Uncategorized Archives

Pay the IRS or Lose Your Passport

by Mat Sorensen | Mar 18, 2019 | Uncategorized

The IRS recently announced that the State Department will be denying passports, and may revoke yours if you have a “seriously delinquent tax debt.” A seriously delinquent tax debt is where you owe more than $52,000 (including interest and penalties). While this law has been on the books for some time, the IRS recently started sending certifications of seriously delinquent taxpayers to the State Department last year.

UPDATE (NOV 2026)

The “seriously delinquent tax debt” threshold is indexed each year. It was $52,000 when this article was written and is $66,000 for 2026. (Source: IRS)

Infographic: how a seriously delinquent tax debt can lead to a denied or revoked passport, and two ways to keep your passport

If you owe the IRS money and have plans to travel abroad, there are a couple of options you can use to maintain or obtain a passport even though you may be a “seriously delinquent taxpayer.” Here are the most common options:

1. Installment Agreement

Enter into an installment agreement with the IRS to repay the debt (i.e. A payment plan). So long as you are current on your installment agreement, you can obtain or maintain your passport. An installment agreement is essentially an agreement whereby you agree to the debt owed and set-up a payment plan to have it paid back over time. The IRS usually requires financial disclosures in order to determine the payment amount and schedule. You can learn more here.

2. Offer in Compromise

Have a pending offer in compromise with the IRS, or be paying timely on an agreed upon offer in compromise. An offer in compromise is a method of negotiating a compromise on the amount owed to the IRS. The IRS only accepts an offer in compromise if there is a doubt as to the liability (i.e. There is a legitimate tax question over your position and that of the IRS), or there is a doubt as to collect-ability (i.e. “Can you really pay it back?”). You can learn more about an offer in compromise here. Keep in mind, so long as the offer in compromise request is pending, you can still obtain or maintain your passport. So, start here if you still have issues to work out with the IRS before you agree to the amount owed in an installment agreement. Though, if you don’t have a legitimate reason for an offer in compromise, you should consider the installment agreement.

If you’ve got plans to travel abroad AND you’ve got a serious tax debt, be proactive about paying it back with an installment agreement or start the process of making an offer in compromise. You don’t want to be surprised by a letter in the mail from the state department that your passport has been revoked. Or even worse, have non-refundable travel plans that have to be cancelled because your passport is revoked. And, last but not least, be abroad and have your passport revoked and your travel status in jeopardy. You may just end up spending your foreign trip at the local U.S. Embassy.

Roth IRA Distributions Before Age 59 ½

by Mat Sorensen | Jan 29, 2019 | Retirement & IRAs, Uncategorized

Every Roth IRA account owner knows that the main benefit of the Roth IRA is that withdrawals are tax-free after the account owner is 59 ½, as long as the Roth IRA has been open for at least five years. However, what taxes or penalties apply to distributions taken before the Roth IRA owner reaches 59 ½?

Roth IRA distributions before age 59 ½ are broken into two categories, contributions and earnings.

Infographic: how Roth IRA withdrawals before age 59½ work. Contributions come out first with no tax or penalty, then conversions, then earnings, which face income tax and the early withdrawal penalty, plus common penalty exceptions

Contributions Can Be Withdrawn Before 59 ½ Without Tax or Penalty

The first category is Roth IRA contributions. This category is distinct because these amounts have been subject to tax before the funds were included in the Roth IRA. The amounts withdrawn from a Roth IRA that do not exceed the amounts of Roth IRA contributions are not subject to taxes or penalties upon early distribution from the Roth IRA. However, any amounts distributed in excess of the Roth IRA contributions, which would typically be the investment returns, are subject to taxes and the early withdrawal penalty of 10%.

KEY TAKEAWAY

This is an excellent perk as it allows Roth IRA owners to take money back that they contributed to the Roth IRA without worrying about penalties or taxes.

What About Amounts You Converted?

If your Roth IRA holds money you converted from a traditional IRA or 401(k), those dollars come out after your contributions and before your earnings. You already paid tax on them when you converted, so they aren’t taxed again. But if you’re under 59 ½, each conversion has its own five-year clock for the 10% penalty, starting January 1 of the year you converted. Take out a conversion before its clock runs out and you’ll owe the 10% penalty on the part that was taxable when you converted.

Earnings Are Subject to Tax and the 10% Early Withdrawal Penalty

Amounts withdrawn before 59 ½ that comprise the Roth IRA’s earnings are subject to tax and a 10% early withdrawal penalty. IRC § 408A(d)(2)(A) & Treasury Reg. §1.408A-6, Q&A-1(b). “Earnings” is the amount over the sums you have contributed to the Roth IRA, and is essentially your investment returns and gains.

WATCH OUT

Since there are taxes AND penalties on the earnings, you should only take distributions when absolutely necessary.

Example of Roth IRA Distribution Before 59 ½

EXAMPLE

For example, let’s say a Roth IRA owner is 45 and has a Roth IRA with $65,000. This balance consists of $35,000 in Roth IRA contributions and $30,000 in earnings or investment returns. If the Roth IRA owner took a distribution of the entire account then $35,000 would NOT be subject to early withdrawal penalties as this amount comprised Roth IRA contributions where taxes have been paid already. However, the remaining $30,000 distributed represents investment returns/gains made in the Roth IRA and would be subject to early withdrawal penalties of 10% and must also be included in the taxable income of the Roth IRA owner. As a result, Roth IRA owners under age 59 ½ should avoid distributions of their Roth IRA in excess of their contributions.

$35,000

Contributions: no tax or early withdrawal penalty

$30,000

Earnings: taxable income plus the 10% penalty

Exceptions to the 10% Penalty

Even when you withdraw earnings before 59 ½, the 10% penalty doesn’t apply in certain cases. You’ll still owe income tax on the earnings unless the distribution is qualified. Common exceptions include:

✓Disability or death
✓Up to $10,000 (lifetime) for a first-time home purchase
✓Up to $5,000 per child for birth or adoption expenses
✓Qualified higher education expenses
✓Unreimbursed medical expenses above 7.5% of your AGI
✓Health insurance premiums while unemployed
✓Substantially equal periodic payments
✓One emergency withdrawal of up to $1,000 per year
✓Victims of domestic abuse, up to the lesser of $10,000 (indexed for inflation) or 50% of the account
✓Up to $22,000 for qualified federally declared disasters

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The IRS Says That You Can Contribute More to Your IRA and 401(k) in 2019

by Mat Sorensen | Nov 6, 2018 | Retirement & IRAs, Uncategorized

Late last week, the IRS announced increased contribution limits for IRAs, 401(k)s and other retirement plans. IRAs have been stuck at $5,500 since 2013, but are finally moving up to $6,000 starting in 2019. If you save in a 401(k), including a Solo K, the good news is that your contribution limits were increased too, with employee contributions increasing from $18,500 to $19,000 and total 401(k) contributions (employee and employer) reaching $56,000. The IRS announcement and additional details can be found here.

Health savings account (HSA) owners also won a small victory with individual contribution maximums increasing by $50 to $3,500, and family contribution amounts increasing by $100 to $7,000.

Breakdown

Here’s a quick breakdown on the changes:

IRA contribution limitations (Roth and Traditional) increased from $5,500 to $6,000, and there is still the $1,000 catch-up amount for those 50 and older.
401(k) contributions also increased for employees and employers: Employee contribution limitations increased from $18,500 to $19,000 for 2019. The additional catch-up contribution for those 50 and older stays the same at $6,000. The annual maximum 401(k) (defined contribution) total contribution amount increased from $55,000 to $56,000 ($62,000 for those 50 and older).
HSA contribution limits increased from $3,450 for individuals and $6,900 for families to $3,500 for individuals and $7,000 for families.

These accounts provide advantageous ways for an individual to either save for retirement or to pay for their medical expenses. If you’re looking for tax deductions, tax deferred growth, or tax-free income, you should be using one or all of these account types. Keep in mind there are qualifications and phase out rules that apply, so make sure you’re getting competent advice about which accounts should be set up in your specific situation. Lastly, remember, all of these accounts can be self-directed and invested into assets you know best.

Tax and Legal Basics: Moving Yourself or Your Money Outside the U.S.

by Mat Sorensen | Oct 15, 2018 | Tax Planning, Uncategorized

Are you a U.S. citizen considering moving yourself or your money outside the USA? Before you or your money leave the USA, first consider the tax and legal consequences as they are often misunderstood.

U.S. Citizens have numerous tax and reporting obligations that arise from their foreign assets, investments, and accounts. In essence, if you have foreign assets, investments, or bank accounts, then you have two obligations to the United States Government.

Infographic: U.S. citizens with foreign accounts must disclose them on the FBAR and Form 8938 and pay U.S. tax on foreign income, with an example of a Swiss bank account and a warning that moving abroad does not end U.S. tax

Disclosure

First, you must disclose any foreign bank account whose value is over $10,000 (all foreign accounts are combined to reach the $10,000 threshold) and you must report any foreign asset (e.g. foreign stock, company ownership, etc.) whose value is $50,000 or greater. The form required to be filed annually to disclose foreign bank accounts in excess of $10,000 is known as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The form filed annually to disclose foreign assets with a value in excess of $50,000, is IRS Form 8938, Statement of Specified Financial Assets. In sum, the first obligation U.S. citizens have to their home country is the disclosure of foreign bank accounts and foreign assets.

Taxes

Second, as a U.S. citizen you are required to pay U.S. federal income tax on the foreign income you receive as the U.S. taxes its citizens on income no matter whether it was earned in the U.S. or abroad. In other words, even if you make money outside the U.S., as a U.S. citizen, you are still required to pay federal tax on that income. If you paid foreign income taxes to the country where the income was derived and if that country has a tax treaty with the U.S., then you’ll typically receive a credit in the U.S. for the foreign taxes paid, which thereby reduces the amount of federal taxes owed in the U.S. Click here to see the list of countries with a foreign tax treaty with the U.S.

WATCH OUT

Some U.S. citizens presume that if they leave the U.S. that they are no longer subject to federal income tax in the U.S., but this is not the case. Even if you relocate to a foreign country and no longer earn income from the U.S., you are still subject to U.S. tax on your foreign income (and potential state income tax depending on your state of residence). The only way to entirely escape the tax jurisdiction of the United States is to renounce U.S. citizenship but this is a costly and expensive process with numerous tax repercussions. See the Expatriation Tax rules from the IRS for more information here.

Example: A Swiss Bank Account

EXAMPLE

Let’s run through a common example that demonstrates how the disclosure and income tax reporting requirements work. A U.S. citizen has a bank account in Switzerland with a balance of $100,000. That account generates income of $5,000 for the year. For example purposes, let’s say that the $5,000 in income resulted in taxes owed to Switzerland of $500 and that the U.S. citizen reported and paid the tax to Switzerland.

$100,000

Swiss bank account balance

$5,000

Income for the year

$500

Tax paid to Switzerland

1FBAR. In addition to compliance with Switzerland law, the U.S. citizen would need to file FinCEN Form 114 (FBAR) to disclose the foreign bank account. The FBAR form filing is due by April 15th for the prior year’s accounts. This was changed effective 2017 as the deadline used to be by June 30th for the prior year. A 6-month automatic extension has currently been offered.
2Statement of Foreign Asset. The U.S. Citizen would also need to file IRS Form 8938, since the account was over $50,000. Form 8938 is due with the filing of the U.S. citizen’s federal tax return.
3Foreign and U.S. Tax Reporting. In addition to the two disclosure forms that are filed in the U.S., the $5,000 of income from the Switzerland account must be reported as taxable income on the income tax return (form 1040) of the U.S. citizen. The $500 paid in tax to Switzerland will be credited to the taxpayer in computing the tax owed to the U.S. because the U.S. and Switzerland have a tax treaty.

In sum, a $100,000 foreign bank account resulted in two disclosure form filings to the U.S. and inclusion of the income on the U.S. citizen’s federal tax return. These are just the basics and every country has their own nuances. In addition, there are many special rules and there are numerous exceptions to the filing discussed herein and as a result a U.S. citizen leaving the U.S. or sending money outside the U.S. should seek out experienced professionals to assist them in their U.S. tax and disclosure reporting obligations.

How to Transfer or Rollover Funds to Your IRA?

by Mat Sorensen | Sep 26, 2018 | Retirement & IRAs, Uncategorized

You have a number of options and decisions to make when moving funds from a retirement account (401(k), 403(b), IRA) to an IRA. And you’ve got to be careful because sometimes checking the wrong box on your transfer, rollover, and withdrawal forms can have drastic tax consequences. For example, should you move funds from one retirement account to your IRA using a Direct Rollover, a 60-Day Rollover, or a Trustee-to-Trustee transfer? Which box do you check on your form and does a 1099-R get issued and reported to the IRS? Will I have to report anything on my tax return? Let’s go over the options and the consequences as well as the tax reporting for each one.

Infographic: Direct Rollover, 60-Day Rollover, and Trustee-to-Trustee Transfer compared, with how each is reported on a 1099-R

Diagram: a Direct Rollover from a 401(k), a Trustee-to-Trustee transfer from an IRA, and a 60-Day Rollover through the account owner, each moving funds into an IRA

1. Direct Rollover from 401(k) to IRA – When Moving from an Employer Plan

A Direct Rollover is generally used when moving funds from an employer plan (e.g. former employer 401(k) or 403(b)) to an IRA. Under a direct rollover, the retirement plan administrator will send the retirement plan funds directly to the new custodian of your IRA. There is no tax consequence and there is no withholding. There is simply a “direct” rollover of the funds to the new IRA account. Most employer plans like 401(k)s and 403(b)s are traditional accounts, so those funds are generally rolled to a traditional IRA. If you are moving the funds to a Roth IRA, which is possible, you will need to convert the funds with the IRA custodian as they are being rolled into a Roth IRA. And of course, there are taxes due from the Roth conversion.

There are no limits on the number of Direct Rollovers you may complete, except as may be reasonably imposed by your employer’s retirement plan.

EXAMPLE

For example, some employer plans may say that it’s an all or nothing option if you want to move funds once you no longer work there (e.g. keep all your funds there or move everything to an IRA).

If you are currently employed with your employer, you are usually only allowed to move funds from the employer’s plan when you have reached retirement plan age under the plan. This is usually 55 or 59 1/2 depending on your employer’s plan.

A direct rollover from an employer plan is not subject to tax or withholding. When a direct rollover is completed, a 1099 is generally issued from the current plan, but is marked as “not taxable” as the funds are being sent to another qualifying retirement account.

2. 60-Day Rollover – Only When You Need It This Way

A 60-Day Rollover allows you to take a distribution from one IRA, so long as you re-deposit that same amount into another IRA within 60 days, and the funds are no longer considered distributed. When using a 60-Day Rollover, you receive the funds personally from the current IRA plan custodian, and then re-deposit those funds into a qualifying IRA within 60 days. Failure to re-deposit in time will cause a distribution of the funds, and you will be subject to taxes and any applicable penalties (e.g. early withdrawal penalty if under 59 1/2) for failure to re-deposit in time. There are no extensions, and there is no mercy if you miss the 60-day deadline. The new IRA custodian will generally require a certification, and your prior IRA account custodian’s statement to verify that the funds were in an IRA within the past 60 days.

UPDATE (NOV 2026)

The 60-day rule is no longer absolute: the IRS now lets you self-certify a late rollover for certain listed reasons (Rev. Proc. 2016-47, expanded in 2020) and can grant waivers. (Source: IRS)

It is very important to note that as of 2015 you can only complete one 60-Day Rollover every twelve months. See my prior article here on the 12-month rule for 60-Day Rollovers. Consequently, you should not use the 60-Day Rollover method option on a regular basis.

When using a 60-Day Rollover, the former IRA custodian will issue a 1099-R reporting the distribution as taxable and you will need to certify that you re-deposited within 60 days on your personal tax return to avoid the distribution. The 60-Day Rollover is communicated to the IRS on your personal tax return on line 4a where you report the distribution from the 1099-R, and then on line 4b you report that it was not taxable, since it was rolled over within 60 days. On line 4b, you indicate that the taxable amount is zero and you write the word Rollover next to line 4b. See the IRS instructions for line 4a here.

3. Trustee-to-Trustee Transfer – the Best Option When Changing IRA Custodians

The Trustee-to-Trustee transfer is the preferred method of moving funds from one IRA to another (e.g. from a Roth IRA at Fidelity to a Roth IRA with a self-directed custodian). Under a Trustee-to-Trustee transfer, the funds are sent from one IRA custodian (partial or full account) to your new IRA custodian. There is no tax, withholding, or penalty for moving funds via a Trustee-to-Trustee transfer, and there is no limit on the amount of Trustee-to-Trustee transfers you may complete.

A 1099-R is not issued when a Trustee-to-Trustee transfer occurs, and there is no withholding or tax due. Consequently, the Trustee-to-Trustee transfer is the preferred method to use when moving funds from one IRA to another.

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Can My IRA/LLC Have a Brokerage Trading Account?

by Mat Sorensen | Sep 4, 2018 | Retirement & IRAs, Uncategorized

Many self-directed IRA investors use an IRA/LLC to make and hold their self-directed IRA investments. In essence, an IRA/LLC (aka “checkbook-controlled IRA”) is an LLC owned 100% by an IRA. For a summary and description of an IRA/LLC, please refer to my video here. While most self-directed investors are using the IRA/LLC to invest in real estate or other non-publicly traded assets, there are many instances where an IRA/LLC owner would like to invest the cash from their IRA/LLC checking account into stocks or other publicly-traded investments. This may arise with portions of cash that are not yet large enough to make a desired self-directed investment, or when the IRA/LLC is between investments, such as after the sale of an asset or investment and before a new self-directed investment may be found. Or, it could simply arise because the account owner finds a publicly traded opportunity that they would like to pursue using the IRA/LLC account funds and structure.

Infographic: rules for an IRA/LLC brokerage account, its pros and cons, and the alternative of moving funds to a brokerage IRA

I. Can My IRA/LLC Establish a Brokerage Account to Buy Stocks?

Yes, an IRA/LLC may have a brokerage account to buy stocks or other publicly traded assets. This account must be established in the name of the LLC.

WATCH OUT

The brokerage account cannot have a margin account whereby account trades on credit. A margin account typically requires the personal guarantee of the underlying IRA/LLC owner, and this would amount to an extension of credit prohibited transaction. Additionally, any profits due from the trading on credit, even if you could get around a personal guarantee, would be subject to unrelated business income tax (UBIT).

II. What Are the Pros and Cons of Having a Brokerage Account with an IRA/LLC That I Should Know About?

1. Pro

Uninvested or accumulating cash from an income producing asset often times sit without earning any income in an IRA/LLC. By having a brokerage account with an IRA/LLC, the cash could be invested into stocks or other publicly traded investments, but could still be somewhat liquid in the event that funds are needed for a self-directed investment.

2. Con

Most brokerage firms do not have a specific account option for IRA/LLCs. As a result, most brokerage firms will simply treat the brokerage account as an LLC brokerage account. The problem with this is that they will send the IRS and your LLC tax reporting via IRS Form 1099-B for trading income. While I’ve had many clients receive and ignore this, because the LLC is owned by their IRA, it does raise concern of an IRS audit for failure to report the 1099-B.

3. Potential Solution

Establish a business brokerage account in the name of the LLC but don’t get a margin account. We have seen clients use E-Trade and Interactive Brokers successfully for this. TD Ameritrade used to offer a specific IRA/LLC brokerage account but now requires customers to just establish an IRA with them instead.

UPDATE (NOV 2026)

TD Ameritrade has since been acquired by Charles Schwab, and its accounts have moved to Schwab. E*TRADE is now part of Morgan Stanley. (Source: Morgan Stanley; Financial Planning)

III. What are the Options?

A second option to establishing a brokerage account with your IRA/LLC is to simply return funds from the LLC back to the self-directed IRA. This is not taxable. It is a return of investment funds or profits to the IRA. Then transfer funds from the self-directed IRA to a brokerage IRA as a trustee-to-trustee transfer. This is also not taxable. Now, you can buy stocks with the IRA funds in the brokerage account.

When you would like the funds back in the IRA/LLC for a self-directed investment, you would send funds from the brokerage IRA back to the self-directed IRA as a trustee-to-trustee transfer, and would then invest the funds from the self-directed IRA to the IRA/LLC. While this involves more steps, it’s cleaner in the end as the brokerage IRA will be set-up with no tax reporting to the IRS on trading income.

In the end, both options are viable, but self-directed investors should understand the differences and requirements for each option before proceeding with a brokerage account with their IRA/LLC funds.

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President / Polycomp Trust Company

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so that the average person can understand them, and ensure that they don't get "tripped up" is second to none.

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Vice President / IRA Services Trust Company

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best investment and retirement savings tools ever created: the Self-Directed IRA."

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J.P. Dahdah

Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs.

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CEO, Vantage Self Directed Retirement Plans

Pay the IRS or Lose Your Passport

1. Installment Agreement

2. Offer in Compromise

Roth IRA Distributions Before Age 59 ½

Contributions Can Be Withdrawn Before 59 ½ Without Tax or Penalty

What About Amounts You Converted?

Earnings Are Subject to Tax and the 10% Early Withdrawal Penalty

Example of Roth IRA Distribution Before 59 ½

Exceptions to the 10% Penalty

The IRS Says That You Can Contribute More to Your IRA and 401(k) in 2019

Breakdown

Tax and Legal Basics: Moving Yourself or Your Money Outside the U.S.

Disclosure

Taxes

Example: A Swiss Bank Account

How to Transfer or Rollover Funds to Your IRA?

1. Direct Rollover from 401(k) to IRA – When Moving from an Employer Plan

2. 60-Day Rollover – Only When You Need It This Way

3. Trustee-to-Trustee Transfer – the Best Option When Changing IRA Custodians

Can My IRA/LLC Have a Brokerage Trading Account?

I. Can My IRA/LLC Establish a Brokerage Account to Buy Stocks?

II. What Are the Pros and Cons of Having a Brokerage Account with an IRA/LLC That I Should Know About?

1. Pro

2. Con

3. Potential Solution

III. What are the Options?

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Tom W. Anderson

Harry Veldkamp

Pamela Constantino

Mark J. Kohler

Richard Davis

Christine Farkas

Jennifer Cayton

Bill Sthay

Kade Creamer

Bill Carlson

Valerie Griffin

Kim Jacobs

Mathew Owens

Kenneth P. Child

K.M

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