Mar 31

New IRS Notice Confirms Tax Treatment of Bitcoins as Property and not Currency – Expected To Increase Popularity for Self-Directed IRAs

In Notice 2014-21, the IRS stated that it will tax digital money such as Bitcoin like property, not currency confirming Bitcoins as an approved investment for retirement funds

IRA Financial Group, the leading provider of self-directed IRA LLC and Solo 401(k) Plans has seen an increase in retirement investors looking to use retirement funds, via a self-directed IRA LLC or Solo 401(k) Plan for purposes of purchases digital currency, such as bitcoins. On March 25, 2014, the IRS issued Notice 2014-21, which for the first time set forth the IRS position on the taxation of bitcoins. According to the IRS, “Virtual currency is treated as property for U.S. federal tax purposes,” the notice said. “General tax principles that apply to property transactions apply to transactions using virtual currency.” By treating bitcoins as property and not currency, the IRS is providing a potential boost to investors but it also imposing extensive record-keeping rules—and significant taxes—on its use. In a notice, the IRS said that it generally would treat bitcoin held by investors much like stock or other intangible property. If the virtual currency is held for investment, any gains would be treated as capital gains, meaning they could be subject to lower tax rates. The top long-term capital gains tax rate is 20%, while the top ordinary income-tax rate is 39.6%, although add-on taxes often make both rates somewhat higher. But as capital investments, loss deductions from bitcoin often would be limited, whereas currency losses can be easier to deduct up front.

The IRS guidance in Notice 2014-21 targets a new crop of digital currencies used by a small number of merchants, consumers and investors. Bitcoin, the best-known of the group, is created using a computer process and can be exchanged for dollars online.

New IRS Notice Confirms Tax Treatment of Bitcoins as Property and not Currency - Expected To Increase Popularity for Self-Directed IRAsAccording to Adam Bergman, a tax partner with the IRA Financial Group, “although, IRS Notice 2014-21, did not address whether bitcoins would be considered an approved investment for retirement purposes, the fact that the Notice is treating bitcoins as property, like stock, and not as a collectible, it should be clear the bitcoins is an approved investment for IRAs and 401(k) plans and would not violate IRC 408(m).  The investment in bitcoins via a self-directed IRA LLC or Solo 401(k) plan could prove a very tax efficient manner for transacting with bitcoins as use of bitcoin in a retail transaction typically would be a taxable “event” for many buyers, requiring them to figure out the gain they had made on the virtual currency—and eventually pay tax on it, whereas, the gains would likely not be subject to tax with retirement funds, “ stated Mr. Bergman. However, the IRS stated in the Notice that bitcoin “miners”–including people who use computers to validate bitcoin transactions or maintain transaction ledgers—also would be subject to tax on payments received in bitcoin and that “Mining” that constitutes a trade or business would be subject to self-employment taxes. Accordingly, dealers in bitcoin—much like dealers in other types of property—would be subject to different tax principles than individual investors, and their gains generally would be taxed as ordinary income.

According to Mr. Bergman, “Notice 2014-21 is important because it sets forth some clarity by the IRS about the tax treatment of virtual currencies, but it also raised new questions, such as what government body would be in charge of regulation, as well as if purchased via a self-directed IRA, how would the currency be held by an IRA custodian”.

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 self-directed IRA 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.

Mar 28

Deadline Approaching to Take RMDs from Your IRA

As most of you know, Tax Day, April 15, is quickly approaching, but there’s a key date before then that might be more important for many of you.  April 1 is the deadline for those that need to take their first required minimum distribution (RMD) from your IRA.  Here we will give you the basics of the RMD and what you need to do.

You have until April 1 to take your first required minimum distributionYou can tell from the name, that an RMD is a distribution (or withdrawal) that you must take from your retirement account.  Traditional plans are tax-deferred meaning you funded the account with pre-tax money and taxes are deferred until you start taking distributions.  As usual, the government wants its cut so you are forced to withdraw funds (which are taxed) whether you need them or not.

The starting age for RMDs is 70 1/2.  Once you reach that age (and every year after), you must start withdrawing from your account.  The next logical question is what account(s) do you need to withdraw from.  The IRAs that are affected are traditional plans, SEP IRAs and SIMPLE IRAs.  If you only have a Roth IRA, don’t worry, you don’t need to take RMDs since you’ve already paid the taxes on any money you contributed to the plan.  Also, if you have a traditional 401(k) or 403(b) plan through work, you must take RMDs from those as well.  The only exception is if you’re still working at age 70 1/2 and funding the plan.

When is the deadline for taking your RMDs each year?  Typically, you have until December 31 to fulfill your requirement.  However, for your first withdrawal, you have a little more time: April 1 of the year after you turn 70 1/2.  Therefore, if you turned 70 1/2 in 2013 and have not taken your RMD, you must do so by April 1, 2014 (not April 15!).  Further, if you waited to take your first distribution until now, you must take two distributions for the year: the one from last year plus the one for this year.

How much are you required to take?  This is not a set amount and is different for everyone.  To figure out your RMD, you need to take your prior year-end account balance(s) and divide that by the life expectancy factor outlined in IRS Publication 590.  You must calculate and distribute the correct amount each year.  (It’s best to consult with a tax expert to make sure you are paying the right amount.)  For example, if you are 70 years of age (which is a life expectancy factor of 17.0) with $100,000 in a traditional IRA, your RMD would be $5,882 ($100,000/17.0).  Note that this is the minimum amount; you may take more than that if you wish.

What if you have multiple IRAs?  If you have more than one IRA, you must contribute the RMD for each account, but you do not have to withdraw from each of them.  You may choose to distribute your entire RMD from one account.  This way you can choose to take funds from under-performing accounts rather than those that are doing well.

Failure to take your full RMD by the deadline will result in a stiff penalty.  Any amount that should have been withdrawn but was not will be subject to a 50% penalty.  This penalty will continue until it’s remedied.  Obviously, missing the deadline entirely will result in the penalty, but also if you make a calculating error and take too little, you’ll also be hit with the penalty.

Like any other IRA distribution, RMDs are taxed at ordinary income tax rates.  Therefore, it might be better to withdraw more money when your tax rate is lower.  For example, you take a year off to travel but plan on returning to the workforce later on.

If you have any questions about required minimum distributions or IRAs in general, please contact one of the IRA experts @ the IRA Financial Group @ 800.472.0646 for more information!

Mar 26

The 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.

Plan Asset Rules

The Plan Asset RulesThe 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.

Mar 25

IRA Prohibited Transaction Penalties

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

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

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

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

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

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

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

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

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

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

To learn more about the IRS prohibited transaction rules for self-directed IRA LLC investments, please contact a tax advisor at 800-472-0646.  Be sure to check us out on Twitter & Facebook!

Mar 24

Self-Directed IRA LLC Providing Business Opportunities to Real Estate Brokers

Increased popularity of using IRA and 401(k) funds to buy real estate in cash without a mortgage offering new client base for real estate agents.

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA LLC solutions announces the findings of its internal report which shows that an influx of cash from new retirement investors using a self-directed IRA to purchase real estate in cash with no mortgage has significantly helped real estate agents expand their client base and enhance their business. In 2013, IRA Financial Group helped thousands of retirement investors use a Self-Directed IRA LLC structure to make real estate investments in the United States using all cash without the need for a mortgage. “We have heard from hundreds of real estate agents across the country who have been able to sell properties to self-directed IRA buyers because of the lack of financing needed for the purchase, “ stated Elena Trumbell, a retirement tax specialist with the IRA Financial Group. “Because self-directed IRA clients typically purchase real estate in cash with no financing, they have generally had good success closing on real estate transactions which has proved to be a nice benefit to real estate agents,” stated Ms. Ospina.

Self-Directed IRA LLC Providing Business Opportunities to Real Estate BrokersThe primary advantage of using a self-directed IRA LLC, also known as a real estate IRA, to make real estate investments is that investments can be made by simply writing a check. In addition, all income and gains associated with the IRA real estate investment grow tax-deferred. “With a self-directed IRA LLC with “checkbook control” retirement investors are able to act quickly when the right real estate investment presents itself, greatly accelerating the likelihood of winning a bidding war, something that many of our real estate agents appreciate, “ stated Ms. Ospina.

With IRA Financial Group’s self directed IRA LLC solution for real estate, traditional IRA or Roth IRA funds can be used to buy real estate throughout the United States in a tax-deferred account by simply writing a check. “Even with real estate prices increasing, our clients are still finding attractive real estate opportunities for the self-directed IRA real estate LLC and gaining the opportunity to move quickly on a potential investment, “ stated Adam Bergman, a tax partner with the IRA Financial Group. “.

IRA Financial Group’s Self-Directed IRA for real estate investors 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 traditional as well as non-traditional investments, such as real estate.

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.

Mar 20

Rolling Over an Inherited IRA?

When someone passes and leaves you an IRA, you may be in for a financial windfall.  However, that money comes with many rules and tax consequences.  If you don’t follow the rules set forth by the IRS, that windfall may be more hassle than it’s worth.  For instance, if you already have an IRA, you may think you can roll the new funds into that account.  For most people, that’s just not the case.

Rollover rules when inheriting an IRAIRA beneficiaries are grouped into two types: spouses and non-spouses.  If your spouse left you his or her IRA, you do have some choices.  You are allowed to roll it over to your own IRA, keep the IRA and treat it as your own or keep it and treat it as if you were the beneficiary.  If the IRA is taxable, you may also be able to roll it over into another type of retirement plan such as a workplace 401(k).

If you are not the decadent’s spouse, you are not allowed to rollover the IRA or add funds to the account, per the IRS.  You do have some options though.

First you can cash out the account.  You can then use that money to fund other retirement plans.  However, since this is treated as a distribution, you will be taxed on the entire amount that is cashed out.  Any IRA contribution will be treated according to IRS rules.  Therefore, you are only allowed to contribute a maximum of $5,500 for 2014 ($6,500 if you are age 50 or above).  Note that spouses are allowed to choose this option as well (but it’s not recommended).

Secondly, if you want to keep deferring taxes on the account, you may convert the IRA to a beneficiary IRA with a trustee to trustee transfer.  You may not combine it with other assets, nor can you contribute any more to the account.  You may choose to cash out any amount you want at any time.  You must start taking required minimum distributions, or RMDs, (or withdraw the entire amount) within five years, depending upon your specific circumstances.  Again, this is an option for spouses as well.

After inheriting an IRA, you do have some time to figure out your next move.  If you are using the “life-expectancy” method, you usually have until December 31 of the year following the IRA owners death to start taking RMDs.  If the decedent died after his or her required beginning date, you must start taking distribution on December 31 of the year in which he or she died.  Since some custodians will not administer a beneficiary IRA, you have plenty of time to transfer the IRA to another one that will.

If you have any questions, please contact an IRA expert at the IRA Financial Group @ 800.472.0646!  Be sure to follow us on Twitter and like us on Facebook for more news and helpful links!

Mar 19

The SEP Self-Directed IRA LLC Solution

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 $50,000 for 2014. 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?

The SEP Self-Directed IRA LLC SolutionA 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!

Mar 17

Using Your Roth IRA to Purchase Real Estate

Most people mistakenly believe that their Roth IRA must be invested in bank CDs, the stock market, or mutual funds. Few Investors realize that the IRS has always permitted real estate to be held inside IRA retirement accounts. Investments in real estate with a Self-Directed Roth IRA LLC are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA). IRS rules permit you to engage in almost any type of real estate investment, aside generally from any investment involving a disqualified person.

In addition, the IRS states the following on their website: “…..IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

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

Income or gains generated by a Roth IRA generate tax-free profits. Using a Self-Directed Roth IRA LLC to purchase real estate allows Using a Self Directed Roth IRA LLC To Purchase Real Estatethe Roth IRA to earn tax-free income/gains and never pay taxes on any future date, rather than in the year the investment produces income.

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

Types of Real Estate Investment

Below is a partial list of domestic and foreign real estate-related investments that you can make with a Self-Directed Roth IRA LLC:

  • Raw land
  • Residential homes
  • Commercial property
  • Apartments
  • Duplexes
  • Condos/townhouses
  • Mobile homes
  • Real estate notes
  • Real estate purchase options
  • Tax liens certificates
  • Tax deeds
  • Farm land
  • Any domestic or foreign real property

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

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

  • Set-up a Self-Directed Roth IRA LLC with the IRA Financial Group
  • Identify the investment property
  • Purchase the investment property with the Self-Directed Roth IRA LLC. As manager of the Self-Directed Roth IRA LLC, you will not be required to seek the consent of the custodian to make a real estate investment providing you with “checkbook control” over your Roth IRA funds.
  • Title to the investment property and all transaction documents should be in the name of the Roth IRA LLC. Documents pertaining to the property investment must be signed by the LLC manager (you).
  • All expenses paid from the investment property go through the Self-Directed Roth IRA LLC. Likewise, all rental income checks must be deposited directly in to the Self-Directed Roth IRA LLC bank account. No Roth IRA related investment checks should be deposited into your personal accounts and no Roth IRA funds should be deposited into your personal account.
  • All income or gains from the investment flow through to the Roth IRA tax-free!

Tax Advantages of Using a Self-Directed Roth IRA LLC!

Using a Self-Directed Roth IRA LLC to make real estate investments presents a number of exciting tax planning opportunities.

The primary advantage of using a Self-Directed Roth IRA LLC to make real estate investments is that all income and gains associated with the Roth IRA real estate 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.

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

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

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

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

2. Partner with Family, Friends, Colleagues

If you don’t have sufficient funds in your Self-Directed Roth IRA LLC to make a real estate purchase outright, your Self-Directed Roth IRA LLC can purchase an interest in the property along with a family, friend, or colleague. The investment would not be made into an entity owned by the IRA owner, but instead would be invested directly into the property.

For example, your Self-Directed Roth IRA LLC could partner with a family member, friend, or colleague to purchase a piece of property for $150,000. Your Self-Directed Roth IRA LLC could purchase an interest in the property (i.e. 50% for $75,000) and your family member, friend, or colleague could purchase the remaining interest (i.e. 50% for $75,000).

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

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

Likely no if it the transaction is structured correctly. Investing in an investment entity with a family member and investing in an investment property directly are two different transaction structures that impact whether the transaction will be prohibited under Code Section 4975. The different tax treatment is based on who currently owns the investment. Using a Self-Directed Roth IRA LLC to invest in an entity that is owned by a family member who is a disqualified person will likely be treated as a prohibited transaction. However, partnering with a family member that is a disqualified person directly into an investment property would likely not be a prohibited transaction. Note: If you, a family member, or other disqualified person already owns a property, then investing in that property with your Self-Directed Roth IRA LLC would be prohibited.

3. Borrow Money for your Self-Directed Roth IRA LLC

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

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

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

A Self-Directed Roth IRA LLC subject to UBTI is taxed at the trust tax rate because an IRA is considered a trust. For 2011, a Self-Directed Roth IRA LLC subject to UBTI is taxed at the following rates:

  • $0 – $2,300 = 15%
  • $2,300 – $5,350 = $345 + 25%
  • $5,350 – $8,200 = $1,107.50 + 28%
  • $8200 – $11,200 = $1,905.50 + 33%
    Over $11,200 = $2,895.50 + 35%

The IRA Financial Group will take care of the entire setup of your Self-Directed Roth 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 onsite greatly reducing the setup time and cost. Most importantly, each client of the IRA Financial Group is assigned a retirement tax professional to help with the establishment of the Self-Directed Roth 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.

To learn more about using a Self-Directed Roth IRA LLC to invest in real estate, please contact one of our Self-Directed Roth IRA Experts at 800-472-0646 for more information.

Mar 14

IRA Financial Group Introduces Self-Directed IRA Real Estate Solution for Fixed Income Retirees

Real estate IRA fixed-income solution would allow for the purchase of real estate or rental properties and generate tax-deferred fixed income.

IRA Financial Group, the leading provider of self-directed real estate IRA solutions, introduces a special self-directed retirement solution for fixed in come retirees looking to generate tax-deferred fixed income through a retirement account.

IRA Financial Group Introduces Self-Directed IRA Real Estate Solution for Fixed Income Retirees IRA Financial Group’s newly created self-directed IRA LLC real estate solution offers retirees the ability to generate tax-deferred fixed income or in the case of a self-directed Roth IRA, tax-free fixed income through their retirement accounts. With the real estate IRA fixed income solution, retirees could use their retirement funds via a self-directed IRA LLC solution to purchase real estate and generate tax-deferred or tax-free rental income, which can then be used to live off for personal purposes. “With the real estate IRA fixed-income solution, some clients have been able to generate 10% or more of annual tax-free income, which can then be used for personal expenses without any additional tax, “ stated Susan Glass, a retirement tax specialist with the IRA Financial Group.

IRA Financial Group also has designed the real estate IRA fixed income solution for Roth IRA funds, which will allow fixed income investor to generate tax-free income, which can then be used for personal purposes without ever paying any additional tax upon retirement. “By purchasing rental income with a self-directed Roth IRA LLC, all income and gains generated by the property would be tax-free and then can be used by a retiree for personal purposes, including living expenses, without ever paying any additional tax.

The IRS has always permitted an IRA to purchase real estate, raw land, or flip homes. “With IRA Financial Group’s real estate IRA fixed-income solution, buying and flipping rental properties is as simple as writing a check and is tax-free, “ stated Ms. Glass. “As the manager of the checkbook control real estate IRA LLC, the IRA holder will have control over his or her IRA funds so that purchasing real estate can be made by simply writing a check,” stated Jean Scharfman, a retirement tax specialist with the IRA Financial Group. One major advantage of buying rental properties with retirement funds is that all rental income generated by the property is tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all gains are tax-free.

Unlike a conventional Self Directed IRA which requires custodian consent and requires high custodian fees, a real estate IRA LLC with Checkbook Control will allow one to buy real estate, including rental properties by simply writing a check. Whereas, with IRA Financial Group’s checkbook control self-directed IRA LLC solution, the IRA funds will be held at a local bank in the name of the IRA LLC which would make entering into a real estate investment as simple as writing a check. With IRA Financial Group’s real estate IRA fixed-income rental solution, no longer would one need to ask the IRA custodian for permission or have the IRA custodian sign the real estate transaction documents. Instead, with a Checkbook Control IRA, as manager of the IRA LLC, the IRA holder, will be able to buy rental properties simply by writing a check.

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

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

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

Mar 13

How to calculate Tax on Unrelated Debt Financed Income from IRA Investments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

What is the Unrelated Business Taxable Income Tax Rate?

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

A self-directed IRA subject to UBTI is taxed at the trust tax rate because an IRA is considered a trust. For 2011, a Solo 401(k) Plan subject to UBTI is taxed at the following rates:

  • $0 – $2,300 = 15%
  • $2,300 – $5,350 = $345 + 25%
  • $5,350 – $8,200 = $1,107.50 + 28%
  • $8200 – $11,200 = $1,905.50 + 33%

Over $11,200 = $2,895.50 + 35%

To learn more about using nonrecourse leverage with a self-directed IRA, please contact an IRA tax expert at 800-472-0646 or visit our website @ irafinancialgroup.com!