Feb 27

High Hidden Fees Charged by Retirement Financial Planners Causing Strong Demand for Self-Directed IRA Investments

President Obama proposal to impose fiduciary obligations on brokers and advisors working with retirement plans highlights advantages of self-directed IRA

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA LLC and Solo 401(k) plan solutions, expects to experience a growth in demand from retirement investors looking to reduce retirement plan fees as well as better diversifying their retirement portfolio.

High Hidden Fees Charged by Retirement Financial Planners Causing Strong Demand for Self-Directed IRA InvestmentsIn remarks at the American Association of Retired Persons (AARP) on Monday, February 23, 2015, President Obama discussed the need to impose fiduciary obligations on brokers and financial advisers working with retirement plans, insisting that new rules are a needed consumer protection to prevent billions in costs due to bad advice. The President echoed the concerns of many self-directed IRA investors who felt troubled by high costs charged by investment advisers for their IRA investments. “Unbeknownst to many retirement investors, some financial advisers are receiving back-door payments or hidden fees for steering people into high fee retirement investments, stated Adam Bergman, a tax partner with the IRA Financial Group.

According to Mr. Bergman, “we have seen a surge in retirement account investors looking to the self-directed IRA as a way to make investments they know and understand that do not come along with hidden or backdoor fees. The self-directed IRA is an attractive solution for many retirement investors because they have greater authority over their investment decisions and have a greater level of control over the fees.

The primary advantage of using a Self Directed IRA LLC or Solo 401(k) Plan to make investments, traditional as well as alternative, such as real estate and all the income and gains associated with the investment grow tax-deferred.

Using IRA Financial Group’s self directed IRA LLC with “checkbook control” solution to make IRA real estate investments offers a number of very interesting investment opportunities, including the ability to diversify ones retirement portfolio with real estate, precious metals, and other alternative investment options. “By making year-end self-directed real estate IRA investments, retirement investors can insulate themselves from a turbulent stock market in light of the looming fiscal cliff issues, “ stated Mr. Bergman.

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

IRA Financial Group is the market’s leading “checkbook control” Self Directed IRA Facilitator. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

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

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Feb 26

Real Estate IRA Rules

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

The basis of the prohibited transaction rules are based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. These rules can be found in Internal Revenue Code Section 4975. In general, 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, and entities in which the IRA holder holds a controlling equity or management interest.

Real Estate IRA RulesThe IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Since you are the manager of the Self-Directed IRA LLC, making a real estate investment is as simple as writing a check from your Self-Directed IRA bank account. The advantage of purchasing real estate with your Self-Directed IRA LLC is that all gains are tax-deferred until a distribution is taken. In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you purchased a piece of property with your Self-Directed IRA LLC for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

When it comes to using a self-directed IRA to purchase real estate, there are a number of rules that should be followed in order to make sure the real estate IRA investment does not violate any of the IRS prohibited transaction rules.

  • The deposit and purchase price for the real estate property should be paid using Self-Directed IRA LLC funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • All expenses, repairs, taxes incurred in connection with the Self-Directed IRA real estate investment should be paid using retirement funds – no personal funds should be used
  • If additional funds are required for improvements or other matters involving the real estate investments, all funds should come from the Self-Directed IRA or from a non “disqualified person”
  • If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed and whereby the lender’s only recourse is against the property and not against the borrower.
  • The IRA holder or “disqualified person” in connection with the real estate investment should perform no services in connection with the use of self-directed IRA LLC. In general, other than standard management type of services (necessary and required tasks in connection with the maintenance of the LLC), no active services should be performed by the LLC manager or a “disqualified person” with respect to the real estate transaction.
  • Title of the real estate purchased should be in the name of the Self-Directed IRA LLC. For example, if Joe Smith established a Self-Directed IRA LLC and named the LLC XYZ, LLC, title to real estate purchased by Joe’s Self-Directed IRA LLC would be as follows: XYZ LLC
  • Although the use of a nonrecourse loan is permitted with a self-directed IRA when buying real estate, the use of a nonrecourse loan would impose a tax pursuant to IRC 514 on a percentage of the income generated by the IRA investment based off a percentage of the debt used in proportion to the amount of cash invested.
  • Keep good records of income and expenses generated by the real estate investment
  • All income, gains or losses from the Self-Directed IRA LLC real estate investment should be allocated to the IRA and be returned to the IRA LLC bank account
  • Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in
  • Make sure you will not be engaging in any self-dealing real estate transaction which would involve buying or selling real estate that will personally benefit you or a “disqualified person”
  • If you need to make additional IRA contributions to your self-directed IRA, the contribution should be made to the IRA custodian/administrator and then the funds will be transferred to the IRA LLC.

Using a self-directed IRA LLC to buy real estate is quick and easy, however, there are a number of IRS rules and potential tax issues that must be addressed before making the self-directed IRA real estate investment.

For more information on using a self-directed IRA LLC to buy real estate, please contact a tax professional at 800-472-0646.

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Feb 24

Strong Optimism in 2015 for Real Estate Market Amongst Self-Directed IRA Investors in Light of Higher Home Prices

In light of higher prices and falling oil prices, self-directed IRA investors continue to invest in real estate.

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA LLC solutions, continues to see a strong demand from retirement investors looking to use their retirement funds to buy real estate in light of higher real estate prices and falling oil prices. A strong number of self-directed IRA LLC investors are citing a number of factors for their optimism in the real estate market including low housing inventory and interest rates and a diversified economy that is creating more demand. “What we are seeing, particularly amongst our self-directed IRA LLC clients, is a strong interest in real estate despite higher market prices and the lower price of oil,” stated Adam Bergman, a tax partner with the IRA Financial Group.

According to Jacky Ospina, a retirement tax specialist with the IRA Financial Group, for many IRA Financial Group self-directed IRA LLC clients, new single-family real estate continues to be a hot market. In addition, single family homes continues to be a very lucrative market for self-directed IRA investors.

Strong Optimism in 2015 for Real Estate Market Amongst Self-Directed IRA Investors in Light of Higher Home PricesIRA Financial Group’s Self-Directed IRA for real estate investors, also called a real estate IRA with checkbook control, 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 manager of the IRA LLC, the IRA owner will have control over the IRA assets to make the investments he or she wants and understands

The IRS has always permitted one to use retirement assets to purchase real estate rental properties. “With IRA Financial Group’s self-directed IRA LLC solution, investors can make real estate purchases and generate tax-deferred rental income or tax-free rental income in the case of a self-directed Roth IRA. “One major advantage of buying rental properties with a Self-Directed IRA is that all rental income generated by the property is tax-distribution until a distribution is taken,” stated Mr. Bergman.

Instead of buying real estate with personal funds and being subject to tax on the income or upon the disposition of the asset, a Self Directed real estate IRA LLC with Checkbook Control will allow one to buy real estate, including rental properties without paying tax immediately. “Notwithstanding a strong real estate market, Just last week I spoke with a client this month that was able to flip a single family home for a $140,000 profit after holding the property for less than four months and doing very minor improvements,” stated Ms. Ospina.

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 real estate 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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Feb 23

Tax Strategies for Your Self Directed Roth IRA

Using a Self-Directed Roth IRA LLC presents a number of exciting tax planning opportunities. Whether you currently have a Traditional IRA or a Roth IRA, the IRA Financial Group’s in-house tax and ERISA professionals have significant experience helping clients use a Self-Directed Roth IRA LLC to maximize their tax benefits and investment returns.

Investment Tax Strategies:

The primary advantage of using a Self-Directed Roth IRA LLC to make investments is that all income and gains associated with the Roth IRA investment grow tax-free and will not be subject to tax upon withdrawal or distribution. This is because unlike traditional IRAs, you are generally not subject to any tax upon taking Roth IRA distributions once you reach the age of 59 1/2. This presents a number of exciting tax strategies, a few of which are described below:

  • Purchasing a vacation home in or outside of the United States with Roth IRA funds and moving in tax-free at age 59 1/2
  • Purchasing a retirement home in or outside of the United States with Roth IRA funds and moving in tax-free at age 59 1/2
  • Purchasing an office building with Roth IRA funds and then using the building for your own business after you turn 59 1/2
  • Investing in precious metals and then taking possession of the metals once you reach the age of 59 1/2
  • Investing in tax deeds and then taking possession of the property personally once you reach the age of 59 1/2
  • Investing in a distressed property – generating large gains and then withdrawing the funds tax-free for personal use upon reaching the age of 59 1/2
  • Investing in an investment fund – generating large gains and then withdrawing the funds tax-free for personal use upon reaching the age of 59 1/2

Tax Strategies for Your Self Directed Roth IRARoth Conversion Valuation Discount Tax Strategies:

The amount of taxable income on a Roth conversion is based on the fair market value of the IRA assets subject to the conversion. Therefore, the lower the fair market value of the IRA assets the lower the taxes that will be due on the Roth conversion. In general, pursuant to case law, the standard of “fair market value” is an objective test using hypothetical buyers and sellers. Furthermore, in determining the valuation of an LLC, the assets to be valued must be the interests in the entity. The IRA Financial Group’s retirement tax professionals in conjunction with a number of valuation experts have developed a structure that will allow you to take a discount when determining the fair market value of the IRA assets subject to the Roth conversion, thus, reducing the amount of tax you will have to pay on the conversion.

The Roth Conversion Valuation Discount Strategy is based on tested case law. The valuation discounts applicable to an LLC with IRA assets typically fall into two categories: (1) a discount for lack of control, and (2) a discount for lack of marketability. The retirement tax professional at the IRA Financial Group along with a valuation expert will help develop a customized Roth conversion tax strategy that will allow you to take a discount of anywhere from 15% to 35% on the value of the IRA assets subject to the Roth conversion. The Roth Conversion Valuation Discount Strategy can save you thousands of dollars in taxes and is based on established case law.

For example, if you have a Traditional IRA and want to convert to a Self-Directed Roth IRA LLC to purchase raw land, real estate, precious metals, or invest in an investment fund, using the Roth Conversion Valuation Discount Strategy can save you thousands of dollars on the conversion.

To learn more about how a Self-Directed Roth IRA LLC can offer you significant tax and investment benefits please contact one of our IRA Experts at 800-472-0646.

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Feb 20

Using a Self-Directed IRA LLC 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.

Using a Self-Directed IRA LLC 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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Feb 19

Strong Demand for Hard Money Lending Helping Self-Directed IRA LLC Investors Generate Strong Returns

Tightening of Mortgage lending rules by banks in 2015 helping to create attractive hard money lending market for self-directed IRA investors

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA LLC solutions has seen a surge in demand from self-directed IRA investors looking to take advantage of strong returns in the hard money lending market. Due to the lack of bank mortgages available and the added restrictions imposed by banks on borrowers, many home buyers and real estate developers have turned to private mortgages for a source of funding. We have experienced significant demand for a specialized self-directed IRA product that focuses on the private lending industry, specifically in the real estate industry, “ stated Jacky Ospina, a retirement tax specialist with the IRA Financial Group

Strong Demand for Hard Money Lending Helping Self-Directed IRA LLC Investors Generate Strong ReturnsIn 2014, the self-directed IRA LLC solution was used by many IRA Financial Group clients looking to take advantage of attractive returns available for private financing of real estate transactions. “In 2014, a significant number of IRA Financial Group clients have used their checkbook IRA LLC solution to provide private mortgages to home buyers and real estate developers at very attractive rates, “ stated Ms. Ospina.

The primary advantage of using a real estate IRA LLC to make hard money loans is that the loan can be made by simply writing a check. In addition, all income and gains associated with the self directed IRA hard money loan would grow tax-deferred.

With IRA Financial Group’s self directed IRA LLC for hard money lending transactions, 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. “With banks continuing to limit real estate financing to investors, our clients have taken advantage of this and have been able to generate strong returns in the private lending market, “ stated Ms. Ospina.

IRA Financial Group’s Self-Directed IRA LLC for private lending transactions, is an IRS approved structure that allows one to use their retirement funds to make hard money and real estate loans 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 manager of the IRA LLC, the IRA owner will have control over the IRA assets to make traditional as well as non-traditional investments, such as hard money loans by simply writing a check

Using IRA Financial Group’s self directed IRA LLC with “checkbook control” solution to make hard money loan investments offers hard money lenders the ability to make loans i quickly without any custodian delay. “By using a “checkbook control” self-directed IRA LLC our clients have been able to make hard money loans quickly and without any custodian delay,” stated Mr. Bergman.

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

IRA Financial Group is the market’s leading “checkbook control Self Directed IRA Facilitator. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

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

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Feb 17

The Facts About the Checkbook IRA

A Self-Directed IRA LLC with “Checkbook Control” plan is an IRS and tax court approved structure that will allow you to use your IRA funds to make almost any type of investment, including real estate, tax liens, precious metals, foreign currency and much more tax free!

With a “checkbook control” Self Directed IRA LLC you will never have to seek the consent of a custodian to make an investment or be subject to excessive custodian account fees based on account value and per transaction.

To establish the Self-Directed IRA LLC “Checkbook Control” structure, a limited liability company (“LLC”) is established that is owned by the Self Directed IRA LLC With Checkbook ControlIRA and managed by the IRA account owner (you). The IRA owner’s funds are then transferred by the passive custodian to the new IRA LLC bank account. As the manager of the IRA LLC, the IRA owner will have the authority to make investment decisions on behalf of the IRA providing the IRA owner with “checkbook control” over his or her IRA funds.

With a “checkbook control” Self Directed IRA LLC you will never have to seek the consent of a custodian to make an investment or be subject to excessive custodian account fees based on account value and per transaction.

By having “checkbook control” over your IRA funds you will gain the following advantages:

Investment Opportunities: A Self-Directed IRA LLC with “Checkbook Control” will allow you to invest in almost any type of investment opportunity that you discover, including: Real Estate (rentals, foreclosures, raw land, tax liens etc.), private businesses, precious metals, foreign currency, stock options, hard money & peer to peer lending; you’re only limit is your imagination.  Of course, you can still make traditional investments, such as stock and mutual fund investments, as you did with a regular IRA. The income from these IRA investments will flow back into your IRA tax-free.

“Control”: With a Self-Directed IRA LLC, you will no longer have to get each investment approved by the custodian of your account. Instead, as manager of the Self-Directed IRA LLC, all IRA investment decisions are truly yours. To make an investment, simply write a check or wire funds straight from your Self Directed IRA LLC bank account.

Example 1: Joe has a Self-Directed IRA LLC set-up by the IRA Financial Group. Joe has established his Self Directed IRA LLC bank account with Bank of America. The name of Joe’s LLC is Joe Smith IRA LLC. Joe wishes to use his IRA funds to purchase a home from Steve, an unrelated third-party (non-disqualified person). Steve is anxious to close the transaction as soon as possible. With a “checkbook control” Self-Directed IRA LLC, Joe can simply write a check using the funds from his IRA LLC account or can wire the funds directly from the account to Steve. Joe, as manager of the LLC, no longer is required to seek the consent of the IRA custodian before making the real estate purchase. In contrast, with a regular Self- Directed IRA without “checkbook control” Joe may not be able to make the real estate purchase since seeking custodian approval would likely take too much time.

Example 2: Joe has a Self0Directed IRA LLC set-up by the IRA Financial Group. Joe has established his Self Directed IRA LLC bank account with Bank of America. The name of Joe’s LLC is Joe Smith IRA LLC. Joe wishes to use his IRA funds to invest in tax lien certificates via auction. Purchasing tax lien certificates requires Joe to make the tax lien payment at the auction. With a “checkbook control” Self-Directed IRA LLC, Joe can simply bring his LLC checkbook to the auction or secure a certified check from the bank in order to make payments at the auction. In contrast, with a regular Self-Directed IRA without “checkbook control” Joe would not be able to make tax lien certificate investments because he would need IRA custodian approval before each tax lien certificate purchase and would not have sufficient time to seek the consent of the custodian.

Lower Custodian Fees: With a Self-Directed IRA LLC with “checkbook control” you can save a lot of money on IRA custodian fees. With a Self-Directed IRA LLC with “checkbook control” you no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with a “checkbook control” Self-Directed IRA LLC, an FDIC backed IRS approved passive custodian is used. The custodian in the “checkbook control” Self Directed IRA LLC structure is referred to as a “passive” custodian largely because the custodian is not required to approve any IRA related investment and simply serves the role of satisfying IRS regulations. By using a Self Directed IRA LLC with “checkbook control” you can take advantage of all the benefits of self-directing your retirement assets without incurring excessive custodian fees and custodian created delays since you as manager of the IRA LLC have “checkbook control” over your IRA funds (“checkbook control”).

See how much you can save in custodian fees with a Self Directed IRA LLC Structure:

Self Directed IRA Custodian
Checkbook Control
Annual Fees – Assuming $100,000 IRA Value and 2 Transactions per year
Equity Trust
No
Approximately $640 per year – Fees may increase based on increase in value of investment(s)
Entrust

No

Approximately $765 per year – Fees may increase based on increase in value of investment(s)
Pensco Trust
No
Approximately $675 per year – Fees may increase based on increase in value of investment(s)
IRA Services

Yes

$180 flat fee for Year 1
$115 flat fee for Year 2+
Sunwest Trust
Yes
$275 flat fee for Year 1
$225 flat fee for Year 2+

 

Below are a number of examples that demonstrate the financial savings one can enjoy using a “checkbook control” Self Directed IRA LLC versus a Self Directed IRA without “checkbook control.

Example 1: Jim, who resides in Missouri, wants to use his retirement funds to invest in real estate and is debating between using a “checkbook control” Self Directed IRA LLC and a Self Directed IRA without “checkbook control”.

If Jim selected Equity Trust as the custodian, Jim would be paying approximately $640 each year for a custodian plus will require custodian approval to purchase or sell a real estate investment. Over a 4 year period, Jim would pay approximately $2560 to Equity Trust for custodian services.

Alternatively, if Jim elected to use the IRA Financial Group’s Self Directed IRA LLC “checkbook control” structure, Jim would pay approximately $1400 in year 1. However, for every year thereafter Jim would only be required to pay approximately $105 per year for maintenance of the “checkbook control” structure. Thus, over a 4 year period, Jim would be required to pay approximately $1715, a saving of $845 or a savings of approximately 33%.

Example 2: Beth, who resides in Michigan, wants to use her retirement funds to invest in precious metals and is debating between using a “checkbook control” Self Directed IRA LLC and a Self Directed IRA without “checkbook control”.

If Beth selected Entrust as the custodian, Beth would be paying approximately $765 each year for a custodian plus will require custodian approval to purchase or sell precious metals. In addition, Beth would have to pay approximately $250 a year for depository services to store the metals. Over a 3-year period, Beth would pay approximately $3045 to Entrust for custodian services.

Alternatively, if Beth elected to use the IRA Financial Group’s Self Directed IRA LLC “checkbook control” structure, Beth would pay approximately $1400 in year 1. However, for every year thereafter would only be required to pay approximately $105 per year for maintenance of the “checkbook control” structure. Thus, over a 3 year period, Beth would be required to pay approximately $1700, a saving of $1345 or a savings of approximately 44%.

Example 3: Dan, who resides in Kentucky, wants to use his retirement funds to invest in real estate and is debating between using a “checkbook control” Self Directed IRA LLC with the IRA Financial Group and a Self Directed IRA without “checkbook control”.

If Dan selected Pensco Trust as the custodian, Dan would be paying approximately $675 each year for a custodian plus will require custodian approval to purchase or sell a real estate investment. Over a 5 year period, Dan would pay approximately $3375 to Pensco Trust for custodian services.

Alternatively, if Dan elected to use the IRA Financial Group’s Self Directed IRA LLC “checkbook control” structure, Dan would pay approximately $1400 in year 1. However, for every year thereafter Dan would only be required to pay approximately $105 per year for maintenance of the “checkbook control” structure. Thus, over a 5 year period, Jim would be required to pay approximately $1820, a saving of $1555 or a savings of approximately 46%.

Example 4: Lisa, who resides in Iowa, wants to use her retirement funds to invest in tax liens and is debating between using a “checkbook control” Self Directed IRA LLC and a Self Directed IRA without “checkbook control”.

If Lisa selected Entrust as the custodian, Lisa would be paying approximately $765 each year for a custodian plus will require custodian approval to make each tax lien purchase. Over a 7-year period, Lisa would pay approximately $5300 to Entrust for custodian services.

Alternatively, if Lisa elected to use the IRA Financial Group’s Self Directed IRA LLC “checkbook control” structure, Lisa would pay approximately $1400 in year 1. However, for every year thereafter would only be required to pay approximately $105 per year for maintenance of the “checkbook control” structure. Thus, over a 7-year period, Lisa would be required to pay approximately $2030, a saving of $3270 or a savings of approximately 62%.

Speed: With a Self-Directed IRA LLC with “Checkbook Control”, you, as manager of the IRA LLC, can act quickly on a great investment opportunity. With a Self-Directed IRA LLC, 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 LLC allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.

Diversification: With a Self-Directed IRA LLC, you can invest in almost any type of investment, including real estate, allowing you to diversify and better protect your retirement portfolio.

Access: With a Self-Directed IRA LLC with “checkbook control”, you, as manager of the IRA LLC, will have direct access to your IRA funds allowing you to make an investment quickly and efficiently. There is no need to obtain approvals from your custodian, or deal with time delays in awaiting approval from your custodian or paying any review fees. Instead making an IRA investment is as simple as writing a check or wiring funds directly from your IRA LLC checking account.

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

For more information, please contact an IRA Expert @ 800.472.0646 or visit http://www.checkbookirafacts.com.

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Feb 16

The DOL Plan Asset Rules

The Department of Labor (“DOL”) Plan Asset Rules were generally enacted to limit an investment fund participant from using his retirement funds to transact with the investment fund or its assets. The Plan Asset Rules set forth the circumstances that can cause assets owned by an entity to be deemed to be assets of an ERISA qualified plan (i.e. 401(k) Plan) or an IRA unless an exemption applies.  Under the Plan Assets Rules, if an IRA/401(k) Plan owns greater than 25% of an investment entity that is neither a “publicly-offered security” nor a mutual fund, the equity interests and assets of the “investment company” will be deemed assets of the IRA/401(k). This is sometimes referred to as the “Look- Through Rule”. Under the “Look-Through Rules, if a retirement plan owns 25% or more of any class of equity interests in an “investment company”, the Plan Asset Rules state that the assets of the entire “investment company” are deemed to be assets of the IRA/401(k).  In other words, if your IRA owns 25% or more of the membership interests of a LLC engaged in passive investments (i.e. private equity fund, hedge fund, or real estate fund), the assets of the LLC are deemed to be assets of the IRA. If the Plan Asset Rules cause the assets of an “investment company” to be deemed to be assets of the IRA/401(k), any transaction involving the “investment company” and a disqualified person will be a prohibited transaction.

The Plan Asset RulesPlan Asset Rules

The DOL’s Plan Asset Rules essentially define when the assets of an entity are considered ‘Plan” assets. Under the rules, IRAs are frequently viewed as pension plans subjecting them to the Plan Asset Rules. Under the Plan Asset Rules, if the aggregate plan (IRA/401(k)) ownership of an entity is 25% or more of all the assets of the entity, then the equity interests and assets of the “investment entity” are viewed as assets of the investing IRA/401(k) for purposes of the prohibited transactions rules, unless an exception applies. Also, if a plan (i.e. IRA or 401(k)) or group of related plans owns 100% of an “operating company”, the operating company exception will not apply and the company’s assets will still be treated as plan assets.

In summary, the Plan Asset Rules can be triggered if:

  • 100% of an “operating company” is owned by one or more IRAs/401(k) and disqualified persons, in which case all the assets of the “operating company” are deemed Plan assets (assets of the IRA/401(k)), or
  • If 25% or more of an “investment company” is owned by IRAs/401(k) and disqualified persons, in which case all the assets of the “investment company” are deemed Plan assets (assets of the IRA/401(k)). In determining whether the 25% threshold is met, all IRAs/401(k) owners are considered, even if they are owned by unrelated individuals.

Exceptions to the DOL Plan Asset Regulations

The Plan Asset look-through rules do not apply if the entity is an operating company or the partnership interests or membership interests are publicly offered or registered under the Investment Company Act of 1940 (e.g., REITs). They also do not apply if the entity is an “operating company,” which refers to a partnership or LLC that is primarily engaged in the real estate development , venture capital or companies making or providing goods and services, such as a gas station, unless the “operating company” is owned 100% by a Plan and/or disqualified persons. In other words, if an IRA or 401(k) Plan owns less than 100% of an LLC that is engaged in an active trade or business, such as a restaurant or manufacturing plant, the Plan Asset Rules would not apply. However, the IRA or 401(k) Plan investment may still be treated as a prohibited transaction under Internal Revenue Code Section 4975. In addition, the Unrelated Business Taxable Income may apply to subject to the IRA or 401(k) Plan to tax on the income or gains generated from the operating business.

How can the Plan Asset Rules Impact my IRA/401(k) Plan Investments ?

The Plan Asset Rules are typically only triggered if your IRA/401(k) Plan assets will own greater than 25% of an investment company (i.e. a passive investment fund) or will own 100% of an operating company (i.e. gas station). In general, the majority of investments involving IRA/401(k) Plan funds will not cause the Plan Asset Rules to trigger a prohibited transaction. For example, any direct purchase of real estate, precious metals, tax liens, or lending transaction not involving a disqualified person will likely not trigger the prohibited transaction rules or Plan Asset Rules. Even if the Plan Asset Rules were to apply, as long as a disqualified person is not involve in a transaction with the investment entity, the prohibited transaction rules would not apply.

Consequences of a Transaction Falling under the Plan Asset Rules

If your Self Directed IRA LLC or 401(k) Plan investment involves an investment in one of the following: (i) an “operating company” that your IRA will own 100% of, or (ii) an investment company in which 25% of more of the “investment company” is owned by IRAs/401(K) Plans and disqualified persons, then all assets of the entity are deemed owned by the IRA/401(k) and all transactions between the investment entity or its assets and a disqualified person may be prohibited.

Note: The fact that a transaction does not trigger the Plan Asset Rules does not mean that the transaction may not be deemed a prohibited transaction under Internal Revenue Code Section 4975. In other words, a transaction that does not fall under the Plan Asset Rules can still be treated as a prohibited transaction.

The following are a number of examples that demonstrate the scope of the Plan Asset Rules.

Example 1: A general partner of a hedge fund wishes to invest his Self Directed IRA LLC in the hedge fund he manages. If the percentage of IRA ownership, including what it would be after the General Partner invests his IRA in the fund, equals or exceeds 25% of the equity interests, then the fund’s assets are considered “plan asset.” That means that a transaction between the general partner, as a disqualified person, and the fund, could be deemed a prohibited transaction because the assets of the fund are viewed as assets of his IRA, since a disqualified person cannot transact with the assets of his plan or IRA. Accordingly, the General Partner cannot receive benefits from his IRA investment into the fund. Thus the General Partner would not be permitted to receive any management fees associated with the IRA’s ownership interest in the fund because he would be receiving a personal benefit from his IRA. Note – the General Partner’s IRA investment in the fund may also be deemed a direct or indirect prohibited transaction under Internal Revenue Code Section 4975.

Example 2: Jane ‘s Self Directed IRA LLC owns 100% of ABC, LLC, which operates a retail store. ABC, LLC makes a loan to Jane. The loan is subject to the Plan Asset Rules and will also be considered a prohibited transaction pursuant to Internal Revenue Code Section 4975. Note – any income generated by ABC, LLC that is allocated to the Self Directed IRA LLC would also likely be subject to the Unrelated Business Income tax.

Example 3: Steve’s Self Directed IRA LLC owns 15% of ABC, LLC, an investment company. Allan’s IRA owns 20% of ABC, LLC. Steve and Allan are unrelated. Since IRAs (Plans) own greater than 25% of ABC, LLC, an “investment company”, assets of ABC, LLC are Plan Assets and deemed owned by each IRA. Thus, if ABC, LLC makes a loan to Steve’s father, the loan would be a prohibited transaction under Internal Revenue Code Section 4975.

Example 4: Robert’s Self Directed IRA LLC invests in ABC, LLC, which will purchase a gas station, an “operating company”. Robert will take an annual salary of $50,000 to run the gas station. The payment of the salary would be a “prohibited transaction under Internal Revenue Code Section 4975 (self dealing indirect prohibited transaction). Note – any income generated by the as station that is allocated to the Self-Directed IRA LLC would also likely be subject to the Unrelated Business Income tax.

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

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Feb 13

Self Directing Your SEP IRA

What is a SEP?

A SEP is a simplified employee pension plan. Any employer can establish a SEP. An employer can maintain both a SEP and another plan. Annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of (i) 25% of compensation, or $53,000 for 2015. However, special rules apply when figuring out the maximum deductible contribution for a self-employed individual (typically 20% of compensation).

What is a SEP Self-Directed IRA LLC?

A Self Directed SEP IRA LLC “Checkbook Control” structure is an IRS approved and Tax Court certified structure that offers one the ability to use his or her SEP IRA funds to make almost any type of investment on their own without requiring the consent of any custodian. Tired of being forced to invest in stocks or mutual funds? Have an investment opportunity, such as real estate or a business investment that you would love to make with your SEP IRA funds… then the Self Directed SEP IRA LLC is your solution.

By gaining “checkbook control” over your SEP IRA funds you will gain the following advantages:

“Checkbook Control”: You will no longer have to get each investment approved by the custodian of your account. Instead, as manager of the SEP self directed IRA LLC, all decisions are truly yours. To make an investment, simply right a check and use the funds straight from your Self Directed SEP IRA LLC bank account.

For example, Jen, who is self-employed, has established a SEP Self Directed IRA LLC. Jen’s SEP IRA care of the custodian is the sole member of the LLC and Jen will be appointed as manager of the LLC. Jen has opened her Self Directed SEP IRA LLC bank account at a local bank. The name of Jen’s Self-Directed SEP IRA LLC is ABC LLC. Jen wishes to use her IRA funds to purchase a home from Jack, an unrelated third-party (non-disqualified person). Jack is anxious to close the transaction as soon as possible. With a “checkbook control” Self Directed SEP IRA LLC, Jen, as manager of the LLC, can simply write a check using the funds from the ABC LLC bank account or can wire the funds directly from the account to Jack. Jen, as manager of the LLC, no longer needs to seek the consent of the custodian before making the real estate purchase. With a regular Self Directed IRA without “checkbook control”, Jen would likely not be able to make the real estate purchase since seeking custodian approval would have likely taken too much time.

Investment Opportunities: With a Self-Directed SEP IRA LLC, you will be able to invest in almost any type of investment opportunity that you discover, including: real estate (rentals, foreclosures, raw land, tax liens etc.), private businesses, precious metals, hard money & peer to peer lending as well as stock and mutual funds; you’re only limit is your imagination. The income and gains from these investments will flow back into your SEP IRA tax-free.

Low Custodian Fees: A Self-Directed SEP IRA LLC “Checkbook Control” structure will help you save a significant amount of money on custodian fees. With a Self Directed SEP IRA LLC with “checkbook control” you no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with a “checkbook control” Self-Directed SEP IRA LLC, an FDIC backed IRS approved passive custodian is used.

The custodian in the “checkbook control” Self Directed SEP IRA LLC structure is referred to as a “passive” custodian largely because the custodian is not required to approve any SEP IRA related investment and simply serves the role of satisfying IRS regulations. By using a Self Directed SEP IRA LLC with “checkbook control” you can take advantage of all the benefits of self-directing your retirement assets without incurring excessive custodian fees and custodian created delays.

All the Passive Custodians we work with are FDIC backed and IRS approved. Once your custodian has transferred your retirement funds to the IRA Passive Custodian, the IRA Passive Custodian will immediately transfer your funds to your new SEP IRA LLC which can be opened at any local bank, where you as manager of the SEP IRA LLC will have “Checkbook Control” over those funds.

Investments Made Quickly: With a Self-Directed SEP IRA LLC “Checkbook Control” structure, you will have the power to act quickly on a potential investment opportunity. When you find an investment that you want to make with your SEP IRA funds, as manager of the SEP IRA LLC, 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.

Tax-Free Gains: With the Self-Directed SEP IRA LLC “Checkbook Control” structure, all income and gains from the SEP IRA investments will generally flow back to your SEP IRA LLC tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes and the SEP IRA, as the member of the LLC, is a tax-exempt party pursuant to Internal Revenue Code Section 408, all income and gains of the LLC will flow-through to the IRA tax-free!

Direct Access: With a Self-Directed SEP IRA LLC “Checkbook Control” structure, you, as manager of the SEP IRA LLC, will have direct access to your SEP IRA funds allowing you to make an investment quickly and efficiently. There is no need to obtain approvals from your custodian, or deal with time delays in awaiting approval from your custodian or paying any review fees.

Limited Liability: By using a Self-Directed SEP IRA LLC with “Checkbook Control”, your SEP IRA will benefit from the limited liability protection afforded by using an LLC. By using an LLC, all your SEP IRA assets held outside the LLC will be shielded from attack. This is especially important in the case of SEP IRA real estate investments where many state statutes impose an extended statute of limitation for claims arising from defects in the design or construction of improvements to real estate.

Asset & Creditor Protection: By using a Self-Directed SEP IRA LLC with “Checkbook Control”, the SEP IRA holder’s IRA will be protected for up to $1 million in the case of personal bankruptcy. In addition, most states will shield a Self Directed SEP IRA from creditors attack against the IRA holder outside of bankruptcy. Therefore, by using a Self-Directed SEP IRA LLC, the IRA will be generally protected against creditor attack against the SEP IRA holder.

To learn more about the Self Directed SEP IRA LLC solution, contact one of our SEP IRA Experts at 800-472-0646 today!

Feb 11

UBTI Rules when Flipping Houses with a Self Directed IRA

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

When engaging in real estate transaction, such as a house flipping transaction, one must keep in mind the Unrelated Business Taxable Income Rules (also known as UBTI or UBIT).

The purpose of the UBTI or UBIT rules is to treat tax-exempt entities, such as charities, IRAs,and 401(k)s as a for-profit business when they engage in active business activities or use leverage.

The UBTI or UBIT rules generally applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words—“trade or business,” “regularly carried on,” and “unrelated.”

  • Trade or Business: In defining “unrelated trade or business,” the regulations start with the concept of “trade or business” as used by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.”
  • Regularly Carried On: The UBIT or UBIT rules generally only applies to income of an unrelated trade or business that is “regularly carried on” by an organization. Whether a trade or business is regularly carried on is determined in light of the underlying objective to reach activities competitive with taxable businesses. The requirement thus is met by activities that “manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.” The determination of whether an activity is “regularly carried on” is generally a fact and circumstances test and is based on the particular facts of the transaction or set of transactions during the year.
  • Unrelated: In the case of an IRA or 401(k) Plan, any business activity will be treated as “unrelated” to its exempt purpose.

UBTI Rules when Flipping Houses with a Self Directed IRAIn the case of an IRA or 401(k) plan, a transaction would not trigger the UBTI or UBIT rules if the transaction is deemed not to be considered a trade or business that is regularly carried on. This typically involves passive types of activities that generate capital gains, interest, rental income, royalties, and dividends. The passive income exemptions to the UBTI or UBIT rules are listed in Internal Revenue Code Section 512. However, if the tax-exempt organization engages in an active trade or business, such as a restaurant, store, or manufacturing business, the IRS will tax the income from the business since the activity is an active trade or business that is regularly carried on.

How does the UBTI Rules Apply to Flipping Homes?

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

The determination of whether an activity is an active trade or business and will, thus, trigger the UBTI or UBIT tax, which is taxed at a rate of approximately 40% for 2015, depends on the facts and circumstances.  Clearly one or two flipping transactions would not be considered an active trade or business and would, thus, not trigger the UBTI or UBIT tax. The question then becomes what happens if you do 3,4, or even 10 flipping transactions in a year – would that be considered an active trade or business and, hence, trigger the UBTI tax? Again, one must examine all the facts and circumstances surrounding the multiple house flipping transactions in order to determine whether the transactions in the aggregate would constitute an active trade or business. Therefore, it is important to work with a tax professional who can help one evaluate the transaction to determine whether the flipping transaction will trigger the UBTI or UBIT tax.

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

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