Oct 19

Factors To Consider When Contemplating A ‘Backdoor’ Roth IRA

The following article, written by Adam Bergman, originally appeared on Forbes.com –

There have been no income level restrictions for making Roth IRA conversions since 2010, hence a high income earner can do a conversion of after-tax (non-deductible) IRA funds to a Roth IRA, which is known as a ‘backdoor’ Roth IRA. In other words, the ‘backdoor’ IRA allows a high- income earner, who has exceeded the Roth IRA annual income contribution limits, to circumvent those rules and make a Roth IRA contribution. However, as detailed below, a tax could be due on the conversion under the pro rata (aggregation) rules if the IRA holder has other traditional pre-tax IRAs that have not been taxed. In general, the taxes owed on the conversion will depend on the ratio of IRA assets that have been taxed to those that have not, making the ‘backdoor’ IRA unattractive for some.

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A regular contribution to a Roth IRA is generally limited to the lesser of the annual contribution limit or 100 percent of the individual’s compensation. The Roth IRA contribution limit is the same as the traditional IRA limit. For the year 2017, the annual contribution limit for an individual under the age of 50 is $5,500, and $6,500 for an individual over the age of 50.

An individual making Roth IRA contributions must reduce those contributions by the amount of any contributions made to a traditional IRA.  However, not all individual taxpayers are eligible to make Roth IRA contributions.  For taxpayer’s filing as single, one must have a modified adjusted gross income under $133,000 to contribute to a Roth IRA for the 2017 tax year, but contributions are reduced starting at $118,000.  Taxpayers filing as married, the combined modified adjusted gross income must be less than $196,000, with reductions beginning at $186,000.

Before considering a “backdoor” Roth IRA strategy, there are a number of important items to consider.  The first is the concept of the IRA pro rata aggregation rules.  Under Internal Revenue Code Section 408(d)(2), the aggregation rules hold that when an individual has multiple pre-tax IRAs, they will all be treated as one account when determining the tax consequences of any distributions (including a distribution out of the account for a Roth conversion). In other words, the aggregation rules can cause issues for individuals looking to take advantage of the ‘backdoor’ Roth IRA strategy that have multiple IRA accounts.

For example, Amy has $100,000 of existing pre-tax IRA assets across multiple IRA accounts. Amy now makes over $200,000 so is not eligible to make a Roth IRA contribution for this year. Amy wishes to make a $5,500 Roth IRA contribution by taking advantage of the ‘backdoor’ Roth IRA strategy, which involves making a non-deductible IRA contribution and then converting those funds into a Roth IRA.  However, since Amy has $100,000 of pre-tax IRA funds prior to the Roth IRA conversion, the aggregation rules will limit how much Amy can convert to a Roth IRA.

If Amy attempted to do a $5,500 Roth conversion (from combined IRA funds that now total $100,000 plus new $5,500 contribution equals $105,500), the return-of-after-tax portion will be only $5,500 / 105,500 = 5.2%. Which means the net result of his $5,500 Roth conversion will be $286 of after-tax funds that are converted, $5,214 of the conversion will be taxable, and she will end out with a $5,500 Roth IRA and $100,000 of pre-tax IRAs that still have $5,214 of related after-tax contributions. Hence, the net result of the IRA pro rata attribution rules is that a large portion of the after-tax funds linked with the new after-tax IRA contribution will not end up in the Roth IRA and will instead be connected with the existing pre-tax IRA funds.

Based on the example, the IRA attribution rules significantly limited the tax benefit of the ‘backdoor” Roth strategy for Amy as only a very small amount of the $5,500 after-tax funds were able to be converted tax-free to the Roth IRA. In addition, the IRA attribution rules only apply to pre-tax IRAs of the taxpayer, not his or her spouse, inherited IRAs, or any employer retirement plans (i.e. 401(k)), which can offer some interesting tax planning opportunities.

In addition to being mindful of the IRA attribution rules when considering a ‘backdoor’ Roth IRA conversion, one must also consider the step-transaction-doctrine. The step-transaction doctrine, which arose from a Supreme Court case, holds that a court can invalidate a transaction if the separate steps involved in the transaction have no independent substantial business purpose. In the context of the ‘backdoor’ Roth IRA strategy, the thinking goes that if the separate steps of the non-deductible IRA contribution and subsequent Roth conversion are done too quickly or simultaneously there is some risk the IRS could attempt to invoke the step-transaction doctrine in order to invalidate the Roth conversion.

There is no court precedent for this position, but many tax experts believe it would be wise to wait some time in between the nondeductible IRA contribution and the subsequent Roth conversion. There is also no firm rule for how long one should wait after the nondeductible contribution is made before making the Roth IRA conversion, but waiting a few months and having the IRA funds invested during the waiting period is thought to be sufficient.

Since 2010, the ‘backdoor’ Roth IRA strategy has been viewed as an attractive way for many high income earners to take advantage of the power of the Roth IRA.  Below are some tips to consider before doing a ‘backdoor’ Roth IRA:

  • Understand the Roth IRA contribution income limits for the taxable year in question
  • Determine whether you have any existing pre-tax IRA funds. If so, understanding the IRA attribution rules under Internal Revenue Code Section 408(d) is crucial
  • Are you currently participating in an employer retirement plan? If so, rolling over existing pre-tax IRA funds to an employer plan may help you circumvent the IRA attribution rules.
  • Be mindful of the step-transaction doctrine and consider waiting at least several months between the non-deductible contribution and the Roth IRA conversion
  • Consider not documenting that you are doing a ‘backdoor’ Roth IRA strategy.

It is unclear how long the ‘backdoor’ Roth IRA strategy will continue to be permitted. President Obama’s 2016 budget recommendations did attempt to end it, but the recommendation did not become law.  It is unclear what the Trump Administration’s position is with respect to it.  However, for now, the ‘backdoor’ IRA strategy continues to be a very popular way for high income earners to make Roth IRA contributions.

For more information about the ‘Backdoor’ Roth IRA, please contact us @ 800.472.0646.

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Oct 17

What are the minimum distribution requirements of an IRA?

The terms of an independent retirement account or annuity must include several minimum distribution rules, which Congress imposed to ensure that IRAs are primarily used as retirement savings media, not as vehicles to build wealth for transmission to heirs. As discussed below, these rules provide separately for distributions to IRA owners and distributions to beneficiaries after the death of an IRA owner. An IRA owner is an individual who establishes and contributes to an IRA for the benefit of himself or herself and his or her beneficiaries.

What are the minimum distribution requirements of an IRA?Minimum distributions to IRA owners

An IRA must, by its terms, require the account or annuity to be fully distributed not later than April 1 of the year following the calendar year during which the IRA owner attains age 70 and 1/2 or be distributed by annual or more frequent payments over a period beginning by that date and continuing not longer than for the owner’s life, the lives of the owner and his or her beneficiary, or a period not longer than the life expectancy of the owner or the owner and beneficiary. April 1 of the year following the calendar year during which the owner reaches age 70 and 1/2 is the required beginning date.

Note: there are no required minimum distributions for a Roth IRA

Please contact one of our IRA Experts at 800-472-0646 for more information.

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Oct 12

IRA Financial Group – Leading Self-Directed IRA Provider – Introduces New Cryptocurrency Forum for Self-Directed IRA Clients

Bitcoin IRA forum for IRA Financial Group clients will allow clients to share information and tips on all matters involving cryptocurrency investing with IRA funds

IRA Financial Group, the leading provider of self-directed IRA LLC and Solo 401(k) Plan solution is proud to announce the introduction of a new cryptocurrency forum for all IRA Financial Group clients who can share information, tips, recommendations, and review of all matters involving the use of self-directed IRA and Solo 401(k) plans to make cryptocurrency investments, such as bitcoins. “We have received a tremendous amount of feedback from clients looking for a way to communicate with our clients and discuss matters involving using retirement funds to buy cryptocurrencies, such as bitcoins,” stated Adam Bergman, a partner with the IRA Financial Group.

IRA Financial Group’s Bitcoin IRA solution with checkbook control will allow retirement account holders to buy, sell, or hold Bitcoins and other cryptocurrency assets and generate tax-deferred or tax-free gains, in the case of a Roth IRA.

The primary advantage of using a Self Directed IRA LLC to make Bitcoin investments is that all income and gains associated with the IRA investment grow tax-deferred or tax-free in the case of a Roth IRA.

IRA Financial Group’s Bitcoin IRA LLC for cryptocurrency investors, is an IRS approved structure that allows one to use their retirement funds to make Bitcoin and other investments tax-free and without custodian consent.

IRA Financial Group is the market’s leading provider of self-directed retirement plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

The IRA Financial Trust Company, a self-directed IRA custodian, was founded by Adam Bergman, a partner with the IRA Financial Group.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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Oct 10

New Podcast – The Trump Tax Plan and Your Retirement Account

IRA Financial Group’s Adam Bergman discusses the new tax plan announced by President Trump and the implications it has for retirement account holders.

 

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Click Here to Listen

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Oct 05

What Are the Advantages of Using IRA Financial Group’s Business Acquisition Solution?

There are many advantages of using IRA Financial Group’s Business Acquisition & Compliance Solution Structure (BACSS), also known as ROBS, when using your IRA funds to start a business:

Tax Advantages: With the BACSS you have the ability to use your retirement funds to acquire a new business or grow an existing business tax-free!

Start or Grow a Business Tax-Free: With BACSS, you can access your retirement funds to start or grow a business tax free and without penalty!

Access Funds without Penalties: Accessing your retirement funds can prove expensive if not structured properly. Distributions before retirement age can cost you up to 45% in taxes and penalties. With BACSS, you can access your retirement funds to start or grow a business tax-free and without penalty!

Acquire or Build a Business with No Debt: With BACSS, you can start or grow a business without ever borrowing a penny or touching the home equity you worked so hard to build.

What Are the Advantages of Using IRA Financial Group's Business Acquisition Solution?Control your Future: With BACSS, you will be in control of your retirement funds. BACSS is designed to make you the trustee of the plan giving you “Checkbook Control” over your retirement funds. As trustee of the plan you will have the ability to invest your funds to acquire or grow a business tax-free and without penalty!

Compliance with IRS and ERISA Rules: BACSS was designed as an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free! The IRA Financial Group’s in-house retirement tax professionals spent the last two years carefully studying IRS guidance in order to design an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free! Unlike our competitors who have been offering this type of structure for many years, prior to receiving guidance from the IRS and with a significant portion of their activity having been found to be non-compliant, the IRA Financial Group has patiently waited for clear IRS guidance before offering a structure that would be fully compliant with IRS and ERISA rules and procedures. Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP to ensure a fully compliant structure.

Speed: We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new or existing business within 14-21 days.

Value: With the IRA Financial Group, you will be working directly with our in-house tax and ERISA professionals to design an IRS and ERISA compliant structure that will allow you to use your retirement funds to acquire or grow a business tax-free at a fair and reasonable price.

Use your retirement funds to purchase a new business or franchise tax-free and without penalty!

It’s 100% IRS compliant!

Call us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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Oct 03

How Do You Make an Investments with a Self-Directed IRA?

Making an investment through a Self-Directed IRA LLC can be done in a few easy steps:

1. Set up a Self-Directed IRA LLC.

With IRA Financial Group, you no longer have to spend $2,000 to $5,000 or more to set up your Self-Directed IRA LLC.

We provide the following all for one low price

  • Free tax consultation with our in-house retirement tax professionals
  • Setup your LLC in the State of your choice
  • Prepare and file the Articles of Organization with the State
  • Generate a special purpose, IRA Custodian approved Self-Directed IRA LLC Operating Agreement
  • Generate a special purpose, IRA Custodian approved Subscription Agreement, as required by the Custodian
  • Obtain the EIN from the IRS
  • Co-ordinate setup with the Custodian of your Choice
  • Free tax and IRA support regarding the Self-Directed IRA LLC Structure
  • Expedited Service Guarantee!
  • Satisfaction Guaranteed!

How Do You Make an Investments with a Self-Directed IRA?The IRA Financial Group will take care of the entire set-up of your Self-Directed IRA LLC “Checkbook Control” structure. The whole process can be handled by phone, email, fax, or mail and typically takes between 7-21 days to complete, the timing largely depending on the state of formation and the custodian holding your retirement funds. Our IRA experts and tax and ERISA professionals are on-site greatly reducing the setup time and cost. Most importantly, each client of the IRA Financial Group is assigned a tax retirement tax professionals to help with the establishment of the Self-Directed IRA LLC “Checkbook Control” structure. You will find that our fee for this service is significantly less than other companies that perform the same or similar services.

2. Transfer of Retirement Funds Tax-Free.

Our IRA Experts will assist you in transferring your retirement funds tax-free from your current custodian to a new FDIC backed/IRS approved Passive Custodian that allows for truly Self-Directed IRA investments, such as real estate, tax liens, precious metals, and much, much more.

What is a Passive Custodian?

The IRS approved and FDIC backed custodian in the “checkbook control” Self-Directed IRA LLC structure is referred to as a “passive” custodian largely because the custodian is not required to approve any IRA related investment and simply serves the passive role of satisfying IRS regulations. The passive custodian business model is built around the establishment and maintenance of IRAs, whereas, a traditional IRA custodian generates income through the marketing and sale of investment products.

All the passive custodians we work with are FDIC backed and IRS approved. Once your custodian has transferred your retirement funds to the passive custodian, the passive custodian will immediately transfer your funds to your new IRA LLC where you as manager of the LLC will have “Checkbook Control” over the funds.

With a Self-Directed IRA LLC with “checkbook control” you no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with a “checkbook control” Self-Directed IRA LLC, an FDIC backed IRS approved passive custodian is used. By using a Self-Directed IRA LLC with “checkbook control” you can take advantage of all the benefits of self-directing your retirement assets without incurring excessive custodian fees and custodian created delays.

What Type of retirement Funds May be Transferred Tax-Free?

  • Traditional IRA
  • Roth IRA
  • SEP
  • SIMPLE
  • 401(k)
  • 403(b)
  • Plans for Self-Employed (Keoghs)
  • ESOPs
  • Money Purchase Pensions Plans

Our IRA Experts will assist you in completing all the necessary custodian documents so your retirement funds are transferred to the new passive custodian quickly and without any tax.

3. Open IRA LLC Bank Account.

Open a local bank account for the LLC at any bank of your choice. You can open a bank account for your Self-Directed IRA LLC at any bank or credit union.

4. Tax-Free Transfer of Funds to LLC Bank Account.

Direct the passive custodian to transfer the IRA funds to your new Self-Directed IRA LLC bank account. The IRA LLC checking account can be opened at any bank or credit union.

5. “Checkbook Control”.

As the Manager of the Self-Directed IRA LLC, you will have the freedom to make all investment decisions for your Self-Directed IRA LLC. In other words, you will have “checkbook control” over your IRA funds allowing you to make an IRA investment by simply writing a check or wiring funds directly from the IRA LLC bank account.

6. Tax-Free Investing.

Since your IRA will become the owner(s) (member(s)) of the newly formed IRA LLC, all income and gains generated by an IRA LLC investment will generally flow back to your IRA tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes, all income and gains are taxed at the owner level not at the entity level. However, since an IRA is a tax-exempt party pursuant to Internal Revenue Code Section 408 and, thus, does not pay federal income tax, all IRA investment income and gains will generally flow through to the IRA tax-free!

Self-Directed IRA LLC Structure

To view a diagram of the Self-Directed IRA LLC structure, please select the image below.

Self Directed IRA LLC

For more information about the Self-Directed IRA, please contact one of our IRA Experts @ 800.472.0646.

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Sep 29

IRA Financial Group Announces List of Most Popular Investments for Self-Directed IRA Clients For 2017

Cryptocurrency and real estate were the two most popular self-directed IRA investments for 2017

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA LLC and Solo 401(k) plan solutions, announces the top three most popular self-directed IRA investments for clients for 2017, which were cryptocurrency, real estate, and hard-money lending. “In 2017 we saw a huge amount of interest in clients looking to use their self-directed IRA to buy bitcoins and real estate,” stated Adam Bergman, a partner with the IRA Financial Group.

The primary advantage of using a self-directed IRA LLC to make investments, such as real estate, is that an investment can be made by simply writing a check. In addition, all income and gains associated with the IRA investment grow tax-deferred and return to the IRA LLC.

With IRA Financial Group’s self directed IRA LLC solution, traditional IRA or Roth IRA funds can be used to buy real estate throughout the United States and globally in a tax-deferred account by simply writing a check and without the need of custodian consent or high custodian fees.

 IRA Financial Group Announces List of Most Popular Investments for Self-Directed IRA Clients For 2017IRA Financial Group’s Self-Directed IRA LLC for real estate investors, also called a real estate IRA with checkbook control or a Self-Directed real estate IRA, is an IRS approved structure that allows one to use their retirement funds to make real estate and other investments tax-free and without custodian consent. The Self-Directed IRA LLC involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the Roth IRA custodian) and managed by the IRA holder or any third-party. As a result, the Self-Directed IRA LLC provides the retirement account holder with greater control over his or her retirement assets allowing the individual to make traditional as well as non-traditional investments, such as real estate tax-deferred and with much lower annual fees.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading provider of self-directed IRA LLC and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646. To learn more about establishing a self-directed IRA account with the IRA Financial Trust Company please visit http://www.irafinancialtrust.com or call 800-472-1043.

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Sep 25

Is a Self-Directed IRA LLC Approved by the IRS?

The Self-Directed IRA Structure has been in use for some 35 years, however, the concept of using an entity owned by an IRA to make an investment was first reviewed by the Tax Court in Swanson V. Commissioner 106 T.C. 76 (1996). In Swanson, the Tax Court, in ruling against the IRS, held that the funding of a new entity by an IRA for self-directing assets was a permitted transaction and not prohibited pursuant to Code Section 4975. The Swanson Case was later affirmed by the IRS in Field Service Advice Memorandum (FSA) 200128011. In FSA 200128011, the IRS, in providing guidance to IRS agents for purposes of conducting audits, confirmed the Tax Court’s holding in Swanson and held that a newly established entity owned by an IRA and managed by the IRA owner may make investments using IRA funds without violating the prohibited transaction rules under Internal Revenue Code Section 4975. In October 2013, the Tax Court in T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M) held that establishing a special purpose limited liability company (“LLC”) to make an investment did not trigger a prohibited transaction, as a newly established LLC cannot be deemed a disqualified person pursuant to Internal Revenue Code Section 4975. The impact of the impact of this ruling is enormous because it directly supports the position that a retirement account can fund a newly established LLC without triggering a prohibited transaction. The Ellis case is decisive because it will silence anyone who claims that using a special purpose LLC to make IRA investments would trigger a prohibited transaction.

Is a Self-Directed IRA LLC Approved by the IRS?When it comes to making IRA investments the IRS does not state which transactions are allowed, but only states what types of transactions are prohibited. The IRA prohibited transaction rules are outlined in Internal Revenue Code Sections 408 & 4975 and generally involve the prohibition against using IRA funds to buy life insurance, collectibles, or enter into any transaction with a “disqualified person”. As per the Internal Revenue Code, a “disqualified person” is generally defined as the IRA holder and any of his or her lineal descendants or any entity controlled by such person(s).

The following is a summary of the key cases & opinion confirming the legality of the Self-Directed IRA LLC:

Swanson V. Commissioner 106 T.C. 76 (1996)

The relevant facts of Swanson are as follows:

1. Mr. Swanson was the sole shareholder of H & S Swansons’ Tool Company (Swansons’ Tool).

2. Mr. Swanson arranged for the organization of Swansons’ Worldwide, Inc. (Worldwide). Mr. Swanson was named as president and director of Worldwide. Mr. Swanson also arranged for the creation of an individual retirement account (IRA #1).

3. Mr. Swanson directed the custodian of his IRA to execute a subscription agreement for 2,500 shares of Worldwide original issued stock. The shares were subsequently issued to IRA #1, which became the sole shareholder of Worldwide.

4. Swansons’ Tool paid commissions to Worldwide with respect to the sale by Swansons’ Tool of export property. Mr. Swanson, who had been named president of Worldwide, directed, with the IRA custodian’s consent, that Worldwide pay dividends to IRA #1.

5. A similar arrangement was set up with regards to IRA #2 and a second corporation called Swansons’ Trading Company.

6. Mr. Swanson received no compensation for his services as president and director of Swansons’ Worldwide, Inc. and Swansons’ Trading Company.

The IRS attacked Mr. Swanson’s IRA transactions on two levels. First, the IRS argued that the payment of dividends from Worldwide to IRA #1 was a prohibited transaction within the meaning of Code Section 4975(c)(1)(E) as an act of self-dealing, where a disqualified person who is a fiduciary deals with the assets of the plan in his own interest. Mr. Swanson argued that he engaged in no activities on behalf of Worldwide which benefited him other than as a beneficiary of IRA #1.

The Tax Court ruled for Mr. Swanson, and found that the IRS was not substantially justified in its position. The court said that section 4975(c)(1)(E) addresses itself only to acts of disqualified persons who, as fiduciaries, deal directly or indirectly with the income or assets of a plan for their own benefit or account. In Mr. Swanson’s case the court found that there was no such direct or indirect dealing with the income or assets of the IRA. The IRS never suggested that Mr. Swanson, acting as a “fiduciary” or otherwise, ever dealt with the corpus of IRA #1 for his own benefit. The Tax Court, in holding for Swanson, stated the following:

“We find that it was unreasonable for [the IRS] to maintain that a prohibited transaction occurred when Worldwide’s stock was acquired by IRA #1. The stock acquired in that transaction was newly issued — prior to that point in time, Worldwide had no shares or shareholders. A corporation without shares or shareholders does not fit within the definition of a disqualified person under section 4975(e)(2)(G). It was only after Worldwide issued its stock to IRA #1 that petitioner held a beneficial interest in Worldwide’s stock, thereby causing Worldwide to become a disqualified person under section 4975(e)(2)(G). . .  Therefore, [the IRS’] litigation position with respect to this issue was unreasonable as a matter of both law and fact.”

Therefore, the Tax Court held that the only direct or indirect benefit that Mr. Swanson realized from the payments of dividends by Worldwide related solely to his status as a participant of IRA #1. In this regard, Mr. Swanson benefited only insofar as IRA #1 accumulated assets for future distribution.

The second issue the IRS raised was that the sale of stock by Worldwide to Mr. Swanson’s IRA was a prohibited transaction within the meaning of section 4975(c)(1)(A) of the Code, which prohibits the direct or indirect sale or exchange, or leasing, of any property between an IRA and a disqualified person. Mr. Swanson argued that at all relevant times IRA #1 was the sole shareholder of Worldwide, and that since the 2,500 shares of Worldwide issued to IRA #1 were original issue, no sale or exchange of the stock occurred.

Once again, the tax court agreed with Mr. Swanson. The critical factor was that the stock acquired in that transaction was newly issued – prior to that point in time, Worldwide had no shares or shareholders. The court found that a corporation without shares or shareholders does not fit within the definition of a disqualified person under section 4975(e)(2)(G). It was only after Worldwide issued its stock to IRA #1 that Swanson held a beneficial interest in Worldwide’s stock, thereby causing Worldwide to become a disqualified person. Accordingly, the issuance of stock to IRA #1 did not, within the plain meaning of section 4975(c)(1)(A), qualify as a “sale or exchange, or leasing, of any property between a plan and a disqualified person”.

The significance of the Swanson ruling was that the Tax Court approved the investment of IRA funds into a newly established entity that is managed by the IRA account holder. In ruling in favor or Mr. Swanson, the Tax Court formally approved the idea of an IRA holder being the sole director and officer of an entity owned by his IRA. In other words, the tax court endorsed a transaction whereby IRA funds are invested in a newly established entity such as a limited liability company of which the IRA owner is the manager. The Swanson Case clearly suggests that as long as the entity is newly established, the investment of IRA funds into that entity would not be treated as a prohibited transaction pursuant to Internal Revenue Code Section 4975.

IRS Field Service Advice Memorandum 200128011

IRS Field Service Advice (FSA) Memorandum 200128011 was the first IRS drafted opinion that confirmed the ruling of Swanson that held that the funding of a new entity by an IRA for self-directing assets was not a prohibited transaction pursuant to Code Section 4975.

An FSA is issued by the IRS to IRS field agents to guide them in the conduct of tax audits.

USCorp is a domestic sub-chapter S Corporation. Father owns a majority of the shares of USCorp. Father’s three minor children own the remaining shares of USCorp equally. USCorp is in the business of selling Product A and some of its sales are made for export.

Father and each child own separate IRAs. Each of the four IRAs acquired a 25% interest in FSC A, a foreign sales corporation (“FSC”). USCorp entered into service and commission agreements with FSC A. FSC A agreed to act as commission agent in connection with export sales made by USCorp, in exchange for commissions based upon the administrative pricing rules applicable to FSCs. USCorp also agreed to perform certain services on behalf of FSC A, such as soliciting and negotiating contracts, for which FSC A would reimburse USCorp its actual costs.

During Taxable Year 1, FSC A made a cash distribution to its IRA shareholders, out of earnings and profits derived from foreign trade income relating to USCorp exports. The IRAs owning FSC A each received an equal amount of funds.

IRS advised that, based on Swanson, neither issuance of stock in FSC to IRAs nor payment of dividends by FSC to IRAs constituted direct prohibited transaction. o IRS warned that, based on facts, transaction could be indirect.

In light of Swanson, the IRS concluded that a prohibited transaction did not occur under Code Section 4975(c)(1)(A) in the original issuance of the stock of FSC A to the IRAs. Similarly, the IRS held that payment of dividends by FSC A to the IRAs in this case is not a prohibited transaction under Code Section 4975(c)(1)(D). The IRS further concluded that in light of Swanson, the ownership of FSC A stock by the IRAs, together with the payment of dividends by FSC A to the IRAs, should not constitute a prohibited transaction under Code Section 4975(c)(1)(E).

The significance of FSA 200128011 is that the IRS confirmed the Tax Court’s ruling in Swanson, which ruled against the IRS. Like Swanson, the FSA advised IRS agents conducting audits that the creation and ownership of a new entity by an IRA for investment purposes would not be considered a prohibited transaction under Code Section 4975. Furthermore, the IRS established that the payments of dividends by an IRA owned entity to an IRA would not constitute a prohibited transaction. Like the Tax Court in Swanson, the IRS concluded that an investment into a newly established entity to make IRA investments would not be a prohibited transaction pursuant to Internal Revenue Code Section 4975. The IRS, in confirming the Tax Court’s ruling in Swanson, seemed to suggest that the focus on whether a transaction is prohibited pursuant to IRS rules should be examined based on how IRA funds are invested not on the structure used to effect the investment. In other words, the type of investment made with IRA funds once contributed to the newly formed entity will determine whether the transaction is prohibited under Internal Revenue Code Section 4975, not the vehicle that was used to make the investment.

T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M)

On October 29, 2013, the Tax Court in T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M), held that establishing a special purpose limited liability company (“LLC”) to make an investment did not trigger a prohibited transaction, as a newly established LLC cannot be deemed a disqualified person pursuant to Internal Revenue Code Section 4975.

In TC Memo. 2013-245, Mr. Ellis retired with about $300,000 in his section 401(k) retirement plan, which he subsequently rolled over into a newly created self-directed IRA.

The taxpayer then created an LLC taxed as a corporation and had his IRA transfer the $300,000 into the LLC. The LLC was formed to engage in the business of used car sales. The taxpayer managed the used car business through the IRA LLC and received a modest salary.

The IRS argued that the formation of the LLC was a prohibited transaction under section 4975, which prohibits self-dealing. The Tax Court disagreed, holding that even though the taxpayer acted as a fiduciary to the IRA (and was therefore a disqualified person under section 4975), the LLC itself was not a disqualified person at the time of the transfer. After the transfer, the LLC was a disqualified person because it was owned by the Mr. Ellis’s IRA, a disqualified person. Additionally, the IRS also claimed that the taxpayer had engaged in a prohibited transaction by receiving a salary from the LLC. The court agreed with the IRS. Although the LLC (and not the IRA) was officially paying the taxpayer’s salary, the Tax Court concluded that since the IRA was the sole owner of the LLC, and that the LLC was the IRA’s only investment, the taxpayer (a disqualified person) was essentially being paid by his IRA.

The impact of the Tax Court’s ruling in TC Memo. 2013-245 is significant because it directly confirms the legality of the self-directed IRA LLC solution by validating that a retirement account can fund a newly established LLC without triggering a prohibited transaction. The Tax Court’s decision in TC Memo. 2013-245 is important because it will silence the small percentage of people still trying to deny the legality of the self-directed IRA LLC solution even after the Swanson Case and the 2001 IRS opinion letter confirmed its validity.

In many respects the Tax Court’s ruling in TC Memo. 2013-245 is more important than the Swanson ruling and IRS advisory opinion. Firstly, TC Memo. 2013-245 is the first case that directly reinforces the legality of using a newly established LLC to make IRA investments without triggering an IRS prohibited transaction. The Swanson case as well as IRS Advisory opinion involved a corporation, not a LLC. Secondly, TC Memo. 2013-245 demonstrates the importance of working with specialized tax professionals who have the necessary expertise regarding the IRS prohibited transaction rules before establishing a self-directed IRA “checkbook control” structure. If Mr. Ellis has worked with the IRA Financial Group to establish his “checkbook control” IRA LLC, he would have been told that he could have used an LLC to make an investment in the LLC business, although, the investment would have to be 100% passive and he would not have been able to be involved in the business in any way, including earning a salary.

Conclusion

In light of Swanson, FSA 200128011, and TC Memo. 2013-245 the establishment and funding of a new LLC by an IRA for purposes of making IRS approved investments will not be considered a prohibited transaction under Internal Revenue Code Section 4975.

For additional information on the Self-Directed IRA LLC structure, please contact one of our IRA Experts at 800-472-0646.

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Sep 18

The UBTI Rules when Using a Self-Directed IRA to Flip Houses

With a Self-Directed IRA with checkbook control, flipping homes or engaging in a real estate transaction is as simple as writing a check. As manager of your Self-Directed IRA LLC, you will have the authority to make real estate investment decisions on behalf of your IRA on your own without needing the consent of an IRA custodian. One of the true advantages of a checkbook control IRA is that when you want to purchase a home with your self-directed IRA, you can make the purchase, pay for the improvements, and even sell or flip the property on your own without involving the IRA custodian.  And the best part is that all gains generated from the house flipping transaction will flow back to the IRA LLC tax-free!

The UBTI Rules when Using a Self-Directed IRA to Flip HousesWhen engaging in real estate transactions, such as a house flipping transaction, one must keep in mind the Unrelated Business Taxable Income Rules (also known as UBTI or UBIT).

The purpose of the UBTI or UBIT rules is to treat tax-exempt entities, such as charities, IRAs,and 401(k)s 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.”

  • Trade or Business: In defining “unrelated trade or business,” the regulations 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.”
  • Regularly Carried On: The UBIT or UBIT rules generally 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 in light of the underlying objective to reach activities competitive with taxable businesses. The requirement thus 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.” The determination of whether an activity is “regularly carried on” is generally a fact and circumstances test and is based on the particular facts of the transaction or set of transactions during the year.
  • Unrelated: In the case of an IRA or 401(k) Plan, any business activity will be treated as “unrelated” to its exempt purpose.

In the case of an IRA or 401(k) plan, 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. This typically involves passive types of activities that generate capital gains, interest, rental income, royalties, and dividends. The passive income exemptions to the UBTI or UBIT rules are listed in Internal Revenue Code Section 512. However, if the tax-exempt organization engages 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 does the UBTI Rules Apply to Flipping Homes?

The question is then asked, what level of real estate transaction must one cross before triggering the UBTI or UBIT tax.  Unfortunately, there is no clear test as to how many house flipping transactions or the number of real estate transactions one must engage in a given year in order to trigger the UBTI or UBIT tax.  In general, the IRS has a number of factors it will examine to determine whether one has engaged in a high enough volume or real estate transactions, such as home flipping, to trigger the UBTI or UBIT tax.  Firstly, the IRS will examine the frequency of the transactions – how many flipping transactions are done in a year.  Secondly, the IRS will examine the intent of the person – was the person intending to engage in an active trade or business.  Thirdly, the IRS will also look at the scope of other activities of the tax-exempt entity to determine whether the activity is part of a business activity or an investment.

The determination of whether an activity is an active trade or business and will, thus, trigger the UBTI or UBIT tax, which is taxed at a rate of approximately 40% for 2017, depends on the facts and circumstances.  Clearly one or two flipping transactions would not be considered an active trade or business and would, thus, not trigger the UBTI or UBIT tax. The question then becomes what happens if you do 3,4, or even 10 flipping transactions in a year – would that be considered an active trade or business and, hence, trigger the UBTI tax? Again, one must examine all the facts and circumstances surrounding the multiple house flipping transactions in order to determine whether the transactions in the aggregate would constitute an active trade or business. Therefore, it is important to work with a tax professional who can help one evaluate the transaction to determine whether the flipping transaction will trigger the UBTI or UBIT tax.

To learn more about the advantages of using a Self Directed IRA LLC to purchase real estate and flip homes tax-free, please call an IRA Expert at 800-472-0646 or visit www.irafinancialgroup.com.

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Sep 11

Taking Advantage of a Self-Directed Roth IRA When Planning Your Estate

In addition to the significant tax benefits in using a Self-Directed Roth IRA LLC to make investments, the Roth IRA also offers a number of very exciting estate planning opportunities.

In general, a self-directed Roth IRA is an after-tax account that allows the Roth IRA holder to benefit from tax-free investment growth, so long as a Roth IRA distribution is not taken prior to a five year holding period and the Roth IRA holder is not under the age of 59½ ( a “qualified distribution”). In addition, a Roth IRA holder would not be subject to the required minimum distribution rules (“RMD”).

With IRA Financial Group’s Self-Directed Roth IRA LLC Estate Planning Solution, your family could receive tax-free use of your Roth IRA funds. Converting a pre-tax IRA to a Roth IRA could be used as a very valuable estate-planning tool for estate owner’s that would be subject to the estate tax (For 2015 – estates over $5,430,000) as the Roth conversion funds would be paid out of funds subject to estate tax.

Estate Tax Basics

In general, an IRA, whether a traditional or a Roth, is included in the owner’s gross estate. You can’t avoid that. But when a traditional IRA is inherited, the beneficiary must include all distributions in gross income just as the original owner would have. The distributions are taxed at the beneficiary’s ordinary income tax rate. The beneficiary is able to stretch out the distributions over his or her life expectancy, but annual distributions are required and will be taxed. Hence, when passing a Traditional IRA to a spouse or child, the beneficiary is required to pay ordinary income tax on the IRA distribution amount, which would reduce the amount of Traditional IRA funds available to spend.

Converting a Traditional IRA to a Roth IRA – Estate Planning Benefits

In a conversion of a Traditional IRA to a Roth IRA, the IRA converted amount is as though it were taken as a distribution. So, hence, you would be subject to ordinary income taxes on the converted amount. Note: there is no restriction on the amount of IRA funds that can be converted at one time.

The first estate tax benefit of a Roth IRA conversion is that the Roth IRA holder’s estate would be reduced by the income taxes paid on the amount of the Roth IRA conversion. There are several estate planning benefits to paying tax on the Roth conversion while you are alive.

  • Turning Taxable Distributions into Tax-Free Distributions: Doing a Roth IRA conversion is in effect paying the taxes on the IRA funds for your heirs. They would have owed the taxes in the future when they were required to take a distribution from the inherited IRA. Instead, the Roth IRA holder would be paying the tax now, out of his/her taxable estate, and avoid estate and gift taxes on that amount. Thereafter, when your beneficiary would take a distribution from the inherited Roth IRA, those Roth IRA distributions would be tax-free.
  • Pay Tax & Reduce Estate Taxes: Paying the taxes now reduces the size of your estate and any estate tax bill. This isn’t a factor for estates below the taxable level, but it could be important for taxable estates.
  • Lifetime of Tax Benefits: A Roth IRA conversion can provide lifetime income tax benefits to the Roth IRA holder and it can also benefit your beneficiaries. When you maintain a traditional IRA, after age 70½ you’re required to take minimum annual distributions, which would be subject to income tax. If it turned out that you didn’t need this money for spending or living purposes, it simply increases the taxes you would be required to pay. In addition, being required to take a Traditional IRA distribution could increase your income enough to push you into a higher tax bracket, reduce itemized deductions, increase taxes on Social Security benefits, and have other effects. The older you become, the higher the required distributions and taxes become. With a Roth IRA, you or your beneficiaries could benefit from tax-free appreciation of the Roth IRA assets as well as generating tax-free income to live off.
  • Tax-Free Growth & Tax-Free Income: Once the Traditional IRA has been converted to a Roth IRA, the Roth IRA holder and his or her beneficiaries would be able to benefit from tax-free growth and income generated by the Roth IRA. In other words, the assets of the Roth IRA will be able to grow tax-free and all “qualified distributions” from the Roth IRA would be tax-free allowing the Roth IRA holder or his or her beneficiaries to live off the Roth IRA funds without ever having to pay tax on the income.
  • Take Advantage of Historical Low Tax Rates: Even though a lot has been made of the increasing Obamacare tax rates, our current income tax rates are still at historical lows. Therefore, it is conceivable that income tax rates will rise in the future especially with the high levels of debt that is being used by the Government to stimulate the economy. Doing a Roth IRA conversion now versus later could potentially be a tax savvy decision if the Roth IRA grows at a respectful rate and if tax rates increase. Having a Roth IRA to use or offer to your beneficiaries in a high tax environment will prove to be extremely tax beneficial.

The Self-Directed Roth Stretch IRA

Unlike the original Roth IRA owner, a non-spousal beneficiary of a Roth IRA is required to take minimum distributions over his or her life expectancy. Note: a spousal beneficiary of a Roth IRA is not required to take a Roth IRA distribution.

In the case of a non-spousal Roth IRA beneficiary, when the beneficiary is relatively young, there is the potential for the distributions to be less than the annual earnings of the Roth IRA, so the Roth IRA grows while the distributions are being taken. Of course, the beneficiary can take more than the minimum, even the entire Roth IRA, at any time tax-free. In other words, using a Self-Directed Roth Stretch IRA will allow an individual to transfer tax-free assets to children or other beneficiaries and allow those individuals to benefit from tax-free income while the Roth IRA contributes to grow tax-free.

To learn more about the estate tax benefits of having a Self-Directed Roth IRA LLC, please contact a tax professional at 800-472-0646.

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