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:

• Up to $2,600: 10% of the amount over zero
• $2,600 up to $9,450: $260 + 24% of the amount over $2,600
• $9,450 up to $12,950: $1,904 + 35% of the amount over $9,450
• $12,950 and over: $3,129 + 37% of the amount over $12,950

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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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.

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.

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:

• Whole life
• Universal
• Term and variable
• SEP
• SIMPLE

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:

• Income tax on the entire contents of the account
• A 10% early withdrawal penalty
• Capital gains tax on the increased value of your account

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:

• Is this an active or a passive investment?
• Are holdings being held in my name or the IRA trust’s?
• Am I directly benefiting from items held in the IRA?
• Does holding this item in an IRA trust produce a conflict of interest?

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.

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:

• Costs associated with maintaining the IRA
• Other miscellaneous fees related to the IRA

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.

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:

• Real estate
• Land
• Precious metals
• Tax liens
• Tax deeds
• Mortgages
• Mortgage pools
• LLCs
• LPs
• Stocks
• Bonds
• Cryptocurrencies

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.
 

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:

• Land
• Residential homes, including mobile homes, condominiums, apartments, duplexes and townhomes
• Commercial properties
• Tax liens and deeds
• Farms
• Real estate notes

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.

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.

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:

• Checkbook Control & Direct Access: By opening a bank account for your SEP SDIRA LLC, you are given checkbook control. This means you no longer need to get approval from your SDIRA’s custodian in order to make an investment. This gives you direct and immediate access to your investment funds. Because of this, you will be able to make investments easier and more efficiently.
• Greater Investment Opportunities: Your SEP SDIRA LLC makes investing in opportunities faster and easier. Investment opportunities include real estate, precious metals, private businesses, foreign currency, and much more. Because your LLC is linked to your SDIRA, all incomes and earnings generated by these investments can flow directly back into your SEP SDIRA, tax-free. This is because your LLC is actually considered to be a pass-through entity by the IRS.
• Reduced Custodian Fees: Because you have checkbook control over your investments, you are able to reduce custodian-incurred fees associated with the account value and transactions.
• Limited Liability: As implied by the LLC, your SEP SDIRA funds are better shielded from attacked. This is important in the case of a bankruptcy, debt or creditor issues, or lawsuits.

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.

• Easy Access & Checkbook Control: If you establish a limited liability company (LLC) or business trust in connection with your SDIRA, you can open a bank account related to that entity. In doing so, you give yourself greater control over your own investment choices and no longer need to seek approval from your custodian. This makes investing in the Forex faster, easier, and much more efficient.
• Tax-Deferred & Tax-Free Growth: When you use your traditional SDIRA to invest in foreign currencies, you are rewarded with a tax-deferred state on any income or gains. A tax-deferred status means that you have the benefit of paying taxes only when your distribute your funds during your retirement. Because of this tax-deferred status, your SDIRA is permitted grow tax-free, giving you more funds to invest in other opportunities.

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).

Self-directed IRAs offer the best of many worlds. That includes having full custodianship over the IRA trust and the ability to make any decisions concerning the trust. For instance, buying and selling a property can be as easy as writing a check. Any gains made from the sale are paid to the trust tax-free.

The one thing that an investor needs to be aware of is UBTI (Unrelated Business Taxable Income Rules), which is sometimes also known as UBIT. Under UBTI, non-taxable entities such as IRAs may be treated as for-profit entities (and thus taxed) given certain conditions. The question then becomes: what re those conditions and do they apply to house flipping?

Firstly, UBTI applies to the taxable income of “any unrelated trade or business regularly carried on” by an organization that would otherwise be subject to the tax. There are three aspects to this that need to be understood. Those are:

• Trade or business
• Regularly carried on
• Unrelated

The language itself is ambiguous. The actual law is less so.

UBTI Income Rules Explained

In terms of an IRA or 401(k), any trade or business may be deemed unrelated to the general function of a retirement fund. The UBTI, however, is only interested in preventing businesses that are engaged in a competitive market with other businesses to gain an advantage by using tax-free or tax-deferred status. Strictly speaking, the UBTI is never going to be triggered by income derived from passive gains, such as interest, rent, royalties, and dividends.
But a business like a store or restaurant would be subject to taxes, even if held in an IRA. How, then, does this apply to house flipping?

UBTI and House Flipping

The question most people ask themselves is: “what exactly is the threshold for regularly carried out?”  The truth is, there isn’t one. The IRS is likely to employ a three-factor test in determining whether or not an individual’s house flipping activities cross the line. Those include:

• The frequency of transactions
• The intent of the individual
• Other activities claiming tax-exemptions

The main factor is whether or not the flipping of the houses constitutes a business. It would, of course, not be ok to have a business that you’re actively engaged in the management of trying to get out of paying taxes. On the other hand, buying a house, fixing it up, and then selling it off is unlikely to trigger a visit from the IRS.

Ultimately, the IRS will make a determination based on whether or not you’re attempting to use your IRA to get out of paying taxes. If you’re operating a business from your IRA, then the IRS is likely to frown upon that. If you flip one or two houses a year using IRA money, then the IRS is unlikely to care.

Clearly, IRAs were not designed for the purpose of flipping houses. Nor does that mean that an individual would be prohibited from using their IRA to do so. So what exists is a legal gray area that, under the proper circumstances, can be exploited fo the purpose of padding your retirement account. For those who are interested, working with a tax professional will help avoid triggering a UBTI audit.

An IRA rollover is the transfer of funds from one account into an IRA. A Rollover IRA is a retirement account capable of accepting those funds. The Employee Retirement Income Security Act (ERISA) permits a number of ways for individuals to transfer funds from one qualified plan to another. However, the provisions for these plans can get somewhat complicated, and navigating your way through them can be a headache.

The provisions in ERISA basically cover transfers from one type of retirement account to the next. They are designed to make it easier for those who are switching from one job to another to move their money without cashing out their 401(k) or IRA. In addition, there are a number of qualified plans that can be rolled over into an IRA, including Health Savings Accounts (HRAs).

While there are a number of reasons why someone would be interested in doing this, the most common reason is when someone changes jobs. They can either have two 401(k)s that exist in their name or roll over their old 401(k) into an IRA that would then receive distributions from their current 401(k).

Rolling Over Funds From One Traditional IRA To Another

While this is perfectly acceptable under the law, there is one stipulation that you should be aware of. Funds withdrawn from one IRA to be deposited in another must be reinvested within 60 days. Failure to comply with that requirement could open an individual up to losing their non-taxable status and perhaps being penalized for cashing out the IRA prematurely.

In addition, the IRA must be transferred in its entirety into the new account. If even a small portion of that money is withheld, then the funds could be treated as taxable.

Lastly, the action of rolling one IRA over into another can only be done once per year.

Rolling Over Funds From A Qualified 401(K) To A Traditional IRA

Funds can easily be rolled over from a 401(k) to an IRA but again there are certain restrictions. Most importantly, an individual cannot roll over any funds distributed from a 401(k) that are part of a payment schedule once the plan has kicked in. The payment schedule may be due to a hardship provision, or the individual has cashed out their 401(k) early. Either way, that money cannot be rolled over into an IRA.

This is one of a multi-part series on the Self-Directed IRA. Depending on how familiar you are with the account type already, you may already know that the Self-Directed IRA one of the best retirement solutions. This is particularly true for experienced investors and self-employed individuals. Even if you're neither of these yet, you'll still want to read on.  A whole world of profitable investment opportunities is just waiting for…YOU!
 
Think of your Self-Directed IRA as a “retirement investment vehicle” which allows you to use your retirement funds to invest in all varieties of investments. This includes, fortunately for my fellow real estate empire builders out there, real estate.  But regardless of your preferred investment types, the best part for all account holders is that if you form and execute your Self-Directed IRA properly, your money grows tax free and you don’t need to take orders from a custodian. This will also free you from the expensive custodian fees that may have been a burden on your retirement account savings for years.

Below, we'll talk about how to take advantage of some of the Self-Directed IRA's best features, but focusing first, of course, on how to get a loan for your investments.

Why Traditional Loans Won't Work For Your Self-Directed IRA

Most investors using retirement funds to make an investment will use cash to make those deals. Whether the investment is in the form of stocks/bonds, gold, or real estate, most investors will not borrow any funds to make an investment.
One significant reason why retirement account investors will generally not borrow money (also called debt or leverage) as part of an investment of real estate acquisition is the IRS. This should come as no surprise, as most Americans fear the IRS--and with good reason.
Internal Revenue Code Section 4975 prevents you, the IRA holder, from personally guaranteeing a loan made to your IRA. This applies to your Self-Directed IRA,  because you are barred from using a typical loan or mortgage loan as part of an IRA transaction. The IRS considers such loans prohibited transactions, which can trigger major consequences and fees for the investor who runs afoul of prohibited transaction rules.

The bottom line is simple: you just can't get an ordinary loan with Self-Directed IRA. But you may still need one to cover your early investments. Don't worry though. You, as a newly empowered Self-Directed IRA investor, do still have a financing option: a non-recourse loan.
 

What is a Non-Recourse Loan and How Does it Work?

Non-recourse loans differ wildly from traditional loans in a major way. Non-recourse loans aren't guaranteed by anyone at all. Rather, they're secured by collateral, such as a valuable property or other asset. While in theory any asset could be used for collateral, lenders in this case are typically securing  the loan via the asset or property that the loan will be used for.

So if you, the borrower, are unable to repay the loan, the lender’s only recourse is against the asset, such as the investment property you intend to use the loan for. They can't come after you personally.  That's the simple definition of "non-recourse."
 
On average, non-recourse loans are tougher to obtain than a traditional loans or mortgages. Fortunately, this is a common enough strategy for investors that you will have your pick from a wide variety of reputable non-recourse lenders. But you should be aware of the fact that interest rates on non-recourse loans do tend to be slightly higher than those of personal loans.
 

IRS Rules Regarding Non-Recourse Loans

The IRS has some strict limits on how these types of loans may be used in retirement accounts. The main thing you should know is that Uncle Sam allows IRA and 401k plans to use non-recourse loans solely for financing purposes.

The rules covering the use of non-recourse financing by an IRA can be found in Internal Revenue Code Section 514. Section 514 requires debt-financed income to be included in unrelated business taxable income (UBTI or UBIT), which can trigger around a  40% tax for 2017 and 2018. If non-recourse debt financing is used, the portion of the income or gains generated by the debt-financed can also get you hit with the approximately 40% UBTI tax.
 
So for instance, if you choose to invest 60% IRA funds and borrow 40% on a non-recourse basis, 40% of the income or gains generated by the debt financed investment would be subject to the UBTI tax.
 
Let's keep it simple and imagine for the purpose of this example that the investment property you wish to buy is $100,000. This means that as a  Self-Directed IRA investor, if you invest $60,000 IRA funds and borrow $40,000 on a non-recourse basis and the IRA investment generates $1,000 of income annually, 40% of the income or $400 would be subject to the UBTI tax.
 
But don't stress it too hard. There are ways to reduce the $400 base tax. It should be clear from this example that using as little non-recourse financing as you need is ideal, but that's not the only way to lower your base tax.

How To Save On Taxes By Avoiding the UBTI

You can use a Solo 401k Plan, if you already have one, to dodge the UBTI.  This is one reason that Solo 401ks and Self-Directed IRAs are such attractive investment vehicles. Used together, or using strategic rollover methods, you can reduce your need for financing, but the news gets even better.
 
If you use non-recourse financing to invest in real estate through your Solo 401k Plan or your Self-Directed IRA, you will “escape” UBTI/UBIT tax due to an exception. This exception can be found in the Unrelated Debt Financed Income (UDFI) rules found under IRC 514(c)(9). If you're curious, you're welcome to learn about how this works, but due to space reasons, I'll just tell you that many of my clients have used this exception to save thousands in tax dollars while securing the loans they need for their Self-Directed IRA investments.

And there's no reason why you can't do this too. That's all for now, but if this subject interests you, keep your eyes peeled for many more upcoming pieces on the Self-Directed IRA and its "big brother" account, the Self-Directed IRA LLC. These will also be discussed in an upcoming book I'm authoring and giving away for free for Bigger Pockets. Stay tuned for updates on that, and happy investing!
 

It's not a secret to the bigger pockets community that I'm a big fan of the Roth IRA, but I love its features so much that I'm doing writing about it again. If you haven't already read my previous Roth IRA piece, it serves as a good primer. The information below, however, will illustrate some of the lesser-known perks of owning a Roth IRA.

Many investors and financial professionals are familiar with the main benefit of a Roth IRA. In short, it's the fact that after you pay taxes on the money going into the Roth IRA, the plan's investments grow tax free. Even better, when the time comes to take your distributions, you won't have to pay taxes on those either.  That being said, there are so many more benefits to the Roth IRA that you should know about if you're considering this retirement account option. Below, you'll find the top three.
 

Roth IRA Benefit #1: Exemption From Required Minimum Distributions

First, Roth IRAs are not subject to Required Minimum Distributions (RMDs). Traditional retirement plan owners are subject to RMD rules which require the account owner to start taking distributions and paying tax on the distributions at a given age. For most plans, the RMD rules kick in when the account owner reaches the age of 70 ½.
 
Why is this a benefit to you? To put it simply, dodging the RMD rules allows the Roth IRA to keep gathering and growing tax-free income. This tax-free benefit extends to capital gains or other taxes on the investment returns. This allows the account to continue to accumulate tax-free income during the account owner’s life time.

And perhaps even beyond. Learn more about how your Roth IRA can outlive you and provide your loved ones with additional security below.
 

Roth IRA Benefit #2: You Can Share the Love With Your Spouse

Death is inevitable. But if you were a smart investor who got a Roth IRA, your surviving spouse can continue contributing to that Roth IRA, provided your significant other is a beneficiary of that account. He or she can combine your Roth IRA into his or her own Roth IRA.

Allowing the spouse beneficiary to take over the account allows additional tax free growth on investments in the Roth IRA account. By contrast, a  Traditional IRA 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, such as the children of a Roth IRA owner, cannot make additional contributions to the inherited Roth IRA and cannot combine it with their own Roth IRA account. Other beneficiaries are subject to required minimum distribution rules,  but they can delay out required distributions up to 5 years from the year of the Roth IRA account owner’s death. Additionally, they are also 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 expectancy of the beneficiary. So, young beneficiaries can delay taking money out of the Roth IRA for quite a longer than older beneficiaries. The lifetime expectancy option is usually the best option for a non-spouse beneficiary to keep as much money in the Roth IRA as possible while also reaping the benefits of tax-free returns and growth.
 

Roth IRA Benefit #3: No Early Withdrawal Penalties

 
That's right!  Roth IRA owners are not subject to the 10% early withdrawal penalty for distributions they take before age 59 ½ based on their own contributions or conversions. This is one reason that many investors choose to go Roth-style: the early withdrawal penalty certainly applies to those using 401ks or Traditional IRAs.

However,  growth and earning are subject to the early withdrawal penalty and to taxes too. But if you do find yourself in a situation where you must withdraw early, you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted. These funds will be available to you tax- and penalty-free.  But if you do this, be aware that conversions have a five-year waiting period before you can take out funds while avoiding penalties or taxes. If you're relying on conversions, you'll want to let them sit for those five years.
 
Roth IRAs are an awesome resource for investors who are eligible to open them. There are some qualification rules for Roth IRA eligibility that leave out many high-income individuals. But as always, there are loopholes you can exploit in this situation.  You can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a "backdoor Roth IRA") as the conversion rules. This works and is legally permitted because there is no 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.

And everyone includes you. So, are you considering a Roth IRA? Have you already been seduced by this sexy beast of a retirement account? Do you have any more questions? Let's keep the conversation going in the comments section below. I'd love to hear from you, and will do my best to answer questions with the time I have available.
 

My clients are always asking me what the deal is with the individual retirement account (IRA).  Don't worry if you're totally lost when it comes to retirement accounts. I spend a lot of my time addressing all sorts of IRA-related queries. Like if it's a good idea to get one even if you're young. Or why  I'm so into this Roth dude that people are constantly talking about talked, and if he's paying me off? (He isn't. He also isn't a "he" either--more on that below). Or what the maximum IRA contribution level is. And will the taxman cut retirees a break, finally? Maybe if I ask super nicely?

Fear not, friends. I've got your backs.  Here are the five most common questions I get about IRAs, finally answered in plain English.

Question #1: Is My Contribution Tax Deductible?

Maybe. All sorts of things factor into whether you will get a deduction. Some circumstances the taxman considers include whether you're married, if your job is backing your IRA, what tax bracket you fall into, etc.  Depending on those variables, you’ll be placed into one of three categories.

Group 1: No Tax Deductions

Contributions to a Roth IRA aren’t deductible. Never. Sorry about it. That said, contributing to your Roth account is still a good idea. You'll want to check your  modified adjusted gross income (MAGI) . Roth accounts have a cut-off for how much you can earn annually and still be eligible to hold the account at all.
 
If you're really looking to save in tax terms, one strategy you can use is maxing out your 401(k) or 403(k) first. You'll get all the same tax perks of the old-school IRA, and more, since you're a superstar taking advantage of multiple accounts.  You can even have one of these AND an IRA if you want to be super comfortable in retirement.

Group 2: Deductions with Limits

You may fall into this group if either of the following apply to you.

1. You or your husband/wife are covered by your employer.
2. You or your husband/wife are outside of the allowed income range.

Now you'll need to be aware of the fact that the IRS changes its parameters on this matter all the time. You'll want to do some research to ensure your eligibility before moving forward with filing. If this is confusing for you, call your lawyer and ask for help.

Group 3: Total Tax Deductions

You belong to this group if both of the following statements apply.

1. You don't have a retirement plan through your work, and aren't married to someone who does.
2. Your income(s) falls under the IRS cut-off point.

See above for information on income ranges. We'll talk more about the cut-off points below.

Question #2: Can I Contribute To An IRA Even if I Have It Through My Employer?

You bet! And frankly, you  probably should, especially if that employer is matching or offering other incentives to do so. You don't even have to have a conventional account.  SEP (self-employed) or SIMPLE IRA account holders can take advantage of this as well.

You'll want to note that there are limits to how much you can contribute. You may not be able to deduct the entire amount, but that will depend largely on your circumstances. (See Question #1 for more details on that).
 
I can already hear some of you saying, "Wait! I'm not covered by my job."  Take a deep breath now. That's okay. You can still contribute to an IRA. One of the perks of IRA plans is that they're available to literally anyone: which type (self-directed, Traditional, etc.) is best for you will depend on your circumstances. There's even the SEP IRA option for self-employed folks. Those contributions could even be deducted entirely depending on your income. Again, consult a CPA on this matter.

Question #3: Is It Possible to Contribute if I Didn't Earn Anything This Year, But My Spouse Did?

Absolutely.  You'll have to file your taxes jointly to do this, but it's A-okay with the taxman if only one partner is earning taxable income. It doesn't matter which individual  earned the money you plan to contribute.
 
As with all things tax-related, there are some restrictions. You have to ensure your contributions don't exceed those. The limits for 2018 are $5500 in if you're under the age of 50, or $6500 if you're over the age of 50.

Question #4: Is There a Way to Contribute To My Roth Account If I Earned Too Much Money In 2018?  

The IRS has set the contribution cutoff at $135,000.00 for single individuals and $199,000.00 for couples who file jointly, which up significantly from last year. Some exceptions apply if you are a qualified widower. If you're married and filing separately, you aren't eligible for a Roth account. Whether you want to reconsider how you file is up to you.

It comes right down to whether you earned more or less than that figure above. If you're under that number, you're good to go.  But if you have earned more, your Roth custodian can limit or even freeze your account.


But there are loopholes here if you do earn more than the Roth cut-off. You can use a Traditional IRA (which is available to everyone, regardless of income). Contribute to that, and pay the taxes upfront. Now roll that cash money over to your Roth IRA. Why this is legal is you've already paid the taxes, so it's eligible to transition into the Roth. Pretty cool, right?

Fun fact for all my retirement superstars out there: This tactic was made possible when the IRS removed the income level restrictions for making Roth conversions in 2010.

Question #5: Can I Contribute To My IRA if I'm older than 70½?

Maybe. The type of IRA you use is the critical factor here.
 
If you've gone with the old-school IRA, the answer is no. Once you hit that age, you won't be able to contribute any further. But if you've opted for a Roth IRA, you can still add funds there. You may also move funds between IRA accounts.  Barring any unforeseeable and unlikely dramatic changes of law, this will always be true, even if you live into your 100s.

And I sincerely hope you do!

There you have it. Those are the short versions of answers to the five most common IRA questions I get. If there's a detail still gnawing away at you, or if a question you didn't see answered above, please use the comments below to ask about anything still on your mind. Thanks for reading!