Nov 27

Back to Basics – The Facts About the Roth IRA

In this latest back to basics article, we’re going to talk all things Roth IRA-related.  While individual retirement plans have been around awhile, the Roth IRA (named after Sen. William Roth) was created in 1998.  (The Roth 401(k) was established in 2006.)  These types of plans allow you to see tax-free withdrawals from your IRA during retirement.  Here are the facts you should know about them:

The major difference between traditional and Roth IRAs is when taxes are paid.  Traditional plans are funded with pre-tax money.  This gives you an immediate tax break on your contributions.  Taxes aren’t due until you withdraw money from the account.  On the other hand, Roth IRAs are funded with after-tax money.  There is no immediate tax break, but all withdrawals during retirement are tax-free (including earnings).  This is especially helpful if you think you will be in a higher tax bracket than you currently are.

The rules of the Roth IRAAs with all retirement plans, there is a limit to how much you can contribute to a Roth IRA each year.  For both 2013 and 2014, that limit is $5,500.  If you are at least age 50, you can contribute an additional $1,000 as a “catch-up” contribution.  These limits sometimes get raised due to inflation, but for next year, they remain unchanged.

There is another number you need to be concerned with as well: your adjusted gross income (AGI).  To be eligible to contribute to a Roth, your AGI cannot exceed a certain amount.  If you are a joint filer, that amount phases out from $178,000 to $188,000 this year.  Those numbers increase by $3,000 for 2014.  If you are a single filer, the amount phases out from $112,000 to $127,000.  These amounts increase by $2,000 next year.  If you make more than the upper limits, you cannot directly contribute to a Roth IRA.

Even if you cannot directly contribute to a Roth IRA, there is still a way to see tax-free earnings and that’s with a Roth conversion.  You are allowed to contribute to a traditional plan and then convert those funds to a Roth plan.  Taxes will be due during the year you perform the conversion.  There a few things to note about a Roth conversion.  First, since the amount converted is treated as taxable income, converting a large amount may push you into a higher tax bracket.  It’s best to convert only an amount that will leave you in the same bracket.  Next, if you are currently in a higher tax bracket than you think you will be when you retire, it may not be worth it to convert.  Lastly, only perform a conversion if you have money outside of the IRA to pay the taxes with.  Using money within the IRA to pay taxes gives you another tax hit plus a 10% penalty if you are under the age of 59 1/2.

As stated earlier, withdrawals are tax-free, but only if you follow the rules (of course!).  Any contributions you make to the plan are always tax- and penalty-free.  You can withdraw those funds at anytime and for any reason.  However, earnings are not immediately tax- and penalty-free.  The first rules is that you have to be at least age 59 1/2.  The second is that you must have at least one Roth IRA open for at least five years.  Taking distributions before then will result in taxes being paid and/or a 10% early withdrawal penalty.

Then, unlike traditional IRAs, Roth plans have no required minimum distributions once you reach age 70 1/2.  If you don’t need the money, the funds will continue to grow tax-free until your death and can then be left to a beneficiary.  (Inherited IRAs have their own set of guidelines which you can find by searching through the older posts here.)  This is a great way to get your children (or grandchildren) off to a great start for retirement.

Lastly, if you want to invest in things other than the normal stocks and bonds, you can look into a Self-Directed Roth IRA.  This allows you to make investments in just about anything from real estate and small businesses to precious metals and some coins.  It’s a great opportunity for those with knowledge in these types of fields.

If you have any questions concerning the Roth IRA, please contact one of our tax experts at the IRA Financial Group @ 800.472.0646 today!  They can help you decide if a Roth is your best bet for a successful retirement.  Also, be sure to follow us on Twitter and like us on Facebook!

Nov 25

Self-Directed IRA Investors Turning to Home Rental Market for Strong Returns

Client Survey shows self-directed IRA investors taking advantage of hot housing rental market in light of declining foreclosures.

IRA Financial Group, the leading provider of “checkbook control” self directed IRA and Solo 401(k) Plans announces the result of its client survey which highlighted the strong demand for housing rental properties by self-directed IRA clients. According to a number of clients the reason for the strong demand for rental properties is due to the lack of foreclosure opportunities presenting themselves in today’s real estate market. Until recently, self-directed IRA real estate investors had focused primarily on purchasing foreclosed homes, at a sharp discount, and converting them into rental properties. Now that the volume of these properties has declined and prices have risen, IRA real estate investors are scooping up newly finished single-family homes to be used as rentals, or even developing vacant lots from the ground up.

Self-Directed IRA Investors Turning to Home Rental Market for Strong Returns, According to IRA Financial Group Survey “We have seen an increasing number of self-directed IRA and Solo 401(k) Plan clients purchasing rental properties as a means of taking advantage of the hot rental market,” stated Adam Bergman, a tax attorney of the IRA Financial Group.

The primary advantage of using a Self Directed IRA LLC and Solo 401(k) Plan to make investments is that all income and gains associated with the IRA investment grow tax-deferred.

Using IRA Financial Group’s self directed IRA LLC with “checkbook control” solution to make real estate investments allows an investor to take advantage of the rising housing rental market and generate tax-deferred income, offers a number of very interesting investment opportunities. “By making self-directed real estate IRA investments, retirement investors can generate tax-deferred income as well as diversifying their retirement portfolio, “ stated Mr. Bergman. With IRA Financial Group’s self directed IRA LLC solution or Solo 401(k) Plan, traditional IRA or Roth IRA funds can be used to make as real estate to better diversify themselves from a falling stock market and take advantage of the rising housing rental market

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.  Be sure to follow us on Twitter and like us on Facebook!

Nov 22

The Self Directed IRA LLC is IRS Approved

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

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

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

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

The relevant facts of Swanson are as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Field Service Advice Memorandum 200128011

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

Nov 20

Donating a Tax-Free IRA Distribution to Charity

The holidays are approaching and it’s time to help others in need.  Did you know you can make a charitable donation from your IRA of up to $100,000 and not pay taxes on it?  If you are age 70 1/2, this is possible, including your required minimum distribution (RMD).  Most public charities are eligible, however private donees are not.  This applies to direct gifts only, not life-income gifts.  There are rules to follow of course.

Make a qualified charitable donation from your IRA and pay no taxesFirst off, the only accounts that can take a tax-free deduction are traditional IRAs and Roth IRAs.  Distributions from employer-sponsored plans such as SEP & SIMPLE IRAs, 401(k) plans and 403(b) plans are not qualified charitable deductions.  Note that you can rollover one of these plans into an IRA and then make the distribution.

The donation must be made directly by the IRA’s administrator or trustee to the charity.  If the donor takes possession of the funds first and then donates to the charity, it’s no longer qualifies.  Further, the entire donation must be paid to the charity without any quid pro quo.  Basically, you cannot receive anything in return for your donation.  The donation must be sufficiently substantiated in writing and no goods were given in connection with said donation.

As stated earlier, you must be 70 1/2 to receive this benefit.  While you can take your RMD at anytime during the year in which you turn 70 1/2, you must already be that age when you make the donation to qualify for the charitable exclusion.  Make sure you have reached that age before making the donation!

In 2007, the IRS outlines some questions that might arise.  Here is a sampling of those:

  • If you have multiple IRAs, the qualified charitable donation (QCD) is capped at $100,00 for the year across all of them.
  • If you are married and filing jointly, the limit is $100,000 per IRA owner
  • If you have an Inherited IRA, The exclusion from gross income for QCDs is available for distributions from an IRA maintained for the benefit of a beneficiary after the death of the IRA owner if the beneficiary has attained age 70½ before the distribution is made.
  • An IRA owner who requests a charitable distribution is deemed to have elected out of withholding under IRC Section 3405(a)(2).
  • In determining whether a distribution requested by an IRA donor satisfies the QCD requirements, the IRA trustee or custodian may rely upon reasonable representations made by the IRA owner.
  • Although charitable IRA distributions aren’t deductible IRC Section 170 charitable contributions, QCDs that are excluded from income under IRC Section 408(d)(8) aren’t taken into account for purposes of the AGI ceilings for traditional charitable gifts.

Check out this article for more info and examples of QCDs.  Act quickly, since this option might not be available to you in 2014!

If you have any questions about this or anything else IRA-related, please contact one of the tax experts at the IRA Financial Group @ 800.472.0646.  Be sure to follow us on Twitter and like us on Facebook as well!

Nov 18

Historical Low Rise in Social Security Payments to Retirees in 2014 Expected to Increase Demand for Self-Directed IRA

Social security payments expected to rise 1.5% in January, a historically small annual adjustment that will increase need to bolster retirement savings

IRA Financial Group, the leading provider of self-directed IRA LLC “checkbook control” structures expects to see an increase in demand for the self-directed IRA plan for retirees looking to supplement their social security benefits in light of historical low increase. With Social Security payments for 63 million retirees and disabled people expected to rise 1.5% in January, a historically small annual adjustment, retirees are likely to look at the self-directed IRA plan as a solution for accelerating gains in their retirement portfolios. The increase in social security payments, announced on October 30, 2013 by the Social Security Administration, would be among the smallest since automatic cost-of-living adjustments started in 1975. “We are hearing more and more from retirees across the country who are concerned that their social security benefits and current retirement account yields will not be enough to sustain their lifestyle in 2014,” stated Susan Glass, a tax professional with the IRA Financial Group. “More and more retirees have been turning to the self directed IRA LLC solution as a means of generating greater diversification and better returns for their retirement assets, “ stated Ms. Glass.

Historical Low Rise in Social Security Payments to Retirees in 2014 Expected to Increase Demand for Self-Directed IRA, According to IRA Financial Group Attorney IRA Financial Group has seen more retirees expressing interest in moving their retirement funds into a self-directed IRA in order to supplement meager social security payments.. The primary advantage of using a Self Directed IRA LLC to make investments is that all income and gains associated with the traditional or non-traditional IRA investment grow tax-deferred.

Using IRA Financial Group’s self directed IRA LLC with “checkbook control” solution to make real estate and hard asset investments offers a number of very interesting investment opportunities, including the ability to diversify ones retirement portfolio. “By using IRA or 401(k) funds to make real estate IRA investments, retirement investors can better diversify their retirement assets and potentially generate higher annual returns “ stated Adam Bergman, a tax attorney with the IRA Financial Group. With IRA Financial Group’s self-directed IRA LLC solution, retirement investors can now properly diversify their retirement portfolio in an effort to bolster their annual retirement account returns.

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.

Nov 15

Self-Directed Roth IRA Investors Looking to Take Advantage of Hot IPO Market

Investors using a self-directed Roth IRA to generate tax-free gains on IPOs, such as Twitter

Self-Directed Roth IRA Investors Looking to Take Advantage of Hot IPO Market, According to IRA Financial Group SurveyIRA Financial Group, the leading provider of “checkbook control” self-directed IRA LLC solutions has conducted a survey of over 300 self-directed IRA clients on the subject to hot investments for 2013 and over 65% of respondents mentioned the IPO market as an attractive investment option for IRA funds, specially the self-directed Roth IRA. In 2013, there have been six IPOs in which the stock doubled from its offering price on the first day of trading and most recently Twitter whose share soared to close almost 73% above their offering price in their first day on the stock market. “We have seen an increasing number of self-directed Roth IRA clients using after-tax funds to take advantage of the hot IPO market, including Twitter, “ stated Adam Bergman, a tax attorney with the IRA Financial Group.

According to Mr. Bergman, the stock market has been on a tear with the S&P 500 index is up just under 24% this year. The Dow and S&P 500 have hit a series of record highs in a bull market that started in March 2009. Our self-directed IRA clients have noticed this trend and have been looking to use after-tax retirement funds to take advantage of the surging stock market.

Unlike a conventional Self Directed Roth IRA which requires custodian consent and requires high custodian fees, a self-directed Roth IRA LLC with Checkbook Control will allow one to make non-traditional investments, such as real estate by simply writing a check. “With a traditional custodian controlled IRA, the Roth IRA holder will generally be relegated to buying stocks and mutual funds, whereas with IRA Financial Group’s Self-Directed Roth IRA LLC one will have the ability to make real estate, precious metals, stocks, options, and much more with retirement funds, “stated Jacky Ospina, a senior paralegal with the IRA Financial Group. With IRA Financial Group’s true Self-Directed IRA Roth LLC solution, all income and gains generated by the Roth IRA real estate investments would be tax-free. “With the “checkbook control” Roth IRA, our clients are able to better diversify their retirement portfolio and make stock as well as real estate investments tax-free and without custodian consent.

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.  Follow us on Twitter and like us on Facebook!

Nov 13

Passing Your IRA Down to Your Heirs

If you fund an IRA and are in the envious position of not needing it for your own retirement, you can pass it on to your loved ones.  They can then use it for whatever reason, including their own retirement.  This is what’s known as a Stretch IRA where the account is “stretched out” for multiple generations.  There are several key factors to consider when setting up this wonderful gift.

First and foremost you need to speak with your loved ones about your intentions.  You don’t want them inheriting your hard earned IRA and have them cash it out right away.  They end up paying all the taxes while losing out on years of tax-deferred savings.  Make your intentions fully known and explain how the IRA works and the benefits of it.

The ability to stretch your IRA is a great planning toolOnce that’s done, you need to figure out exactly who ya want to leave your IRA to.  If you fail to name a beneficiary, then the entire IRA must be distributed within five years of your death.  It’s a good plan to designate a primary beneficiary along with contingent beneficiaries, therefore if the primary person passes before you or disclaims the inheritance, your IRA will pass on to the next person.  It’s important to note that only designated beneficiaries are allowed to inherit your IRA and that your will or living trust has no bearing on who gets your IRA.

In most instances, your spouse is automatically named as the primary beneficiary with your child(ren) as contingent beneficiaries.  Each individual is unique and can opt for different beneficiaries (such as your grandchild(ren) to reap the benefits for a longer time.  Lastly, a charity can be named as a last resort beneficiary if no one is able to inherit your account, ensuring it’s not left to your estate and be forced to be withdrawn within five years.

When you pass, generally the oldest heir is considered the designated beneficiary.  Your estate administrator has until September 30 of the year following the year of your death to notify the IRA custodian of the designated beneficiary.  The age of that person is used to determine required distributions.  If there’s more than one beneficiary, there’s an option to split the account into each individual’s own IRA.  Therefore, each person would use his or her age to determine the distributions.

There are a few things that are required to split up the IRA.  First, all post-death earnings, gains, losses and contributions of the IRA must be shared pro rata between the different IRAs.  Then, all new IRAs must be established by December 31 of the year following the year of the IRA owner’s death.  This is also the deadline for taking the first required distribution.  You may open a new IRA after that date, but then all required distributions will be based on the life expectancy of the oldest person of the joint IRA.  This almost defeats the purpose of the plan since younger beneficiaries won’t get the full benefit of the plan.

Finally, what happens when the primary beneficiary dies?  Well, this is the whole point of the stretch IRA comes into play.  The required distributions allow for money to remain in the account after you reach your life expectancy date.  The successor must follow the same distribution schedule and method that the original beneficiary had.  This is where it gets tricky.  A lot depends on both the IRA and the estate planners.  Some IRAs allow the primary beneficiary to name his or her own successor.  Others say it goes back to the estate to name a successor in the event of the primary’s passing.  Some estate planners argue that the original contingent beneficiaries are entitled to the account.  This may lead to a dispute among heirs as to who the account passes on to.  There’s a lot of grey area that should be addressed as soon as possible.

With all this being said, it’s best to consult with a professional to make sure your IRA is in order in the event of your passing.  The tax experts at the IRA Financial Group can work with you to make sure your money goes where you want it to.  Give them a call at 800.472.0646 or visit their website today for more info!

Nov 11

New Tax Court Case Confirms Validity of “Checkbook Control” Self-Directed IRA LLC Structure

TC Memo 2013-245 confirms legality of using self-directed IRA LLC to make investments without triggering an IRS prohibited transaction

The Tax Court in T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M) recently held that establishing a special purpose limited liability company (“LLC”) to make an investment did not trigger a prohibited transaction as a newly established LLC cannot be deemed a disqualified person pursuant to Internal Revenue Code Section 4975. According to Adam Bergman, a tax attorney with the IRA Financial Group, the impact of the impact of this ruling is enormous because it directly supports the position that a retirement account can fund a newly established LLC without triggering a prohibited transaction. This is very important because some people still try to deny the legality of the self directed IRA LLC solution even after a 1996 Tax Court riling and 2001 IRS opinion letter confirmed its validity.

New Tax Court Case Confirms Validity of “Checkbook Control” Self-Directed IRA LLC StructureIn Ellis, the Tax Court rules that an investment of a husband’s IRA into a newly established LLC was not a prohibited transaction, but the payment of compensation to the husband by the LLC constituted a prohibited transaction. Mr. Ellis caused the creation of the LLC where the founding members were his IRA, with a 98-percent membership interest, and a third party, with a 2-percent interest. Subsequently, Mr. Ellis created his IRA with funds distributed from his 401(k) plan with his former employer, after which the IRA made the initial capital contribution to the LLC. This LLC was formed so that Mr. Ellis could sell used cars. He transferred $319,000 from his 401(k) account to fund the LLC business.

When it comes to making IRA investments the IRS does not state which transactions are allowed, but only states what types of transactions are prohibited. The IRA prohibited transaction rules are outlined in Internal Revenue Code Sections 408 & 4975 and generally involve the prohibition against using IRA funds to buy life insurance, collectibles, or enter into any transaction with a “disqualified person”. As per the Internal Revenue Code, a “disqualified person” is generally defined as the IRA holder and any of his or her lineal descendants or any entity controlled by such person(s). According to Mr. Bergman, “the use of the special purpose self-directed IRA LLC to make the investment was not what caused Mr. Ellis to engage in a prohibited transaction, the problem was that Mr. Ellis paid himself a salary from the LLC which violated Internal revenue Code Section 4975. Although the LLC (and not the IRA) was officially paying the taxpayer’s salary, the Tax Court concluded that since the IRA was the sole owner of the LLC, and that the LLC was the IRA’s only investment, the taxpayer (a disqualified person) was essentially being paid by his IRA.

“If Mr. Ellis has worked with the IRA Financial Group to establish his “checkbook control” IRA LLC, he would have been told that he could have used an LLC to make an investment in the LLC business, although, the investment would have to be 100% passive and he would not have been able to be involved in the business in any way, including earning a salary, “ stated Fred Horner, a tax partner with the IRA Financial Group.

According to Mr. Bergman, the Ellis case is important for two main reasons. Firstly, it is the first case that directly reinforces the legality of using a newly established LLC to make IRA investments without triggering a IRS prohibited transaction. Secondly, it demonstrates the importance of working with tax professionals who have specific expertise working with the very complex IRS rules concerning using retirement funds to make investments.

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.

Nov 07

2014 IRA Contribution Levels Remain Unchanged

Recently, the IRS announced cost of living adjustments affecting dollar limitations for retirement plans for next year.  Since the Consumer Price Index “did not meet the statutory thresholds”, IRA limits remain unchanged from 2013.The IRS announces 2014 IRA contribution limits

  • The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500.  The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000 in 2013.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $181,000 and $191,000, up from $178,000 and $188,000.  For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013.  For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000.  For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  • The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.

The limit on SIMPLE IRAs also remains the same for 2014 at $12,000.  The catch-up contribution limit also remains unchanged at $2,500.

If you have a SEP IRA, contribution levels increase by $1,000 to $52,000.  That’s based on the amount they can contribute as an employer, as a percentage of their salary; the new compensation limit used in the savings calculation is up $5,000 to $260,000.

If you have any questions, please contact a tax expert at the IRA Financial Group @ 800.472.0646!

Nov 06

Tapping Your IRA to Buy Your First Home

The real estate market has gotten better recently, however it’s still an excellent time to buy your first house.  If you can’t quite afford the down payment, tapping your traditional IRA may be a good idea.  Act now before it’s too late!

In most cases, withdrawing from your IRA before you reach age 59 1/2 comes with a 10% early withdrawal penalty.  However, rule changes from the 1997 Taxpayer Relief Act allows for certain penalty-free distributions.  One of those provisions was for purchasing, building or rebuilding a first home.  Therefore, if you qualify, you may not have to spend too much out of pocket on your first home.

You can use an IRA to buy your first houseDon’t think you qualify since you’ve already owned a home?  Think again!  As long as you haven’t had a financial interest in a home in the past two years, you qualify as a first time home buyer.  So if you sold your last home on December 1, 2011 and haven’t had a stake in another house, you will qualify for the withdrawal on December 1, 2013.  You may also take out the money for certain family members’ first time house including your spouse, children and grandchildren.

So what can you use this money for?  The technical phrase is “qualified acquisition costs” of a house.  These include the costs of buying, building or rebuilding a home.  In addition to financing, settlement and closing costs of the home.  Note that the $10,000 limit you can borrow from your IRA is over the course of your entire life.  If you use $5,000 now on a down payment, you will only have $5,000 left to use down the road.  This includes any funds used for a family member’s home as well.

Just because the money you use is penalty-free, you will still owe taxes on the amount withdrawn.  Traditional IRAs are tax-deferred, meaning you fund them with pre-tax money but must pay the taxes when you withdraw the money.  Depending on your tax bracket at the time of withdrawal, this could be a hefty sum of money.  Be sure to plan accordingly.

It’s a little different if you have a Roth IRA, since they are funded with after-tax money.  Money withdrawn from the account is taken in a specific order: contributions, conversions and earnings.  Generally, earning are tax-free, but you need to be age 59 1/2.  Therefore, any earnings before that time that are withdrawn will be taxed.  If you take out $5,000 towards your new home and $1,000 of it is earnings, you’ll own taxes on that $1,000.

A few last notes to consider:  You have 120 days from the time you withdraw the money from your IRA to use it on your new home.  If you fail to do so (say the purchase falls through) it will be treated as a non-qualified distribution and you will be hit with the 10% penalty.  Further, any money you withdraw is considered taxable income which could bump you into a higher tax bracket.  Lastly, the money withdrawn from the IRA will no longer be earning for you.  You’ll lose out on the benefits of compounded tax-deferred growth.  It’s best to speak with a qualified financial advisor before withdrawing from any retirement account.

The tax experts at the IRA Financial Group can walk you through every step and help you understand the ramifications of such a move.  If you have any questions or want a consultation, please contact them at 800-472-1646 now!  Like us on Facebook & Follow us on Twitter!