian fees and

How Self-Directed IRAs with Checkbook Control Work

For holders of a traditional IRA account, the process includes the extra step of directing the custodian to execute a specific transaction. Not only does this cost money (custodian fees), but it also delays the transaction.

With checkbook control, you are essentially the manager of the account and take over some of the responsibilities of the custodian. You can immediately use your IRA LLC bank account to invest in stocks, bonds, real estate, precious metals, tax liens, and cryptocurrencies. You do not need the consent of a custodian to execute any of these transactions.

What you are doing is using a business structure that is owned by the IRA to execute transactions. In this case, the entity is an LLC. Since you are authorized to act on behalf of that entity, you essentially have complete control of your IRA.

Legalities of Establishing an LLC for IRAs

The IRS is not enthusiastic about allowing individuals this kind of autonomy over their self-directed IRAs. Nonetheless, when they attempted to pursue the matter in court to stop the practice, they lost the case. The decision was later upheld in 2013. The question at the center of the lawsuit was whether or not using an LLC managed by a beneficiary to execute trades was a prohibited transaction. So long as the transaction does not violate any of the other IRS restrictions on prohibited transactions, it is not in violation of any of tax codes that the IRS enforces.

How Checkbook Control Works

With checkbook control, using your IRA to invest is as easy as writing a check. You will not need custodian approval to purchase real estate, invest in precious metals, execute trades on stocks, bonds, or mutual funds, or even buy cryptocurrencies.

Essentially, your IRA funds will be held in a bank account in the name of the IRA LLC. As a manager of the LLC, you are authorized to perform transactions on behalf of the IRA. While custodianship still resides with whoever has set up your IRA, this allows you to perform the most important duties of the custodian without either their action or consent.

The Benefits of Checkbook Control

There are a number of advantages of establishing an LLC to execute transactions. Firstly, you retain all the tax advantages that an IRA has. Secondly, because it is a self-directed IRA, you have more options in terms of investment. Lastly, because you are authorized to write checks on behalf of the IRA LLC, you don’t have to go through the middleman (the custodian) in order to execute these transactions.

Essentially, you have more power over your own IRA than any other form of IRA would afford you. This includes the ability to:

Caveat Emptor

While having the ultimate power over your IRA is indeed a serious advantage, you don’t want to trigger any of the IRA's prohibited transactions. This includes not cutting checks to your own businesses, buying real estate that you or your family occupy, or purchasing anything with IRA funds that the IRS expressly prohibits.

Any transaction that is flagged by the IRS can open you up to the forfeiture of your IRA. The IRS will consider the funds held therein to be distributed. You will be immediately required to pay taxes on the entire contents of the IRA. You will be charged a 10% penalty for early withdrawal. You can also be subject to capital gains tax.

While checkbook control using an IRA LLC gives you unprecedented power, you will want to be aware of the restrictions that apply to enjoying tax-deferred status. In other words, be aware of what you buy. If you are in doubt, contact the advice of a trusted tax attorney or financial advisor.

The SEP for IRA LLC Solution: Retirement Savings For Small Businesses & The Self-Employed

There are my kinds of retirement plans available today. An individual retirement account (IRA) is one of the most well known. A self-directed IRA (SDIRA) may not be as well known, though it can afford you greater investment opportunities and return potential.

As with an IRA, there are different types of SDIRAs. Traditional and Roth SDIRAs are the most common. However, simplified employee pension (SEP) plans have been around for many years. SEP accounts are available to any business owner, with one or more employees, or anyone who earns a freelance income.

What is a SEP self-directed IRA (SDIRA)?

A SEP approach to retirement funds offers employers with an easy means of contributing toward both their employees’ and their own retirement accounts. SEP SDIRAs are considered traditional accounts because they are established with pre-tax wages. As such, SEP SDIRAs are subjected to the same regulations that govern a traditional SDIRA account, as established by the Internal Revenue Service (IRS). These regulations, established through the IRS’ Internal Revenue Codes, govern investment, distribution, and rollovers.

SEP for IRA LLC

As with any other type of SDIRA, the SEP account owner can establish a business entity to act on its behalf. A limited liability company (LLC) is one such entity. Your SEP SDIRA LLC is an IRS-approved structure that gives you, the owner, the opportunity to open an LLC-related, SEP SDIRA-funded bank account. Other benefits include:

 

Advantages of Using a Self-Directed IRA to Purchase Real Estate

Self-directed IRAs avail investors to a number of great investment choices. One of those happens to be real estate. Since the passing of ERISA (Employee Retirement Income Security Act) in 1974, anyone with the capital can invest in real estate using the tax-deferred status of their IRA. There are some restrictions to this, but these involve family members and other relatives benefiting from businesses or properties owned by your IRA trust. They constitute disqualified persons.

The Benefits of Using a Self-Directed IRA to Invest in Real Estate

Aside from the fact that real estate is an extremely hot commodity right now, there are a number of excellent reasons to use your self-directed IRA as an investment vehicle. The number one reason, of course, is that any gains you earn from properties held in your IRA are tax-deferred. You only begin paying taxes on those earnings once you begin collecting on the IRA.

Roth IRAs are a different story. You pay taxes on the contributions, but do not pay taxes on gains or earned income once you’ve cashed in the IRA.

There are a number of other excellent reasons, other than tax-deferral, for using your IRA to invest. Those include:

What Kind of Real Estate Can I Invest in Using my IRA?

There are no limitations on the kind of real estate you’re allowed to invest in using your IRA. There are only limitations on who occupies the real estate or financially benefits from its earnings. Popular types of real estate to invest in are:

In other words, there is no real limitation on what kind of property you can purchase with your self-directed IRA. So long as you or your family members are not residing on the property, you can collect on the property tax-deferred.

How Much Can I Save Investing with a Self-Directed IRA?

Let’s say you put $250,000 into your self-directed IRA to invest in real estate and other ventures. Each year, you get a return of about 10% on your investment. The tax rate for taxable profits is around 25%.

Over the course of one year, your investment would have appreciated to $268,750. However, if you had invested with your IRA, that number balloons to $275,000. That’s a difference of $6,250.

Now let’s say your investment has been maturing for 30 years. Given the same rates, you would have earned $2,188,739. What would the same investment be worth in your IRA? The answer is an astounding $4,362,351. In other words, your investment is worth double what it would be if the profits were taxed yearly over 30 years.

Investing with your self-directed IRA can literally save you millions of dollars.

Investing in Foreign Currency With a Self-Directed IRA

Most employers offer their employees retirement accounts. An individual retirement account (IRA) is one of the most popular choices. These accounts allow owners to invest in bonds, stocks and mutual funds. A self-directed IRA (SDIRA), however, offers much more. A SDIRA permits owners to invest in almost anything, including real estate, precious metals, private businesses and even foreign currency. While real estate may be one of the biggest draws, being able to invest in foreign currency is not without its own merits. Let us take a look.

The Foreign Exchange Market

If you are considering making an investment in foreign currency, you should first learn more about the market itself. The foreign exchange market (Forex) is the largest in the world. The market itself is open for five and a half days a week, without closing. Exchanges are made electronically. Currency trading is considered to be one of the safest investments you can make. Fluctuations, if there are any, are extremely small, meaning your risk is minimal.

A SDIRA and the Forex

A SDIRA is a great way for account owners who want to have more control over their investments to do so. As such, when you use your SDIRA to invest in foreign currency, you can do so at your leisure. (Note: Some financial institutions will attempt to convince you to stay safely within the realm of stocks, bonds and mutual funds. At Royal Legal Solutions, however, we know the benefits of investing in foreign currency and we are here to support your decision to do so!) If you choose to invest in foreign currency, there are several advantages you give yourself.

Your SDIRA, Your Investments

Other benefits include asset and creditor protection, limited liability, and reduced custodial fees. At Royal Legal Solutions, our custodians are both reputable and qualified. While we cannot legally advise you on what investments you should make, our goal is to ensure your investments are smooth, easy, and abide by the regulations as set forth by the Internal Revenue Service (IRS).

What are the Perks of a Self-Directed Roth IRA?

Self-directed IRAs are a specialized kind of IRA that allows investors to broaden the scope of their investments. For example, traditional IRAs are generally limited to stocks, bonds, and mutual funds. Self-directed IRAs, so long as certain criteria are met, can hold things like businesses, real estate, tax liens, and a great deal more on top of that. In addition, self-directed IRAs give investors more control over their investments than do traditional IRAs. These investments are allowed to accrue passive income tax-free.

What is a Roth IRA?

Roth IRAs were introduced by Congress in 1997. With a traditional IRA, investments are allowed to mature tax-free, but once you either cash out the IRA or begin taking distributions, the money immediately becomes taxable. Not so with a Roth IRA. Distributions from a Roth IRA are tax-free. But there are some caveats, restrictions, and stipulations to be aware of.

Contributions are Not Tax-Free, But...

The most important thing to be aware of is that the contributions themselves are not tax-deductible. This is because contributions made to your Roth IRA are made with money that has already been taxed.

With a traditional IRA, contributions are tax-free and then taxed on their way out. Roth IRAs are just the opposite. Contributions are taxed on their way in but not on their way out. Earnings are tax-deferred and in some instances, they can be tax-free, so long as certain conditions are met. This depends on whether or not the distribution qualifies under certain guidelines. If it does, you’ll never pay any tax on your Roth IRA distributions. Conditions include the age of the individual receiving distributions and the age of the IRA itself.

As Long as You Have Earned Income, You Can Contribute to Your Roth IRA

With a traditional IRA, you cannot make contributions to the IRA beyond the age of 70 and a half. So long as you have some kind of earned income, you can continue to make contributions to your Roth IRA so long as they don’t exceed the accept $5,500 per year if you are under the age of 50, and $6,500 per year if older.

Other Limitations on Roth IRAs

Roth IRAs were instituted as a form of tax relief for individuals below a certain income threshold. So the IRS limits what your contribution can be to a Roth IRA depending on how much you make. As of 2016, the cutoff for making any contribution at all was $132,000 for single filers and $194,000 for married couples. Once a single individual reaches $117,000 the amount they’re allowed to contribute becomes smaller and smaller until it reaches zero at $132,000. For married couples that number begins at $184,000.

The Bottom Line

For those that qualify for a Self-Directed Roth IRA and can make contributions based on their income status, the ability to allow their investments to grow tax-deferred and then collect distributions tax-free is an incredible opportunity.