How To Flip Houses & Avoid UBTI/UBIT

First of all, I'd like to commend all you house flippers out there. Flipping houses isn't easy--not unlike some less honorable professions. But you know what makes it a little easier? Avoiding unnecessary contributions to Uncle Sam. Let's talk about the best way to flip houses and limit or avoid UBTI/UBIT.

Use a Self-Directed IRA for Flipping Houses

With a Self-Directed IRA, you can flip homes or engage in real estate transactions funded with your retirement savings by simply writing a check. As owner of your Self-Directed IRA LLC, you will have the authority to make real estate investment decisions on your own without having to wait for the consent of an IRA custodian.
Another advantage of using a Self-Directed IRA to flip homes is when you want to purchase a home with your self-directed IRA, you can make the purchase, pay for the improvements, and sell or flip the property on your own without involving an IRA custodian.

Did I forget to tell you all the money you make from flipping houses using a Self Directed IRA will be tax free? This is true, believe it or not. However, there are a few things you need to watch out for.

Understand and Avoid UBTI & UBIT

When engaging in a real estate transaction, like flipping a house, you should always be mindful of the Unrelated Business Taxable Income rules (also known as UBTI or UBIT).
The purpose of the UBTI and UBIT rules is to make sure those who are traditionally tax exempt, (IRA's, charities and 401k's) are taxed as a for-profit business when they engage in active business activities or use leverage.
The UBTI or UBIT rules generally applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words—“trade or business,” “regularly carried on,” and “unrelated.”
Overview of The Three UBTI/UBIT Aspects
Trade or Business
The rules start with the concept of “trade or business” listed by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.”
The tax code is vague on this issue, but by using Section 162 as a reference you can limit the term “trade or business” to profit oriented activities involving the tax exempt entity. Let's break down the language.

"Regularly Carried On"

The UBIT or UBIT rules only applies to income of an unrelated trade or business that is “regularly carried on” by an organization.
Whether a trade or business is "regularly carried on" is determined by comparing what the tax exempt entity does to non-tax exempt entities. Basically, tax exempt entities can't do things that are deemed "commercial".
Unless they want to start paying taxes.

"Unrelated"

In the case of an IRA or 401k plan, any business activity will be treated as “unrelated” to its exempt purpose. This can be confusing, I know.
For IRA's and 401k's, a transaction would not trigger the UBTI or UBIT rules if the transaction is deemed not to be considered a trade or business that is "regularly carried on".
Activities which wouldn't trigger UBIT OR UBTI include capital gains, interest, rental income, royalties, and dividends generated by the IRA/401k. The passive income exemptions to the UBTI or UBIT rules are listed in Internal Revenue Code Section 512.

But if you, as a tax exempt entity, engage in an active trade or business, such as a restaurant, store, or manufacturing business, the IRS will tax the income from the business since the activity is an active trade or business that is regularly carried on.

How Do The UBTI/UBIT Rules Apply to Flipping Homes?

So now you're probably wondering what kind of real estate transaction will trigger the UBTI or UBIT taxes. As I mentioned earlier, the IRS is unfortunately vague on issues like this. What a coincidence, right?
There's no telling how many houses you have to flip in order to trigger the UBTI or UBIT tax. But the IRS does have a number of factors it will use to determine whether you've engaged in a high enough volume of real estate transactions, such as home flipping, to trigger the UBTI or UBIT tax.
3 Factors The IRS Uses:

What Happens If You Trigger UBTI or UBIT?

If it's determined that an activity/transaction you engaged in is an active trade or business transaction, you will trigger the UBTI or UBIT tax, which is taxed at a rate of approximately 40% for 2017.
The 40% rate can be lower or higher, depending on the facts and circumstances of your situation. What you should know is that one or two flipping transactions per year wouldn't be considered an active trade or business and wouldn't trigger the UBTI or UBIT tax.

Final Thoughts on Flipping and UBTI/UBIT: One Size Doesn't Fit All

Now, knowing the real estate tycoon that you are, you're probably asking yourself, what happens  if you do 4 or 5, or even 10 flipping transactions in a year? Would that be considered an active trade or business causing the UBTI/UBIT taxes to get triggered?

The answer to your question largely depends on the circumstances of your unique situation. It's all about how and why you flip the houses, not how many you flip. At least, that's how your friends at IRS see it anyway.

 

401(k) For The Self Employed: What Kick-Ass Entrepreneurs Should Know

A self-directed 401(k) for self-employed business owners isn't the same as an employer-funded retirement plan.

And if you're a kick-ass entrepreneur, a solo 401(k) is a kick-ass way to save for retirement. Why? Because this unique plan offers the ability to use retirement funds to make any type of investment on your own without requiring the consent of a custodian.

The following are some examples of the types of investments you can make with your solo 401(k) :

Indeed, you can make just about any type of investment except art and collectibles.

solo 401k self employed

Who Benefits The Most From a Solo 401(k) Plan?

The solo 401(k) plan is designed specifically for small, owner-only businesses. It’s a tax-efficient and cost-effective plan that offers all the benefits of a self-directed IRA, and includes a couple of unbeatable benefits, such as high contribution limits (up to $60,000 or $54,000 depending on your age) and a $50,000 loan feature.

There are many benefits and features of the solo 401(k) plan that make it useful to self-employed individuals. These features and benefits are what make the solo 401(k) plan so popular:

Roth Type Contributions

Roth IRAs have historically been unavailable to people with high incomes. But if you have a solo 401(k), you can use the built-in Roth sub-account which can be contributed to regardless of how much money you make.

Flexible Investment Options

As I mentioned above, you can make almost any type of investment, including real estate and private stock, and then channel them back into your solo 401(k) tax-free.

Loan Features

I also mentioned earlier how the solo 401(k) allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose. The interest rate on this loan will be the prime interest rate, which is around 4% give or take.

But be careful, failing to pay back this loan will "displease" your friends at the IRS to say the least!

UDFI Exemption

Most IRAs generate Unrelated Debt-Financed Income (a type of Unrelated Business Taxable Income) when they buy real estate. Which means they'll end up paying more taxes. Thankfully, a solo 401(k) plan is exempt from UDFI.

Sky High Contribution Limits

Under the 2017 solo 401k contribution rules, if you're under the age of 50 you can make a max contribution of $18,000. This amount can be made in pre-tax or after-tax dollars.

On the profit-sharing side, a business can make a 25% (20% in the case of a sole proprietorship or single-member LLC) profit-sharing contribution up to a combined max of $54,000, if you include the employee deferral.

If you're over the age of 50 everything is the same, except your contribution limit, which is $60,000 instead of $54,000.

Consolidation

A solo 401(k) can accept rollovers of funds from any other retirement account, such as an IRA, a SEP, or a previous 401(k).

Employee Elective Deferrals & Employer Profit Sharing

For 2017, you can contribute up to $18,000 per year through employee elective deferrals. An additional $6,000 ($24,000) can be contributed for persons over age 50. These contributions can be up to 100% of your self-employment compensation.

As an employer, you can make an additional contribution of up to 25% of your self-employment compensation.

Total Limit

As I mentioned earlier, the contributions to a solo 401(k) are capped at a max of $54,000 per year or $60,000 for persons over age 50.

But if your spouse also participates in the Solo 401(k) with you and earns compensation from the business, the spouse is allowed to make separate and equal contributions.
This would increase your combined annual contribution limit to $108,000 (or $120,000 if both spouses are over the age of 50).

Cost-Effective Administration

The solo 401(k) is not only easier to administrate, but it's also cheaper! There is no annual filing requirement unless your solo 401(k) plan exceeds $250,000, in which case you will need to file Form 5500.

Do Self-Employed Solo 401(k) Owners Need a Custodian?

Nope! The most cost-effective benefit of the solo 401(k) is that it does not require you to hire a bank or trust company to serve as trustee. This allows you to serve in the trustee role.

This means that all assets of the 401(k) trust are under your sole authority. You won't have to pay fees, or wait for a custodian's consent, unlike most other people with retirement accounts! And then you'll also be able to invest in almost anything by simply writing a check.

Click here to watch videos on Solo 401(k) and other retirement planning tools

Are There Any Administration Costs or Maintenance Fees With a Solo 401(k)?

Yes and no. You won't have to pay a custodian, so that kills 90% of the fees right there.

As for maintenance cost, there is generally no annual filing requirement unless your solo 401(k) plan exceeds $250,000 in assets. If you have more than $250,000, you'll need to fill out Form 5500.

Besides the $250,000 filing rule, you're not required to do anything else. However, I would advise you to keep all records, receipts, and contracts related to your solo 401(k) and its investments on file. So, if you hire someone to do those things for you, that will probably be your biggest administrative cost.

Do you want to learn more about solo 401(k) to see if it's the right option for you? Check out our previous article to find out if you're eligible for the solo 401(k).

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

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

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

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

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

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

  1. Start saving now!

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

  1. Set A Goal!

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

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

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

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

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

  1. Meet Your Employer's 401k Match.

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

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

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

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

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

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

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

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

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

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

  1. Automate Your Savings.

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

  1. Cut Down On Expenses.

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

  1. Save Extra Money.

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

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

  1. Delay Taking Social Security.

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

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

Are You Eligible For a Solo 401k? What About Your Employees?

Chances are if you're reading this you've probably heard of a solo 401k, which our friends at the IRS call a "one participant 401k." But what about solo 401k eligibility? Before you waste 5 minutes of your life reading my masterpiece, I'd like to let you know: if you're not self employed you aren't eligible for a solo 401k.

I know, some people just got their hearts broken. It'll be okay, trust me. You've got options. And you can read about the Roth IRA and conventional IRAs/401ks from our previous posts on the subjects. Anyway, for those of you who are self employed and interested in learning more about solo 401ks, read on.

Solo 401k Basics

The solo 401k was born out of the Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA. The idea is to give kick-ass entrepreneurs who'd rather work for themselves than "the man" an opportunity for tax-deferred retirement savings.

With that introduction out of the way, you should know there are some limitations to solo 401k eligibility.

What Are The Limitations Of a Solo 401k?

A solo 401k is limited to companies with one employee (you as the owner) although if you have a spouse then he or she can also contribute to the plan. Partners or shareholders can be included in the plan as well.

Your company can have part-time employees who are excluded from the plan, as long as they work less than 1,000 hours a year, or belong to a union or are non resident aliens.

But if your company takes on full time employees who aren't married to you (the boss), then your solo 401k will unfortunately have to be converted to an old-school 401k plan.

The solo 401k plan is available to anyone who is already a business owner or who will be establishing a sole proprietorship and does not have, or plan to have, full time employees.

The solo 401k is great for consultants, freelancers, home businesses, and independent contractors. So now I bet you want to know about the contribution rules huh. As a good host, I must oblige my audience.

Solo 401k Contribution Rules

If you're under the age of 50, you can make a max contribution in the amount of $18,000. This amount can be made before or after tax.

On the profit sharing side, your business can also make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to $36,000. That comes out to a combined max of $54,000.

Note: If you're over the age of 50, the contributions are the same, except you can contribute $6,000 extra.

The 2 Kinds Of Solo 401k Contributions

The solo 401k plan accepts two types of contributions: salary deferrals and a profit sharing contribution. Both are tax deductible and grow tax-deferred until withdrawals.

You can withdraw money from your solo 401k penalty free after you turn 59 1/2. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals must begin at the age of 70 1/2--but this rule doesn't apply if you go Roth style.

To fund a solo 401k, you can rollover funds from your previous retirement plans, IRAs etc,  by setting up a Trust account for the solo 401k and directly transferring your funds from the old custodian to the trust bank account.

A Trustee needs to be designated to hold the assets of your solo 401k, preferably you. However, if you do serve as Trustee, you cannot legally benefit directly from the trust, enter into a transaction with the trust, or use the trust as your personal fund.

Since a solo 401k is an IRS qualified retirement plan, it has to have a written 401k plan document that establishes the provisions of the plan. It's a lengthy document which will explain how the plan works and operates.

For example, the plan document will explain how you are able to borrow up to 50% or $50,000 (whichever is greater) from your solo 401k tax free, and literally for free. You pay interest, but the interest is paid into your account, so you're really paying yourself.

What Are The Technical Requirements For a Solo 401k Plan?

Great question! To be eligible for a solo 401k plan you must meet two eligibility requirements:

Allow me to explain these two lines in detail.

The Presence of Self Employment Activity

This basically means you should be the owner/operator of one of the following: sole proprietorship, LLC, C Corporation, S Corporation, or Limited Partnership where the business intends to generate revenue for profit and make contributions to the solo 401k plan.

There's no set amount of revenue for profit you should be generating. In most cases the IRS will consider you eligible if your business is legitimate and run with the intention of generating profits. You can be self employed either part time or full time, and even have another job somewhere else.

You can also participate in an employer’s 401k plan alongside your solo 401k. But if you choose to do this, your contribution limits will not be raised. (So a few thousand dollars contributed to your employer 401k will mean a few thousand dollars less you can contribute to your solo 401k.)

The Absence of Full-Time Employees

As you already know, a solo 401k is available to self employed individuals or small business owners who have no other full time employees.

The following types of employees are excluded from solo 401k coverage:

If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will have to include them in any plan you set up. You can get around this by employing independent contractors.

Once you have a solo 401k, you'll be able to invest in anything from real estate to cryptocurrency and more!

Everything You Need To Know About IRA & 401k Distributions

Are you ready for the next phase of life? One that leaves the daily grind behind? If you're nearing retirement age, you've been saving for a long time, and now you're getting close to the point where you can start taking distributions (finally).

Let's review everything you need to know about taking a distribution from an IRA or 401(k).

Options For IRA or 401(k) Distributions

When you receive a distribution from a 401k or IRA you should weigh the following tax options:

What Happens When You Take Money Out of Your IRA or 401(k)?

You'd think this would be a no brainer, wouldn't you? You saved up for retirement, now it's time to start receiving it. But it's never simple when the IRS is involved. When you take money out of your IRA or 401K, the following income tax rules apply.

How Are Distributions From a Traditional IRA Taxed?

Distributions from a traditional IRA are taxed as ordinary income, but if you made non-deductible contributions, not all of the distributions will be taxable.

Internal Revenue Code Section 72(t) imposes a tax equal to 10 percent of certain early distributions from IRAs (exclusive of portions considered a return of non-deductible contributions).

The 10% tax, which must be paid in addition to the regular income tax on the distribution, applies to all IRA distributions except the following:

 

Options For Receiving Distributions Before Retiring

The current retirement plan rules discourage taking distributions before retirement. The following are the options you have when receiving a distribution prior to retirement:

As I mentioned above, you can also choose to do forward averaging. But your best bet is to just wait until you reach retirement age.

Clash Of The Titans: IRA Vs 401K

You've probably heard a lot about 401ks and IRAs. But do you know how they compare to each other? More importantly, how do you know which is better for you?

401ks are usually employer-sponsored retirement accounts. Unfortunately, not everyone has access to those. Meanwhile, anyone can open a Roth IRA or Traditional IRA. To get the most benefits possible, you should max out contributions to both accounts if you're able to.

But maxing out both may not be an option for you. So the real question here is, should you contribute to your IRA or 401k first?

I'll give you two answers, one will be a short "quick version" while the other will be a detailed comparison and contrast analysis via chart below (as in, the actual "Clash of the Titans" you came here for.)

Let's start with the quick and dirty version.

The Quick Answer: IRA Vs. 401k

The account you should contribute to first depends heavily on whether your employer offers a 401k with a company match. Scroll to the option that applies to you.

Contribute to your 401k only to the point where your employer will no longer continue matching your contributions. This way, you can get as much free money as possible. Then consider an IRA.

Start with an IRA first. Opening one is free. After contributing up to the limit, contribute to your 401k for the pre tax benefit it offers.

 

A Detailed Comparison of The 401k, Traditional IRA, and Roth IRA: Clash Of The Titans

 

  401k

 

 Traditional IRA Roth IRA
contribution limit $18,500 for those under age 50.

$24,500 for those age 50+.

 $5,500 as a combined IRA limit. $6,500 for those age 50+.
Pros Employer contribution match. (If offered.)
Higher annual contribution limit.
Contributions lower taxable income in the year they are made.
Eligibility is not limited by income.
Able to borrow up to $50,00 or 50% of your 401k's value, whichever is greater.		 Large investment selection.
If deductible, contributions lower taxable income in the year they are made.		 Large investment selection.
Qualified withdrawals in retirement are tax free.
Contributions can be withdrawn at any time.
No required minimum distributions when you retire.
Cons No control over plan and investment costs.
Limited investment selection.
Distributions in retirement are taxed as ordinary income, unless a Roth 401k.
Required minimum distributions start at age 70 1/2.		 Contribution limits are lower than a 401k.
Deduction phased out at higher incomes if you or your spouse are covered by a workplace retirement account.
Distributions in retirement are taxed as ordinary income.
Required minimum distributions begin at age 70 1/2.		 Contribution limits are lower than a 401k.
No immediate tax benefit for contributing.
Ability to contribute is phased out a higher incomes.
Bottom line Fund a 401k first if your company is willing to match your contributions. Fund an IRA first if your 401k doesn't offer a match or if you can't get a 401k.

If you max out your IRA, start funding your 401k. Are you not sure which IRA is best for you?

If you plan on being in a higher tax bracket when you retire, choose a Roth. (Yea. I know that isn't the easiest thing in the world to predict.)

Keep reading to read more useful information about IRAs and 401ks, along with the conclusion to this article. Spoiler alert: we are going to discuss a nontraditional option that you might consider--especially if you're a real estate investor.

  401k Traditional IRA Roth IRA
Tax treatment of contributions Contributions made with pretax dollars, which reduces your taxable income on a dollar for dollar basis. Some employers offer a Roth 401k option, funded with after tax dollars.
Investments in the account grow tax deferred. If Roth 401k, investments grow tax free.		 Contributions are deductible. Higher income and participation in a workplace retirement account (for you or your spouse, if married filing jointly) may reduce or eliminate deduction.
Investments in the account grow tax deferred.		 Contributions are not deductible.
Investments in the account grow tax free.
Investment options Limited choice of investments.

Some plans have a brokerage option with access to investments outside of the plan.

 Any investment available through your account provider (stocks, bonds, mutual funds, etc.).
Taxes on withdrawals after age 59 ½. Distributions are taxed as ordinary income. If Roth 401k, distributions are tax free. Distributions are taxed as ordinary income. Distributions are tax free as long as the account has been open for at least five years.
Early withdrawal rules before age 59 ½. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Contributions can be withdrawn at any time without taxes or penalties.

Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes.

Best Practices For Traditional 401ks and IRAs

If you've got enough money, max out both. Otherwise, fund your 401k to the point where you max out your employer contributions for the year, then max out your IRA. And if you have a lot of money to invest, consider establishing a Self Directed IRA LLC.

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

What Is a Self-Directed IRA LLC & Should I Get One?

A Self Directed IRA LLC offers the same benefits as a Traditional or Roth IRA, but with even more investment opportunities available for you to choose from, such as real estate, along with asset and liability protection up to one million dollars.

Fair warning though, a Self Directed IRA LLC requires more involvement on your part and is not intended for passive investors. I'll tell you this though. If you're already investing in real estate with your personal funds, there's no reason for you not to get a Self Directed IRA. If you're considering this option, you may find our previous article on investing in real estate with your Self-Directed IRA LLC helpful.

If you still have questions about IRAs, 401ks, or lesser-known retirement options, feel free to ask them below or contact us.

 

How to Fund Your Business or Start-Up With Self Directed IRA

Do you have a private company or start-up that could use some funding? Maybe you're planning on starting your own soon. Whatever the case is, you're in for some great news!

There are tens of trillions of dollars in retirement plans across the United States. But did you know that these funds can be invested in your business? Yes, it’s true! IRA's and 401k's can be used to invest in start-ups, private companies, and even real estate.

Most entrepreneurs and retirement account owners have no idea that retirement accounts can invest in private companies. And there's a good reason for that. (More on this later.)

And it's not just anyone who owns these retirement funds, it's EVERYONE! Literally. Have you ever asked anyone to invest in your business with their retirement account?

Probably not.

But why not? How much do you think they have in their IRA or old employer 401k and how attached do you think they are to those investments? Think hard on that one.

(The answer is they usually have lots of money and they probably don't even know anything about what it's invested in.)

Those two questions have paved the way for over a billion dollars to be invested in private companies and start-ups!

This kind of funding isn't as uncommon as you might think.

Recent industry surveys show that there are over one million retirement accounts that are self-directed into private companies, real estate, venture capital, private equity, hedge funds, and start-ups.

How does it work?

So now you want to know how these funds are properly invested into your business. Well, if you ask your CPA or lawyer, the typical response is, “It’s possible, but we wouldn't recommend it.” Which probably means they don't know-how.

So they don't know, how about you ask a financial adviser? If you ask a financial adviser, especially your own, they'll tell you it's a bad idea. Most likely because you won't be paying him or her fees like how you do with mutual funds, annuities, and stocks.

There are "different" risks in a private company or start-up investments, so self-directed IRA investors need to be cautious and they shouldn’t invest everything into one private company or start-up. And yes, you will probably need some help regarding the tax and legal issues.

What is a Self Directed IRA?

A self-directed IRA is a retirement account that can be invested into any investment allowed by law. In order to invest in a private company, start-up, or small business, the retirement account holder must have a self-directed IRA. If you have an account with a "typical" IRA or 401k company, such as Vanguard or Ameritrade, then you can only invest in investments allowed under their platform. Usually, these companies won’t allow your IRA or 401k to invest in private companies or start-ups. To do so, you would first need to roll over or transfer the funds to a self-directed IRA custodian.

For a detailed list of the companies that provide these types of accounts, check out the (RITA) Retirement Industry Trust Association’s website and membership list. RITA is the leading national association for the self-directed retirement plan industry.

How to sell corporation stock or LLC units to Self Directed IRA's

Are you seeking capital for your business in exchange for stock or other equity? You might consider offering shares or units in your company to retirement account owners. And no, you don't have to go public. Companies that have had individuals with self-directed IRA's invest in them before they were publicly traded include Google, Facebook, PayPal, Domino’s, Sealy, and Yelp.

There are many investment options available. Popular ones include:

Note: you must comply with state and federal securities laws when raising money from investors.

What You Need to Know: Prohibited Transactions

One of two important things to be aware of when someone invests their retirement account money into your business relates to what they can and can't invest in (prohibited transactions). The tax code restricts an IRA or 401k from transactions with the account owner personally or with certain family members (parents, spouse, kids).

This is called the prohibited transaction rule. If you own a business personally you can’t have your own IRA or your parent's IRA invest into your company to buy your stock or LLC units. However, family members such as siblings, cousins, aunts, and uncles could move their retirement account funds to a self-directed IRA to invest in your company. Anyone else can invest in your company without worrying about that rule.

Note: If a prohibited transaction occurs, the investors self-directed IRA is entirely distributed. Make sure the rules are followed!

What You Need To Know: UBIT Tax

The second thing you need to be aware of is the tax known as Unrelated Business Income Tax (UBIT).

UBIT is a tax that can apply to an IRA when it receives “business” income. Generally, IRAs and 401k's don’t pay tax on the income or gains that go back to the account because they're considered "investment income". Investment income would include rental income, capital gain income, dividend income from a c-corp, interest income, and royalty income. (e.g. income from a mutual fund).

However, when you go outside of these forms of investment, you may find yourself outside of “investment” income. This means you might be receiving “business” income that is subject to the extremely costly “unrelated business income tax.”

This tax rate is at 39.6% at $12,000 of taxable income annually last time I checked. That’s steep. You want to make sure you avoid it.

When should an investor anticipate paying UBIT?

The most common situation where a self-directed IRA will have to pay UBIT is when the IRA invests in an operational business selling goods or services that do not pay corporate income tax.

Let's say you own a new business that sells goods online, and is organized as an LLC and taxed as a partnership. This is a very common form of private business and taxation, but one that will cause UBIT tax for net profits received by self-directed IRA. On the other hand, if your new business was a c-corporation and paid corporate tax (that’s what c-corps do), then the profits to the self-directed IRA would be dividend income, a form of investment income, and UBIT would not apply.

Self-directed IRAs should expect that UBIT will apply when they invest into an operational business that is an LLC but should expect that UBIT will not apply when they invest into an operational business that is a c-corporation.

Note: IRAs can own c-corporation stock, LLC units, LP interest, but they cannot own s-corporation stock.

Are you an LLC wanting to raise capital from other peoples IRA's or 401k's?

You should have a section in your offering documents that notifies people of potential UBIT tax on their investment. UBIT tax doesn’t your company any additional money or tax. But it will cost the retirement account investor since UBIT is paid by the retirement account.
If the investment from the self-directed IRA was via a note or other debt instrument, then the profits to the IRA are simply interest income and that income is always investment income, which is not subject to UBIT tax.

Interestingly, many companies raise capital from IRAs for real estate or equipment purchases. These loans are often secured by the real estate or equipment being purchased and the IRA ends up earning interest income like a private lender.

Recap (because that was a lot!)

So, here’s a brief recap of everything you just read.

Retirement account funds can be a huge source of funding and investment for your business, so it’s worth some time and effort to learn how these funds can be used. Just make sure you follow the rules.

How to Fund Your Business With Self-Directed IRA and 401(k) Money

Do you have a small business or start-up that could use some funding? If so, you're in for some great news!

There's tens of trillions of dollars in retirement plans across the United States. But did you know that these funds can be invested into your business?

IRAs and 401(k)s can be used to invest in startups, private companies, and even real estate.

Most entrepreneurs and retirement account owners have no idea that retirement accounts can invest in private companies. And there's a good reason for that. (More on this later.)

And it's not just anyone who owns these retirement funds, it's EVERYONE! Literally. Have you ever asked anyone to invest in your business with their retirement account?

Probably not.

But why not? How much do you think they have in their IRA or old employer 401(k) and how attached do you think they are to those investments? Think hard on that one.

(The answer is they usually have lots of money and they probably don't even know anything about what it's invested in.)

Those two questions have paved the way for over a billion dollars to be invested in private companies and startups!

This kind of funding isn't as uncommon as you might think. Recent industry surveys show that there are over one million retirement accounts that are self directed. Those accounts invest heavily in private companies, real estate, venture capital, private equity, hedge funds, and start-ups.

How does it work?

So now you want to know how these funds be properly invested into your business. Well, if you ask your CPA or lawyer, the typical response is, “It’s possible, but we wouldn't recommend it.” Which probably means they don't know how.

What about you ask a financial adviser? If you ask a financial adviser, especially your own, they'll tell you it's a bad idea. Most likely because you won't be paying him or her fees like how you do with mutual funds, annuities and stocks.

There are "different" risk in private company or start-up investments, so self directed IRA investors need to be cautious and they shouldn’t invest everything into one private company or start-up. And yes, you will probably need some help regarding the tax and legal issues.

What is a Self Directed IRA?

A self directed IRA is a retirement account that can be invested into any investment allowed by law. In order to invest into a private company, start-up, or small business, the retirement account holder must have a self directed IRA.

If you have an account with a "typical" IRA or 401(k) company, such as Vanguard or Ameritrade, then you can only invest in investments allowed under their platform.

Usually these companies won’t allow your IRA or 401(k) to invest in private companies or start-ups. To do so, you would first need to rollover or transfer the funds to a self directed IRA.

For a detailed list of the companies that provide these types of accounts, check out the (RITA) Retirement Industry Trust Association’s website and membership list. RITA is the leading nationwide association for the self directed retirement plan industry.

How to sell corporation stock or LLC units to Self Directed IRAs

Are you seeking capital for your business in exchange for stock or other equity? You might consider offering shares or units in your company to retirement account owners. And no, you don't have to go public.

Companies who have had individuals with self directed IRAs invest in them before they were publicly traded include: Google, Facebook, PayPal, Domino’s, Sealy and Yelp.

There are many investment options available. Popular ones include:

Note: you must comply with state and federal securities laws when raising money from investors.

What You Need to Know: Prohibited Transactions

One of two important things to be aware of when someone invest their retirement account money into your business relates to what they can and can't invest in (prohibited transactions).

The tax code restricts an IRA or 401(k) from transactions with the account owner personally or with certain family members (parents, spouse, kids).

This is called the prohibited transaction rule. If you own a business personally you can’t have your own IRA or your parents IRA invest into your company to buy your stock or LLC units.

However, family members such as siblings, cousins, aunts and uncles could move their retirement account funds to a self directed IRA to invest in your company. Anyone else can invest into your company without worrying about that rule.Note: If a prohibited transaction occurs, the investors self directed IRA is entirely distributed. Make sure the rules are followed!

What You Need To Know: UBIT Tax

The second thing you need to be aware of is the tax known as Unrelated Business Income tax (UBIT). UBIT is a tax that can apply to an IRA when it receives “business” income. Generally, IRAs and 401(K)s don’t pay tax on the income or gains that go back to the account because they're considered "investment income".

Investment income would include rental income, capital gain income, dividend income from a c-corp, interest income, and royalty income. (e.g. income from a mutual fund).

However, when you go outside of these forms of investment, you may find yourself outside of “investment” income. Which means you might be receiving “business” income that is subject to the extremely costly “unrelated business income tax.”

This tax rate is at 39.6% at $12,000 of taxable income annually last time I checked. That’s steep. You want to make sure you avoid it.

When should an investor anticipate paying UBIT?

The most common situation where a self directed IRA will have to pay UBIT is when the IRA invests into an operational business selling goods or services who does not pay corporate income tax.

Let's say you own a new business that sells goods online, and is organized as an LLC and taxed as a partnership. This is a very common form of private business and taxation, but one that will cause UBIT tax for net profits received by self directed IRA.

On the other hand, if your new business was a c-corporation and paid corporate tax (that’s what c-corps do), then the profits to the self directed IRA would be dividend income, a form of investment income, and UBIT would not apply.

Self directed IRAs should expect that UBIT will apply when they invest into an operational business that is an LLC, but should expect that UBIT will not apply when they invest into an operational business that is a c-corporation.
Note: IRAs can own c-corporation stock, LLC units, LP interest, but they cannot own s-corporation stock.

Are you an LLC wanting to raise capital?

You should have a section in your offering documents that notifies people of potential UBIT tax on their investment. UBIT tax doesn’t your company any additional money or tax. But it will costs the retirement account investor since UBIT is paid by the retirement account.

If the investment from the self directed IRA was via a note or other debt instrument, then the profits to the IRA are simply interest income and that income is always investment income, which is not subject to UBIT tax.

Interestingly, many companies raise capital from IRAs for real estate or equipment purchases. These loans are often secured by the real estate or equipment being purchased and the IRA ends up earning interest income like a private lender.

Recap (because that was a lot!)

So, here’s a brief recap of everything you just read.

The bottom line

Retirement account funds can be a huge source of funding and investment for your business, so it’s worth some time and effort to learn how these funds can be used. Just make sure you follow the rules.

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

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

Traditional IRA and 401k Accounts

1. Early Withdrawal Penalty.

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

2. Required Minimum Distributions (RMD).

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

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

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

4. Distribution Withholding.

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

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

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

Tips For Roth IRAs and Roth 401ks

6. Roth IRAs Are Exempt from RMD.

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

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

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

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

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

9. Tax Free Distributions of Roth IRA Earnings.

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

10. Delay Your Roth Distributions.

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

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

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

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

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

Benefit #1: Your Roth IRA Can Outlive You

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

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

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

How To Pocket Your Retirement Distributions Tax Free

You've worked hard all your life, and now it's time to retire, or you're getting ready to retire. When that time comes, depending on what state you live in, you may end up having to say good bye to some of your hard earned money.
When you begin taking distributions from your IRA, 401k, or pension plan, those distributions are taxable under federal income tax and any applicable state income tax rules. While federal taxation cannot be avoided, state taxation may be avoided depending on your state of residence.
That's right! The good news is that there are a few states that have no income tax and don’t tax retirement plan distributions. On the other hand, some states that have special exemptions for retirement plan distributions, and other states that do in fact tax retirement plan distributions.
Let's discuss how to avoid paying taxes. (We do that a lot around here folks!)

States with No Income Tax.

Naturally, the easiest way you can avoid state income tax on retirement plan distributions is by living in a state that has no state income tax. Have you ever heard of "the villages" in Florida? It isn’t just the sunny beaches of Florida that helps attract all of those retirees. It’s the tax free state income treatment!
The 8 other states with no tax on retirement plan distributions are New Hampshire, Nevada, South Dakota, Texas, Washington, Tennessee, Wyoming and Alaska.

States Income Tax Exceptions for Retirement Distributions.

There are many states who are willing to make an exception for your retirement distribution. There are 36 states that have some sort of exemption for retirement plan distributions. Since each of these states are different, so too are their exemptions. The type of retirement account you have is what decides the exemptions available to you. Here’s a quick summary of the common exemptions found throughout the states:

Most of the 36 states that have an exemption for retirement plan income provide an exemption for public employee pensions and retirement plans.

Tennessee and New Hampshire are states that do not tax wage income and therefore they do not tax retirement plan distributions of any kind. There are also numerous states that exclude a certain limit of retirement plan income from taxation. For example, Maine exempts the first $10,000 of income from any retirement plan, including IRAs.
I hope this article has helped you. Oh, and just in case you were thinking about going to the villages, they were raided for drugs recently.
Just kidding, of course. We like to have fun at Royal Legal Solutions. Ideally, while helping you plan your retirement.
 

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

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

How Uncle Sam Gets Your IRA Money: Taxes and Distributions

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

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

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

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

Example of Bypassing Withholding Tax on your IRA/401k

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

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

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

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

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

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

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

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

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

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

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

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

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

Royal Legal Solutions Ensures Tax Compliance

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

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

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

We can help you retire earlier & richer.

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

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

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

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

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

Has Your Individual 401k Plan Been Updated?

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

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

Are You Keeping Track of Your Plan Funds?

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

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

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

Do You Need to File a Form 5500? 

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

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

Are You Correctly Accounting for Contributions and Rollovers? 

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

Keep Your Friends at the IRS Happy

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

Solo 401k Plan Roth Contributions: Frequently Asked Questions

The short answer is yes. Your Solo 401k does allow for Roth contributions.

You can choose to treat contributions under your plan which would otherwise be "elective deferrals" as designated Roth contributions. In this context, an “elective deferral” is an employer contribution to your 401k plan which is excluded from your gross income.

An elective deferral is instead a designated Roth contribution if you “designate” it as not being excludable. Your designated Roth contributions for any year may not exceed the maximum amount of elective deferrals that could be excluded from gross income.

All About the Roth IRA: A Hybrid Account

The Roth "sub-account" of the Solo 401K Plan is a hybrid of sorts. Although it is technically a type of 401k plan, it has some of the features of a Roth IRA. Only after-tax salary deferral contributions may be deposited in the Roth 401k sub-account.

No employer contributions and no pretax employee contributions are permitted. The entire account will contain only after-tax contributions from your salary plus pretax earnings on those contributions.

Note: Because the Roth 401k is actually just part of a regular 401k plan, most of the rules that apply to a regular 401k plan also apply to a Roth 401k plan, including the contribution limits.

Can a Roth 401k Plan Exist On Its Own?

We wish! Unfortunately, the answer is no. A Roth 401k plan is only available as an option that can be added to a traditional 401k.

When Are Roth 401k Distributions Taxable?

Distributions from a designated Roth account are excluded from gross income if they are:

However, the exclusion is denied if the distribution takes place within five years after your first designated Roth contribution to the account from which the distribution is received. Or if the account contains a rollover from another designated Roth account, to the other account.

Other distributions from a designated Roth account are excluded from gross income under Internal Revenue Code 72 only to the extent they consist of designated Roth contributions and are taxable to the extent they consist of trust earnings credited to the account.

Can I Convert a Traditional 401k Plan to a Roth 401k Plan?

Yes, you can. The Small Business Jobs Act of 2010, signed by then-President Obama contains a provision, which went to effect on Sept. 27, 2010. This provision allows for the conversion of a traditional 401k or 403b account to a Roth in the same plan if their employer offers one.

However, you must pay income tax on the amount converted. Let's take a look at 3 important criteria below that need to be satisfied in order for you to reap all the benefits of a Roth 401k:

All income and gains from your Roth 401k plan investment would be tax free!

Can I Rollover the Roth 401k Plan to a Roth IRA?

Yes. You are permitted to roll over your Roth 401k plan assets into a Roth IRA. Your assets can be transferred via a direct rollover, which will avoid mandatory income tax withholdings.

Can I Rollover a Roth IRA to a Roth 401k Plan?

No. But you can rollover assets from a Roth 401k to a Roth IRA. (Basically, you can't do the reverse.)

How Are Distributions From Roth 401ks Taxed?

 All distributions from Roth 401k's are either qualified distributions or non-qualified distributions.

Also, because all qualified distributions from Roth 401ks are tax-free, they are also exempt from the early distribution tax as well.

What is a "Qualified Distribution?"

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

Are You Required to Take Distributions From Your Roth 401k?

Yes, the required distribution rules that force you to begin taking money out of your retirement plans and Traditional IRAs during your lifetime also apply to Roth 401k.
If you have leftover money in your Roth 401k after your death, the distributions will be directed to your beneficiaries.
Note: The rules for a Roth 401k plan are different from those for a Roth IRA. If you have a Roth 401k, you must begin taking distributions from the account when you reach age 70 and 1/2, or after you retire, whichever comes first.

How Should a Solo 401k Plan Trustee Administer a Plan With Roth Contributions?

A trustee of a Solo 401k plan with a qualified Roth contribution program must establish separate accounts including only designated Roth contributions and “earnings properly [allocated] to the contributions”.

Also, the plan administrator must maintain separate records for these accounts.

Since distributions from accounts containing elective deferrals are included in the distributees' gross income, while distributions from accounts containing designated Roth contributions are generally excluded from gross income, an employee's designated Roth contributions cannot be grouped with elective deferrals.

Note: Forfeitures may not be allocated to Roth accounts.

That's all for our FAQ on the Roth option. If you have any questions about your Solo 401k plan, take our financial freedom quiz now. We're happy to help with any concerns you may have.

Interested in a Solo 401k? Royal Legal Solutions Can Help!

There are many benefits to setting up a Solo 401k.

When you come to Royal Legal Solutions you'll get to work directly with our in-house tax and ERISA professionals to customize your Solo 401k to suit your investment and retirement goals.

At Royal Legal Solutions, we can handle or help with all of the following Solo 401k issues.

Establishing your IRS-Compliant Solo 401k Plan

A plan that is compliant in the eyes of the IRS is the only kind of plan you want. Trust us on that.

When you meet with our retirement account experts, they will guarantee your compliance. This will help you avoid those costly penalty fees.

We are able to help you with the following:

Note: We will also supply you with free tax updates and ERISA changes.

Transferring Your Retirement Funds Tax-Free

Once you've established your account, you will need to transfer your retirement funds (IRA, SEP-IRA, 401k, 403b, etc.). You can do so tax-free. We can help you move funds from your current custodian to any IRS-approved financial institution or credit union without incurring additional fees.

To do this, simply direct your current custodian to transfer the retirement funds to your new Solo 401k Plan bank account.

Of course, there are mistakes many investors can make that will incur taxes or penalties. But the retirement tax professionals at Royal Legal Solutions will assist you in completing this task in a simple and tax-free manner.

You can look forward to using any local bank or credit union to serve as your custodian. Doing so will allow you to self-direct your retirement assets without the costly custodian fees and delays.

Note: Royal Legal Solutions will assist you in completing all the necessary custodian documents. Your retirement funds may be transferred to a local bank account established in the name of your Solo 401k Plan quickly and without any tax.

Open a local trust bank account for your Solo 401k Plan at any bank or credit union of your choice. If you don't know how to do this, our in-house tax and ERISA professionals will guide you.

Understand the Basic Benefits of Solo 401ks

You get the freedom of choice plus tax-free investments.

As the trustee of the Solo 401k Plan, you will have the freedom to make all investment decisions. Your Solo 401k Plan will allow you to eliminate the expense and delays associated with an IRA custodian. This means you can act instantly when the right investment opportunity presents itself to you.

Once you make an investment, the investment is then made in the name of your Solo 401k account. Finally, all you have to do is sit back and wait for those returns.

 

Common Self-Directed IRA Prohibited Transactions: A Quick List

If you own an IRA account, you've probably read or heard a lot about prohibited transactions. If you haven't, that's okay.

Let's just say you don't want to get caught being involved in one.

This is vital information for anyone who invests with a Self-Directed IRA, so read on.

Direct Prohibited Transactions

The types of transactions that could fall under the prohibited transaction rules can be grouped in three different categories: Direct, Conflict of Interest, and Self-Dealing.

The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person” can take on many forms. Here are some more examples.

The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”.

The direct or indirect transfer to a “disqualified person” of income or assets of an IRA also constitutes a prohibited transaction. In real life, this might look like any of these examples:

Conflict of Interest Prohibited Transactions

A “Conflict of Interest Prohibited Transaction” often involves one of the following:

Self-Dealing Prohibited Transactions

Self-dealing refers to the direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the IRA in his/her own interest or for his/her own account.

Hopefully this article helps you, feel free to bookmark it as it sure to prove useful to you in the future if you plan on investing using a Self-Directed IRA.

If you have any questions about investing with a Self-Directed IRA, please contact Royal Legal Solutions today.

The Solo 401k Vs SEP IRA For Self-Employed Retirement Planning

Solo 401ks and SEP IRAs have both been around for awhile now. Previously, SEP IRAs were considered better only because they had lower administration cost and fees.

However, in recent years, competition among brokerages has made administration cost and fees much lower for Solo 401ks. Most brokerages no longer have fees, aside from for the initial setup.

This means that you, the self-employed business owner or real estate investor, are able to choose the retirement plan that's best for you based solely on the merits. Let's take a look at each.

What Is a Solo 401k Plan?

A Solo 401k plan is an IRS-approved retirement plan, which is suited for business owners who do not have any employees. These include consultants, freelancers, yoga instructors, Uber drivers ... and of course our favorite clients: real estate investors.

The Solo 401k, as its name implies, is a plan designed for one person who is a business owner. You can include your spouse on the plan if you have one. For example, a Solo 401k Plan allows you and your spouse to contribute a combined $60,000 annually.

Note: If you REALLY want to learn everything there is to know about the self-directed Solo 401(k), join our Tax, Legal, & Asset Protection Secrets For Real Estate Investors Facebook Group. Once you're in, go to "Units" and look for the Solo 401(k) Unit, where you'll find the "Know More Than Your Attorney" book by Scott Smith. It's 117 pages and nearly 40,000 words but designed to be skimmable so you can find exactly what you're looking for.

9 Reasons Why a Solo 401k is Better For Self-Employed Business Owners Than a SEP IRA 

1. You can open a Solo 401k at any bank.

With a Solo 401k, the 401k bank account can be opened at any local bank or trust company. However, in the case of a Simplified Employee Pension (SEP) IRA, a custodian is required to hold the IRA funds, which will eat into your bottom line whether your investments gain or lose.

2. Roth features are available.

A Solo 401k plan contribution can be made in pre-tax or Roth (after-tax) format. In the case of an SEP IRA, contributions can only be made in pre-tax format.

3. No annual paperwork.

With a Solo 401k, there is no annual paperwork required if your plan has less than $250,000 in plan assets.

4. You can use non-recourse leverage tax free.

With a Solo 401k Plan, you can make a real estate investment using non-recourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax.

However, the non-recourse leverage exception is only applicable to 401k qualified retirement plans and does not apply to IRAs. In other words, using a SEP IRA to make a real estate investment involving non-recourse financing would trigger the UBTI tax.

5. You can reach your maximum contribution limit quicker.

A Solo 401k includes both an employee and profit sharing contribution option, whereas, a SEP IRA is purely a profit sharing plan. Business owners with a Solo 401k plan can contribute to their plan both as owners and employees in two ways:

  1. Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
    • $18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over.
  2. Employer non-elective contributions up to:
    • 25% of compensation as defined by the plan.

Note: Total contributions cannot exceed $54,000 unless catch up contributions are used by those over age 50.

6. You don't need an LLC.

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

7. Better creditor protection.

 A Solo 401k Plan offers you greater creditor protection than a SEP IRA. The 2005 Bankruptcy Act protects all 401k Plan assets from creditor attack in a bankruptcy proceeding.

8. Tax free loan option.

With a Solo 401K Plan you can borrow up to $50,000 or 50% of your account value in the form of a loan for any purpose. If you tried to borrow money using a SEP IRA, it would be considered a prohibited transaction.

9. No catch up contributions.

Catch-up contributions allow you to make larger contributions than normal if you qualify. SEP IRA's do not allow for catch-up contributions.

With a Solo 401k Plan you can make a contribution of up to $54,000 to the plan each tax year ($60,000 if the participant is over the age of 50).

The Drawback of a Solo 401k

The only drawback to a Solo 401k is that there is slightly more paperwork required to initially set one up than a SEP IRA.

But investing requires more than just money, it also requires time. So what if a Solo 401k takes an extra hour or two to set up? That's time well spent.

Contact us or explore our Solo 401k offering if you're interested in learning more about a Solo 401k plan.

What Self-Directed IRA Owners Need To Know About UBTI & UBIT Tax

Your friends at the IRS just love making new rules for us lawyers to learn. I decided to "share the love" and write this article for you. Don't panic--this is much more readable than the version I got.

While UBTI (Unrelated Business Taxable Income) and UBIT (Unrelated Business Income Tax) sound familiar, they apply in different investment scenarios and are certainly not the same tax rate.

Wait: Aren't IRAs Tax Exempt?

They are, most of the time.

When it comes to using your Self-Directed IRA, most of the investments you make are exempt from federal income tax. Some examples of exempt income include: dividends, royalties, most rentals from real estate and gains/losses from the sale of real estate.

But this doesn't mean you can't end up finding yourself in trouble with the IRS.

The UBTI/UBIT Income Rules.

The IRS enacted a set of rules in the 1950s in order to prevent IRAs from engaging in an active trade or business and having an unfair advantage because of their tax-exempt status.

These rules became known as the Unrelated Business Taxable Income rules or UBTI or UBIT. If the UBTI rules are broken, the income generated from your activities will be subject to a 40% tax for 2018.

Note: An IRA investing in an active trade or business using a C Corporation will not trigger the UBTI tax.

Where Does UBTI and UBIT Apply?

The UBTI/UBIT tax applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words “trade or business” “regularly carried on” and “unrelated.”

Let's go over them.

What is "Trade or Business?"

The rules start with the concept of “trade or business” as used by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.”

Although Internal Revenue Code Section 162 is a natural starting point, the case law under that provision does little to clarify the issues. Expenses incurred by individuals in profit-driven activities not amounting to a trade or business are deductible under Internal Revenue Code Section 212. This means it is rarely necessary to decide whether an activity conducted for profit is a trade or business.

The few cases on the issue under Internal Revenue Code Section 162 generally limit the term “trade or business” to profit-oriented endeavors involving regular activity by the taxpayer.

What is "Regularly Carried On"?

Whether a trade or business is regularly carried on is determined based on intent. If the underlying objective is to reach activities competitive with taxable businesses, your business may meet this criterion.

The requirement is met by activities that “manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.”

What About Short Term and Intermittent Activities?

Short-term activities are exempted if comparable commercial activities of private enterprises are usually conducted on a year-round basis. But a seasonal activity is considered regularly carried on if its commercial counterparts also operate seasonally.

Intermittent activities are similarly compared with their commercial rivals and are ordinarily exempt if conducted without the promotional efforts typical of commercial endeavors.

If an enterprise is conducted primarily for beneficiaries of an organization's exempt activities (e.g., a student bookstore), casual sales to outsiders are ordinarily not a “regular” trade or business.

What Type of Income Is Subject to UBTI or UBIT Tax?

The type of income usually subject a Self-Directed IRA to UBTI or UBIT is income generated from the following sources:

Internal Revenue Code Section 511 taxes “unrelated business taxable income” (UBTI) at the rates applicable to corporations or trusts, depending on the organization's legal characteristics.

What Are The Actual UBTI and UBIT Tax Rates?

A Self-Directed IRA subject to UBTI is taxed at the trust tax rate because an IRA is considered a trust. For 2020, a Solo 401k Plan or Self-Directed IRA is subject to UBTI is taxed at the following rates:

Meanwhile UBIT tax is levied based on corporate taxes.

I hope this article helped any answer questions you might have concerning your Self-Directed IRA and UBIT/UBTI tax. If you have any questions, feel free to ask in the comments below or contact us directly.

How To Save For Retirement When You're Self Employed: The Solo 401k

Have you ever heard of the Solo 401k plan? The Solo 401k is the most tax efficient way for small business owners, consultants and contractors to save money for their retirement.
The Solo 401k plan is an IRS approved retirement plan which is suited for business owners who do not have any employees, other than themselves or their spouse. Learn more about the Solo 401k and its benefits below.

Solo 401ks Are Designed Uniquely For Self-Employed Individuals.

If you're self employed, you know how crucial it is to maintain financial security for yourself and your family. The Solo 401k offers powerful and exclusive features not found in traditional 401k or IRA retirement plans.
Are you sick of being forced to invest in Wall Street stocks and mutual funds? Are you ready to invest in any and all opportunities as you see fit? If you answered yes, then a Solo 401k is just what you need!

What Are The Features That Make A Solo 401k So Useful?

In addition to the tremendous 401k benefits (tax free profits, high tax contribution deductions, asset protection and estate planning), the Solo 401k also allows you to invest tax free in virtually anything.
Popular Solo 401k investments include: real estate, private businesses, public stocks, private stocks, and even cryptocurrency. You can also borrow up to $50,000 or 50% of the account value for any purpose.
Besides letting you make high contributions (up to $60,000 for 2017) and borrow between $1,000 to $50,000 (tax free), the Solo 401k plan offers you the same investment opportunities as a Self-Directed IRA LLC. But without having to hire a custodian or create an LLC (both of which are costly ventures.)
Note: The money you borrow from a Solo 401k is lent to you at the current prime rate + 1%.

Some Disadvantages Of Solo 401k's

Of course, no retirement plan is perfect. As you read above, Solo 401k's have high contribution amounts. Naturally, this doesn't go unnoticed by the people who manage these 401k's. Which means they want a piece of your cake.
Most firms charge between $100 to $500 to set up a Solo 401k. After that, you can expect to pay annual fees of up to $500. So you don't want to get a Solo 401k unless you intend to contribute tens of thousands of dollars as soon as you open one.
And then there's the IRS you have to deal with. With Solo 401k's you don't have to file any paperwork annually unless you have $250,000 or more in your 401k (form 5500-EZ). When you take a distribution, you will have to file a form 1099-R with the IRS.
If you're thinking of establishing a 401k or need other advice on retirement options for self-employment, contact Royal Legal Solutions. Our experts are happy to help you asses your situation.

How To Transfer Your Roth IRA To A Self-Directed Roth IRA LLC

If you're ready to kick your Roth account up a notch, you're in the right place. Today we will discuss how to easily transfer your Roth IRA into a Self-Directed Roth IRA LLC,  as well as why you may want to do this.

There are two things you should know first:

Okay, with those basics down, let's move onto the nuts and bolts.

What is the Easiest Way to Add Money to a Self-Directed Roth IRA?

There are two types of transactions that let you re-arrange funds between multiple IRAs. These are known as transfers and rollovers. Remember, you have to stay in line with the rules we mentioned above. Roth accounts are, by definition, funded after taxes are paid. Therefore, you can't roll pre-tax funds into one. At least not without getting in trouble with Uncle Sam. We promise you don't want that.

What You Need To Know About Roth IRA Transfers To A Self-Directed Roth IRA.

As I told you above, direct transfers tend to be the most straightforward method. A transfer is defined by the fact that it takes place between two banks or custodians. Occasionally, you may encounter transfers within a financial group.

There are some clear advantages to using a transfer. When you do, the funds aren't taxed by, or even reported to, our friends at the IRS.

As the account holder, you control and direct any transfers. You won't, however, directly accept the cash or other assets involved. That honor goes to your financial institution. This is simply the way it must be. If you were to get directly involved, you could incur taxes and penalties unnecessarily.

So, keep your name off of any checks in this transaction. Make it clear that your payment is to the bank or other approved custodian. If you're having any doubts or reservations about that, call a professional. It's much cheaper to pay for help with this process beforehand than to learn the hard way about the penalties.

How Does The Roth IRA To Self-Directed Roth IRA Transfer Work?

Royal Legal Solutions is here to help you with any phase of this process. We begin by establishing a new Self-Directed Roth IRA account for you. After you grant permission, we can even execute the rollover or transfer on your behalf to fund your new account.  We will ensure all steps are followed to current legal requirements, meaning you'll have a complete Roth IRA transfer free of taxes and penalties.

Once your Roth IRA funds are either transferred by wire or check to the new Roth IRA custodian, that institution can place the funds into your  new Roth IRA LLC.

As soon as the transfer is complete, you have complete control over your retirement funds. Any investment that you see fit, with few exceptions, can now be held in your retirement account. Real estate investors especially love this solution, because the Roth IRA LLC can hold property and other nontraditional investments.  

What’s The 60 Day Rollover Rule?

You generally have 60 days to complete the transaction.  The clock starts ticking when you actually receive the funds from your original Roth IRA. There are very few exceptions to this rule, and you don't want to mess around with it. When you do get an exception, it's very limited. Typically, you'll be required to  do the rollover on the following business day.

Note: You may elect to roll over all, or simply some of your funds. We don't advise that you withdraw funds from the Roth that you don't intend to rollover, because they could be subject to massive taxes. Half of the beauty of the Roth is in the tax breaks.

But don't worry, we're here to assist with technicalities like this.

Royal Legal Solutions Will Guide You Throughout The Entire Process.

When you come to Royal Legal Solutions, you will be assigned a dedicated retirement tax professional to help you establish your Self-Directed Roth IRA LLC. He or she will guarantee that your rollover goes smoothly, and that your new account is up, running, and ready for business.

Solo 401k Vs. SIMPLE IRA: Which is Better for You?

You've got lots of investment options. But not all of them are created equal. This is especially true when it comes to the SIMPLE IRA and the solo 401k.

The SIMPLE IRA plan is similar to a solo 401k plan. They are both funded by employee deferrals and additional employer contributions.

But there are a few differences you should be aware of. As you can see below.

The SIMPLE IRA

A SIMPLE IRA plan can be established at a bank, insurance company, or other qualified financial institution by any employer who has less than 100 employees, who will receive at least $5,000 in compensation from the employer in the preceding calendar year.

The SIMPLE IRA plan has a lower deferral limit than a solo 401k. But unlike a solo 401k plan, the SIMPLE IRA plan uses an IRA-style trust to hold SIMPLE IRA contributions for each employee, rather than the a single plan like a 401k Plan or other qualified retirement plan.

The Solo 401k

The solo 401k plan is an IRS-approved retirement plan, which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. There are a number of benefits that are specific to solo 401k plans that make them a far more attractive retirement option for a self-employed individual than a SIMPLE IRA.

8 Solo 401k Benefits

1. Higher Contributions.

A Solo 401k Plan includes both an employee and profit sharing contribution option, whereas, a SIMPLE IRA only offers minimal employee deferral opportunities.

For those below the age of 50:

Under the 2017 Solo 401k contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $54,000.

For those over the age of 50:

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can also be made in pre-tax or after-tax (Roth).
On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $60,000.

Compared to a SIMPLE IRA:

Whereas, a SIMPLE IRA has a lower deferral limit of $11,500 for 2017, plus a $2,500 catch-up contribution. In addition, the employer must provide either a dollar-for-dollar contribution of up to three percent of compensation to all who defer or a two percent non-elective contribution to all employees who are eligible to participate in the plan and who have earned $5,000 or more in compensation from the employer during the year. Hence, a participant in a SIMPLE IRA would be significantly limited in the amount of annual deferrals to be made to the retirement account in comparison to a Solo 401k Plan participant.

2. Reduced Catch-Up Contribution Amount.

With a Solo 401k Plan a plan participant who is over the age of 50 is able to make a catch-up contribution of up to $6,000. Whereas, with a SIMPLE IRA, the maximum annual contribution limit for is just $2,500.

3. No Roth Feature.

A Solo 401k Plan can be made in pre-tax or Roth (after-tax) format.  Whereas, in the case of a SIMPLE IRA, contributions can only be made in pre-tax format.  In addition, a contribution of $18,000 ($24,00, if the plan participant is over the age of 50) can be made to a Solo 401k Roth account.

4. Tax-Free Loan Option.

With a solo 401k plan you can borrow up to $50,000 or 50% of your account value, whichever is less.  The loan can be used for any purpose. With a SIMPLE IRA, you can't even borrow $1.

5. Access to Tax-Free Nonrecourse Leverage.

With a solo 401k plan, you can make a real estate investment using non-recourse funds without triggering the Unrelated Debt Financed Income Rules and the Unrelated Business Taxable Income (UBTI or UBIT) tax. However, the non-recourse leverage exception is only applicable to 401k qualified retirement plans and does not apply to IRAs. In other words, using a Self-Directed SIMPLE IRA to make a real estate investment involving non-recourse financing would trigger the UBTI tax.

6. You Can Open Your Account at any Local Bank.

With a Solo 401k plan, your 401k bank account can be opened at any local bank or trust company. In the case of a SIMPLE IRA or a Self-Directed IRA, a special IRA custodian is required to hold the IRA funds.

7. No Need for the Cost of an LLC.

With a Solo 401k, the plan itself can make real estate and other investments without the need for an LLC. (Depending on the state you're in, forming an LLC could prove costly.) Since a 401k Plan is a trust, the trustee on behalf of the trust can take title to a real estate asset without the need for an LLC.

8. Greater Creditor Protection.

A Solo 401k offers greater creditor protection than a SIMPLE IRA. The 2005 Bankruptcy Act generally protects all 401k assets from creditor attack in a bankruptcy proceeding.  In addition, most states offer greater creditor protection to a solo 401k qualified retirement plan than a SIMPLE IRA outside of bankruptcy.

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

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

What is Hard Money Lending?

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

What is Peer to Peer Lending?

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

How To Use Your Retirement Funds To Lend

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

The Self-Directed IRA LLC Lending Advantages

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