Mar 30

Calculating Tax on an IRA Investment

When a tax-exempt organization like an IRA or charity borrows money for a transaction on a nonrecourse basis, the IRA or charity must complete IRS Form 990-T and Schedule E and report the income, as the income is likely subject to tax. In general, a tax-exempt organization like a charity or IRA is permitted to borrow funds on a nonrecourse basis (a loan that is not personally guaranteed by the borrower), however, a prorate percentage of the income or gains associated with the nonrecourse loan will be considered “unrelated debt financed income” which will likely trigger the “unrelated business taxable income” tax. Note: A recourse loan, a loan that the IRA holder will be required to personally guarantee is not a permitted transaction and is treated as a prohibited transaction pursuant to Internal Revenue Code Section 4975 as the loan would require the IRA holder to personally guarantee the obligation of the IRA.

IRS Form 990-T, Schedule E applies to all organizations except sections 501(c)(7), (9), and (17) organizations. Hence, the Schedule E would apply to IRAs.

Calculating Tax on an IRA InvestmentWhen debt-financed property is held for exempt purposes and other purposes, the IRA must allocate the basis, debt, income, and deductions among the purposes for which the property is held. It is important to remember to not include in Schedule E amounts allocated to exempt purposes. With respect to an IRA, income considered exempt is all passive categories income, such as interest, capital gains, rental income, royalties, dividends, and interest. Thus, the majority of transactions involving IRAs are not subject to tax and Schedule E reporting.

When completing the IRS Form 990-T, Schedule E, below please find instructions:

Column 1. Any property held to produce income is debt-financed property if at any time during the tax year there was acquisition indebtedness outstanding for the property. In other words, if at anytime during the year there was an outstanding loan on the property, the property would be considered debt-financed. When any property held for the production of income by an organization is disposed of at a gain during the tax year, and there was acquisition indebtedness outstanding for that property at any time during the 12-month period before the date of disposition, the property is debt-financed property. Securities purchased on margin are considered debt-financed property if the liability incurred in purchasing them remains outstanding.

Acquisition indebtedness is the outstanding amount of principal debt incurred by the organization to acquire or improve the property:

1. Before the property was acquired or improved, if the debt was incurred because of the acquisition or improvement of the property; or

2. After the property was acquired or improved, if the debt was incurred because of the acquisition or improvement, and the organization could reasonably foresee the need to incur the debt at the time the property was acquired or improved.

With certain exceptions, acquisition indebtedness does not include debt incurred by:

1. A qualified (section 401) trust in acquiring or improving real property. See section 514(c)(9).
2. A tax-exempt school (section 170(b)(1)(A)(ii)) and its affiliated support organizations (section 509(a)(3)) for indebtedness incurred after July 18, 1984

3. An organization described in section 501(c)(25) in tax years beginning after December 31, 1986.

4. An obligation, to the extent that it is insured by the Federal Housing Administration, to finance the purchase, rehabilitation, or construction of housing for low and moderate income persons, or indebtedness incurred by a small business investment company licensed after October 22, 2004, under the Small Business Investment Act of 1958 if such indebtedness is evidenced by a debenture issued by such company under section 303(a) of that Act, and held or guaranteed by the Small Business Administration (see section 514(c)(6)(B) for limitations).

5. A retirement income account described in section 403(b)(9) in acquiring or improving real property in tax years beginning on or after August 17, 2006.

Column 2. Income is not unrelated debt-financed income if it is otherwise included in unrelated business taxable income. For example, the IRA should not include income that is attributable to a business investment held through an LLC so that the income is not taxed twice..

Column 4. Average acquisition indebtedness for an IRA investment is for any tax year is the average amount of the outstanding principal debt during the part of the tax year the property is held by the IRA. To figure the average amount of acquisition debt, determine the amount of the outstanding principal debt on the first day of each calendar month during that part of the tax year that the IRA holds the property. You would then have to add these amounts together, and divide the result by the total number of months during the tax year that the IRA held the debt-financed property.

Column 5. The average adjusted basis for debt-financed property is the average of the adjusted basis of the property on the first and last days during the tax year that the IRA held the property. One would then need to determine the adjusted basis of property, using the rules under Internal Revenue Code Section 1011 (section contains rules on how to calculate the basis of a property taking into account income, losses, expenses, etc). The property’s basis would then need to be adjusted for the depreciation for all earlier tax years, whether or not the organization was exempt from tax for any of these years. Similarly, for tax years during which the IRA is subject to tax on unrelated business taxable income, the property’s basis must be adjusted by the entire amount of allowable depreciation, even though only a part of the deduction for depreciation is taken into account in figuring unrelated business taxable income.

If, however, no adjustments to the basis of property under section 1011 apply, the basis of the property would be the cost.

Column 7. The amount of income from debt-financed property included in unrelated trade or business income is figured by multiplying the property’s gross income by the percentage obtained from dividing the property’s average acquisition indebtedness for the tax year by the property’s average adjusted basis during the period it is held in the tax year. This percentage cannot be more than 100%.

Column 8. For each debt-financed property, deduct the same percentage (as determined above) of the total deductions that are directly connected to the income of the debt-financed property. However, if the debt-financed property is depreciable property, figure the depreciation deduction by the straight-line method only and enter the amount in column 3(a).

For each debt-financed property, attach statements showing separately a computation of the depreciation deduction (if any) reported in column 3(a) and a breakdown of the expenses included in column 3(b).

When a capital loss for the tax year may be carried back or carried over to another tax year, the amount to carry over or back is figured by using the percentage determined above. However, in the year to which the amounts are carried, do not apply the debt-basis percentage to determine the deduction for that year.

Example 1. An IRA, via a self-directed IRA LLC, owns a four-story building, and is subject to a nonrecourse loan. The building generates $10,000 of rental income. Expenses are $1,000 for depreciation and $5,000 for other expenses that relate to the entire building. The average acquisition indebtedness is $6,000, and the average adjusted basis is $10,000. Both apply to the entire building

To complete Schedule E for this example, describe the property in column 1. Enter $10,000 in column 2 (since the entire amount is for debt-financed property), $1000 and $5,000 in columns 3(a) and 3(b), respectively, $6,000 and $10,000 in columns 4 and 5, respectively, 60% in column 6, $6,000 in column 7, and $1,800 in column 8 (60% of $1,000 and $5000 of depreciation/expenses). Thus, the IRA holder would be subject to tax on $6,000 of unrelated business taxable income, $10,000 of income multiplied by 60% – amount of average acquisition indebtedness of debt financed property ($10,000) over average adjusted basis of average debt-financed income ($6,000).

Example 2. Assume the same facts as in Example 1, except the building is rented out as an unrelated trade or business for $20,000. To complete Schedule E for this example, enter $20,000 in column 2, $1,000 and $5,000 in columns 3(a) and 3(b), respectively (since the entire amount is for debt-financed property), $6,000 and $10,000 in columns 4 and 5 (since the entire amount is for debt-financed property), 60% in column 6, $12,000 in column 7, and $3,600 in column 8. Thus, the he IRA holder would be subject to tax on $12,000 of unrelated business taxable income, $20,000 of income multiplied by 60% – amount of average acquisition indebtedness of debt financed property ($10,000) over average adjusted basis of average debt-financed income ($6,000).

What is the Unrelated Business Taxable Income Tax Rate?

Internal Revenue Code Section 511 taxes “unrelated business taxable income” (UBTI) at the rates applicable to corporations or trusts, depending on the organization’s legal characteristics. Generally, UBTI is gross income from an organization’s unrelated trades or businesses, less deductions for business expenses, losses, depreciation, and similar items directly connected therewith.

A self-directed IRA subject to UBTI is taxed at the trust tax rate because an IRA is considered a trust. For 2015, a Solo 401(k) Plan subject to UBTI is taxed at the following rates:

  • $0 – $2,500 = 15% of taxable income
  • $2,501 – $5,900 = $375 + 25% of the amount over $2500
  • $5,901 – $9,050 = $1,225 + 28% of the amount over $5,900
  • $9,051 – $12,300 = $2,107 + 33% of the amount over $9,050
  • $12,300 + = $3,179.50 + 39.6% of the amount over $12,300

To learn more about using nonrecourse leverage with a self-directed IRA, please contact an IRA tax expert at 800-472-0646.

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Mar 27

Penalties for Engaging in an IRA Prohibited Transaction with a Self-Directed IRA

In general, the penalty under Internal Revenue Code Section 4975 generally starts out at 15% for most type of retirement plans; however, the penalty is harsher for self-directed IRAs.

IRA Holder or IRA Beneficiary Engages in a Prohibited Transaction Under IRC 4975

When a self-directed IRA or Roth IRA holder (owner) or beneficiary is involved in a transaction that is deemed prohibited pursuant to Internal Revenue Code Section 4975, pursuant to Internal Revenue Code Section 408(e), the IRA loses its tax-exempt status and the IRA holder (or beneficiary) is treated for tax purposes to have received a distribution on the first day of the tax year in which the prohibited transaction occurred. The distribution amount that the IRA holder is deemed to have received is equal to the fair market value of the IRA as of the first day of such tax year, and is required to be included in the IRA holder’s income for the year. In addition, unless the IRA holder qualified for an exception to the early distribution penalty (i.e. over the age of 591/2, disabled, etc.), the 10% early distribution penalty would also apply.

Therefore, if the IRA holder or IRA beneficiary engages in a transaction that violates the prohibited transaction rules set forth under Internal Revenue Code Section 4975, the individual’s IRA would lose its tax exempt status and the entire fair market value of the IRA would be treated as taxable distribution, subject to ordinary income tax. In addition, the IRA holder or beneficiary would be subject to a 15% penalty as well as a 10% early distribution penalty if the IRA holder or beneficiary is under the age of 591.2.

Non-IRA Holder or Non-IRA Beneficiary Engages in a Prohibited Transaction Under IRC 4975

In the case where someone other than the IRA holder or IRA beneficiary (for example, another disqualified person) engages in a prohibited transaction, that disqualified person may be liable for certain penalties. In general, a 15% penalty is imposed on the amount of the prohibited transaction and a 100) additional penalty could be imposed if the transaction is not corrected. Note – fiduciaries to an IRA or plan are not subject to the 15% or 100% additional penalty.

Penalties for Engaging in a Prohibited Transaction Under Internal Revenue Code Section 408

The penalty for engaging in an Internal Revenue Code Section 408 prohibited transaction differs from the Internal Revenue Code Section 4975 penalty.  If an IRA assets are invested in collectibles or life insurance, only the assets used to purchase the investment are considered distributed, not the entire IRA.

In addition, pledging an IRA as a security for a loan is a prohibited transaction under Internal Revenue Code Section 408(e)(4). Under this section, if an IRA holder pledges a portion of his or her as security for a loan, only the amount pledged is deemed distributed – not the entire IRA.

The prohibited transaction rules are extremely broad and the penalties extremely harsh (immediate disqualification of entire IRA plus penalty). Thus, the IRA owner self directing his or her investments must be especially cautious in engaging in transactions that could compromise his or her best judgment or result in a direct or indirect personal benefit. Accordingly, it is crucial that any retirement investor looking to make an investment involving retirement funds work directly with a retirement tax professional or qualified tax advisor to make sure that the proposed transaction would not violate any of the IRS prohibited transaction rules.

To learn more about the IRS prohibited transaction rules for self-directed IRA LLC investments, please contact a tax advisor at 800-472-0646.

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Mar 26

How to Use a Self Directed IRA to Invest in a Hedge Fund

The Internal Revenue Code does not describe what a Self Directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain type of transactions. The purpose of these rules is to encourage the use of IRAs for accumulation of retirement savings and to prohibit those in control of IRAs from taking advantage of the tax benefits for their personal account.

When it comes to using retirement funds to invest in a hedge fund, it is important to be mindful of the IRS prohibited transaction rules under Internal Revenue Code Section 4975. In general, the IRS has restricted certain transactions between the IRA and a “disqualified person”. The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder (i.e. parents, children, spouse, daughter-in-law, or son-in-law), and entities in which the IRA holder or a disqualified person holds a controlling or management interest. Furthermore, Internal Revenue Code Section 4975(c)(1)(D) and (E) outlines rules that relate to self-dealing or conflict of interest transactions that involves an investment that could directly or indirectly personally benefit a disqualified person. The self-dealing or conflict of interest prohibited transaction rules have the broadest application especially when it comes to hedge fund type investments.

HHow to Use a Self Directed IRA to Invest in a Hedge FundA hedge fund is an alternative investment vehicle available only to sophisticated investors, such as institutions and individuals with significant assets. In general, retirement funds are permitted to invest in hedge funds. The prohibited transactions rules tend to become more of an issue when the person using the IRA funds or any disqualified person related to the IRA owner has a personal interest or relationship with the hedge fund investment. In other words, an IRA can generally make an investment into a hedge fund in which neither the IRA holder nor any disqualified person has any personal ownership or relationship with. The issues begin to arise from an IRS prohibited transaction standpoint when the IRA owner wishes to use retirement funds to invest in a hedge fund where her or she or a disqualified person is either an owner, employee or, in some cases, has a professional relationship with the fund in question.

In general, if structured correctly, there may be a way for one to use their retirement funds to invest in a hedge fund that one is personally involved in.  The key is to make sure that the IRA investment into the hedge fund will not directly or indirectly personally benefit the IRA owners since that type of investment would likely trigger a prohibited transaction.

Generally, hedge funds are structured as limited partnerships or LLCs. In the case of a limited partnership, a general partner (“GP”) is created that tends to perform all the hedge fund management tasks. The GP generally owns a small percentage of the partnership. The investors are limited partners (“LP”) of the partnership. A typical fee structure for a hedge fund is the 2 and 20 model, which means the hedge fund manager will take a 2% management fee of all assets under management and then take 20% of the profits generated by the fund after the LP investors have received their money they invested back and, in some cases, a preferred return on the money invested is also returned to the investor.

A popular question is whether an individual who is a principal or in a management position with the hedge fund can use their retirement funds to invest in the fund. To begin with, the use of the retirement funds cannot be invested into the GP entity since that is the entity where the services are generally being performed on behalf of the hedge fund and where the management fee and carried interest are typically being directed as investing IRA funds into a company where the IRA holder has a personal ownership or is performing services as an employee would likely violate the IRS prohibited transaction rules. Therefore, the question then becomes can the IRA holder who has some personal ownership in the hedge fund use retirement funds to invest as an LP of the fund? The answer generally depends on the facts and circumstances involved in the transaction. However, in general, there are ways that one can properly structure an investment of retirement funds into a hedge fund in which the IRA holder has some personal interest. The main question that needs to be asked and answered positively is if the IRS looked at the transaction, could they argue that the IRA owner has in any way directly or indirectly personally benefited by the IRA investment. If the IRA owner cannot prove that he or she did not receive any direct or indirect personal benefit from the IRA investment into the hedge fund, then the IRS would likely argue that the investment triggered a prohibited transaction. Since the onus is always on the taxpayer to disprove a claim made by the IRS, it is crucial that the IRA owner that is seeking to make a retirement investment into a hedge fund in which he or she has some personal connection to be extremely confident that he or she can prove, if requested, that no personal benefit was derived from the retirement account investment, either directly or indirectly. Accordingly, when it comes to using retirement funds to make investments into a hedge fund in which the IRA owner has a personal relationship with, issues such as the management fee and carried interests are items that need to be taken into account when structuring the self-directed IRA hedge fund investment.

The Tax Court in Rollins v. Commissioner, a 2008 Tax Court case, offers some insight as to how the IRS looks at transactions that involve investments into entity’s where the IRA owner has a small ownership interest in. Even though the Rollins case not involve using retirement funds to invest in a hedge fund, it nevertheless offers some insight as to the IRS thoughts on the application of the IRA self-dealing and conflict of interest rules. The Rollins case is especially helpful in examining how the IRS could look at a transaction involving the use of retirement funds into a hedge fund in which the IRA owner has some personal relationship or ownership interest. Mr. Rollins was a CPA who had an ownership in several companies. One of the companies, in which he owned less than 10%, served as a director, but received no compensation, was in financial trouble and needed additional funds. Mr. Rollins decided to use his 401(k) plan funds to lend the company money at prevailing interest rates. The IRS audited the transaction and argued that the loan from Mr. Rollins 401(k) plan to the company was a prohibited transaction as the loan personally benefited him. The Tax Court agreed and basically stated that even though the company was not itself a disqualified person because Mr. Rollins owned less than 50% of the company, nonetheless he could not provide that he did not directly or indirectly personally benefit from the loan made to the company by his 401(k) plan. Clearly the Tax Court felt that Mr. Rollins personally benefited from the loan since without the loan his personal investment would have been lost. The Rollins case is a good illustration as to how the IRS could view an investment into a hedge fund by an IRA owner who has some personal interest in the hedge fund below the 50% ownership threshold.

Below are several examples that highlight the complexities involved in structuring an investment of retirement funds into a hedge fund in which the IRA owner has some personal relationship or ownership.

1. Joe is looking to start a hedge fund and needs $100,000 to begin operations. The hedge fund would be a limited partnership and Joe would be charging a traditional 2% management fee and 20% carried interest on fund profits. Joe will own 100% of the general partner of the hedge fund and is looking for investors to invest in the hedge fund. Joe wishes to use his IRA funds to invest in his hedge fund.

Issues for Joe to consider: Joe would clearly not be able to use his IRA funds to invest in the general partner since he will own 100% of that entity personally and that would likely trigger a prohibited transaction. What if Joe wanted to invest the funds as a limited partner of the fund? Unfortunately, there is no clear answer to this question as the answer is generally dependent on the facts and circumstances involved in the transaction. For example, if the only way Joe could attract investors to the fund is to show he also has invested in the fund and the only funds he had available to invest were IRA funds, the IRS could argue that the use of his IRA funds would personally benefit him since without his IRA funds being used he would not be able to attract investors to his fund and derive a personal financial return from owning the fund.

2. Ben is a 2% partner at a hedge fund that has $500 million under management. The hedge fund is set-up as a limited partnership. The hedge fund has a traditional fee model of 2% management fee and 20% carried interest. The hedge fund is looking to raise an additional $250 million and Ben is seeking to use $250,000 from his IRA to invest as a limited partner of the fund. His limited partnership interest would be 2.5% of the total fund.

Issues for Ben to consider: Ben is clearly a disqualified person because he is the IRA holder, but the hedge fund he is a partner at would likely not be since he owns just 2% of the fund, pursuant to Internal Revenue Code Section 4975(e)(2). However, the self-dealing or conflict of interest rules under Internal Revenue Code Section 4975(c)(1)(D) and (E) could treat Ben’s investment into the fund as a prohibited transaction. The question Ben must ask himself is whether he would receive any personal benefit, either directly or indirectly, from making the fund investment with his IRA funds. For example, would the fund be in financial trouble without Ben’s investment? Will Ben receive a salary bonus if he invests in the fund? Or what if, Ben is required to invest in the fund in order to maintain his position as partner of the fund? These are some of the facts that would need to be examined before determining whether Ben’s investment would rise to the level of a prohibited transaction.

3. Steve is a 99% owner of hedge fund A, which has over $750 million in assets under management. The hedge fund is set-up as a limited partnership. The hedge fund has a traditional fee model of 2% management fee and 20% carried interest. The hedge fund is looking to create fund B, which will be exclusively investing in a pool of loans. Fund B will be looking to raise $500 million from outside investors. Steve and a number of hedge fund A executives want to invest their retirement funds into fund B, but expect to own less than 5% of fund B. Fund A will be charging a management fee and carried interest on the limited partners of fund B.

Issues for Steve to consider: Since Steve owns 99% of hedge fund A and hedge fund A will be receiving a fee from the limited partners of fund B, a management fee and carried interest allocated to Steve’s IRA and potentially his executives could violate the prohibited transaction rules under Internal Revenue Code Section 4975. Fees paid by Steve’s IRA to a company he owns 99% of could be considered a prohibited transaction. What if Steve and his executives were able to have their IRAs exempted from the management fee and carried interest going to the general partner of fund A or were able to buy a different membership class of fund B, which did not have to pay any fees to hedge fund A. Because of Steve’s large ownership interest in hedge fund A, it is especially important that he focuses on the self-dealing and conflict of interest prohibited transaction rules to make sure his IRA investment into fund B could not be viewed as personally benefiting him directly or indirectly.

Unrelated Business Taxable Income

After examining the IRS prohibited transaction rules in order to determine whether an IRA investment into a hedge fund could be made, another set of IRS rules must be reviewed in order to verify whether a tax would be imposed on the income allocated to the IRA from the hedge fund investment.

In general, when it comes to using a Self Directed IRA to make investments most investments are exempt from federal income tax. This is because an IRA is exempt from tax pursuant to Internal Revenue Code 408 and Section 512 of the Internal Revenue Codes exempt most forms of investment income generated by an IRA from taxation. However, in the case of the use of margin, nonrecourse debt, or income generated from an active trade or business conducted via an LLC or partnership, a tax would be imposed on a percentage of the income generated. These rules have become known as the Unrelated Business Taxable Income rules or UBTI or UBIT. If the UBTI rules are triggered, the income generated from that activities will generally be subject to close to a 40% tax for 2015. The UBTI generally applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words—“trade or business,” “regularly carried on,” and “unrelated.” In the case of an IRA, all active business activities will be treated as unrelated.

So why have I never heard of these rules before? The reason is that since most Americans with retirement funds invest in publicly traded stocks or mutual funds, which are often structured as a “C” Corporation, an entity subject to tax. A “C” corporation is also known as a blocker corporation. Unlike an LLC, which is treated as a passthrough entity, income from a “C” Corporation is blocked or stays in the “C” Corporation and does not flow to the shareholder. Whereas, income from an LLC passthrough the to the member/owner of the LLC – there is no entity tax with an LLC or partnership. Hence, any income allocated to an IRA via an LLC or passthrough entity would not be subject to an entity level tax and could be subject to the UBTI tax if the LLC was engaged in an active trade or business or margin or debt was used by the LLC. In other words, if one buys stock of a “C” corporation with a retirement account, the UBTI tax rules would not apply. Whereas, if one purchased an interest in a passthrough entity, such as an LLC, with IRA funds and the LLC was engaged in an active trade or business, used margin, or acquired debt, then the income allocated to the IRA could be subject to the UBTI tax.

In the case of an IRA investment into a hedge fund, if the hedge funds activities rise to the level of a trade or business, or if margin or debt is used in the hedge funds trading activities, then even though the investment may not violate the IRS prohibited transaction rules, the income could be subject to the UBTI tax rules. Since most hedge funds are structured as passthrough entities, gaining a solid understanding of the UBTI tax rules is extremely important.

Using retirement funds to invest in a hedge fund is not on its face a prohibited transaction, however, when the IRA owner has some personal involvement with the hedge fund, the IRS prohibited transaction rules must be closely examined to make sure the investment would not trigger a prohibited transaction.

The tax professionals and CPAs of the IRA Financial Group have helped hundreds of hedge fund investors use their retirement funds to make hedge fund related investments, including in their own funds, and have significant experience in this area.

To speak with an IRA Financial Group tax professional, please contact us at 800-472-0646.

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Mar 25

Self-Directed IRA Maximum Contribution

The maximum contribution limit for a self-directed IRA for 2015 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.

Self-Directed IRA Maximum ContributionIs 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 contribute to a traditional or Roth Self-Directed IRA if I’m covered by a retirement plan at work?

Yes, you can contribute to a traditional and/or Roth self-directed IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA plan). If you or your spouse is covered by an employer-sponsored retirement plan, such as a 401(k) plan and your income exceeds certain levels, you may not be able to deduct your entire contribution.

Can I establish a self-directed IRA if only one spouse has earned income for the year?

Yes. If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return and cannot exceed the maximum IRA contributions for the year (for 2015 $5500 or $6500 if over the age of 50). It doesn’t matter which spouse earned the compensation.

How can I make a Roth IRA contribution if I earned too much money in 2015?

For 2015, if your modified adjusted gross income is below $181,000 and you file a joint return, you can make a Roth IRA contribution. For those who earned greater than $181,000 during the year, the IRS provides a formula, which will set forth the reduced maximum amount of Roth IRA contributions permitted for the year, if any.

One way to circumvent the Roth IRA income threshold rules, if to simply make an after-tax traditional IRA contribution and then convert the Traditional IRA into a Roth IRA. Since the Traditional IRA contribution was made after-tax there would be no tax on the Roth IRA conversion. This tactic was made possible when the IRS removed the income level restrictions for making Roth conversions in 2010.

Can I Make IRA contributions after age 70½

You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.

To learn more about the self-directed IRA and self-directed Roth IRA contribution rules, please contact a self-directed IRA tax expert at 800-472-0646.

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Mar 23

Using a Roth IRA for Estate Planning

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

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

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

Estate Tax Basics

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

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

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

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

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

The Self-Directed Roth Stretch IRA

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

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

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

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Mar 20

High Net Worth Self-Directed IRA Clients Turning to Real Estate To Make-Up for Lackluster Financial Market Performance in 2015

Flat financial markets in 2015 causing self-directed IRA investors to look to real estate to generate higher returns

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA LLC solutions, has seen a number of high net worth clients begin focusing on real estate investment opportunities for their self-directed IRA in light of the flat equity markets in 2015. Because the S&P 500 has been up less than 1% as of March 17, 2015, a number of high net worth self-directed IRA clients are turning to the real estate market as a way of making up for the flat equity markets. “Over the last several weeks we have seen more and more high net worth self-directed IRA clients turning to real estate in order to make-up for a lackluster stock market performance so far in 2015, “ stated Adam Bergman, a tax partner with the IRA Financial Group. “Using a self-directed IRA to buy real estate offers self-directed IRA investors the ability to diversify their retirement portfolio and at the same time generate tax-deferred income, “ stated Mr. Bergman.

The primary advantage of using a Self Directed IRA LLC to buy real estate is that it can be done by simply writing a check. In addition, all income and gains associated with the IRA investment grow tax-deferred and return to the IRA LLC. “A number of our real estate investor clients like the fact that they can use their IRA funds to invest in assets their know and understand, such as real estate and feel more comfortable they can generate strong returns by making such investments, “ stated Mr. Bergman.

High Net Worth Self-Directed IRA Clients Turning to Real Estate To Make-Up for Lackluster Financial Market Performance in 2015With IRA Financial Group’s self directed IRA LLC solution, traditional IRA or Roth IRA funds can be used to buy real estate throughout the United States and globally in a tax-deferred account by simply writing a check and without the need of custodian consent or steep custodian fees. IRA Financial Group’s Self-Directed IRA LLC for real estate investors, also called a real estate IRA with checkbook control or a Self-Directed real estate IRA, is an IRS approved structure that allows one to use their retirement funds to make real estate and other investments tax-free and without custodian consent. The Self-Directed IRA LLC involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the IRA custodian) and managed by the IRA holder or any third-party. As a result, the Self-Directed IRA LLC provides the retirement account holder with greater control over his or her retirement assets allowing the individual to make traditional as well as non-traditional investments, such as real estate tax-deferred and with much lower annual fees.

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

IRA Financial Group is the market’s leading “checkbook control” Self Directed real estate IRA and Solo 401(k) Plan provider. 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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Mar 19

Two New IRA Rules to Be Aware of for 2015

There are two new rules for IRA owners that could effect you for 2015.  One has to do with the 60-day rollover rule and the other pertains to Non-Spousal Inherited IRAs.

The first rule change involves the number of times you are permitted to do a 60-day IRA rollover.  Previously, you could withdraw funds from each IRA account you owned for any reason once every 365 days.  There were no tax implications so long as you deposited those funds (either into the same IRA a brand new account) within 60 days.  Basically, this gave you the ability to borrow against your IRA with no taxes or penalties.

However, after a court case last year, the rule changed for 2015 which will only allow one rollover from one IRA account every 365 days.  Even if you have multiple IRAs, you may only perform this rollover once per year.  Note that trustee to trustee transfers are not affected by this rule.  A transfer is when you move IRA funds from one financial institution to another without the money ever coming to you.  As soon as you take possession of IRA funds, the 60 day clock to rollover that money begins.

As was the rule previously, if you fail to move the funds back into an IRA within those 60 days, the money will be treated as a distribution and you will be taxed at your current rate and face a 10% early withdrawal penalty if you are not at least 59 1/2 years of age.  Further, if you try to do another rollover before the 365 days have expired, those funds will be immediately considered a taxable distribution.  Pay attention to dates and you should be okay.

Two New IRA Rules to Be Aware of for 2015Secondly is the Inherited IRA rule.  IRAs offer a great way to pass along money to your heirs/beneficiaries.  Non-spousal beneficiaries (like children, grandchildren and business partners) are affected by a new rule for 2015.

Normally, retirement plans offer asset protection from creditors, especially in the case of bankruptcy.  However, after a 2014 Supreme Court ruling, this is not the case for non-spousal inherited IRAs.  These are now looked at as inherited assets (not retirement accounts) and thus not protected from creditors.  You need to make sure your beneficiary is financially prepared to accept the inherited account.  You may need to talk to a financial adviser for other options if that’s not the case.

Spousal beneficiaries are not affected by this new rule.  They are allowed to take an inherited IRA and treat the IRA as their own.  Therefore, it’s still a retirement plan and will have creditor protection.

If you have any questions about these new rules, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646 today!

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Mar 17

Advantages of Having Checkbook Control

Experience the Self-Directed IRA LLC “Checkbook Control” Advantage

Many traditional IRA custodians advertise themselves as offering a Self-Directed IRA, but what that really means is that you will need approval from your custodian before making an investment. Whereas, in the case of a truly Self-Directed IRA, a limited liability company (“LLC”) is established that is owned by the IRA account and managed by the IRA account holder providing the IRA holder with “checkbook control” over his or her funds.

In general, there are three categories of self-directed IRA structures distinguishable by the level of control the custodian exercises over your IRA investments.

1. Financial Institution Self-Directed IRA

With a financial institution self-directed IRA, you are able to direct your IRA investments, however, you are generally limited to investing in the financial products offered by the financial institution. For example, a financial institution such as Vanguard or Fidelity will allow you to select the type of investments for your IRA, but your choices would generally be limited to the financial products they offer, such a stocks, mutual funds, and bonds. With a financial institution self-directed IRA, you will not be permitted to make non-traditional investments such as real estate, precious metals, private business investments, foreign currency, options, etc.

2. Custodian Controlled Self-Directed IRA Without “Checkbook Control”

With a custodian controlled Self-Directed IRA without “Checkbook Control”, many types of nontraditional investments, such as real estate, are generally permitted, however, custodian consent is required in order to enter into and execute the transaction. This typically results in long delays and high custodian fees associated with the transaction. For example, before engaging in an IRA investment, you will be required to receive the consent of the custodian. To this end, you will be required to provide the custodian with the transaction documents for review as part of their transaction review process. As a result, it is common to experience time delays as well as high annual fees as well as additional transaction fees. For example, it is common for a moderately active investor with $50,000 in assets with a Self-Directed IRA custodian without checkbook control to end up paying from $400 to $600 in aggregate annual fees (i.e. account value fee, transaction fees, approval letters).

In addition, there is no guarantee that the custodian will approve your investment even though the investment would not violate IRS rules. Overall, with a custodian controlled self-directed IRA, even though you will generally be permitted to make most non-traditional IRA investments, time delays and high custodian fees are the common characteristics of using a custodian controlled self-directed IRA.

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

With a truly Self-Directed IRA, you will have total control over your IRA funds and you will no longer have to get each investment approved by the custodian of your account. Instead, all decisions are truly yours. When you find an investment that you want to make with your IRA funds, simply write a check or wire the funds straight from your Self-Directed IRA LLC bank account to make the investment. A truly Self-Directed IRA allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.

With a Self-Directed IRA LLC, a limited liability company (“LLC”) is established that is owned by the IRA account and managed by the IRA account holder. The IRA Holder’s IRA funds are then transferred by the Custodian to the LLC’s bank account providing the IRA holder with “checkbook control” over his or her IRA funds.

The Self-Directed IRA LLC “Checkbook Control” Structure has been in use for over 30 years. The notion of using an entity owned by an IRA to make an investment was first reviewed by the Tax Court in Swanson V. Commissioner 106 T.C. 76 (1996). In Swanson, the Tax Court, in holding against the IRS, ruled that the capitalization of a new entity by an IRA for making IRA related investments was a permitted transaction and not prohibited pursuant to Code Section 4975. The Swanson Case was later affirmed by the IRS in Field Service Advice Memorandum (FSA) 200128011.

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

 

Financial Institution Self-Directed IRA

Custodian Controlled Self-Directed IRA Without “Checkbook Control”

Self-Directed IRA LLC with “Checkbook Control”

Traditional investments options (stocks, mutual funds, etc.)

Yes

Yes

Yes

Nontraditional Investment options (i.e. real estate, precious metals, tax liens, etc)

No

Yes

Yes

Unlimited Investment Options

No

No

Yes

All Investments must be approved by the custodian

N/A

Yes

No

True “checkbook control”

No

No

Yes

Direct Access to your Retirement Funds

No

No

Yes

Limited Liability

No

No

Yes

High annual account fees

No

Yes

No

Transaction fees

No

Yes

No

Bankruptcy Protection of up to $1 million

Yes

Yes

Yes

For more information about the advantages of having Checkbook Control over your IRA, please contact us @ 800.472.0646.

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Mar 16

IRA Financial Group Self-Directed IRA Clients Continue To Prefer Flipping Real Estate Vs. Rental Income

Even as the demand for rental housing has increased in most markets, self-directed IRA investors continue to prefer to flip houses vs. hold-to-rent properties

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA LLC solutions, announces the finding of its internal survey which showed a continuation of a trend seen in the fourth quarter of 2014 – self-directed IRA investors’ preference to flip houses rather than rent them out. Even as the demand for rental housing has increased in most markets, self-directed IRA and Solo 401(k) Plan investors continue to prefer to flip houses due to a recent combination of price appreciation and decreased inventory, according to the IRA Financial Group survey. About 58 percent of investors surveyed said they preferred to flip the homes they purchased, while about 42 percent said they prefer a hold-to-rent strategy. “In light of the perceived shortage of rental units in many markets, we expected to see more self-directed IRA investors starting to move toward a buy-and-hold strategy, “ stated Adam Bergman, a tax partner with the IRA Financial Group. “Interestingly, our internal survey showed that self-directed IRA and Solo 401(k) plan investors continue to see the opportunity in flipping real estate, “ stated Mr. Bergman.

IRA Financial Group Self-Directed IRA Clients Continue To Prefer Flipping Real Estate Vs. Rental IncomeThe primary advantage of using a Self Directed IRA LLC to make investments is that investments can be made by simply writing a check. In addition, all income and gains associated with the IRA investment grow tax-deferred and return to the IRA LLC. With IRA Financial Group’s self directed IRA LLC solution, traditional IRA or Roth IRA funds can be used to buy real estate throughout the United States and globally in a tax-deferred account by simply writing a check and without the need of custodian consent or steep custodian fees. “The growth in the real estate market in 2013 has allowed our clients to generate significant growth in their retirement accounts through appreciation in their Self-Directed IRA LLC account”, stated Mr. Bergman.

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

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

IRA Financial Group is the market’s leading “checkbook control” Self Directed IRA and Solo 401(k) Plan provider. 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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