Investing In Promissory Notes With Your Self-Directed IRA

IRAs allow you to make tax-deferred investments while working, so you'll reap the rewards when you retire. A custodian typically puts your money in mutual funds, stocks and bonds. 

The self-directed IRA allows you to bypass the custodian, take charge of your retirement savings, and put your money into a wide range of investments, including real estate and cryptocurrency. You can also use your self-directed IRA to invest in promissory notes, including mortgage notes and trust deeds.

Financial advisors will usually steer you away from alternative assets and towards Wall Street investments, but if you're a smart real estate investor, don't you want control over how your IRA is invested?

If you invest in promissory notes and other alternative assets using IRA funds, all income is tax-deferred until you choose to take a distribution. This keeps more money in the account and increases the effect of compounding. And with a Roth IRA, there will never be an income tax since contributions are taxed on their way into the account.

The self-directed IRA lets you put promissory notes to work for you. Let's take a closer look.

What Are Promissory Notes?

Good question! Promissory notes are legally-binding IOUs that borrowers sign when they take out loans. Essentially, it's a promise to pay back the lender. 

Most promissory notes will list the terms of the loan, such as:

After a borrower issues a promissory note, the lender will keep it until the last payment is made. When the loan is entirely paid, the lender will mark the note "paid in full" and return it to the issuer. 

What Are Real Estate Notes?

Real estate or mortgage notes are promissory notes associated with real estate purchase loans and secured by the property. When a borrower takes out a home loan, the lending institution will typically require them to sign a promissory note and a mortgage agreement. It will be a deed of trust in some states rather than a mortgage, but they're pretty much the same thing (for our purposes, at least). 

While promissory notes outline the terms of the loan, a mortgage or deed of trust secures the loan with the purchased real estate. After the loan is executed, the lender will record their lien on the property by filing the mortgage. Promissory notes don't get filed, so the lender will hold onto it until the loan's paid in full.

Performing Versus Non-Performing Notes

There are two categories of real estate notes you should know about: performing and non-performing. The distinction between the two types of promissory notes is relatively simple. If the borrower makes their payments on time, and the loan has never been in default, the note is "performing." When the loan is in default or the borrower is late on payments, the note is called "non-performing." 

Both performing and non-performing promissory notes can be purchased, traded, sold, or transferred at any time before they are paid off. If you buy real estate notes, you will acquire the right to receive all future payments on the loan. In other words, you're investing in debt, not property.

Why Should I Invest In Promissory Notes?

The appeal of promissory notes varies with your investment strategy. People looking for a truly passive investment should consider performing real estate notes. Being a performing noteholder is basically just an upgrade from being a landlord. Since you own the debt, not the real estate, you don't have to handle tenants or repairs. Your only responsibility is to collect mortgage payments each month.

Investing in non-performing notes, on the other hand, can be a much wilder ride. While this route is not all that passive, you can make a lot of moolah through non-performing notes. Since the borrowers aren't paying, you can usually acquire these types of notes at a hefty discount, leaving plenty of room for profits.

While there are various strategies for investing in non-performing notes, the most common are:

No matter what strategy you choose, investing in real estate notes is an excellent way to diversify your retirement portfolio.

How Do I Invest In Promissory Notes With My Self-Directed IRA?

While investing in notes with your self-directed IRA may sound complicated, it's actually pretty straightforward. 

Step One — Open A Self-Directed IRA

I'm sure I don't have to tell you this, but, just in case, if you don't currently own a self-directed IRA, the first thing you need to do is get one.

Step Two — Purchase Or Create A Promissory Note

Once you find a note you want to invest in, you'll use your IRA to purchase it. You can also create your own promissory notes by lending out funds from your IRA and collecting interest.

Step Three — Do Paperwork

You'll need to fill out some paperwork and provide an original copy of the note to your bank. Take note — your IRA must be listed as the lender instead of you personally.

Step Four — Make Money

That's pretty much the entire investment process. Once you've secured the note and the bank has processed your paperwork, you're officially a promissory note investor!

Important Considerations

As always, when investing with your self-directed IRA, some due diligence is required. You should always thoroughly review the existing legal documents, information on the property, and the borrower's financial background before investing in a note. 

Once you have added notes to your IRA, you should also engage a third-party loan servicing company. Having a servicer deal with your loans eliminates the possibility of engaging in prohibited transactions by providing services to your retirement plan. While there may not be any issues with you handling certain aspects of servicing the loan yourself, hiring a third-party to manage your notes is your safest bet.


Investment Options for Your Self-Directed IRA

One of the best things about rolling over your retirement assets into a self-directed IRA is that it opens up a wide range of investment options—including our favorite, real estate.

Typically, IRA investment options are limited to stocks, mutual funds and bonds. Holders of a self-directed IRA, however, can also invest in:

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

Investment Restrictions for Self-Directed IRAs

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

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

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

Investment Possibilities With Your Self-Directed IRA

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

Tax Deferral

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

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

Real Estate

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

Stocks, Bonds, and Mutual Funds

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

Precious Metals

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

Tax Liens

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

Private Businesses

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

Loans and Notes

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

Foreign and Cryptocurrencies

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

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

The Bottom Line

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


The Real Threats to Your Self-Directed IRA & How to Defend Against Them

One of the many reasons real estate investors love the self-directed IRA (SDIRA)  is the control they have over both their assets and participation with traditional custodians. But many investors are also aware of the SDIRA’s relative security as an asset protection tool. If you weren’t aware of this benefit before, you are now. 

Don’t make the same mistakes other investors make. Watch out for threats to your SDIRA’s security. If you establish an SDIRA, it’s smart to do what you can to protect it; read on to learn how.

How Safe Is Your Self-Directed IRA?

When pros like attorneys discuss self-directed IRAs being “safer” than other investment vehicles, they’re referring to safety in two senses of the word. Your SDIRA isn’t “safe” from any type of attack, but it does protect you legally:

So, this article isn’t intended to suggest IRAs are inherently risky, just to remind you how not undermine its protections. The sticky reality is that for real estate investors, self-directed IRAs can be riskier when they own assets (including REI property) that have liabilities attached.

Your Biggest Threat: Prohibited Transactions Explained

The biggest way you can be a danger to yourself and your self-directed IRA is by performing prohibited transactions. The prohibited transaction rules are a gift from our buddies at the Department of Labor. Basically, there are things you can’t do in a business context with your SDIRA:

  1. Self-dealing is the term for doing business with yourself via your self-directed IRA or other qualified retirement plan (QRP). You can’t do this, frankly, because of too many opportunities for corruption.
  2. Disqualified People.The DOL isn’t dumb. They disqualify certain individuals, namely relatives, spouses, and other types of people you might form “sweetheart deals” with like business partners. So to keep everyone playing fair, plan participants can’t allow their plan to make transactions with anyone the DOL labels a “disqualified person.” Expect to pay hefty penalties if you do.

For your convenience, we’ve compiled an educational resource about avoiding prohibited transactions, complete with examples. Our prohibited transaction resources can help you educate yourself to the point you avoid engaging in such transactions with your self-directed IRA. The only downside to the SDIRA’s freedom from custodians is such freedom means you are responsible for dodging prohibited transactions.

How to Protect Your Self-Directed IRA

You have additional options for protecting your IRAs. For those of us concerned about our real estate assets, the liability-limiting powers of the SDIRA LLC offer an elegant fix.

Consider a Self-Directed IRA LLC for Liability Protection

The ideal legal tool for a long-term SDIRA owning REI is the SDIRA LLC. This variation of the retirement plan is hybridized into an entity, a more secure option for investors.

The SDIRA LLC is an alternative to the IRA Business trust, another option for IRA-owned entities. Real estate investors are attracted to the LLC option because of its strong liability protections. Using an SDIRA LLC gets investors the flexibility to buy real estate with IRA funds and the protection of an LLC, or the best of both worlds.

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

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

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

Why the IRS Prohibits Active Earnings from an IRA

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

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

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

Prohibited Investments for Your Self-Directed IRA

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

Life Insurance Policies

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

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


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

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

Real Estate that You or Your Family Personally Use

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

How does this work?

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

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

Derivative Trading

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

Business Interests

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

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

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

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

A Checklist for Acceptable Investments

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

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

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

How to Fund Your Business with Self-Directed IRA Investors

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

Investing with Self-Directed IRA Funds

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

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

Avoiding Prohibited Transactions/UBIT

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

Forget Wall Street: 6 Reasons To Form a Self Directed IRA LLC

You're living in the 21st century now, which means you don't have to put all your eggs in one basket when it comes to investing.

With a Self-Directed IRA LLC (Limited Liability Company) you can take back control of your retirement and receive higher returns from your investment dollars.

Here's 6 reasons why you should forget about Wall Street and form a Self Directed IRA LLC:

1. To Purchase Non-Traditional Assets

It's might be hard for you to forget about Wall Street, when for nearly a hundred years people have been told that they could only invest their money there. But with a Self Directed IRA you can move beyond Wall Street and invest in a whole new world of opportunity.

A Self Directed IRA LLC will allow you to use your IRA funds to make self directed investments in “non-traditional” assets of your choice. Most Wall Street IRA custodians only allow you to invest in stocks, bonds, mutual funds, annuities, CDs and other traditional investments.

The problem is, while traditional investments are numerous, they only make up a fraction of the profitable assets you can purchase and hold for investment.

2. Checkbook Control

With an IRA, you can be the manager of your own IRA LLC, but you can't be compensated for services or use your funds to pay any of the IRA LLC’s expenses. Doing so would make your friends at the IRS angry and cost you big time.

3. Asset Protection

In most states the owner of an LLC isn't liable for the debts or obligations of their LLC.

For example, in Arizona the law is that the members (owners) of an Arizona LLC are not liable for the debts or obligations of the LLC. This is an especially important factor when the IRA LLC has members who are not IRAs.

However, there are rare instances where a member's personal assets can be pursued by creditors, such as if they act as a guarantor for a loan to fund the LLC and fail to pay it back.

4. To Pool Assets with Other Investors

Banks have recently tightened up on their lending regulations, which means it's become harder for real estate investors to secure capital to acquire property. This has become a major obstacle for many real estate investors.

When the cost to acquire an asset exceeds the funds available to you,  combining your money with other investors may be the only way you can purchase an asset. A great way for investors to pool assets is through an IRA LLC.

Your IRA and other investors contribute money to the IRA LLC and then use the LLC funds to purchase the asset. An IRA LLC can have multiple members including more than one IRA, people and entities as long as the prohibited transaction rules are not violated. (I will go over the rules towards the end of the article.)
Not only do you get the benefit of having your money combined under legal and contractual guidelines, but you also get the protection an LLC offers, such as protection from creditors and lawsuits.

5. To Create A Legal & Organized Structure When There Are Multiple Members

It can be hard to decide what to do with an asset when several people own it. An IRA LLC provides a legal governing structure, rules and policies to how the joint owners will operate the company and deal with its assets.

You shouldn't rely on oral statements or agreements. An Operating Agreement signed by all of the members of your LLC will provide the firm foundation from which you all can make decisions together.

For example, an Operating Agreement will prevent members from being "lone wolves" and doing something that the majority of the members disagree with, such as entering into an unprofitable contract.

6. To Make Day-To-Day Property Management Easier

If you purchased a complex asset, you will want a Self Directed IRA LLC to be the owner of that asset. For example, if you want to purchase a thirty unit apartment complex, you should form an IRA LLC to own and operate the apartments. Why?

Because you and your IRA custodian don't have time to be involved in the day to day operations of a thirty unit apartment complex, such as paying utilities, depositing rent checks, or evicting tenants.

And then think of the liability involved. Anyone of those tenants could sue you for a variety of reasons. An LLC will protect you from an "unhappy camper".

What Can't You Purchase With An IRA?

An IRA LLC may not purchase any of the following three types of assets:

What Are The Most Popular Self Directed IRA Investments?

Real estate is the most popular investment people make with self directed IRA funds.
IRA funds can be used to purchase homes, condos, duplexes, penthouses, raw land, office buildings, shopping centers, factories, mobile home parks and all other types of  commercial and residential real estate.

What Are The Consequences if an IRA LLC Engages in a Prohibited Transaction?

Okay so I mentioned the prohibited transactions earlier. If your IRA purchased a prohibited asset (such as life insurance) or engaged in a prohibited transaction, your friends at the IRS would get extremely angry. They could dismantle your IRA, tax you until you bleed and make you pay fees on top of the taxes.

What are the Prohibited Transaction Rules?

All the prohibited transactions rules can be found in IRC Section 4975. The quickest way to sum those up is that a “prohibited transaction” includes any direct or indirect:

Who are Disqualified Persons?

IRC 4975(e)(2) states “the term ‘disqualified person‘ means a person who is:

The Bottom Line

If you're looking for more control over your retirement savings, you have multiple options to consider, including traditional self-directed IRAs and self-directed IRA LLCs with Checkbook Control.

There's also the IRS regulations, which if not followed to the letter could cost you thousands of dollars and waste all the time you spent securing a good investment return.

Depending on your level of investment experience & IRS knowledge, it can be hard for you to figure out all these financial and legal definitions. If you want help taking back control of your retirement, contact Royal legal Solutions today.

Top 10 Features Of The Solo 401k Plan: Empower Your Business

Are you an independent contractor or the only employee of a business you own? If so, you may want to learn about the Solo 401k.

A Solo 401k is a dream come true for small businesses, independent contractors and sole proprietors, such as consultants or freelance writers. A Solo 401k Plan can be adopted by any business with no employees other than the owner(s).

The business can be a sole proprietorship, LLC, corporation, or partnership. The Solo 401k is a tax efficient and cost effective plan offering all the benefits of a Self-Directed IRA, plus additional features.

Solo 401k Features and Benefits

1. Easy to maintain.

There is no annual filing requirement unless your solo 401k plan exceeds $250,000 in assets. If it does you will need to file a short information return with the IRS (Form 5500-EZ).

2. Freedom of choice and tax-free investing.

With a Solo 401K Plan, you will be able to invest in almost any type of investment opportunity, including:

Your only limit is your imagination.
Note: The income and gains from these investments will flow back into your Solo 401K Plan tax-free.

3.You can get a loan.

The Solo 401k allows you to borrow up to $50,000 or 50% of your account value, whichever is less. The interest rate will be the current prime rate. You can use the money for anything you want.

4. No Custodian fees.

A Solo 401k plan allows you to eliminate the expense and delays that come with an IRA custodian. This enables you to act quickly when the right investment opportunity presents itself.

Also, because you can open a Solo 401k at any local bank or credit union you won't have to pay custodian fees for the account as you would in the case of an IRA.

Another benefit of the Solo 401k plan is that it doesn't require you to hire a bank or trust company to serve as trustee. This flexibility allows you to serve in the trustee role. This means all assets of the 401k trust are under your direct control.

5. High contribution limits.

While an IRA only allows a $5,500 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), the solo 401(k) contribution limits are $54,000.  (With an additional $6,000 catch up contribution if you're over age 50.)

Under the 2017 Solo 401k contribution rules, if you're under the age of 50 you can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after tax. The after-tax method is known as the Roth account.

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

If you're over the age of 50, you can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre tax or after tax (Roth). (Up to a combined maximum of $60,000.)

6. Contribution options.

You always have the option to contribute as much as legally possible, as well as the option of reducing or even suspending plan contributions if necessary.

7. Roth contributions.

The Solo 401k plan contains a built-in Roth sub-account you can contribute to without any income restrictions. With a Roth sub-account, you can make Roth type contributions while having the ability to make significantly greater contributions than with an IRA.

8. Tax deductions can offset the cost of your plan.

By paying for your Solo 401k with business funds, you would be eligible to claim a deduction for the cost of the plan, including annual maintenance fees.

9. Exemption from UDFI tax.

When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (UDFI). This means you're going to be paying a lot of money in taxes!

How much is a lot you ask? The UBTI tax is approximately 40% for 2017-2018! Learn more details about this whopping tax penalty from our previous UBTI breakdown.

But, with a Solo 401k plan, you can use leverage without being subject to the UDFI rules and UBTI tax. This exemption provides significant tax advantages for using a Solo 401k Plan over an IRA for real estate purchases.

10. Rollover options.

A Solo 401k plan can accept rollovers of funds from another retirement savings vehicle, such as an IRA, a SEP, or a previous employer's 401k plan. Which means you can directly rollover your IRA or qualified plan funds to your new 401k Plan for investment or loan purposes.
Note: Roth IRA funds can't be rolled into a Solo 401k Plan.

Still Using an IRA?

While the IRA is nice and all, it just can't compete. With a solo 401k plan, your business will pay less in tax, and you won't have to deal with the typical IRA restrictions.

Are you interested in learning more about Solo 401ks? Call Royal Legal Solutions at (512) 757–3994 to schedule your retirement consultation today.

What is the Self-Directed IRA?

Do you have an IRA? If yes, you've probably only invested in mutual funds and other types of stock investments. But did you know lot of people that are in the know are now using their IRAs to invest in real estate and other more productive assets? All thanks to the self-directed IRA.

The Self-Directed IRA Basics

As its name suggest, the self directed IRA is an IRA you self-direct, or control. You might think that you control your IRA already. The truth is you don't. Your IRA is controlled by a custodian, and you have a limited choice of investments. You can only invest in things like stocks, bonds and mutual funds.
But by using a self-directed IRA, you'll be able to take complete control of your IRA. You'll be able to streamline the investment process and cut out the custodian, which means no more custodian fees or undue delays. And the best part? You can invest in real estate using a self directed IRA!

The Self-Directed IRA Rules

However, there are certain restrictions that apply to self directed IRA investors. You don't want to violate the IRA rules. (If you do, there are several consequences, including a fine.)
For example, one of these IRA rules is you can't loan money to a disqualified person. Also, there are certain assets that you can't invest in such as artwork, life insurance or collectibles.
Yet despite all these IRA rules, the self-directed IRA is the most powerful investment tool available for an IRA owner. Once you have a self directed IRA, you'll be able to use to invest your IRA funds into highly profitable asset classes with the ease of not having to involve a custodian.
If you have any questions about the self directed IRA, I've written several blog post that should be able to answer all of your questions. To learn more about the self-directed IRA (including how to fund and create one), check out our answers to top self-directed IRA questions. You may also be interested in learning how to buy real estate with your self-directed IRA.
If you have more questions or want to establish your self-directed IRA, Royal Legal Solutions is here to help. Contact us today.

Do You Need An IRA Custodian?

Every IRA is required to have a custodian. But not everyone needs or wants the services of a custodian. Most of the time investors are forced to use custodians due to the way traditional IRAs are set up.

A custodian is someone you need to finalize your deals. You might even have a custodian choose your investments for you. And if that's the case, you want to make sure you have a custodian who knows the prohibited transaction rules inside and out.

Keep in mind, not all IRA custodians are created equal and the IRS isn't lenient. If your custodian breaks the prohibited transaction rules with your IRA funds, you're the one they'll penalize, not your custodian.

The Self-Directed IRA Custodian

As I said earlier, not everyone wants or needs an IRA custodian. And that's where the self-directed IRA comes in. Investors with self-directed IRAs can take on the responsibilities of a custodian.

Yes, that's right, these investors volunteer to do more work. The benefits of doing your custodian's job include the following:

But you can't just become your own IRA custodian right away. You'll need to know the IRS's prohibited transaction rules. Unless you want to pay a steep penalty tax.

When you're your own custodian, you can also get an attorney who's familiar with the IRS's rules to look over your deals for you. An attorney will be able to make sure your deals are in compliance with IRS rules and not disqualified transactions.

Always remember, with an IRA custodian you get what you pay for. Same thing with an attorney. If you plan on investing purely by yourself, make sure you know what you're getting yourself into. The IRS isn't known for being lenient.

If you need assistance managing your retirement account or reviewing your IRS compliance, schedule your consultation with our online tool.

Why You DON'T Want A Self Directed IRA LLC In California

You may have heard about the benefits of the self directed IRA before. The self directed IRA offers many advantages, including asset protection, tax benefits, and freedom of choice. But if you live in California, you don't want to get one.

California Investor: Don't Get an LLC, Get An IRA Business Trust

With an LLC you end up having to pay an $800 yearly franchise tax as a California resident. (That's on top of the filing fees.) Instead of getting an LLC, you should get what's known as a business trust.

Business trusts aren't subject to the costly franchise tax laws in California. And with a business trust you're able to do everything you can do with an LLC. You can direct your funds where you would like to and you can invest in anything you want. All without involving a custodian.

So yes, with a business trusts you will save money where fees are concerned. But there are some downsides.

The One Downside Of Using An IRA Business Trust

Unfortunately business trusts lack the asset protection you would get with an LLC. However, they're still partly anonymous, which can help you a little bit.

While a business trust won't give you all the asset protection you need, you'll still be able to invest in a cost and tax efficient manner. At the end of the day that's always better than paying custodian fees and missing out on great investment opportunities.

I wish I could've given you better news, but on the bright side at least you know what you're up against in California. If you have any questions feel free to ask me in the comment section, It'd be my pleasure to assist you.

Learn more about the exclusive benefits of having a self directed IRA.