Aug 24

Are Self-Directed Roth IRAs Protected from Creditors?

Retirement accounts have become many Americans’ most valuable assets. That means it is vital that you have the ability to protect them from creditors, such as people who have won lawsuits against you.

In general, the asset/creditor protection strategies available to you depend on the type of retirement account you have (i.e. Traditional, IRA, Roth IRA, or 401(k) qualified plan, etc), your state residency, and whether the assets are yours or have been inherited.

Using a Self-Directed IRA LLC will offer you the ability to make a wide range of traditional as well as non-traditional investments, such as real estate, in addition to offering you strong asset and creditor protection. In addition, by using an LLC wholly owned by your IRA, you will also gain another layer of limited liability protection. In this regard, using a Self-Directed IRA LLC to make investments offers you far greater asset and creditor protection versus making the investment personally. For this reason, growing and investing your retirement funds through a Self-Directed IRA LLC is a great tool to protect your retirement assets from creditors, inside or outside of bankruptcy.

Federal Protection for IRAs for Bankruptcy

Like 401(k) qualified plans, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA” or the “Act”) effective for bankruptcies filed after October 17, 2005, gave protection to a debtor’s IRA funds in bankruptcy by way of exempting them from the bankruptcy estate. The general exemption found in sec­tion 522 of the Bankruptcy Code, 11 U.S.C. §522, pro­vides an unlimited exemption for IRAs under section 408 and Roth IRAs under section 408A. IRAs created under an employer-sponsored section 408(k) sim­plified employee pension (a “SEP IRA”) or a sec­tion 408(p) simple retirement account (a “SIMPLE IRA”), as well as pension, profit sharing, or qualified section 401(k) Plan wealth transferred to a rollover IRA.

Are Self-Directed Roth IRAs Protected from Creditors?Traditional and Roth IRAs that are created and funded by the debtor are subject to an exemp­tion limitation of $1 million in the aggregate for all such IRAs (adjusted for inflation and subject to increase if the bankruptcy judge determines that the “interests of justice so require”). It is understood that a rollover from a SEP or SIMPLE IRA into a rollover IRA receives only $1 million of protection since such a section 408(d)(3) rollover is not one of the rollovers sanctioned under Bankruptcy Code section 522(n).

Protection of IRAs from Creditors Outside of Bankruptcy

In general, ERISA pension plans, such as 401(k) qualified plans, are afforded extensive anti-alienation credi­tor protection both inside and outside of bankrupt­cy. However, these extensive anti-alienation protections do not extend to an IRA, including a Self-Directed IRA, arrangement under Code section 408. Therefore, since an individually estab­lished and funded Traditional or Roth IRA is not an ERISA pension plan, IRAs are not preempted un­der ERISA. Thus, for anything short of bankruptcy, state law determines whether IRAs (including Roth IRAs) are shielded from creditors’ claims.

Note – on June 12, 2014, the Supreme Court unanimously upheld a Seventh Circuit decision that said inherited IRAs do not enjoy the protections of IRAs in bankruptcy proceedings.

IRA Asset Protection Planning

The different federal and state creditor protection afforded to 401(k) qualified plans and IRA, including Self-Directed IRAs, inside or outside the bankruptcy context presents a number of important asset protection planning opportunities.

If, for example, you have left an employer where you had a qualified plan, rolling over assets from a qualified plan, like a 401(k), into an IRA may have asset protection implications. For example, if you live in or are moving to a state where IRAs are not protected from creditors or have in excess of $1million dollars in plan assets and are contemplating bankruptcy, you would likely be better off leaving the assets in the company qualified plan.

Note – If you plan to leave at least some of your IRA to your family, other than your spouse, the assets may not be protected from your beneficiaries’ creditors, depending on where the beneficiaries live. IRA assets left to a spouse would likely receive creditor protection if the IRA is re-titled in the name of the spouse. However, you will likely be able to protect your IRA assets that you plan on leaving to your family, other than your spouse, by leaving an IRA to a trust. To do that, you must name the trust on the IRA custodian Designation of Beneficiary Form on file.

The IRA Asset & Creditor Protection Solution

By having and maintaining an IRA, you will have $1 million of asset protection from creditors in a bankruptcy setting. However, the determination of whether your IRA will be protected from creditors outside of bankruptcy will largely depend on state law. As illustrated above, most states will afford IRAs full protection from creditors outside of the bankruptcy context.

To learn more about using a “Checkbook Control” Self-Directed IRA LLC to make real estate and other investments without tax, please contact one of our Self-Directed IRA Experts at 800-472-0646 for more information.

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Aug 22

The Advantages of the Rollover Business Start-up (ROBS) 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?

In 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 (Rollover Business Startup) strategy, please contact a retirement tax expert at 800-472-0646.

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Aug 18

New Podcast – Strategy For Minimizing UBTI Tax On A Self-Directed IRA Real Estate Investment

IRA Financial Group’s Adam Bergman discusses dealing with UBTI on a Self-Directed IRA Real Estate Investment.

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Aug 16

Adam Bergman, IRA Financial Trust President, To Release Second Book on Self-Directed IRA in September 2016.

Self-Directed IRA in a Nutshell book will help introduce the self-directed IRA structure to the American public in an easy to understand format

Adam Bergman is a senior partner with the IRA Financial Group, LLC, the markets leading provider of Self-Directed IRA LLC and Solo 401(k) plans. Mr. Bergman will be releasing his sixth book on the topic of self-directed retirement plans and his second book on the self-directed IRA structure. The new book titled, Self-Directed IRA in a Nutshell will be available on Amazon in September 2016.

Mr. Bergman is a recognized expert on IRAs and 401(k) Plans and is the founder of the BergmanIRAReport.com and the Bergman401KReport.com. Mr. Bergman is the author of five previous books on the taxation of retirement accounts: Going Solo, The Checkbook IRA, Turning Retirement Funds into Start-Up Dreams, In God We Trust—In Roth We Prosper, and Solo 401(k) Plan in a Nutshell, which are all available on Amazon.com and Barnes & Nobles. Mr. Bergman is a frequent contributor to Forbes. Mr. Bergman has advised over 12,000 clients on the self-directed IRA LLC and Solo 401(k) Plan solutions.

Adam Bergman, IRA Financial Trust President, To Release Second Book on Self-Directed IRA in September 2016.According to Mr. Bergman, “I’ve written this book for people who want to learn more about the basics of what a self-directed IRA is and how it works without having to read a five hundred-page book. In 2015, I published an in depth and detailed 466 page book on the self-directed IRA structure titled, The Checkbook IRA, Why You Want It, Why You Need It, A Private Conversation With a Top Retirement Tax Attorney, that I am very proud of and which has hopefully helped many retirement investors learn more about the Self-Directed IRA option. However, in addition to have received some really great feedback from many people and clients who bought the book, I did get some comments requesting that I write another book on the self-directed IRA structure that was a bit more introductory and less comprehensive. So I have decided to heed their advice and hope this book helps introduce many of the important concepts involved in establishing and using a self-directed IRA to make traditional as well as alternative asset investments, such as real estate with their retirement funds.”

Mr. Bergman has been quoted in a number of major publications on the area of self-directed retirement plans. Mr. Bergman has been interviewed on CBS News and has been quoted in Businessweek, CNN Money, Forbes, Dallas Morning News, Daily Business Review, Law.com, San Francisco Chronicle, U.S. Tax News, the Miami Herald, Bloomberg, Arizona Republic, San Antonio Express, Findlaw, Smart Money, USA Today, Houston Chronicle, Morningstar, and American Lawyer on the area of retirement tax planning.

Prior to joining the IRA Financial Group, LLC, Mr. Bergman worked as a tax and ERISA attorney at White & Case LLP, Dewey LeBoeuf LLP, and Thelen LLP, three of the most prominent corporate law firms in the world. Throughout his career, Mr. Bergman has advised thousands of clients on a wide range of tax and ERISA matters involving limited liability companies and retirement plans. Mr. Bergman received his B.A. (with distinction) from McGill University and his law degree (cum laude) from Syracuse University College of Law. Mr. Bergman also received his Masters of Taxation (LL.M.) from New York University School of Law.

Mr. Bergman is recognized as a leading retirement tax-planning expert and has lectured attorneys on the legal and tax aspects of Self-Directed IRA LLC and Solo 401(k) Plans. Mr. Bergman has also been retained by several leading IRA custodians, including Entrust, to offer expertise on the Self-Directed IRA structure. Mr. Bergman is a member of the Tax Division of the American Bar Association and New York State Bar Association.

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

IRA Financial Group is the market’s leading provider of self-directed IRA 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.

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Aug 15

The SDIRA Operating Agreement

The LLC Operating Agreement is the core document that is referred to when issues concerning the LLC need to be resolved. The LLC Operating Agreement is the most important document for your Self Directed IRA. It is extremely important that you create an Operating Agreement for your Self Directed IRA LLC.

The SDIRA Operating AgreementThe standard LLC Operating Agreement will not meet the requirements for your Self-Directed IRA LLC. In general, a self directed IRA LLC Operating Agreement should include special tax provisions relating to “Investment Retirement Accounts” and “Prohibited Transactions” pursuant to Internal Revenue Code Sections 408 and 4975. In addition, since the LLC will be managed by a manager and not the member, the Operating Agreement would need to include special management provisions.

It is extremely important to have a properly prepared Operating Agreement to fit the needs of your LLC and meet the requirements of the Internal Revenue Service for a Self Directed IRA LLC. In fact, a copy of the LLC Operating Agreement will be required by the Custodian and also by the bank where you will have your LLC’s checking account.

IRA Financial Group will generate a special purpose self-directed IRA LLC Operating Agreement that has been approved by all IRA passive custodians. The special purpose self-directed IRA LLC operating agreement has been drafted by tax professionals who worked at some of the largest law firms in the country such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP. With our work experience at some of the largest law firms in the country, our tax knowledge in this area is unmatched.

Our low one time service fee includes not only the special purpose self-directed IRA LLC operating agreement, but also includes the setting up of the entire Self Directed IRA LLC structure for you, including LLC formation, acquiring a Tax ID#, assisting with the completion of all transfer documents, and self-directed IRA tax advisory service from our in-house tax and ERISA professionals.

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

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Aug 08

Grand Rapids, MI Among Top Cities for Real Estate IRA Investments

Do you live in or around Grand Rapids, Michigan? Are you looking to invest in real estate? Did you know you can use your retirement funds to invest in almost anything, including real estate, tax free? If you currently have a retirement plan at a traditional financial institution, you may not know this. That’s because they want to push the investments they’re familiar with, such as stocks, bonds and mutual funds. With an IRA Financial Group Self-Directed IRA LLC, you can invest in almost anything without the consent of your custodian. Further, with checkbook control, you can make an investment by simply writing a check. Now is the time to invest in the Grand Rapids area. In a recent client survey, Grand Rapids ranked in the Top 10 for real estate investments. Continue reading to see how to use your retirement funds to invest.

Advantages of Using a Self-Directed IRA LLC to Purchase Real Estate

Income or gains generated by an IRA generate tax-deferred/tax-free profits. Using a Self-Directed IRA LLC to purchase real estate allows the IRA to earn tax-free income/gains and pay taxes at a future date (in the case of a Roth IRA the income/gains are always tax-free), rather than in the year the investment produces income.

With a Self-Directed IRA LLC, you can invest tax-free and not have to pay taxes right away – or in the case of a Roth IRA – ever! All the income or gains from your real estate deals flow through to your IRA tax-free!

Why Buy Real Estate Using a Self-Directed IRA LLC

  • Gains are tax free
  • Positive cash flow is tax free
  • No time limit for holding property
  • IRA can borrow money – Leverage your investment with non-recourse financing
  • Potential to earn a larger rate of return on invested capital

Tax Advantages of Buying Real estate with a Self-Directed IRA LLC

Grand Rapids, MI Among Top Cities for Real Estate IRA InvestmentsWhen purchasing real estate with a Self-Directed IRA LLC, in general, all income and gains generated by your pre-tax retirement account investment would generally flow back into the retirement account tax-free. Instead of paying tax on the returns of a real estate investment, tax is paid only at a later date, leaving the real estate investment to grow unhindered. Generally, self-directed IRA real estate investments are usually made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.

For example, if Joe established a Self-Directed IRA LLC with $100,000 to purchase real estate and make other investments. Assume Joe kept his Self-Directed IRA LLC open for 20 years. Further assume that Joe was able to generate an average annual pre-tax rate of return of 8% and the average tax rate was 25%. By using a tax-deferred Self-Directed IRA LLC strategy, after 20 years Joe’s $100,000 investment would be worth $466,098 – a whopping $349,572 after taxes on the earnings. Whereas, if Joe made the investments with taxable funds (non-retirement funds) Joe would have only accumulated $320,714 after 20 years.

Investing in Real Estate with a Self-Directed IRA LLC is Quick & Easy!

Purchasing real estate with a Self-Directed IRA LLC is essentially the same as purchasing real estate personally.

  • Set-up a Self-Directed IRA LLC with the IRA Financial Group
  • Identify the investment property
  • Purchase the investment property with the Self-Directed IRA LLC – no need to seek the consent of the custodian with a Self-Directed IRA LLC with “Checkbook Control
  • Title to the investment property and all transaction documents should be in the name of the Self-Directed IRA LLC. Documents pertaining to the property investment must be signed by the LLC manager
  • All expenses paid from the investment property go through the Self-Directed IRA LLC. Likewise, all rental income checks must be deposited directly in to the Self-Directed IRA LLC bank account. No IRA related investment checks should be deposited into your personal accounts.
  • All income or gains from the investment flow through to the IRA tax-free!

Structuring the Purchase of Real Estate with a Self-Directed IRA LLC

When using a Self-Directed IRA LLC to make a real estate investment there are a number of ways you can structure the transaction:

1. Use your Self-Directed IRA LLC funds to make 100% of the investment

If you have enough funds in your Self-Directed IRA LLC to cover the entire real estate purchase, including closing costs, taxes, fees, insurance, you may make the purchase outright using your Self-Directed IRA LLC. All ongoing expenses relating to the real estate investment must be paid out of your Self-Directed IRA LLC bank account. In addition, all income or gains relating to your real estate investment must be returned to your Self-Directed IRA LLC bank account.

2. Partner with Family, Friends, Colleagues

If you don’t have sufficient funds in your Self-Directed IRA LLC to make a real estate purchase outright, your Self-Directed IRA LLC can purchase an interest in the property along with a family member (non-disqualified person – any family member other than a parent, child, spouse, daughter-in-law, son-in–law), friend, or colleague. The investment would not be made into an entity owned by the IRA owner, but instead would be invested directly into the property.

For example, your Self-Directed IRA LLC could partner with a family member (non disqualified person – any family member other than a parent, child, spouse, daughter-in-law, son-in–law), friend, or colleague to purchase a piece of property for $150,000. Your Self-Directed IRA LLC could purchase an interest in the property (i.e. 50% for $75,000) and your family member, friend, or colleague could purchase the remaining interest (i.e. 50% for $75,000).

All income or gain from the property would be allocated to the parties in relation to their percentage of ownership in the property. Likewise, all property expenses must be paid in relation to the parties’ percentage of ownership in the property. Based on the above example, for a $2,000 property tax bill, the Self-Directed IRA LLC would be responsible for 50% of the bill ($1000) and the family member, friend, or colleague would be responsible for the remaining $1000 (50%).

Isn’t Partnering with a family member in a Real Estate Transaction a Prohibited Transaction?

Likely not if the transaction is structured correctly. Investing in an investment entity with a family member and investing in an investment property directly are two different transaction structures that impact whether the transaction will be prohibited under Code Section 4975. The different tax treatment is based on who currently owns the investment. Using a Self-Directed IRA LLC to invest in an entity that is owned by a family member who is a disqualified person will likely be treated as a prohibited transaction. However, partnering with a family member that is a non-disqualified person directly into an investment property would likely not be a prohibited transaction. Note: If you, a family member, or other disqualified person already owns a property, then investing in that property with your Self-Directed IRA LLC would be prohibited.

3. Borrow Money for your Self-Directed IRA LLC

You may obtain financing through a loan or mortgage to finance a real estate purchase using a Self-Directed IRA LLC. However, two important points must be considered when selecting this option:

  • Loan must be non-recourse – A “prohibited transaction” is a transaction that, directly or indirectly involves the loan of money or other extension of credit between a plan and a disqualified person. Normally, when an individual purchases real estate with a mortgage, the traditional loan provides for recourse against the borrower (i.e., personal liability for the mortgage). However, if the IRA purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse; otherwise there will be a prohibited transaction. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the IRA itself.
  • Tax is due on profits from leveraged real estate – Pursuant to Code Section 514, if your Self-Directed IRA LLC uses non-recourse debt financing (i.e., a loan) on a real estate investment, some portion of each item of gross income from the property are subject to Unrelated Business Income Tax (UBTI). “Debt-financed property” refers to borrowing money to purchase the real estate (i.e., a leveraged asset that is held to produce income). In such cases, only the income attributable to the financed portion of the property is taxed; gain on the profit from the sale of the leveraged assets is also UDFI (unless the debt is paid off more than 12 months before the property is sold). There are some important exceptions from UBTI: those exclusions relate to the central importance of investment in real estate – dividends, interest, annuities, royalties, most rentals from real estate, and gains/losses from the sale of real estate. However, rental income generated from real estate that is “debt financed” loses the exclusion, and that portion of the income becomes subject to UBTI. Thus, if the IRA borrows money to finance the purchase of real estate, the portion of the rental income attributable to that debt will be taxable as UBTI.

For example, if the average acquisition indebtedness is $50 and the average adjusted basis is $100, 50 percent of each item of gross income from the property is included in UBTI.

Why Work With the IRA Financial Group?

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. Over the years, we have helped thousands of clients establish IRS compliant Self-Directed IRA LLC solutions. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and real estate IRA knowledge in this area is unmatched.

For more information about using your Self-Directed IRA LLC to invest in real estate in Grand Rapids, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646.

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Aug 04

Finally Some Clarity On What You Can And Cannot Do In Your Self-Directed IRA

IRA Financial Group’s Adam Bergman recently authored an article for Forbes about a recent case involving Self-Directed IRAs:

Many Americans mistakenly believe that their individual retirement account must be invested in the stock market, or mutual funds. Few Investors realize that the Internal Revenue Service has always permitted real estate to be held by an IRA. The IRS states the following on its website,“IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”  That being said, using retirement funds to make alternative asset investments is still not common knowledge among retirement investors.  However, using a self-directed IRA or Solo 401(k) plan to buy real estate has become much more popular over the last several years, largely due to volatile equity markets rivaled by a hot real estate market. While the legality to use retirement funds to buy real estate is not in question, the type of services or tasks that can be performed by the IRA holder relating to that real estate investment has been a source of uncertainty up until only recently.

FILE – This April 6, 2011 file photo shows a “For Rent” sign in front of a home in Los Angeles.  (AP Photo/Reed Saxon, File)

The Internal Revenue Code does not describe what a retirement account can invest in, only what it cannot invest in. IRC Sections 408 & 4975 prohibits “disqualified persons” from engaging in certain type of transactions. A disqualified person is generally defined as the IRA holder and any of his or her lineal descendants and controlled entity.  However, when it comes to performing services by a “disqualified person” with respect to real estate owned by a retirement account, IRC Section 4975(c)(1)(C) is clear that a prohibited transaction occurs in the instance of the furnishing of goods, services, or facilities between a plan and a disqualified person   What is not so clear is what actually constitutes “services” when it comes to a “disqualified person” and his or her real estate investment.  That all changed based of a recent bankruptcy case called, IN RE: CHERWENKA, Cite as 113 AFTR 2d 2014-2333 (508 B.R. 228), (Bktcy Ct GA), 03/06/2014.  The Cherwenka cases involved a Georgia statutory bankruptcy estate exemption for IRAs, which covered a self-directed IRA held by Michael Cherwenka who was in business of “flipping” houses. Michael Cherwenka established a self-directed IRA to buy real estate. In Cherwenka, the court considered whether a debtor could exempt a self-directed IRA utilized to invest in distressed real properties and have the IRA realize profit from the later sale of these properties.  The court agreed that the Cherwenka was a “disqualified person” under IRC Section 4975.  It was argued that Cherwenka performed work on the properties by researching and identifying the subject properties, appointing and approving work on the properties, and overseeing payment from the IRA custodian for such work and those acts constitute prohibited transactions under IRC Section 4975(c)(1)(C) as direct and indirect services by a “disqualified person”.  The Court disagreed and held that such a position requires the Court to read out of the statute the word “transaction.” There is no evidence that Cherwenka engaged in any transaction. A transaction includes an exchange of goods or services and the evidentiary record does not include that Cherwenka received anything in exchange for his alleged services. In fact, Cherwenka testimony included that he received no money, discount, or other benefit for the identified activities he undertook with the IRA.

The Cherwenka case is really the first case that offers a detailed framework about the type of activities or tasks a self-directed IRA real estate investor can perform without triggering the IRC 4975 prohibited transaction rules. In the case, Cherwenka was not compensated for any real property research he performed, nor was he compensated for any recommendations, management or consulting services he provided relating to how the IRA properties were improved before resale. Cherwenka explained his role in buying and selling of these properties as being limited to identifying the asset for purchase and later selling the asset. Cherwenka engaged contractors to decide or oversee the scope of work with improved properties. Cherwenka testified that he “read and approved” the expense forms prior to the IRA custodian paying funds to reimburse the submitted expenses. Contractors were paid by the job, which accounted for labor costs, but no management fee or additional cost was included in the expenses submitted to the IRA custodian. Cherwenka stated he would inspect or confirm that work was completed through site visits or communication with his “team” before he would approve expenses to be paid by the IRA custodian.

Because most self-directed IRA real estate investors tend to perform the same sort of tasks that Cherwenka performed, such as locating the property, reviewing transaction documents, engaging contractors to perform property improvements, inspection of improvements, approval of expenses, and coordinating with IRA custodian regarding the real estate, the case offers a clear blueprint for the type of activities or tasks that a self-directed IRA or Solo 401(k) plan real estate investor can do without violating the IRC Section 4975 prohibited transaction rules.

Adam Bergman is a tax partner with the IRA Financial Group and founder of the Bergman Law Group, LLC. Contact him via email at adamb@irafinancialgroup.com or call him at 800-472-0646 Ext. 12.

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Aug 03

Self Directed IRA Contribution Rules

What is the Maximum I can contribute to a Self-Directed IRA?

The maximum contribution limit for a self-directed IRA for 2016 is $5,500 or $6,500 if you’re age 50 or older, or your taxable compensation for the year, if less. Contributions to a self-directed Roth IRA may be limited based on your filing status and income.

Contributions made to a self-directed IRA LLC must be made to the IRA administrator/custodian and may not be contributed directly to the LLC. Once the IRA contribution is made to the IRA administrator/custodian, the funds can then be transferred to the IRA LLC.

Is my IRA contribution deductible on my tax return?

If neither you nor your spouse is covered by an employer retirement plan, such as a 401(k), your deduction is allowed in full.

For contributions to a traditional IRA, the amount you can deduct may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. In the case of a Roth IRA, contributions aren’t deductible.

Can I make Traditional IRA contributions less than the maximum?

Yes. However, if contributions to your traditional IRA for a year are less than the limit, you cannot contribute more after the due date of your return for that year to make up the difference.

When is the due date for making Traditional IRA Contributions?

Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your tax return for that year, not including extensions. For most people, this means that contributions for 2016 must be made by April 15, 2017.

Note: Contributions cannot be made to your traditional IRA for the year in which you reach the age of 70 and 1/2 or for any later year.

May I file my tax return before making my contributions?

Yes. You can file your tax return claiming a traditional IRA contribution before the contribution is actually made.

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

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Aug 01

Making Your Kids a Millionaire with a Roth IRA

Here’s a great article from Forbes’ contributor, Vita Nelson about the beauty of compounding and Roth IRAs:

I have written often on the effects of compounding over the long term, emphasizing the simple but potent message that the sooner you start, the more the multiplying effect you will experience in your investments. That’s why it makes so much sense to help your children take advantage of the benefits of compounding within a Roth IRA.

Under current law, qualified Roth IRA distributions are not taxed, no matter how much income is reported on the taxpayer’s tax return. Anyone with earned income can have a Roth IRA, even a child.

You might consider hiring your children or grandchildren to do work around the house, or, if you run a business or a professional practice, you can hire them there. The younger the kids are, the better. You’ll not only cut your own taxes today, but you’ll set the kid on a path that could lead to a multi-million-dollar retirement fund decades down the road.

The premise is simple. Money you pay the youngsters reduces your business income and thereby your income taxes. The children will owe little or no tax, which you can pay for him or her, while fully funding their Roth IRAs.

Miracle of Compounding Creates Multi-Million Dollar Wealth

Suppose that you hire your child. If he earns at least $5,500 a year, that much could be invested in his Roth IRA. (You could pay a bit more in order to cover any payroll taxes.). If he works for your business for 10 years and your business makes no further payments to him after that, he would have contributed $55,000 to his Roth IRA.

How much that investment would be worth at the end of those 10 years depends on the rate of return during that period. To get an idea, we built models to calculate returns of 6%, 8%, and 10%.

Are these returns realistic? Morningstar’s Ibbotson subsidiary tracks investment returns going back to 1926. Through 2013, large-company stocks returned 10.1% a year. Shorter durations could be much lower or much higher. Our illustrations are assuming that we are going to be invested for the very long term.

Using our three models, we figured that the $55,000 total invested would be worth $74,669 at the end of 10 years at 6%, $82,863 at 8%, and $92,039 at 10%. Keep in mind that the full $55,000 was invested for only half the time, on average. (In the first year only $5,500 was invested and in the second, only $11,000, etc., so on average only $27,500 was invested for the full ten-year period.)

But the seemingly magical effect of compounding is only just beginning! Those first years are just to get the wheels rolling.

Let’s assume an 8% average annual return inside the Roth IRA, doubling every nine years (using the Rule of 72). The initial $55,000 ($5,500 invested every year for 10 years) would be worth about $3,831,415 after another 50 years, and if the average annual return were to be 10% per year, that figure would be $10,749,493. That’s the power of compounding.

Again, how reasonable are these calculations?  Even during the past 10 years, which included the “Great Recession,” the S&P 500 returned an annualized 7.98% and, over the past five years, an annualized 12.79%. As you can see, market returns vary from year to year, but over very extended periods, the broad averages seem to average out to be around 10% or better. If you can allow investments to compound over long periods of time at such average annual returns you will have amazing results!

Keep in mind that the multi-million dollar portfolio we calculated was achieved without any further investments after the first 10-year period. And if your child were able to continue to fund his or her Roth IRA account, the tax-free Roth IRA buildup is likely to be even more overwhelming.

Still, many assumptions underlie those accumulations. To begin with, what kind of work can a young child do to earn $5,500 or more? The IRS might be skeptical. The answer is: Lots of things. There’s no reason why you can’t hire your child to do work around your house and lawn or work around your office. If you run your own business, chances are that your business has a website and produces various promotional brochures. If a family theme fits in, you can use young children as models and pay them the going rate. Such pictures on your website or promotional brochures can help illustrate the benefits of your business to potential customers.

As your children grow older, the range of possible employment opportunities will expand, inside and out of the office. Besides the tasks that first come to mind (filing, cleaning, grounds keeping), your teenager (or pre-teen!) might help you establish a social media presence or do market research among peers.

When the child is off to college, you might buy a house near campus so your live-away collegian can avoid dorm fees while earning a management fee if you rent rooms to other students.

Tax Advantages for the Entire Family

As mentioned earlier, hiring your child or grandchild can have immediate tax advantages for your family. Say you have an effective 35% marginal tax rate and you pay your child $5,500 a year. You save $1,925 a year: 35% times $5,500.

There are other tax advantages for hiring your children. For instance, wages paid to a child under age 18 who works for his or her parent’s trade or business are not subject to Social Security and Medicare taxes, as long as the entity is a sole proprietorship or a partnership between the child’s parents. In addition, wages paid to a child under age 21 who works at a parent’s trade or business are not subject to federal unemployment tax.

Court cases have upheld deductions for wages paid to very young children, provided the parents could show they were paid fair compensation. And hiring your children can deliver more than tax savings for you and substantial long-term wealth for your child. At an early age, your youngsters can get an idea of what it means to work for money. They can learn values such as being on time, cooperating with other employees, and taking pride in accomplishing the tasks that they’ve been asked to perform.

Such beyond-school education might be largely lost on your three-year-old, but it won’t be long before your children are getting more from the entire exercise than just a Roth IRA.

Indeed, at some point you can begin to discuss investing with your child. It will be his or her retirement fund, so your child should have some idea of how the money is being invested and why. Helping your children to become intelligent investors can be at least as worthwhile as the money you’ll ultimately spend to send them to college!

That brings me to another important consideration: Unlike assets held directly in his or her name, assets held in a retirement account will not affect your child’s ability to obtain financial assistance to pay for college (even though some withdrawals from a Roth IRA can be made without penalty to pay for secondary education).

The same process can be established using no-fee DRIPs. The effect of compounding will be the same, but the dividends thrown off by the companies will be taxable annually at the child’s rate and eventually the gains will be taxed at favorable rates.

If you have any other questions about Roth IRA’s, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646.
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Jul 29

The Self-Directed SEP IRA

A Self-Directed IRA is a type of IRA structure that allows the IRA holder (you) to have more control over your retirement funds. Unknown to some, not all Self-Directed IRAs are the same. It is well known that the IRS allows you to use your IRA to make traditional investments, such as stocks and mutual funds. It is not as well known that the IRS also allows you to use IRA funds to make investments such as real estate, precious metals, tax liens, private business and much more tax-free and penalty free!

The SEP IRA in a Nutshell

A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees’ retirement, as well as their own retirement savings. A SEP is essentially an employer-sponsored profit-sharing plan. Contributions are made to a retirement account or annuity set up for each plan participant.

A SEP IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRAs. Employees must be included in the SEP plan if they have

  • attained age twenty-one,
  • received at least $550 in compensation from your business for the year, and
  • worked for your business for at least three of the past five years.

The three-of-five eligibility rule means you must include any employee in your plan who has worked for you in any three of the past five years as long as the employee has satisfied the other plan eligibility requirements. This is the most restrictive eligibility requirement allowable. You can choose to use less restrictive participation rules in your plan, such as allowing employees to participate immediately after they start work or after a shorter period of employment. If you use the three-of-five rule, you must count any work, no matter how little, in each of the prior five years. Use plan years (often the calendar year), not years based on the date the employee started working for you.

The contributions you make to each employee’s SEP IRA each year cannot exceed the lesser of

  • 25 percent of compensation; or
  • $53,000 for 2015.

There are no catch-up contributions for a SEP IRA as there are for a 401(k) plan. These limits apply to contributions you make for your employees to all defined contribution plans, which includes SEPs. Up to $265,000 in 2015 of an employee’s compensation may be considered. Also, contributions must be made in cash, and you cannot contribute property.

Types of Self-Directed SEP IRA Accounts

There are essentially three types of Self-Directed SEP IRAs:

1. Financial Institution Offered Self-Directed SEP IRA

The most popular Self-Directed SEP IRA account offered is the financial institution Self-Directed SEP IRA. The reason that this type of Self-Directed SEP IRA is so popular is because it is generally offered by the major financial institutions, such as Bank of America, Wells Fargo, Fidelity, Vanguard, etc. With this type of Self-Directed SEP IRA, the SEP IRA holder is generally able to only make SEP IRA investments offered by the financial institution which typically only includes financial related investments, such as stocks, mutual funds, and ETFs. Even though these types of IRA accounts are called “Self-Directed IRA” accounts that are very limited in their investment scope and do not allow IRA investors to make any non-traditional investments, such as real estate.

Why do the financial institutions limit the investment options available?

A financial institution that offers IRA accounts is not required to offer its IRA investors with the opportunity to make all allowable types of IRA investments. For example, even though real estate is an IRS approved investment, an IRA custodian is not required or obligated to offer that investment option. Accordingly, most financial institutions offering SEP IRA accounts will restrict the SEP IRA investment option to financial products offered by the financial institution. The reason behind this is quite clear – a financial institution earns fees from the sale of financial products, not by allowing its clients to pull money out of the IRA account to buy real estate from a third-party.

2. Custodian Controlled Self-Directed SEP IRA

IRA Financial Trust Company offers Self-Directed SEP IRA investors full IRA custodial services for traditional and alternative asset investments, such as real estate. All IRA funds will be held with Northern Trust, an FDIC insured global banking leader for over 125 years, before the client directs the funds for investment.

Until a 1996 court case, the custodian controlled Self-Directed SEP IRA was the only way one was able to use IRA funds to make a non-traditional investment, such as real estate. In essence, with a custodian controlled Self-Directed SEP IRA, every step a SEP IRA holder wanted to make had to be carried out through a custodian, such as IRA Financial Trust Company. In other words, the SEP IRA holder directs the IRA custodian, IRA Financial Trust, to make the investment directly. All transaction related activity, such as paying expenses or depositing checks, must be paid by the IRA custodian.

3. “Checkbook Control” Self-Directed SEP IRA LLC

IRA Financial Trust is proud to offer Checkbook IRA custodial services along with its full service IRA administration services, all for one low price without any transaction or asset valuation fees. IRA Trust Company is one of the few full-service IRA custodians who specialize in establishing Checkbook Control IRA LLC accounts.

IRA Financial Trust Company is a regulated, non-banking financial institution that is made up of retirement tax specialists committed to helping you make Self-Directed retirement investments quickly while minimizing annual fees. IRA Financial Trust Company was founded by tax attorneys who worked at some of the largest law form in the world, including White & Case LLP and Dewey and LeBoeuf LLP and have helped over 12000 clients self-direct their retirement funds through their ownership in the IRA Financial Group LLC. Our experience working with Checkbook Control IRA LLC structures is unmatched in the industry.

In the 1996 case of Swanson vs. Commissioner, 106 T.C. 76 (1996), the tax court gave its blessing to a new type of Self-Directed IRA structure — the Self-Directed SEP IRA LLC also known as the Checkbook SEP IRA— that is much simpler than investing through a regular custodial controlled Self-Directed IRA account.

The Self-Directed SEP IRAWith a “Checkbook Control” Self-Directed SEP IRA, the SEP IRA holder (you) will have total control over your SEP IRA funds. You will no longer have to get each investment approved by the IRA custodian of your account like in a custodian controlled Self-Directed SEP IRA. Instead, with IRA Financial Trust Company’s Checkbook Control SEP IRA account, all decisions are truly yours. When you find an investment that you want to make with your SEP IRA funds, simply write a check or wire the funds straight from your Self-Directed SEP IRA LLC bank account to make the investment.

Under the Checkbook SEP IRA format, the Checkbook Control SEP IRA is set up as a Self-Directed account with IRA Financial Trust that’s capitalized by funds rolled over from your current retirement account. The funds are deposited with Northern Trust who serves as IRA Financial Trust Company’s banking partner. Then, a Limited Liability Company (“LLC”) is created in which your new SEP IRA purchases all the membership units/interests. Now, your money is held in an LLC and you are ready to invest at your discretion. A “Checkbook Control” Self-Directed SEP IRA allows you to eliminate the delays, IRA custodian transaction fees, and IRA account annual valuation fees, enabling you to act quickly when the right investment opportunity presents itself.

With a Self-Directed SEP IRA, when you find an investment that you want to make with your SEP IRA funds, simply write a check or wire the funds straight from your Self-Directed SEP IRA LLC bank account to make the investment. The Self-Directed SEP IRA allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.

IRA Financial Trust offers one low, flat fee IRA Custodian fee without any transaction fees and annual account valuation fees. We believe that Self-Directed SEP IRA investing should be affordable and simple. IRA Financial Trust is committed to helping all our clients build their retirement wealth through Self-Directed IRA investments without the high costs and complexities.

To learn more about what type of Self-Directed SEP IRA account will best suit your retirement and investment needs, please contact a Self-Directed retirement expert at 1-800-472-1043.