May 22

The Self-Directed Roth IRA Distribution Rules

The advantage of contributing to a self-directed Roth IRA is that income and gains generated by the Roth IRA investment can be tax-free and penalty-free so long as certain requirements are satisfied. Unlike with a traditional self-directed IRA, contributions to a self-directed Roth IRA are not tax deductible.

Unlike the self-directed Traditional IRA, there is no 70 1/2 age limit on making contributions. Individuals of any age with compensation are eligible to contribute to a self-directed Roth IRA. The total amount you may contribute to a self-directed Roth IRA for 2015 cannot exceed the lesser of $5,500 ($6500 if over the age of 50) or 100% of compensation ($11,000 for married couples – $13,000 if over the age of 50).

If you maintain a Traditional self-directed IRA, the maximum contribution to your self-directed Roth IRA is reduced by any contributions made to your Traditional self-directed IRAs.

Amount of Roth IRA Contributions That You Can Make for 2015

If your filing status is… And your modified AGI is… Then you can contribute…
married filing jointly or qualifying widow(er) < $181,000 up to the limit
> $181,000 but < $191,000 a reduced amount
> $191,000 zero
married filing separately and you lived with your spouse at any time during the year < $10,000 a reduced amount
> $10,000 zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year < $114,000 up to the limit
> $114,000 but < $129,000 a reduced amount
> $129,000 zero

Self-Directed Roth IRA Distributions Rules if Age 59 and under.

You can withdraw contributions you made to your self-directed Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

Withdrawals from a Roth IRA you’ve had less than five years and under the age of 59½

If you take a distribution of self-directed Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  • You use the withdrawal to pay for qualified education expenses.
  • You’re at least age 59½.
  • You become disabled or pass away.
  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
  • The distribution is made in substantially equal periodic payments.

The Self-Directed Roth IRA Distribution RulesWithdrawals from a self-directed Roth IRA you’ve had more than five years

If you’re under age 59½ and your self-directed Roth IRA has been open five years or more, your earnings will not be subject to taxes if you meet one of the following conditions:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  • You use the withdrawal to pay for qualified education expenses.
  • You’re at least age 59½.
  • You become disabled or pass away.
  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
  • The distribution is made in substantially equal periodic payments.

Self-Directed Roth IRA Distributions Rules if Over Age 59½

Withdrawals from a Roth IRA you’ve had less than five years

If you have a self-directed Roth IRA LLC and you have not met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

Withdrawals from a Roth IRA you’ve had more than five years.

If you’ve met the five-year holding requirement for the self-directed Roth IRA, you can withdraw money from a Roth IRA with no taxes or penalties.

Penalties on Conversions From a Traditional IRA to a Roth IRA

The penalty rules regarding conversions are a bit different than those for annual contributions, which may be taken at any time for any purpose free of income taxes and penalty. An early withdrawal of a conversion contribution has a different twist. The early withdrawal penalty applies to a distribution of conversion money from a Roth IRA when:

  • 1. The distribution is made within the five-tax-year period starting with the year that the conversion was distributed from a regular IRA; and
  • 2. Only to the extent that the distribution is attributable to amounts that were includable in gross income as a result of the conversion.

In general, when doing a Roth conversion, one can take a distribution of the funds that were converted at any time without tax, however, an early distribution penalty of 10% would apply if the five-year holding period from date of conversion was not satisfied.

For example, Joe made a $20,000 conversion from his regular IRA to a Roth IRA in 2008. The entire amount converted was includable in Joe’s income for 2008. Joe made no additional contributions or conversions to a Roth IRA in 2008 or in later years. In 2011, before he is age 59 1/2, Joe withdraws $10,000 from the Roth IRA. Joe will have no tax to pay on this withdrawal because he paid income taxes on the full $20,000 he converted in 2008; however, he will have to pay a 10% penalty (or $1,000) unless one of the IRA early withdrawal exceptions apply. Why? Because Joe didn’t keep the conversion amount in his Roth IRA for the required five-tax-year period since his original conversion.

So, if you are going to take funds “early” from your Roth IRA, weigh your conversion decision very carefully.

Deciding between a Traditional Self-Directed IRA and a Self-Directed Roth IRA?

Unfortunately there is no right or wrong answer when it comes to deciding whether one should make contributions to a self-directed IRA or self-directed Roth IRA. The decision generally depends on a variety of factors, which are generally facts and circumstance based, such as:

  • If you are not eligible to take advantage of tax-deductible contributions to a Traditional self-directed IRA, but qualify for after-tax contributions to a self-directed Roth IRA, then the Roth IRA is the better choice. Roth IRA contributions are made in after-tax dollars while earnings are generally are not taxable.
  • If contributions to a Traditional self-directed IRA contribution are tax deductible and you are also eligible to contribute to a self-directed Roth IRA, then:
    • if you expect your retirement tax rate to be equal or higher than it is today, a self-directed Roth IRA should yield the greatest benefit.
    • if you expect your retirement tax rate to be much lower than it is today, you may want to choose making contributions to a self-directed Traditional IRA.
    • If you expect your investment to generate strong returns, then a self-directed Roth IRA could be a option
  • The younger one is the more attractive a self-directed Roth IRA is because your Roth IRA will have more time to grow without paying any tax

To learn more about the self-directed Roth IRA and the rules surrounding contributions and distributions, please contact an IRA Financial Group tax professional at 800-472-0646.

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May 21

Is a Self-Directed IRA Right for You?

Here’s an interesting read about Self-Directed IRAs from Investopedia:

Many of us have heard the term, “the world is your oyster.” That is exactly how moving to a self-directed IRA can make people feel – that the world of investing has opened up to them due to the multiple investment options they are now able to employ.

The investment world is full of stories of investors who have benefited from taking the nontraditional route of the self-directed IRA – and other stories of people who have been penalized for not following the complicated rules or have been scammed.

To understand whether a self-directed IRA is right for you, you must first understand exactly what it is – and isn’t – and how to avoid the pitfalls.

What is a Self-Directed IRA?

A self-directed IRA (SDIRA) is a retirement account in which the individual investor, not a custodian, makes all the investment decisions. It permits greater asset diversification outside of the stocks, bonds and mutual funds generally available to investors in traditional and Roth IRAs. The money can be invested in real estate, private tax liens, notes and even gold. All securities and investments are held in an account administered by a custodian or trustee.

Self-directed IRAs may seem like a new way to save for retirement, but the option has been around since the advent of IRAs in 1974. Many people have not heard of SDIRAs because the account requires a custodian and many investment firms only allow traditional investments.

Phillip Christenson, CFA and financial advisor at Phillip James Financial in Plymouth, Minn., explains the self-directed IRA, “Picture your last IRA statement and the types of investments held in your account. There may be some individual stocks, maybe some bonds and most likely mutual funds and ETFs. Stocks and bonds are fine and should be a core part of your investment portfolio, but maybe you want to take more risk or diversify into non-traditional assets. That’s where a SDIRA comes in.”

Christenson explains that if you want to invest in rental property or flip a house (buy a home at a low cost that needs repair and sell it), you can do this with a self-directed IRA. “This type of IRA account provides the flexibility to invest in alternative assets like physical real estate, gold bullion, mortgages, franchises and other assets.

“The reason for opening up a self-directed IRA has to do with accessibility, control and the potential rate of return on your investments,” says Christenson. “When your money is held in an IRA you generally cannot get access to it until you reach age 59 ½. Therefore, while the money is in a traditional or Roth IRA, you can only invest in things such as stocks, bonds and mutual funds.”

With an SDIRA, people have access to their IRA money for non-traditional investments, Christensen says. The other major benefit is that investors might believe they can get better rates of return from these alternative investments than they can earn in the stock or bond market.

How to Set Up a SDIRA

Christenson says the first thing you need to do is evaluate what you’re trying to accomplish with your SDIRA. “Are you trying to purchase real estate, flip properties, invest in gold or fund a start- up company? This will help when finding a custodian, setting up the account and determining if a self-directed IRA is going to help accomplish these goals.” Here’s what to do.

Consult with a an objective professional, such as a CPA, financial advisor or attorney. Review what you want to accomplish, learn the rules associated with a SDIRA and consider the risks.
Find a custodian: This will be the company that will hold your assets and administer the account. You can find a company online, but investors must do due diligence by checking reviews, asking other investors and comparing fees. Your custodian will be able to help you follow IRS regulations, but not analyze and choose investments.
Fill out the required paperwork provided by the custodian.
Deposit money or roll over funds from an old IRA or 401(k) account into your new self-directed IRA.

The Pros of a SDIRA

It allows investors to use tax-advantaged money held in their IRA for nontraditional investments, such as gold and real estate.
Investors gain greater flexibility and control over their money.
It provides greater diversification and reduces the risk of too narrow a retirement portfolio.
It has the potential for greater return, given the increased investment opportunities.

The Cons of a SDIRA

Additional rules make it complex and more costly to administer.
Alternative assets can be hard to value and analyze.
There is a risk of not correctly following IRS regulations and losing the tax-advantaged status of the account, which may lead to taxes and penalties. One of those rules prohibits “self-dealing.” These are investments in which you or your family members of lineal descent have prior ownership. In addition, some investment types, such as life insurance, are still not permitted in an IRA. It is entirely up to the investor to follow all of the IRS regulations regarding a self-directed IRA.
There is a greater time commitment needed to set up and direct investments.
Depending on the amount you invest and the type of investments, you could greatly increase the overall financial exposure of your retirement portfolio.
SDIRAs have a greater risk of fraud due to their complexity and the prevalence in the SDIRA market of custodians from small operations, rather than mainstream firms.

The Bottom Line

Many investment professionals believe that the SDIRA doesn’t typically provide enough benefit or ROI for the amount of work investors need to do to maintain it. What’s more, only a savvy and sophisticated investor can benefit from the greater freedom without falling into the many traps that await the untutored.

“The bottom line is tread lightly,” says Greg Ostrowski, CFP and managing partner at Scarborough Capital Management in Annapolis, Md. “If an investment sounds too good to be true, it likely is. Conduct comprehensive due diligence and seek counsel from a trusted professional.”

For more information, or to set up your own Self-Directed IRA, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646 today!

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May 19

Contributing to an Inherited IRA

Once an IRA account owner dies, his or her IRA will be passed on to the beneficiary.  Typically, this will be a spouse or child, but can be anyone the account owner has named.  If there is no beneficiary, then the account will usually go through probate.  Contributions, in addition to taxes, will depend on who the beneficiary is.

If you inherit your spouse’s IRA, you have two options.  First, if you’re the sole beneficiary, you can designate the account in your name and treat it as your own.  You may continue to contribute to the plan, assuming you are qualified to do so.  The type of account (traditional or Roth), your age and income are all factors in deciding if you can contribute to the plan.  Secondly, you have the option of cashing out the IRA.  Note that taxes will become due if you choose this option.

Contributing to an Inherited IRAIt’s important to note the type of IRA you are inheriting.  You must follow the same rules as the original account.  If you inherit a traditional plan, you contributions are tax deductible (if you qualify), you must start taking required minimum distributions (RMDs) once you hit age 70 1/2 and you cannot contribute after that age.  Roth IRAs do not benefit from tax breaks since taxes are paid before contributions.  Qualified withdrawals are tax free, there are no RMDs and there are no age restrictions for contributions.

Whether you’re a spouse or not, you always have the option of withdrawing the funds.  A spouse has the option of taking that money and rolling it over into a new IRA and continuing to contribute.  However, a non-spouse cannot do this.  Moreover, a non-spouse cannot contribute to an inherited IRA and cannot rollover funds into or out of the IRA.

Lastly, non-spouse beneficiaries must continue to take RMDs if the original owner had begun doing so.  If not, you must take RMDs based on your own life expectancy, as per the IRS.  You must start these no later than December 31 the year following the year of the original IRA owner’s passing.  Note, you have five years to cash out the entire IRA in lieu of this.

If you have any questions about Inherited IRAs, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646.

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May 18

Passing on a Roth IRA

Here are three important questions to ask when a Roth IRA owner passes away:

What happens to the Roth IRA after the holder dies?

Once the Roth IRA holder dies, the distribution rules for Roth IRAs merge with those of Traditional IRAs. All of the post-death required distribution rules apply to Roth IRAs in the same way they apply to Traditional IRAs. Thus, if you die before your Required Beginning Date for distributions, the life expectancy rule or five-year rule will apply.

What happens to the spouse of a Roth IRA Owner who dies?

A surviving spouse succeeding to the interest of the owner of a Roth IRA may designate the account or annuity as a Roth IRA of his or her own. An electing spouse is, from the date of the election, treated as owner of the IRA. For example, an electing spouse is treated as owner, not beneficiary of the account, for purposes of applying the distribution rules, including the penalty tax imposed by Internal Revenue Code Section 72(t).

Are Distributions to beneficiaries from a Roth IRA subject to tax?

No. Because distributions to beneficiaries from a Roth IRA are not subject to tax, beneficiaries have access to 100% of the funds when the IRA holder dies.

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

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May 14

Self-Directed IRA Clients Continue to See Strong Returns from Flipping Homes but Market Becoming More Difficult

Increase popularity of flipping homes causing tighter market conditions for self-directed IRA real estate clients

IRA Financial Group, the leading provider of self-directed IRA LLC solutions for real estate investors, has seen continued demand from real estate investors looking to use their retirement funds to flip homes. According to an IRA Financial Group internal customer survey that involved clients from across the country, a strong majority of the respondents indicated seeing string returns from flipping homes but have noticed a tightening real estate market which could limit profit down the road.

“We have heard from a number of our self-directed IRA clients who find the real estate market a lot more competitive now, “ stated Adam Bergman, a tax partner with the IRA Financial Group. “The feedback we have heard from our clients is that because real estate has become very trendy, you have a lot of people who didn’t invest in real estate before 2009 that are now wanting to get involved in real estate because it is so prevalent on TV,” stated Mr. Bergman.

Self-Directed IRA Clients Continue to See Strong Returns from Flipping Homes but Market Becoming More DifficultAccording to Mr. Bergman,“a self-directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment without tax, including real estate. The IRS has always permitted an IRA to purchase real estate, raw land, or flip homes”.

“With IRA Financial Group’s IRA LLC solution, buying and flipping rental properties is as simple as writing a check and is tax-free, “ stated Jacky Ospina, a tax specialist with the IRA Financial Group. “As the manager of your Real Estate IRA LLC, the IRA holder will have control over his or her IRA funds so that flipping a home can be made by simply writing a check,” stated Ms. Ospina.

Unlike a conventional Self Directed IRA which requires custodian consent and requires high custodian fees, a self-directed IRA LLC with Checkbook Control will allow one to buy real estate, including rental properties by simply writing a check. With a traditional custodian controlled self directed IRA, one will have total control to make a real estate purchase, pay for improvements, and then sell the property without ever talking to the IRA custodian. Since all the IRA funds will be held at a local bank in the name of the self-directed IRA LLC, all one would need to do to engage in an IRA house flipping transaction is write a check straight from the IRA LLC account or simply wire the funds from the Real Estate IRA LLC bank account. With IRA Financial Group’s real estate IRA LLC solution, no longer would one need to ask the IRA custodian for permission or have the IRA custodian sign the real estate transaction documents. Instead, with a Checkbook Control IRA, as manager of the IRA LLC, the IRA holder, will be able to buy rental properties simply by writing a check.

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 “checkbook control” Self Directed IRA Facilitator. 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 call 800-472-0646.

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May 13

The Advantages of the ROBS Solution vs. the Self-Directed IRA to Buy a Business

The Business Acquisition & Compliance Solution Structure (BACSS) also known as the “Rollover Business Start-Up” (“ROBS”) Solution is an IRS and ERISA approved structure that allows an individual to purchase a new or existing business with retirement funds and be active in the business without triggering any of the IRS prohibited transaction rules. The ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules, which do not apply to a Self-Directed IRA structure.

How Does the ROBS structure work?

The ROBS arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsored, and then investing the rollover 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes.

The following is how a typical ROBS structure works:

  • 1. Jim, an entrepreneur or existing business owner, establishes a new C Corporation in the state where the business will be operating. The ROBS structure must involve a C Corporation and not an LLC or S Corporation because the exemption to the IRS prohibited transaction rules under IRC 4975(d) involves the purchase of “Qualifying Employer Securities”, which is defined as stock of a Corporation. Using an LLC would not satisfy this definition and only individuals can be shareholders of an S Corporation and a 401(k) Plan is a trust.
  • 2. The new C Corporation adopts a prototype 401(k) plan that specifically permits the plan participants, including Jim, to direct the investment of their plan accounts into a selection of investments options, including employer stock, also known as “qualifying employer securities.
  • 3. Jim elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover of a prior employer’s 401(k) Plan funds into the newly adopted 401(k) plan.
  • 4. Jim then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that Jim wishes to invest in the new business).
  • 5. Jim also invests personal funds equal to more than 1% of the purchase price so that the structure is not considered an Employee Stock Option Plan (ESOP).
  • 6. The C Corporation utilizes the proceeds from the sale of stock (the amount of rollover funds and personal funds used) to purchase the assets for the new business.
  • 7. Joe would be able to earn a salary from the revenues of the business as well as personally guarantee any business loan.

What is the Difference between using a Self-Directed Vs. ROBS structure to buy a business?

The Advantages of the ROBS Solution vs. the Self-Directed IRA to Buy a BusinessIn a lot of respects, using a Self-Directed IRA LLC or a 401(k) Plan to purchase stock in a corporation would seem to be subject to the same rules. However, as described above, using 401(k) Plan funds and not IRA funds allows one to take advantage of the prohibited transaction exemption under IRC 4975(d) for “Qualifying Employer Securities.”

The recent U.S. Tax Court case Peek v. Commissioner, 140 T.C. No. 12 (May 9, 2013), highlights the risk and limitations involved when using a Self-Directed IRA to purchase business assets. In the Peek case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. Because Mr. Peek used an IRA and not a 401(k) Plan to purchase the C Corporation stock, Mr. Peek was not able to earn a salary or personally guarantee a business loan, which ultimately was the cause of the IRS prohibited transaction rule violation.

The limitation of using a Self-Directed IRA LLC to buy a business is that the individual retirement account business owner would not be able to be actively involved in the business, earn a salary, or even personally guarantee a business loan. Whereas, if the business owner used a ROBS strategy, that individual would be able to be actively involved in the business, earn a salary, as well as personally guarantee a business loan without triggering the IRS prohibited transaction rules.

To learn more about the benefits of the ROBS strategy, please contact a retirement tax expert at 800-472-0646.

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May 11

New Podcast – New IRS Form 5498 And Its Potential Impact On IRS Audits Involving Self-Directed IRA Accounts

IRA Financial Group’s Adam Bergman discusses IRS Form 5498 and the potential impact on IRS audits involving Self-Directed IRAs.

IRAFG Logo SmallClick Here to Listen

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May 08

Self Directed IRA Investments

A Self-Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS only describes the type of investments that are prohibited, which are very few.

The following are some examples of types of investments that can be made with your Self-Directed IRA LLC:

  • Residential or commercial real estate
  • Domestic or Foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

Using a Self-Directed IRA LLC to make investments offers the investor the ability to make traditional as well as non-traditional investments, such as real estate, in a tax-efficient manner.

Tax Deferral

The concept of tax deferral is premised on the notion that all income and gains generated by the pre-tax retirement account investment would generally flow back into the retirement account tax-free. Instead of paying tax on the returns of a Self-Directed IRA investment, such as real estate, tax is paid only at a later date, leaving the investment to grow unhindered. For example, if an IRA investor invested $100,000 into a Self-Directed IRA LLC in 2014 and the account earns $10,000 in 2014, the investor would not owe tax on that $10,000 in 2014. Instead, the Self-Directed IRA investor would be required to pay the taxes when he or she withdraws the money from the IRA, which could be many years later. For example purposes, assuming the IRA investor mentioned above is in a 33% federal income tax bracket, she would have had to pay $3,333 in federal income taxes on the $10,000 earned on the IRA in 2014. That would have left $6,667 in the account. At a 8% annual return, those earnings would go on to produce $533.36 in 2015. However, because IRAs are tax deferred, the self-directed IRA investor is able to earn a return on the full $10,000 rather than the $533.36 she would have had if she had to pay taxes that year. At a 8% annual return, she’d earn $800 in 2015. The beauty of tax deferral is that the deferral compounds each year.

Tax deferred investments though a self-directed IRA LLC generally help investors generate higher returns. That’s because the money that would normally be used for tax payments is instead allowed to remain in the account and earn a return.

Real Estate

It's Time To Let 401(k) Holders Invest Like the ProsThe IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Real estate is the most popular investment made with a Self-Directed IRA. Making a real estate investment is as simple as writing a check. Since you are the manager of your Self-Directed IRA LLC, you have the authority to make investment decisions on behalf of your IRA. One major advantage of purchasing real estate with a Self-Directed IRA is that all gains are tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all gains are tax-free.

For example, if you purchased a piece of property with your Self-Directed IRA for $75,000 and later sold the property for $150,000, the $75,000 of gain would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and in most cases state income tax.

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a Self-Directed IRA LLC. By using a Self-Directed IRA LLC to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all income and gains received would be tax-free.

More importantly, with a Self-Directed IRA LLC, you, as the manager of the IRA LLC, will have “checkbook control” over your IRA funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Loans & Notes

The IRS permits the use of IRA funds to make loans or purchase notes from third parties. By using a Self-Directed IRA LLC to make loans or purchase notes from third parties, all interest payments received would be tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all interest received would be tax-free.

For example, if you used a Self-Directed IRA LLC to loan money to a friend, all interest received would flow back into your IRA tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Private Businesses

With a Self-Directed IRA LLC you are permitted to purchase an interest in a privately held business. The business can be established as any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using IRA funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512. The retirement tax professionals at the IRA Financial Group will work with you to develop the most tax-efficient structure for using your IRA to invest in a private business.

Precious Metals & Coins

Internal Revenue Code Section 408(m) lists the type of precious metals and coins that are permitted investments using IRA funds:

  • One, one-half, one-quarter or one-tenth ounce U.S. gold coins (American Gold Eagle coins are the only gold coins specifically approved for IRAs. Other gold coins, to be eligible as IRA investments, must be at least .995 fine (99.5% pure) and be legal tender coins.
  • one ounce silver coins minted by the Treasury Department;
  • any coin issued under the laws of any state;
  • a platinum coin described in 31 USCS 5112(k) ; and
  • gold, silver, platinum or palladium bullion (other than bullion that is made into a coin) of a certain fineness that is in the physical possession of a trustee that meets the requirements for IRA trustees under Code Sec. 408(a).

The Technical and Miscellaneous Revenue Act of 1998 allowed IRA owners to invest their IRA assets in certain platinum coins as well as certain gold, silver, platinum, or palladium bullion provided the coins are held in a financial organization.

The advantage of using a Self-Directed IRA LLC with “checkbook control” to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the metals and/or coins can be held in the name of the LLC at a financial organization (at any local bank) safety deposit box eliminating depository fees.

Foreign Currencies

The IRS does not prevent the use of IRA funds to purchase foreign currencies, including Iraqi Dinars. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

Purchasing foreign currency, such as the Iraqi Dinar, with a Self-Directed IRA LLC is as easy as writing a check. As manager of the IRA LLC, you will have “checkbook control” over your IRA funds, providing you with the ability to make investments without requiring custodian consent. In addition, the foreign currency notes, including Iraqi Dinars, can be held in the name of the LLC at a financial organization (any local bank) safety deposit box eliminating depository fees.

By using a Self-Directed IRA LLC to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all foreign currency gains would be tax-free.

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Self-Directed IRA LLC may purchase stock, bonds, mutual funds, and CDs. The advantage of using a Self-Directed IRA LLC with “Checkbook Control” is that you are not limited to just making these types of investments. With a Self-Directed IRA LLC with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless!

Self Directed IRA LLC

For additional information on the advantages of using a Self-Directed IRA LLC with “checkbook control” to make investments, please contact one of our IRA Experts at 800-472-0646.

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May 07

Contribution and Distribution Rules for a Roth IRA

A taxpayer’s contributions to Roth IRAs during any year may not exceed a dollar ceiling (or, if less, the taxpayer’s compensation income), reduced by deductible contributions for the year to traditional IRAs. For 2015, the dollar ceiling will be $5,500. The ceiling is raised by $1,000 for individuals who are at least 50 years old at year-end.

The maximum contribution is the same for traditional and Roth IRAs, but this ceiling applies differently to them because contributions to Roth IRAs are after-tax funds, whereas contributions to traditional IRAs are pretax funds. Assume A contributes $3,000 to a Roth IRA for 2014, and B contributes the same amount for the year to a traditional IRA; both are taxed at 30 percent at all times. Although only $3,000 of salary income was required to fund B’s contribution, A’s contribution effectively takes pretax income of $4,286 ($4,286, less 30 percent thereof, is $3,000). If each of the IRAs earns 8 percent, and each of the contributors withdraws the accumulated funds on retirement 10 years after the contributions are made, A will have $6,477 ($3,000 plus earnings at 8 percent for 10 years), and B will have $4,534 ($6,477 less 30 percent thereof).

Taxpayer’s ability to make a Roth IRA contribution begins to phase out when your adjusted gross income (AGI) exceeds $183,000 (for joint filers) and $116,000 for single filers. In addition, you are not permitted to make a contribution at all when your AGI exceeds $193,000 (for joint filers) or $131,000 (for single filers). Note: with a traditional IRA you may make a contribution even if your income is high and you are covered by an employer’s plan. However, you may not be able to deduct the contribution on your return.

Contribution and Distribution Rules for a Roth IRAContributions in excess of the maximum are subject to a 6 percent excise tax unless the excess and income thereon are distributed to the owner not later than the due date of his or her return for the year (taking extensions into account). Income included in a distribution made within this time is included in the owner’s gross income for the year of the contribution, not the year of the distribution.

As with traditional IRAs, contributions to a Roth IRA are deemed made on the last day of the year if made before the following April 15. Contributions to a Roth IRA, unlike a traditional IRA, can be made by taxpayers older than 70 1/2.

Distributions from Roth IRAs are not required to begin at any particular time, and there are no limitations on death benefits. Distributions from a traditional IRA, in contrast, must begin by April 1 following the year in which the owner reaches age 70 1/2 or (if later) retires and must generally be made in ways that will exhaust the account during the lifetimes or over life expectancies of the owner and his or her spouse. In other words, while congressional policy is that traditional IRAs be for retirement savings only, Congress acquiesces in the use of Roth IRAs for accumulating wealth to be transmitted at death.

Roth and traditional IRAs are subject to the same rules for distributions after the owner’s death. If the beneficiary is not the surviving spouse, distributions must either be completed by the end of the fifth calendar year following the year of the owner’s death or consist of a series of payments beginning before the end of the calendar year following the year of death and continuing not longer than the beneficiary’s life expectancy. If the beneficiary is a surviving spouse, distributions may be delayed until the spouse reaches age 70 1/2 or retires, or the spouse may elect to treat the IRA as his or her own.

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

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

Qualified special purpose distributions are distributions, up to a $10,000 lifetime maximum, that are “used” by the distributee within 120 days to pay “qualified acquisition costs” for property to serve as the “principal residence” of a “first-time homebuyer,” who must be the IRA owner, his or her spouse, or a child, grandchild, or more remote ancestor of the owner or spouse. Qualified acquisition costs are costs of acquiring, constructing, or reconstructing a residence, including “reasonable settlement, financing, or other closing costs.” A first-time homebuyer is a person who has not had a “present ownership interest in a principal residence” during the two years preceding the acquisition of the residence financed with the distribution. A distribution can qualify only to the extent of $10,000, less all prior qualified first-time homebuyer distributions received by the recipient.

A nonqualified distribution is excluded from gross income only to the extent of the excess of the taxpayer’s contributions to Roth IRAs, less all prior distributions, qualified and unqualified. A distribution of an excess contribution is not qualified and is therefore included in gross income to the extent of the income of the account required to be included in the distribution. An amount included in gross income on a nonqualified distribution may be subject to an additional 10 percent penalty tax under Internal Revenue Code Section 72(t) (e.g., if made to the owner before age 59 1/2 ). Very generally, the effect of these rules is that investment returns of a Roth IRA are tax-free to the distributee if received in a qualified distribution but are otherwise taxed.

The basis of property other than money received in a distribution from a Roth IRA is the property’s fair market value, whether or not the distribution is qualified. An owner’s lifetime gift of a Roth IRA to another person is treated as a distribution in full to the owner and a gift of an account or annuity that is not an IRA.

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

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May 06

Avoiding a Major Investment Property Flop

If you are a Real Estate investor, here’s an interesting read from the good folks over at biggerpockets.com:

You would be hard-pressed to find a real estate investor, at least one with some experience and time under their belt, who doesn’t have some horror story about investing in real estate.

These horror stories range from mild to downright disastrous, and they happen to all types of investors. Long-term buy and hold investors have their share of stories. Fix and flip investors have plenty to share. Note buyers, lenders, custom builders… you name it, and you can find plenty of opportunity to learn about real estate mistakes and blunders from talking to investors.

The last thing any investor wants is to get in over their heads and deep in the red, and learning from others is a great way to avoid disaster yourself. Sometimes investors are blinded by their love for a property, and other times, unexpected problems bamboozle them into spending thousands upon thousands of dollars on unanticipated repairs.

Whether due to our own mistakes or unforeseen problems, investment property flops can cost us in both money and time. Don’t allow yourself to fall into a real estate investment sinkhole with a bad investment property. Follow these tips to keep your goals and your investments on track!

4 Tips to Avoid a Real Estate Investment Disaster

1. Don’t Fudge the Numbers

One of the surest ways to keep yourself from buying into a flop is to be honest and realistic about the numbers. While numbers can’t account for everything, they can certainly act as a guide. Don’t rely on Google or online calculators to tell you the worth of a property or what it will be worth after you’ve done renovations. While online sites are good for finding data quickly on properties, such as recent sales prices and possible comparison sales, these sites are not trustworthy for giving you accurate values of investment properties. They are only as reliable as the data they receive.

Sometimes that data is not updated quickly enough either by the site itself or the place they are getting their data. Far too often the data you can find from online sites is out of date and inaccurate and not a reliable place for determining the true value of a property.

Trust a real estate professional in your area, and when possible, get multiple opinions on property values, renovation costs, long-term holding costs and rental rates. Hypotheticals will usually hurt you. It’s all too easy to fudge numbers to make a deal seem more attractive and profitable in your head.

As your reading this, if you think you are one of those special people who can be completely rational when it comes to numbers, think again. We are all able to fool ourselves and make irrational decisions. I wrote an article on this topic for BiggerPockets recently and even shot a video on how easy it is for us to make biased decisions. We are able to easily fool ourselves and look for reasons to do a deal when a rational viewpoint tells us to think again. Let logic and facts rule. Listen to local professionals who deal with the numbers everyday and let them help you put together a map of what your numbers will look like.

Pay attention to the good and the bad, and do not let “what could be” influence your decision making. At the same time, do not let anyone tell you what the “definitive real estate costs” will be. The 50% rule may apply from a 30,000 ft. view, but when you really get into the numbers, making generic assumptions can hurt you in many ways. It can make you pass on good deals or purchase bad deals.

Remember that numbers are real things. They are actual functions of location, performance, decision-making (by you and your team), and they can fluctuate up and down. The quicker you realize that the numbers on a property are real, the quicker you’ll avoid a lot of undue heartache and frustration.

2. Have an Exit Strategy

If something becomes too big for you or you end up with a flop, do you have a plan, or are you just going to be stuck with an unwanted investment property?

This is where your networking skills comes in handy. Some would consider renting and leasing exit strategies — and they are. But it’s also helpful to have contact with other real estate investors to whom you can wholesale a property that you no longer want to fool with. It is good to make sure on the front end of a decision that you have multiple exit strategies on a property. This is one of the reasons that I moved away from lower-end properties, where the only real attraction was low barrier of entry.

The cost was low to get started, but the options were limited, and, in my experience, the problems were magnified at the lower price points. When problems occurred, the options were often limited. I prefer today to work in properties where I have more options, including retail, wholesale and after market investors. It offers more protection for me personally.

No matter how you decide to move forward or what your strategy is, make sure that you are always aware of and considering what your best options are as an investor.

3. Invest Within Your Means

Sometimes the risk is just too great. I see investors make mistakes in this area everyday. You should never, ever sink your life savings into a single property. That’s why it’s so important to assess your capacity for investment before you even consider buying a property. Do you know the maximum amounts you can bid? Are you accounting for unexpected costs? If you make smart investment choices that respect your personal budget, a single bad deal won’t send you up the river without a paddle.

Investing with a Self-Directed IRA is very popular today and becoming more popular as companies are promoting it as a strategy for acquiring property. More and more people are moving their investment accounts to self-directed custodians.

Be very, very careful as an investor to not use ALL of your funds from an SDIRA when investing in a property, whether it is short or long-term. It is very difficult to get money into an IRA account, and you must know the rules before investing in real estate. If you get into a property and have unexpected costs or delays, having that cushion in your SDIRA will provide you the breathing room to be able to function. If you invest with every dollar, you have zero room for mistake or delay, and if they occur, you will be faced with the unenviable task of figuring out your next move without violating the tax rules of your IRA.

Be careful and stay within your means!

4. Trust Your Instincts

Listen to your gut. While we don’t recommend making emotional decisions about a property, we all know that feeling. Too often, we have a feeling about a property, a renter, a vendor or partner, and we don’t act on it. Acting on it may not mean walking from the deal, but it definitely means addressing whatever your concerns are. Asking questions, taking a pause to investigate your questions further — and even waking away entirely — are all possibilities when we start to address our instincts.

If you just don’t quite feel right about a deal, it’s probably better not to make it. While some apprehension is natural, listen carefully for alarm bells and red flags. You’re better off skipping a deal altogether than ending up with buyer’s remorse. That applies to all aspects of your deal, including walking away from partners, vendors or even a purchase and sale if things just do not feel right.

Conclusion

I am quite sure there are plenty of other criteria to be aware of when investing in real estate and trying to avoid a flop. This is such a “learned business,” and it takes time to figure out the warning signs and pitfalls.

Regardless of your experience level, the one piece of advice not listed on here, but vitally important, is to stay humble. Always believe you know less than you do and surround yourself with great people who will ask you questions and keep you on your toes. That will definitely help keep you on track with the four tips above!

If you have any questions or would like to invest in real estate with your retirement funds, please contact an IRA expert at the IRA Financial Group @ 800.472.0646 today!

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