Investing in real estate has the potential to generate substantial wealth, but the financing strategy you choose may have a significant influence on your financial results.
Although both Roth IRAs and Roth Solo 401(k)s provide tax benefits, they have contrasting approaches to managing real estate debt-funded assets.
For many reasons, it would be best to prioritize utilizing a Roth Solo 401(k) instead of a Roth IRA for these particular assets.
1. Unrelated Debt-Financed Income (UDFI) Tax
If you use debt to invest in real estate via a Roth IRA, you may be liable to pay Unrelated Debt-Financed Income (UDFI) tax. This tax applies to the share of revenue derived from the property’s debt-financed component.
For instance, in the case of acquiring a property with 50% debt, 50% of the income derived from such property may be liable to UDFI tax. Using a Roth IRA for real estate investments might result in a substantial reduction in tax benefits.
On the other hand, a Roth Solo 401(k) often does not incur UDFI tax on real estate assets. This implies that you may use borrowed money to invest in real estate without being concerned about paying extra taxes on the revenue earned but maintaining the advantages of tax-free growth provided by your Roth Solo 401(k).
2. Higher Contribution Limits
Roth IRAs have relatively low annual contribution limits, which can restrict the amount of capital you can invest in real estate. As of 2024, the contribution limit for a Roth IRA is $7,000 ($8,000 if you’re 50 or older).
This makes it challenging to accumulate enough funds to make significant real estate investments without taking on substantial debt.
On the other hand, a Roth Solo 401(k) lets you put in a lot more money. When you add up your employee and company payments for 2024, you can put in up to $69,000 ($76,500 if you’re 50 or older).
With these higher limits, you can quickly build a more significant cash pool, so you don’t have to rely on loans to purchase real estate.
3. Greater Investment Flexibility
A Roth Solo 401(k) often provides more flexibility regarding investment options than a Roth IRA. With a Roth Solo 401(k), you can invest in a wide range of assets, including real estate, without the same restrictions that might apply to a Roth IRA.
This adaptability may be especially beneficial when you want to broaden your investment portfolio and capitalize on different real estate prospects.
4. Loan Provisions
With a Roth Solo 401(k), you can borrow and use money from your account for anything, even investing in real estate. You can borrow as much as $50,000, which is 50% of your account balance. This function adds another way to get money for real estate purchases without paying the UDFI tax.
Roth IRAs don’t have loan options, so you can only use the money to invest in real estate if you take withdrawals, which could be taxed and penalized if you aren’t eligible.
Conclusion
Although both Roth IRAs and Roth Solo 401(k)s offer tax-free growth and tax-free withdrawals in retirement, the Roth Solo 401(k) provides substantial benefits to real estate investors, particularly when employing debt.
The Roth Solo 401(k) is a more effective vehicle for leveraging debt in real estate investments due to the loan provisions, significant investment flexibility, higher contribution limits, and exemption from UDFI tax.
You can enjoy the full benefits of tax-free growth and maximize your investment potential by selecting a Roth Solo 401(k).
As a C Corporation owner, you have the unique advantage of participating in a Health Reimbursement Arrangement (HRA) and enjoying tax-free reimbursements for qualified medical expenses. Setting up an HRA can be a great way to manage healthcare costs for yourself and your employees.
Here’s a step-by-step guide to help you get started:
1. Plan Design
First, decide on the specifics of your HRA plan. Consider the following:
1. Annual Contribution Limit:Calculate the specific amount the company will allocate to the Health Reimbursement Arrangement (HRA) annually.
2. Eligible Expenses:Specify the medical expenses that qualify for reimbursement under the plan.
3. Coverage: Determine whether the Health Reimbursement Arrangement (HRA) will provide benefits solely to the owner or extend to all employees.
2. Plan Documents
Create formal plan documents that outline the terms and conditions of the HRA. These documents should include:
Plan description
Eligibility requirements
Reimbursement procedures
3. Adopt the Plan
Ensure the C Corporation formally authorizes the HRA plan through a corporate resolution. This step is vital for ensuring the company formally acknowledges the plan.
4. Notify Employees
If the HRA will cover other employees, provide them with a summary plan description (SPD) and inform them about the plan details. Transparency is critical to ensuring everyone understands their benefits.
5. Administer the Plan
Set up a system to manage the HRA. This includes:
Tracking contributions
Processing reimbursement requests
Maintaining records
You can handle administration in-house or hire a third-party administrator to manage the plan.
6. Reimburse Expenses
Once the plan is in place, the owner and eligible employees can submit qualified medical expenses for reimbursement according to the plan’s terms. Ensure that all reimbursements are correctly recorded and follow the plan’s rules.
7. Compliance
Ensure the HRA adheres to relevant laws and regulations, including the Affordable Care Act (ACA) and IRS guidelines. Regularly review the plan to make sure it remains compliant with any changes in legislation.
Conclusion
Establishing a Health Reimbursement Arrangement (HRA) as the owner of a C-Corporation can offer substantial tax benefits and effectively control healthcare expenses. Following these steps, you can create a robust HRA plan that benefits you and your employees.
Consider talking to a benefits advisor or tax professional for personalized advice and to ensure you follow the rules.
On June 20, 2024, the Internal Revenue Service (IRS) declared it would reject many high-risk Employee Retention Credit (ERC) claims. However, it would proceed with processing lower-risk claims to assist eligible taxpayers. This action results from a thorough examination to protect taxpayers and small businesses.
IRS Commissioner Danny Werfel highlighted that the review provided significant insights into risky ERC activities, confirming concerns about numerous improper claims.
“We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims,” said Werfel.
Complex Review Process
Since September, the IRS has been digitizing and analyzing over 1 million ERC claims, amounting to over $86 billion. Based on the review, 10–20% of these claims are in the highest-risk group and clearly show mistakes. These will be denied in the coming weeks.
Additionally, 60-70% of claims show an unacceptable level of risk and will undergo further analysis.
Support for Small Businesses
The IRS will start handling 10 to 20 percent of low-risk ERC claims because it is worried about small businesses waiting for legitimate claims. Initial payments for these claims are expected later this summer, but due to increased scrutiny, they will be issued at a slower pace.
Continued Scrutiny and Review
The IRS has emphasized that taxpayers with claims for the Employee Retention Credit (ERC) should refrain from taking any action and wait for further notification.
Processing speeds will not be equivalent to the levels observed during the previous summer, and taxpayers are advised against contacting the IRS toll-free lines to obtain updates on these claims.
Compliance Efforts and Legislative Consultation
Werfel expressed concerns about taxpayers misled by promoters into filing improper ERC claims. He advised individuals with pending claims to carefully examine the IRS guidelines and seek guidance from authorized tax experts. The IRS also warned about promoters exploiting today’s announcement to attract clients.
Since September 2023, the IRS has investigated 28,000 claims worth $2.2 billion and turned down over 14,000 claims worth more than $1 billion. Because of the findings and the high number of wrong claims, the IRS will not process any new ERC claims sent after September 14, 2023.
During this period, the IRS will consult with Congress and consider potential legislative actions, including closing new claims and extending the statute of limitations to pursue improper claims.
Special IRS Withdrawal Program
The IRS encourages businesses with unprocessed claims to consider the ERC Withdrawal Program to avoid future compliance issues. This program allows businesses to withdraw improper claims and return received checks without penalty.
Compliance Work Tops $2 Billion
The IRS has spent more than $2 billion on compliance efforts related to wrong ERC claims, almost twice as much as in March.
The IRS is considering reopening the ERC Voluntary Disclosure Program with lower fees to help taxpayers whose claims have already been processed avoid having to deal with compliance issues again.
Ongoing Enforcement Actions
The IRS reminded those with pending claims of other ongoing compliance actions, including criminal investigations, audits, and promoter investigations. As of May 31, 2024, the IRS Criminal Investigation has started 450 criminal cases related to approximately $7 billion in potentially fraudulent claims.
Guidance for Taxpayers
The IRS and tax professionals stress that ERC eligibility depends on specific circumstances and advise businesses to consult trusted tax professionals rather than promoters.
The IRS provides numerous resources to help companies to understand and verify ERC eligibility.
Conclusion
The IRS’s actions reflect its commitment to protecting taxpayers and ensuring the integrity of the ERC program. By denying high-risk claims and carefully processing low-risk ones, the IRS aims to support eligible businesses while preventing improper payouts.
In Texas, the franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.
Filing the Texas Franchise Report is crucial for several reasons:
1. Compliance:Companies in Texas are legally required to do this. Failure to file can result in penalties, interest, and even the forfeiture of the right to conduct business in the state.
2. Good Standing:Filing on time helps the entity stay in good standing with the Texas Comptroller’s Office, which is needed for many business transactions and contracts.
3. Avoiding Penalties: If you file your taxes late, you may have to pay penalties and interest, raising your business’s tax bill.
Thresholds for Filing
For the Texas Franchise Tax, certain thresholds determine whether an entity is required to file:
1. No Tax Due Threshold: For reports due in 2023, entities whose total revenue falls below a certain amount ($2,470,000) may file a “Public Information Report.
2. Entities with total revenue below $20,000,000 can use the E-Z Computation report for 2023. This report offers a reduced tax rate of 0.331%. (Please note that the threshold for E-Z Computation may change, and verifying the current threshold with the Texas Comptroller’s office is essential.)
Choosing Between EZ Computation and Long Form
Entities with a total revenue higher than the “No Tax Due Threshold” but lower than the E-Z Computation threshold should assess which option, the E-Z Computation or the long-form franchise tax return, would be more advantageous.
The E-Z Computation method is more straightforward and may result in a lower tax rate, but it may only sometimes be the most tax-efficient option. Various factors, including deductions, credits, and margin calculations, can impact the total tax liability.
Businesses are recommended to conduct a comparative analysis or seek advice from a tax professional to ascertain the most advantageous method of filing.
Deadlines for Filing
The annual Texas Franchise Tax Report is due on May 15th each year. If May 15th falls on a weekend or holiday, the due date is the next business day.
How to File an Extension
To file an extension for the Texas Franchise Tax Report:
1. Automatic Extension: Most entities can obtain an automatic extension if they pay at least 90% of the tax owed or the minimum $1,000 franchise tax by May 15th.
2. Extension Request: An extension request form must not be submitted to the Comptroller’s office; the extension is granted upon receipt of the payment.
3. Duration of Extension: The automatic extension for non-E-Z computation filers is until November 15th. For E-Z Computation filers, the extension is until August 15th.
4. Online Filing: Entities can pay the franchise tax and file their reports online through the Texas Comptroller’s Webfile system.
5. Payment Options:Payment can be made via electronic funds transfer, credit card, or check/money order.
Please note that obtaining an extension to file the report does not grant additional time to make the tax payment. Interest accrues from the original due date on any unpaid tax.
Conclusion
Filing the Texas Franchise Report is a critical annual task for businesses operating in Texas. Knowing the new filing requirements, thresholds, and deadlines for 2023 can help you ensure you are following the rules and avoid unnecessary penalties.
Entities should seek guidance from a tax expert to navigate the intricacies of the Texas Franchise Tax, assess the most suitable method for filing, and guarantee precise and punctual submission.
Retirement planning is a critical aspect of financial health, and understanding the details of Individual Retirement Accounts (IRAs) can significantly impact your long-term savings.
One key aspect is the five-year rule associated with Roth IRA conversions. This rule is very important for people who are switching from a traditional IRA to a Roth IRA, and it is also very important as you get closer to retirement age.
Let’s delve into the details of this rule and how it applies to a real-world scenario.
Understanding the Roth Conversion Five-Year Rule
The five-year rule for Roth conversions is an IRS rule that encourages people to save for the long term.
It says that no matter what age you are, you must wait five years from the beginning of the year that you moved money from a traditional IRA to a Roth IRA before taking that money out without being penalized.
This rule is applied to each conversion separately, meaning multiple conversions will each have their own five-year timeline.
Real-World Scenario: Converting on December 29, 2023
You change your traditional IRA to a Roth IRA on December 29, 2023. According to the five-year rule, the clock starts ticking on January 1, 2023, the beginning of the tax year in which the conversion occurred.
This means the funds you converted will be available for penalty-free withdrawal on January 1, 2028, after the five-year period has elapsed.
The Impact at Age 59 and Beyond
For those who are 59 or older and considering a Roth conversion, it’s crucial to understand the following:
1. Individual Five-Year Periods:
Each conversion initiates its own five-year period. If you convert money at age 59, you cannot access it without penalties or taxes until at least age 64, assuming you do not have any other Roth IRAs that have already reached their five-year period.
2. Contributions vs. Earnings:
It’s essential to differentiate between your contributions (the money you’ve invested) and the earnings on those contributions.
You can take money from a Roth IRA anytime without paying taxes or penalties. However, earnings are subject to the five-year rule for earnings.
The Roth IRA Five-Year Rule for Earnings
Beyond the conversion rule, there’s a separate five-year rule for earnings within a Roth IRA. To withdraw earnings without taxes or penalties, you must meet two conditions:
You must be at least 59½ years old.
The Roth IRA must have been open for at least five tax years.
This rule ensures that Roth IRAs are used for their intended purpose, which is to save for retirement.
Strategic Planning for Roth Conversions
When thinking about converting to a Roth, keep these tips in mind:
1. Start Early:
Start the conversion process well before you retire to meet the five-year rule as quickly as possible.
2. Stagger Conversions:
To mitigate tax impacts and initiate multiple five-year periods, consider spreading conversions over time.
3. Keep Track of Dates:
Record the dates of each conversion and the opening of each Roth IRA to ensure adherence to the five-year rules.
Conclusion
The five-year rules for Roth IRA conversions are essential to the retirement planning process, promoting long-term savings and ensuring the proper use of Roth IRA tax benefits.
As you approach retirement, it’s increasingly important to understand and plan for these rules to prevent unexpected financial consequences.
Always talk to a tax or financial advisor before making a Roth conversion plan that fits your financial goals. In this way, you can get the most out of your retirement savings and ensure you have more money.
