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

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

401(k) Tax Credits

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

401(k) Contributions Can Lower Your Tax Bracket

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

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

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

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

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

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

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

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

Elective Employee Contributions

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

Catch-Up Contributions

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

Total Annual Maximum Self-Directed 401(k) Contributions

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

Health Savings Accounts (HSAs)

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

What About IRAs?

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

 

401(k) Contribution Limits In 2018

There is no doubt – the Internal Revenue Service (IRS) is the governing body when it comes to your retirement account. For 2018, the IRS did not make any major changes. However, any change, regardless of size, it worth knowing. This is especially true when they affect your contribution limits.

A Quick Note On Retirement Accounts

Before we get into the contribution limits for 2018, we want to make one thing clear. The limits imposed by the IRS on 401(k) plans apply to all types of these accounts. This includes your individual 401(k), self-directed 401(k), self-administered 401(k)s and more.

2018 Contribution Limits for 401(k) Accounts

The contribution limits below apply to both employees and employers. Let us take a look.

Other Types of Retirement Accounts

The IRS also sets limit for other types of accounts as well. Your health savings account, or HSA, is one such example. For individual HSAs, there was a $50 increase, which gives you a new total contribution limit of $3,450. Family HSA plans also increased. With a new limit of $6,900, these accounts have a $150 increase.

For individual retirement accounts (IRAs), however, the IRS has continued with the current contribution limits. These limits, established in 2013, remain at $5,500 for individuals under the age of 50. For individuals over the age of 50, the limit remains at $6,500 as well.

Stay Informed On Contribution Limits For 401(k) Accounts

One of the best ways to stay informed regarding your retirement account is to hire a reputable custodian. At Royal Legal Solutions, we do the homework for you when it comes to IRS regulations. Our professionals have years of experience studying and applying tax laws to help our clients avoid penalties and unnecessary fees. If you would like to learn more about retirement accounts, tax laws, or contribution limits, contact Royal Legal Solutions today!

2018 401(k) Contribution Limits

There is no doubt – the Internal Revenue Service (IRS) is the governing body when it comes to your retirement account. For 2018, the IRS did not make any major changes. However, any change, regardless of size, it worth knowing. This is especially true when they affect your contribution limits.

A Quick Note

Before we get into the contribution limits for 2018, we want to make one thing clear. The limits imposed by the IRS on 401(k) plans apply to all types of these accounts. This includes your individual 401(k), self-directed 401(k), self-administered 401(k)s and more.

2018 Contribution Limits for 401(k) Accounts

The contribution limits below apply to both employees and employers. Let us take a look.

Other Types of Accounts

The IRS also sets limit for other types of accounts as well. Your health savings account, or HSA, is one such example. For individual HSAs, there was a $50 increase, which gives you a new total contribution limit of $3,450. Family HSA plans also increased. With a new limit of $6,900, these accounts have a $150 increase.
For individual retirement accounts (IRAs), however, the IRS has continued with the current contribution limits. These limits, established in 2013, remain at $5,500 for individuals under the age of 50. For individuals over the age of 50, the limit remains at $6,500 as well.

Stay Informed

One of the best ways to stay informed regarding your retirement account is to hire a reputable custodian. At RLS, we do the homework for you when it comes to IRS regulations. Our professionals have years of experience studying and applying tax laws to help our clients avoid penalties and unnecessary fees. If you would like to learn more about retirement accounts, tax laws, or contribution limits, contact us today!

'Life Cycle' of a Retirement Plan: Setting Up a Solo 401(k)—And When To Shut It Down

When we talk about 401(k) plans having a life cycle, we mean that as literally as it can be meant. They are born, they exist, and then they’re terminated. It’s a useful analogy because it draws attention to the distinct stages of a 401(k) and creates a blueprint for managing it.

What is a Solo 401(k)?

Solo 401(k)s are the same as any kind of 401(k) but they’re for those who run their own business as sole proprietors. Typically, an employer would set up a 401(k) for you, but as a sole proprietor, you are the employer. You have to do it yourself. It may sound daunting, but it’s not as hard as you might imagine.

The Birth of the Solo 401(k) (How To Set It Up)

Let’s face facts. The economy is changing. Salaried careers still exist, but more and more folks are proprietors in the gig economy. That means they run a business out of their own homes or use their own capital and property to support themselves.

If that describes you, and you’re looking for options to save for your retirement, you should know that the 401(k) allows you to save more money than other kinds of retirement vehicles. As the “parent” of the plan, you must sign an Adoption Agreement. In order to do that, you must have an EIN (Employer Identification Number).

Setting up a solo 401(k) isn’t difficult, but there are quite a few forms to fill out. The second form identifies a Designation of Successor Plan or Administrator and requires a notary or a witness.

For individuals you will also need to fill out:

After all this, your solo 401(k) has been born!

The Operation or Execution (the Life) of Your Solo 401(k) Plan

First, you’ll need a place for it to live. Many people erroneously believe that the only place you can “house” a 401(k) is at a bank. That’s not true and it may not even be close to the best option available to you.

You’ll also need to nourish your solo 401(k). Remember that you can roll over funds from previously established 401(k)s or even IRAs.

You also don’t want to raise a delinquent child, so you will need to ensure that your 401(k) complies with IRS regulations. That includes reinvesting the money that your plan generations and being aware of which transactions are prohibited.

Death or Terminating Your Solo 401(k)

This is where we hope the parent/child analogy falls a bit short. The plan will terminate after the sole proprietor shuts down the plan and begins taking disbursements.

While the process can be managed on your own, it helps to have a financial professional on your side who can help ensure you remain in compliance with IRS regulations.

401K Plan Loans — Why 72(p) Can Assist Your Investments

People often wonder if they can borrow money from their 401(k) plans. The answer is yes, but there are a number of things to bear in mind when you do.

Firstly, the money that was paid into your 401(k) is your money, but it was allowed to accrue interest tax-free. In addition, money that you paid into the fund was tax-deductible. In order to enjoy that tax-deferred or tax-free status, you have to comply with specific IRS regulations.

When you take out a car loan, what happens when you don’t pay it back? They come and they repossess the car, of course.

Now, what happens if you default on a loan from your 401(k)?

The IRS will consider the 401(k) “distributed”. That means they assume you cashed out your account. Not only is the entire fund now voided, but you face a 10% penalty for cashing out early. You may also be forced to pay an additional capital gains tax.

Guidelines for Executing a Loan with Your 401(k)

401(k)s are not like savings accounts where you simply withdraw money and pay it back whenever. You must draw up a legally executable contract and that contract must follow IRS guidelines. The repayment plan must also conform to IRS guidelines. In other words, it’s risky to borrow against your 401(k), but it can be done, and safely.

401(k) Loan Limits

No loan taken from a 401(k) is allowed to exceed either $50,000 or half the vested balance, whichever is lower.

401(k) Loan Repayment Limits

The loan must be repaid over a period of no more than 5 years. Exceptions are made for loans used to purchase homes.

401(k) Loan Repayments and Interest

You can’t just float yourself an interest-free loan. The loan must be repaid on (at least) a quarterly basis with a legitimate interest rate attached to it. The loan must be 1% over prime and there must be an agreed upon amortization schedule.

Section 72(p) regulations are not meant to hurt you. They’re meant to help you. When you borrow against your 401(k) you are using tax-exempt monies that the IRS and the government have allowed you to set aside for your retirement. If you could just take money out of the fund then that would defeat the entire purpose of it.

Logistically, you’re borrowing the money from yourself and then paying it back with interest. Technically, however, you are borrowing money from a fund that enjoys tax-free or tax-deferred status. There are conditions for enjoying those exemptions.

Our recommendation is to tread lightly and know what you’re getting into before executing the loan. If necessary, have someone help you with the process.

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

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

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

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

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

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

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

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

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

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

Why not?

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

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

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

Solo 401k Contribution Limits: What The Self-Employed Need To Know

Real estate investors, like anyone else, need peace of mind and financial security by the time they retire. Luckily, there are a lot of great retirement plan options available today. The most well known types include an individual retirement account (IRA) or a 401(k) plan as offered by an employer. These plans allow account owners to invest in mutual funds, bonds and stocks.

However, did you know both types of accounts come with another option? A self-directed IRA (SDIRA) or self-directed 401(k) plan offers many more investment options than regular IRA or 401(k) accounts do. This includes real estate, life insurance, private placements, precious metals, renewable energy sources and much more.

With such great avenues of investment available to you, it makes sense to want to be able to maximize your contributions. After all, the more money you put into your retirement account, the more you have available to invest and increase your growth potential. This is where the self-directed, or solo, 401(k) really stands out. In fact, unlike your other retirement accounts, a solo 401(k) has an annual contribution limit that can be five to ten times higher. How is this possible? Let us take a look at solo 401(k) contribution limits and types of contributions allowed.

Contribution Limits

The Internal Revenue Service (IRS) regulates the contribution limits for retirement or investment accounts. For a SDIRA, and most other retirement accounts for that matter, the IRS only allows you to contribute up to $5,500 each year. If you start making contributions to your 401(k) account at the age of 30, based on an average return on your investments, this means you will likely only receive $1,000 a month once you retire.

Based on your current cost of life expenses and standard of living, will a $1,000 monthly distribution be enough based on retirement at the age of 65? Most likely, it will not. In contrast, however, a solo 401(k) has a much higher maximum contribution limit. In fact, as of 2017, the IRS allows you a maximum annual contribution of up to $54,000 for anyone under the age of 50. If you are older than 50, this limit is even higher.  

Types of Contributions

The contribution limits alone are among the solo 401(k) benefits. However, a solo 401(k) also offers flexibility when it comes to how those contributions are made. Like an IRA or SDIRA, you can make traditional (pre-tax) or Roth (post-tax) contributions. A solo 401(k) also permits account owners to make a combination of employee deferral contributions and profit-sharing contributions.

As of 2017, the IRS has set the maximum employee deferral contribution limit to $18,000 for a solo 401(k). As the name implies, this type of contribution is one made as an employee. This is the most commonly understood type of contribution; it is the same type of contribution you can make to an IRA, SDIRA, 401(k) or other retirement account. The limit is just higher for a solo 401(k).

Profit-sharing contributions, on the other hand, are the employer or business owner side of the house. With a solo 401(k), the IRS allows you to contribute up to 25% of your annual business income up to $54,000.

It is important to note that your maximum contribution limit is a combination of the employee deferral contributions and your profit-sharing ones. Therefore, if you make a $18,000 employee deferral contribution, you can only supplement it with a $36,000 profit-sharing contribution. However, you can mix and match these contributions to reach that $54,000. If you want to contribute less through your employee deferral investments, you can increase your profit-sharing contributions to reach that $54,000 limit.

Important Things to Note

There are a few things you should note when it comes to your solo 401(k) contributions, however.

Your incorporation status affects the percentage of profit-sharing contributions you can make. If your company is considered a non-pass through entity, such as an S- or C-Corporation, the IRS allows you to contribute 25% of your net W-2 income. However, if you have a pass through entity, such as a sole proprietorship or limited liability company (LLC), the IRS formula is much more complicated. (If this is you, our professionals can help you understand how different pass through entities affect your profit-sharing contributions.)

The IRS allows you to make catch-up contributions if you are over the age of 50. Catch-up contributions increase your employee deferral contributions by $6,000. This means you can contribute $24,000 to your solo 401(k) instead of just $18,000. When combined with your profit-sharing contribution, this gives you a new maximum limit of $60,000 instead of $54,000!

If you have both a 401(k) account through your employer, as well as a solo 401(k) account through your side hustle, your employee deferral contributions of both can not go beyond the $18,000 limit. However, the employer contribution to the 401(k) and your profit-sharing contribution to the solo 401(k) do not affect each other. For example, if you make the maximum $18,000 contribution into your 401(k) account and your employer matches this, you have a total $36,000 contributions. However, if your solo 401(k) side business nets you a $200,000 income, you can still contribute up to 25%, or $50,000, of this. Total, this gives you $86,000 in contributions you can use for investments.

Contributions to your solo 401(k) can only be made in relation to your self-employment activities. You cannot take money from your day job and contribute it to your solo 401(k).

 

Solo 401(k) Benefits: What Small Business Owners and Investors Have To Know

Are you thinking about the best way to save for your retirement? If so, there are several options available to you. It is likely your company has offered you the opportunity to invest in an individual retirement account (IRA) or a 401(k) plan. Traditionally, these options are provided through a pre-selected firm chosen by your employer.

If you are a small business owner (or an employee of a small business), a simplified employee pension (SEP) IRA or Simple IRA may also be avenues you have considered. However, a self-directed, or solo 401(k) plan has benefits that go beyond these options.

Have you not heard of a solo 401(k)? We are not surprised. Although it has been around for almost two decades now, solo 401(k) plans have remained relatively unknown as they are not options provided by most employers. However, they certainly provide plenty of benefits that make them appealing to those who learn of them. Do you want to know why? Keep reading to find out more.

# 1. Higher Contribution Limits

When you compare the contribution of a solo 401(k) to those of almost all other retirement accounts, you will notice that it is substantially higher. In fact, contributions to a solo 401(k) can be five to ten times higher than those made to most other retirement accounts.

Your solo 401(k) also comes with contribution flexibility as well. You may opt for pre-tax, or traditional, contributions. These contributions are tax-deferred, which means they are taxed only when you take a distribution. You can also opt for after-tax, or Roth, contributions. When you have a Roth solo 401(k), your distributions are taken tax-free. Why? Because the Internal Revenue Service (IRS) cannot legally tax you twice for the same dollars. Because you were already taxed on the contributions, your gains and returns are tax-free. If, for example, you made an income of $125,000 through self-employment, your maximum contribution limit for a Roth and self-directed IRA (SDIRA), would be $5,500. (If you are over 50, however, this limit increases to $6,500.) By comparison, your contribution maximum is $18,000 through a traditional 401(k).

You can also make employee deferral contributions and profit-sharing contributions. Like a traditional 401(k), your solo 401(k) has a maximum employee deferral contribution limit of $18,000. Depending on your incorporation status, however, you can also include a profit-sharing contribution of up to 25% of your annual income. That means your maximum contribution limit could actually be $54,000! Using our example of a $125,000 income, with a solo 401(k), you could have an employee deferral contribution of $18,000 plus a 25% profit-sharing contribution of $31,250. This would give you a maximum contribution of $49,250 a year.

# 2. Flexible Loans

Unlike almost all other retirement accounts, solo 401(k) plan owners are able to take out personal loans without paying steep interest rates, IRS penalties, or other such fees. In fact, taking out a personal loan from your solo 401(k) is relatively easy and painless. If you choose a reputable firm, like IRA Business Trust, your loan request can be processed in just minutes. The IRS allows you to easily take out a loan up to $50,000 or 50% of your account value, whichever is less. As long as your loan request abides by this limit, your request is instantly approved. In addition to this, you set your own interest rate and have up to five years to pay off the loan from your solo 401(k). However, if you use your loan to purchase your primary residence, you are permitted to take up to fifteen years instead. You can set the frequency of your repayments as well. While some opt to make regular payments along with their standard contributions, as long as you make a payment every quarter, you are on track. Perhaps best yet – you can use your personal loan for anything you desire. This includes paying off your personal or business debt, mortgage, or buying that new car you have been eyeing.

You may want to note that not all financial institutions or investment firms permit you to take a personal loan. At Royal Legal Solutions, however, we understand that your solo 401(k) is built from your hard-earned dollars. If you want to take a personal loan from your own retirement account, we support you. Our professionals will make it easy for you to get the funds you request.

# 3. Alternative Asset Investments Options

A solo 401(k) will certainly allow you to invest in the same stocks, bonds, and mutual funds other retirement accounts permit. However, a solo 401(k) allows you to invest in much more! While there are almost limitless investment possibilities, some of the most notable include real estate, precious metals, private equity and debt, life insurances, cryptocurrencies, private placements, and renewable energy sources. A solo 401(k) makes investments in these alternative assets easy as well. A solo 401(k) does not require you to establish a limited liability company (LLC) or other business entity in order to invest in real estate. (Although, it certainly will not prevent you from doing so either. After all, an LLC can help you protect your assets and your investment returns.) You also do not need to get the approval of your solo 401(k) custodian. Why? Because the IRS does not require you to have a custodian or trustee in order to open a solo 401(k)! You are also able to take out a non-recourse business loan for your solo 401(k). This will allow you to invest in real estate, bypass the Unrelated Business Taxable Income (UBTI) tax, and protects your solo 401(k) assets from debt claims.  

# 4. Easy to Set Up

Royal Legal Solutions makes your solo 401(k) account set up easy. Our professionals have streamlined the process to ensure it runs as smoothly and quickly as possible. We keep our setup costs low, minimize paperwork, and assist with contribution rollovers.

Form 5500 EZ Filing Requirements For The Solo 401(k)

If you have a self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—one of the benefits that may have attracted you to this type of retirement account was the tax-free growth potential.

A solo 401(k) allows account owners to leverage a wider range of investments than a traditional retirement account. In fact, account owners can invest in real estate, precious metals, renewable energy and much more—all in addition to the stocks, bonds and mutual funds a traditional account permits. Because of these investment opportunities, account owners are more likely to see increased diversity and growth potential. When coupled with tax-free growth, the returns can quickly escalate.

Your solo 401(k) does not normally have a standard, yearly tax filing requirement. However, there are two exceptions:

  1. If your solo 401(k) had over $250,000 in assets by December 31 of the previous year, you will need to file Form 5500 EZ in accordance with Internal Revenue Service (IRS) regulations.
  2. Additionally, if you terminate your solo 401(k), you will be required to file Form 5500 EZ as well.

Let's take a look at 5500 filing requirements for the solo 401(k).

What is Form 5500 EZ and Who Can See It?

Form 5500 EZ is an IRS document required to be submitted for one-participant retirement plans, like your solo 401(k) plan, by July 31 every year if the value of the account is over $250,000. For those who value their privacy, you will be pleased to hear that as of 2012, Form 5500 EZ is no longer a public document when submitted on behalf of a solo 401(k) account.

What If I Fail to File Form 5500 EZ?

If you own an account that meets the requirement threshold for filing Form 5500 EZ, failure to do so will result in penalties once the IRS finds out. At $25 a day, the IRS can fine you up to $15,000 a year for failure to file your Form 5500 EZ.

Avoid the Penalties and File Directly

If you need to file Form 5500 EZ for your solo 401(k), it must be submitted to the IRS directly. Mail your form to the Department of Treasury, Internal Revenue Service, Ogden, UT 84201-0020. Again, to avoid penalties, you must file Form 5500 EZ for any solo 401(k) valued at over $250,000 by July 31 every year.

 

IRA Prohibited Transactions: Rules You Need To Know

If you have an individual retirement account (IRA), you probably already know that it is a great way to save for when you retire.

Through your IRA, you can invest in stocks, bonds and mutual funds. Your IRA is governed by regulations established by the Internal Revenue Service (IRS). While the IRS does not dictate what you can do, the regulations it has enacted do provide limitations that prohibit certain types of transactions.

Disqualified Persons

The Internal Revenue Code (IRC) Section 4975 defines a “disqualified person” as:

Prohibited Transactions

In general, the IRS prohibits any transaction that occurs between individuals on the “disqualified person” list and the IRA. These types of transactions call into four categories.

Your Custodian Can Help

Tax laws can be complicated and confusing. Hiring reputable professionals like the team at Royal Legal Solutions can help. Contact us today to find out more.

Funding Self-Directed 401(k)s

The contributions made to a traditional 401(k) account established by your employer are obvious. They are typically made with your pre-tax dollars and matched, or partially matched, by your employer. The benefits of using pre-tax dollars make these types of contributions ideal. Your 401(k) is also one that benefits from being a tax-deferred investment account.

One of the pitfalls of an employer’s 401(k) plan, however, is the limited, often biased, investment options available to you. With a self-directed 401(k) plan, many of those investment boundaries are removed. In fact, if you choose to open a self-directed 401(k) account, you not only increase your investment opportunities, but also your own control over the account as a whole.

The benefits of a self-directed 401(k) are definitely worth considering when it comes to your retirement nest egg. After all, an increase in your portfolio diversity is not just a great way to generate different types of returns and earnings, but also help to prevent the negative effects of an economic downturn from robbing you of your future. However, if you already have a 401(k) account with your employer or not, you may wonder how a self-directed 401(k) is funded.

Solo 401(k) Funding Options

Funding your self-directed 401(k) is not as complicated as you might think. At IRA Business Trusts, we tend to see three methods that help fund your new self-directed 401(k) account. Funds from transfers, contributions and profit sharing are typically used for these types of accounts.

 

What is a Roth Solo 401(k) Plan?

Retirement investment accounts such as IRAs and 401(k)s are subject to regulations dictated by the Internal Revenue Service (IRS). No surprise there, right?

Because of this, the various types of retirement accounts have very specific investment and distribution guidelines, which they must abide by or owners will be faced with penalties, fines and taxes. Retirement accounts are typically taxed in one of two ways: pre-tax deductions or post-tax wages. A self-directed 401(k), also known as a solo 401(k), provides plan owners with an almost tax-free investment opportunity and some of the most diverse portfolio options. And when you opt for a Roth solo 401(k), the possibilities are endless!

Limitless Investment Potential With A Roth Solo 401(k)

Many types of retirement accounts limit your investments to mutual funds, stocks and bonds. This is not so with a Roth solo 401(k) plan. In fact, with your Roth solo 401(k) plan you can invest in things like:

Funding Your Roth Solo 401(k)

You can fund your Roth solo 401(k) account in two different ways.

  1. When you make contributions to your Roth solo 401(k) account, you can deposit your funds into your account. Simply write “Roth” in the memo line of your contribution check before depositing it into your account. These contributions are made after taxes have already been deducted from your paycheck. This makes your investment returns and earnings tax-free and entirely yours.
  2. If you have traditional funds already in your Solo 401(k), they can be converted into Roth contributions. The IRS does not consider this to be a distribution. Instead, this is considered to be an “in plan” conversion.

As your plan provider, Royal Legal Solutions can help you figure out the best way to fund your Roth solo 401(k) account. Whether you want to deposit Roth contributions directly into your account or opt for an “in plan” conversion, we are here to make the process easy for you.

Self-Directed IRAs vs Roth Solo 401(k)s

As stated above, your Roth solo 401(k) allows you to invest in real estate. You may already know that a self-directed IRA (SDIRA) permits this as well. Both a Roth solo 401(k) and SDIRA permit you to borrow money for investment purposes. However, the IRS subjects a portion of the profits generated by these investment loans to an Unrelated Business Income Tax (UBIT). (This is typically around 35% of your profits.) While a UBIT is owed on loan profits of a SDIRA, the Roth solo 401(k) earnings are exempt.

Trustee Vs. Executor: Who Do You Need For Estate Planning?

Unless you are the villain in a spy thriller, there's unlikely to be any intrigue surrounding the reading of your will. Sure, this is a great cinematic device, but a "surprise" announcement regarding your trustee or executor is neither funny nor mysterious in real life.

The events following your death will most likely be painful and dramatic enough as it is. You can ease some of the misery by planning ahead, and letting your chosen executor and trustee(s) know about their jobs ahead of time.

That said, sometimes the executor or trustee really do find out at the last minute. Whether you're in this situation or planning your own estate, this article is for you. You'll learn about the duties of both positions, and how to survive if you're picked to serve as either.

What's the Difference Between a Trustee vs. Executor For Estate Planning?

The executor represents the dearly departed. This person is tasked with administering and distributing the estate. For an executor to do their job properly, he or she must know the identities of any heir and have a solid comprehension of the will. Their main job is to ensure the deceased's wishes are carried out.

Trustees, on the other hand, have a more narrowly defined role: managing a trust. Not all estates necessarily have trusts, but many do. The first order of business for a trustee is to clarify which assets are held within a trust. Check out our asset checklist for estate planning to get started.

It's rare for all of a person's assets to be placed in a trust, so some may be stated only in the will or other documents.

In estate planning, trusts are used to clear up any possible confusion about where certain possessions go. A person may decide to use a trust to offer guidance and maintain more control over their estate. The trust's "job" is to literally own properties, cars, family heirlooms, or any other assets that the creator decides to place within it. The person who creates the trust provides for its funding. The trustee, who may be an individual or even several people, is tasked with determining how money and other assets flow in and out of the trust.

Trust executor duties include liquidating estates. Trustee duties include managing estates.

The former is usually temporary, while a trustee might serve in that capacity for years. There is rarely compensation for either. Many have tried to monetize this position, and few have succeeded. So if someone asks you to serve in either capacity, there are some things you'll want to be aware of. After all, you want to honor your deceased loved one's wishes, don't you?

If this happens to you, don't be afraid. We've got some tips on how to execute and cope with your new responsibilities.

Get Your Estate Planning Paperwork in Order

Before you do anything, you need to review any and all paperwork relating to the estate. These should cover the basics: funeral arrangements, how the deceased wants the estate managed, and preferences about matters like burial. Assuming the deceased planned ahead, there will also be a specific document cataloging valuables like heirloom necklaces or firearms. In legalese, we call this a "memorandum of personal property."

Next you need to determine the assets, which is usually only a hassle if the document above is incomplete or totally absent. If you're in such an unfortunate situation, you may need to get some help. Death leaves quite the paper trail. You're going to need to hunt down everything from the glaringly obvious like bank accounts and real estate, to the not-so-obvious assets like IRAs/401ks, and perhaps a secret vault or two if you get lucky.

Identify the Heirs

Most of the time, heirs are direct relatives. You can usually expect to see them at the funeral. Even if you don't, your paperwork from above should list any heirs. But you should know ahead of time these matters often get sticky. What if one of the heirs has died themselves? Details like this can easily go unnoticed if the most recent will is, say, ten years old. This is when it becomes your job to make a decision--one that can breed contempt under the best of circumstances. Hey, there's a reason people have tried to figure out how to get paid for theses services.,

Speaking of money, there are almost certainly going to be creditors that need to be paid. You need to guarantee that all creditor claims are taken care of from the estate. If you don't pay up, you may suffer liability. "Liability" is legalese for "an all-around bad time."

Yeah, this is a thankless job.

Deal With the Creditors

It doesn't take long for the vultures to circle. You'll have two kinds of creditors to tango with: secured and unsecured. Worry about secured creditors first. These are folks like conventional lenders. You'll want to make sure these types of creditors are notified of the deceased's passing right away. Make payments immediately, as soon as reasonably possible. This is to avoid that all-around-bad-time mentioned above.

Unsecured creditors, on the other hand, are a totally different ballgame. They have to actually come after you in the form of a claim. Unsecured creditors can include everyone from the neighborhood bookie to the (much more likely) credit card companies. Fortunately, credit card companies are fairly realistic about the fact that they're unlikely to be paid off in full. So bust out your haggling skills. There is some wiggle room about the total bill, but don't expect the company to tell you that.
While credit card companies won't break your kneecaps, they can make probate court an even bigger pain in the ass than it already is. Both types of creditors can demand and collect legal fees in a court setting. If the estate ends up in probate court, you will be obligated to alert all creditors of this fact.

Still with me? At this point, nobody will blame you for cursing whoever named you executor.

To recap: Don't mess around with secured creditors. It's a good idea to delay making unsecured creditor payments, because if a claim is never made you won't be on the hook. There's also a clock on how long these types of creditors have to make a claim at all.There’s a good chance this one is going to take care of itself by dissolving into the ether of banking bureaucracy. Now it's time for the fun part: probate court.

Probate Court For Estate Planning

The estate documents should outline exactly how the estate will be administered. Sometimes, the court has to approve certain aspects of this, such as when the family home is transferred to an heir. This is particularly common if the estate is based solely on a will (all the more reason we should all be thorough in our estate planning.)

If the estate you're dealing with is more "Jerry Springer" than "cinematic drama," you may find issues with the identities of the heirs. We're kidding. This is actually more common than most of us would think. Fortunately, it's on the court to figure this out. You've got enough on your plate. Let the judge interpret the law, or anything ambiguous for that matter. Even if you have legal chops of your own, you'll likely need a greenlight from the court to interpret much of anything.

We're approaching home base: stay with me, folks.

Income Tax Returns

That's right, you get to deal with both of life's inevitabilities in one experience: death and taxes. You'll have to file the deceased's final tax return. You'll want to be certain that you label the returns with the word "DECEASED.

As your last task, you may have to also file an estate return. This is legally required if the estate earns over $600.00 in gross income.

Final Legal Estate Planning Tips

Don't go it alone if you don't have to. We're sure you're smart, but it's unlikely that you are both an attorney and a CPA. Enlist help from the pros. The estate will assume their costs, particularly if it is a large or complex one. If you spend any of your own money in the course of your duties, the estate should reimburse you.

Be aware that this is a sensitive time for the relatives and other loved ones.The role can be as emotionally draining as it is time-consuming. But don't forget that you have a job to do, and you must do with your head and not with your heart.

If you've been tapped to act as a trustee or executor, or if you need estate planning services yourself (if only to spare your loved ones from some of this rigmarole), get help from experts who know all types of estate planning and administration issues, and who can help in a compassionate manner. Don't let your death become a big traumatic affair played out on the probate court stage.

Top 10 Retirement Savings Tips

Retirement: that sweet period of respite between work and death. If you do it right, this can be the greatest time of your life. Saving for retirement is the only way to ensure your "good years" don't suck.

There are a lot of tricks the government uses to get its hands on your hard-earned money. You’ve poured years of your life into your retirement savings, so you should keep as much of it as you can.

Think you're too young to think about this stuff? We hope you enjoy many remaining years of youth and beauty. But be advised: If you start planning for retirement early, you’ll be better prepared to keep more of your money when you've gotten a little long in the tooth.

Here are our top ten tips to keep you from parting with your hard-earned cash.

1. Avoid Early Withdrawal Penalties

A distribution from your IRA or 401k before 59 and half years old will incur a ten percent penalty. You’ll be paying taxes on it, too. That’s like getting punched in the ear and kicked in the shin at the same time. Hilarious, but it really hurts.
So, unless you need the money to keep yourself alive before sixty, you should leave it in the fund. Simple.

2. Avoid Required Minimum Distributions (RMD)

Whether you can spend it or not, your frenemies at the IRS are going to start making you take distributions after 70 and a half years old unless you’re still employed. These distributions are going to be taxed. There isn’t a lot you can do here from within a traditional retirement package.

The workaround? The Roth IRA. Unlike traditional IRAs, there are no RMDs for Roth IRAs during the account owner’s lifetime. You don’t have to take distributions. If you want to let it grow, grow it will.

3. Don’t Take Large Distributions in One Year

The money from your traditional retirement account is subject to tax at the time of distribution. If you take too much in one year, it can push you into a hire tax bracket. You’re older now. Take small nibbles. You’ll live longer.

4. Beware The Distribution Withholding

Most distributions are subject to 20% withholding by the IRS in anticipation of a tax penalty, unless you’re at the age of 59 and a half. In the case of an IRA, this might be lowered to 10%.

This is yet another reason to leave your money to grow a little longer. When you start a retirement plan, it’s long term. Think like the tortoise, not the hare.

5. Convert to a Roth IRA to Avoid Tax Penalties

Again, Roth IRAs are the real smart play. You can use tax penalties to offset income that arises when you convert traditional IRAs or 401ks to Roth accounts.

When you convert to a Roth account, you pay tax on the amount of the conversion, but believe me it’s worth it. These sexy beasts grow entirely tax free and there is no tax on distributions.

Speaking of Roth IRAs and Roth 401ks, these next five tips are exclusively for you masters who’ve already caught on.

6. Generate Passive Income With Rental Properties

Use your real estate knowledge and connections to identify the best real estate investment opportunities. Then use those properties to generate passive income that you can put toward your retirement.

7. “Designated” Roth 401ks Must Take RMDs

Yeah. Tax code is confusing. “Designated” 401(k) accounts have to take distributions. These are part of your employer plan. That’s what designated means.

If you don’t want to take money out, we’ve covered this. Roll the 401k into a Roth IRA when your reach 70 years old.

8. Distributions of Contributions Are Always Tax-Free

Unless, of course, the government decides to change things up. But for now, distributions of contributions to a Roth IRA are always tax-free. No matter your age. You pay the tax up front. You don’t pay it twice.

9. Don't Take Early Distributions of Roth IRA Earnings

Before you get too excited by the prospect of drawing money from your Roth IRA, remember that you have to be 59 and a half years of age or older and you have to have had the Roth account for five years or longer. Slow and steady wins the race.

10. Leave Your Roth IRA Alone

Because they aren’t the most tax efficient funds while they are invested, you have another reason to let your Roth IRA grow as long as possible. Tax-free accounts are the best way to earn income in the U.S. if you use them right, but using them right is a matter of being patient while your money grows.

Self-Directed IRAs: Frequently Asked Questions (FAQ)

Self-Directed IRAs offer investment freedom, but they require some explanation. Here are the answers to the most common questions we receive regarding Self-Directed IRAs.

1. What Is a Self-Directed IRA?

A self-directed IRA account allows the IRA to invest funds anywhere allowed by law.
The main reason most people don’t use Self-Directed IRAs is that the large financial institutions that administer most U.S. retirement accounts don’t think it's a good idea to hold real estate or non-publicly traded assets in retirement plans.

2. Can I "Roll Over" or Transfer My Existing Retirement Account to a Self-Directed IRA?

This depends on your situation:

Your Situation: Transfer/Rollover
I have a 401k or other
company plan with a current
employer.
____________________________________		 No, in most instances your current
employer’s plan will make it impossible
until you reach retirement age.
____________________________________
I inherited an IRA and keep the
account with a brokerage or
bank as an inherited IRA.
____________________________________		 Yes, you can transfer to a self-directed
inherited IRA.
____________________________________
I have a Traditional IRA with a
bank or brokerage.
____________________________________		 Yes, you can transfer to a self-directed
IRA.
____________________________________
I have a Roth IRA with a bank
or brokerage.
____________________________________		 Yes, you can transfer to a self-directed Roth IRA.
____________________________________
I have a 403(b) account with a
former employer.
____________________________________		 Yes, you can rollover to a self-directed
IRA.
____________________________________
I have a 401k account with a
former employer.
____________________________________		 Yes, you can rollover to a self-directed
IRA. If it is a Traditional 401k, it will be a
self-directed IRA. If it is a Roth 401k, it will be a self-directed Roth IRA
____________________________________

3. What Can I Invest in With a Self-Directed IRA?

The most popular self-directed retirement account investments include:
• Rental real estate.
• Secured loans to others for real estate (trust deed lending).
• Private small business stock or LLC interests
• Precious metals, such as gold or silver.
• Cryptocurrency

You May Not Invest In:

• Collectibles such as artwork, stamps, coins, alcoholic beverages, or antiques
• Life insurance
• S-corporation stock
• Any investment owned by someone in your close family.

4. What Restrictions Are There on Using a Self-Directed IRA?

When self-directing your retirement account, you must be aware of the prohibited transaction rules found in IRC 4975. These rules don’t restrict what you can invest in, but whom your IRA may transact with.
The prohibited transaction rules restrict your retirement account from transactions with someone who is disqualified. Disqualified persons include: the account owner, their spouse, children, parents, and certain business partners.

On the other hand, your retirement account could buy a rental property from your distant cousin, college roommate, friend, or a random third party.

5. Can My Self-Directed IRA Invest in My Personal Company, Business, or Deal?

No, it would violate the prohibited transaction rules if your IRA transacted with you personally or with a company you own.

6. What Is Checkbook Control?

Many self-directed retirement account owners, particularly those buying real estate, use an IRA LLC, also known as a “checkbook-control IRA”, to hold their retirement assets so that they have fast access.

7. Can I Get a Loan to Buy Real Estate With My IRA?

Your IRA can buy real estate using its own cash and a loan or mortgage. To do this, you must obtain a non-recourse loan.

A non-recourse loan is made by the lender against the asset. In the event of default, the sole recourse of the lender is to foreclose and take back the asset. The lender cannot pursue the IRA or the IRA owner for any deficiency.

8. Are There Any Tax Traps I Should Know About?

The Unrelated Business Income Tax, or UBIT, applies when your IRA receives unrelated business income. If your IRA receives investment income, that income is exempt from UBIT tax. Investment income exempt from UBIT includes the following:
• Real Estate Rental Income: Rent from real estate is investment income and is exempt from UBIT.
• Interest Income: Interest and points made from money lending is investment income and is exempt from UBIT.
• Capital Gain Income: The sale, exchange, or disposition of assets is investment income and is exempt from UBIT.
• Dividend Income: Dividend income from a C-Corp, where the company pays corporate tax, is investment income and exempt from UBIT.
• Royalty Income: Royalty income derived from intangible property rights, such as intellectual property, oil, gas, or mineral leasing activities is investment income and is exempt from UBIT.
So, make sure your IRA receives investment income as opposed to “business income”.

9. What Is Unrelated Debt-Financed Income (UDFI)?

If an IRA buys an investment with debt, then the income attributable to the debt is subject to UBIT. This income is referred to as “unrelated debt-financed income” (UDFI), and it triggers an UBIT tax. This often occurs when an IRA buys real estate with a non-recourse loan.

For example, let’s say an IRA buys a rental property for $100,000, and that $40,000 came from the IRA and $60,000 came from a non-recourse loan. The property is now 60% leveraged, and as a result, 60% of the income is not a result of the IRA's investment, but the result of the debt invested. This debt is not retirement plan money, so your friends at the IRS will require you to pay tax on 60% of the income. So, if there were $10,000 in net rental income on the property then $6000 would be subject to UBIT taxes.

10. Should I Use an Individual 401k Instead of A Self-Directed IRA?

This is where things get interesting.

An individual 401k is a great self-directed account option, and can be used instead of an IRA for persons who are self-employed. If you are not self-employed, then the individual 401k may not work for you.
If you are self-employed and you want to maximize your contributions the individual 401k has much higher maximum contribution amounts: $54,000 annually versus $5,500 annually for an IRA. That’s a significant difference.

A self-directed IRA is a better option for someone who has already saved for retirement. Some funds can be rolled over and invested in a self-directed IRA.

If you are going to carry debt and you are self-employed, you are much better off choosing an individual 401k over an IRA. Individual 401ks are exempt from UDFI tax on leveraged real estate.

There are a lot of things to consider when rolling funds into an IRA. If you have additional questions, feel free to reach out to us.

Roth IRA: Top Benefits You Should Know For Retirement Planning

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

Roth IRA Benefit #1: Massive Tax Savings

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

Roth IRA Benefit #2: Exemption from Required Minimum Distributions

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

Roth IRA Benefit #3: No Early Withdrawal Penalties

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

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

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

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

1. Update Your 401k Account on Time

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

2. Keep Track of Your Funds

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

3. Separate Your Funds By Plan and Participant

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

4. File a 5500 with The Department of Labor

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

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

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

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

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

5. Document Contributions and Rollovers

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

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

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

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

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

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

How to Fund Your Business with Self-Directed IRA Investors

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

Investing with Self-Directed IRA Funds

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

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

Avoiding Prohibited Transactions/UBIT

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

Choose Royal Legal Solutions For Your 401k

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

Why You Don't Want To Skimp on Retirement Planning

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

401ks Work Best For You With Qualified Professional Assistance

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

How Royal Legal Solutions Helps You Retire Wealthier

We take care of your annual maintenance so that you’re investment plan maximizes growth and always remains in compliance with IRS regulations.
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Rollover IRAs Explained

An IRA rollover is a transfer of funds from one retirement account into another, such as a traditional IRA or Roth. You can do this either through a direct transfer or via check. If you do a rollover via check, your custodian will write you a check account which you will then deposit into the other account.

Rollovers are defined as tax free transfers of retirement from one type of investment account to another. Rollovers were originally introduced to increase the mobility of qualified plan funds for employees moving from one job to another.
You can find the basic provisions governing roll over transfers here. These provisions cover transfers from one IRA to another, transfers from qualified pension, profit-sharing, stock bonus, and annuity plans to IRAs, and transfers from IRAs to qualified plans.

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

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

How Often Can I do a Rollover?

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

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

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

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

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

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

Note: According to our friends at the Tax Court, the rollover contribution must be of cash if the distribution is in cash.
Can I Rollover Funds From a Qualified Plan to a Traditional IRA?

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

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

Can a Traditional IRA be Rolled Into a Qualified Plan?

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

The term “eligible retirement plan” includes:

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

Can I Rollover a Traditional IRA I inherited?

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

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

Why Not?

Because the tax allowances for IRAs (including an IRA’s tax exemption) are intended to encourage saving for the retirement of the contributor and surviving spouse.

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

Are There Reporting Requirements For Traditional IRA Holders?

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

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

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

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

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

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

 

IRA Rollovers, Explained

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

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

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

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

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

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

How Often Can I Do a Rollover?

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

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

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

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

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

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

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

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

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

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

Can a Traditional IRA be Rolled Into a Qualified Plan?

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

The term “eligible retirement plan” includes:

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

Can I Rollover a Traditional IRA I inherited?

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

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

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

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

Are There Reporting Requirements For Traditional IRA Holders?

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

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

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

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

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

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

 

Should You Convert Your IRA or 401k to Roth?

Are you thinking about converting your IRA or 401k to a Roth? Doing so may or may not be a good idea. If you have a traditional IRA or 401k, your money is currently growing tax deferred and you'll pay tax on the money as it is drawn out at retirement. So why might you want to convert? Read on to learn the benefits, and who is a good candidate for this kind of switch.

Reasons to Convert Your Traditional IRA/401 to a Roth

A Roth is the opposite of a traditional IRA or 401k. Roth IRAs and 401ks grow and the money invested in them is distributed tax free when you decide to retire. So if you had a Roth, you'd pay taxes now and pay no taxes on distributions when you decide to retire.

The benefit of paying now is it's less money in the long run. If you can afford to pay taxes today, they'll be cheaper than their equivalent in 20 or even 5 years. $20 today can inflate dramatically in the time until you retire.

There are several differences between traditional and Roth accounts. To put it simply, a Roth is best for you if you plan on being in a higher tax bracket then the one you're in now when you retire. If you plan on being in a lower tax bracket, a traditional account is better for you.

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

Roth IRA Conversion Doesn't Have to Be Forever

Yes that's right! If you have second thoughts, you can convert at any time. The good news is you can convert your traditional IRA to a Roth IRA, or your traditional 401k to a Roth 401k. The price to make that conversion is including the amount you convert to Roth as taxable income for the year in which you make the conversion.
For example, if you convert $100,000 from your traditional IRA to a Roth IRA in 2017, you will list $100,00 as income on your 2017 tax return. You will then pay any federal and state taxes on that income depending on your 2017 tax bracket.

You probably don’t like the idea of paying additional taxes to convert. Honestly, who would? Nobody likes paying their friends at the IRS more taxes now. However, you can easily end up saving more money as your account grows and the entire growth comes out tax free.

Three Situations Where Converting Your IRA or 401k Funds to Roth Is Your Most Profitable Option:

  1. Expecting Higher Than Average Returns From An Investment Opportunity.

If you're about to make an investment you expect will produce huge returns, then it'll be in your best interest to convert to a Roth.
Wouldn't you rather pay tax on the smaller investment amounts now? Those larger returns will go back into your Roth IRA or 401k, where they will grow to an unlimited amount and come out tax free.
I realize this is hard to predict. After all, if it was easy we'd all be rich. However, a situation like this is bound to happen when you're investing in real estate, startups, pre-IPOs, and other investments.

  1. Low Income Year.

The biggest pain of a conversion is that you have to pay tax on the money you convert. The best time to convert is when you're in a lower tax bracket because you'll end up paying less in taxes.
For example, if you are married and have $50K of taxable income for the year and you decide to convert $100K to Roth, you will pay federal tax on that converted amount at a rate of 15% which would result in $15,000 in federal taxes.
And don't forget about state income tax (if you live in a state that actually has one) because they tax conversions the same way the fed does!

If you choose to convert when you're in a high tax bracket at around $250,000 of income, then you’d pay federal tax on a $50K conversion at a rate of 33%. This would result in federal taxes of $16,500. In other words, that's one third of your money down the drain. Ouch!

Unfortunately, many of us have careers where we can't just expect to be in a lower tax bracket. This option is probably more likely for those who are self employed as small business owners, consultants and freelancers.

  1. You'd Rather Have The Money Sooner Instead Of Later

Roth accounts are kind of like the gift that never stops giving.  With a Roth you can take out the funds you've contributed or converted (NOT the earnings) after five years without paying tax or the early withdrawal penalty. Even if you aren’t 59 1/2.

For Roth conversions, the amount you convert can be distributed from the Roth account five years after the tax year in which you converted. The five-year clock starts to tick on January 1st of the tax year in which you convert, regardless of when you convert within the year.

Let's say you converted your traditional IRA to a Roth IRA in May 2017. You'd be able to take a distribution of the amounts converted without paying tax or penalty on January 2nd, 2022.

Whereas if you try to access funds in your traditional IRA or 401k before you are 59 1/2, you will pay tax AND a 10% early withdrawal penalty even if the amounts you distribute are only the contributions you put in, not the investment gains.

Roth accounts offer you flexibility, plain and simple. So if you're looking to always have access to your retirement money, a Roth is what you need!

Final Thoughts on Who Should Convert to a Roth

Whether or not you should convert to a Roth largely depends on your future. Will you be richer or poorer when you retire? Also, many employers are willing to match your contributions to a traditional 401k to a certain degree, whereas for a Roth they aren't.

For most people, a Roth conversion simply isn't worth the money. But for some circumstances, it's a no-brainer. If you need help determining if a Roth conversion is in your best interest call Royal Legal Solutions now at (512) 757–3994 to schedule your retirement consultation.