May 29

Leading Self-Directed IRA Provider – IRA Financial Group – Introduces the Special Purpose IRA LLC Solution

Special Purpose “checkbook control” self-directed IRA to allow retirement investors to use a newly established LLC to purchase real estate & more

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA and solo 401(k) Plans, announces the introduction of the special purpose self-directed IRA LLC solution offering individual retirement investors the ability to use a special purpose limited liability company (“LLC”) to make traditional as well as alternative assets investments, such as real estate. IRA Financial Group has experienced a strong demand from retirement investors looking to be able to make real estate and other IRA investments from a local bank and without having to go through an IRA custodian. “With the special purpose LLC, retirement account holders can use their IRA assets and make investments like real estate by simply writing a check”, stated Jacky Ospina, a retirement tax specialist with the IRA Financial Group.

Leading Self-Directed IRA Provider - IRA Financial Group – Introduces the Special Purpose IRA LLC Solution IRA Financial Group’s special purpose IRA LLC solution, 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 all from the comforts of a local bank account. The Self-Directed IRA LLC involves the establishment of a special purpose LLC that is owned by the IRA (care of the IRA custodian) and managed by the IRA holder or any third-party. As manager of the special purpose IRA LLC, the IRA owner will have control over the IRA assets to make the investments he or she wants and understands

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 provider of checkbook IRA solutions. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please contact us at 800-472-0646.

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May 27

Using a Loan With a Self-Directed IRA to Make an Investment

The Self-Directed IRA is a retirement solution that will unlock a world of investment opportunities. The Self-Directed IRA is a retirement investment vehicle that allows one to use their retirement funds to make traditional as well as non-traditional investments, such as real estate tax-free and without custodian consent. In most instances, investors using retirement funds to make an investment will use cash to make the investment. Whether the investment is in the form of stocks, precious metals, or real estate most investors using retirement funds to make the investment will not borrow any funds to make the investment. In other words, most investors using retirement funds will use cash to make the investment. One significant reason why retirement account investors will generally not borrow money (also called debt or leverage) as part of an investment of real estate acquisition is the Internal Revenue Code Section 4975 prohibits the IRA holder (you) from personally guaranteeing a loan made to the IRA. Pursuant to Internal Revenue Code Section 4975(c)(1)(B), a disqualified person (i.e. the IRA holder) cannot lend money or use any other extension of credit with respect to an IRA. In other words, the IRA holder cannot personally guarantee a loan made to his or her IRA. As a result, in the case of a Self-Directed IRA, one could not use a standard loan or mortgage loan as part of an IRA transaction since that would trigger a prohibited transaction pursuant to Code Section 4975. This type of loan is often referred to as a recourse loan since the bank can seek recourse or payback from the individual guaranteeing the loan. These loans are generally the most common types of loans offered by banks and financial institutions. Thus, in the case of a Self-Directed IRA, a recourse loan cannot be used. This leaves the Self-Directed IRA investor with only one financing option – a nonrecourse loan. A nonrecourse loan is a loan that is not guaranteed by anyone. In essence, the lender is securing the loan by the underlying asset or property that the loan will be used for. Therefore, if the borrower is unable to repay the loan, the lender’s only recourse is against the underlying asset (i.e. the real estate) not the individual – hence the term nonrecourse. In general, nonrecourse loans are far more difficult to secure than a traditional recourse loan or mortgage. There are a number of reputable nonrecourse lenders, however, the rate on a nonrecourse loan are typically less attractive than a traditional recourse loan.

Using a Loan With a Self-Directed IRA to Make an InvestmentThe IRS allows IRA and 401(k) plans to use nonrecourse financing only. The rules covering the use of nonrecourse financing by an IRA can be found in Internal Revenue Code Section 514. Code Section 514 requires debt-financed income to be included in unrelated business taxable income (UBTI or UBIT), which generally triggers close to a 40% tax for 2015. In general, if nonrecourse debt financing is used, the portion of the income or gains generated by the debt-financed asset will be subject to the UBTI tax, which is generally 40% for 2015. Thus for example, if an individual invests 70% IRA funds and borrows 30% on a nonrecourse basis, 30% of the income or gains generated by the debt financed investment would be subject to the UBTI tax. For example, if a Self-Directed IRA investor invests $70,000 and borrows $30,000 on a nonrecourse basis (the IRA holder is not personally liable for the loan) – 70/30 equity to debt finance ratio, and the IRA investment generates $1,000 of income annually, 30% of the income or $300 would be subject to the UBTI tax. Note – the $300 tax base could be reduced by any pro rata portion of deduction/depreciation associated the debt-financed property. The rationale behind this is that since the IRS is treating the IRA, which is typically treated as tax-exempt pursuant to IRC 408, as a taxpayer by imposing a tax on the debt-financed portion, the IRS will allow the investor to allocate proportionally any asset expenses or depreciation in order to reduce the tax base. The IRS Form 990-T is the form where the UBTI must be disclosed to the IRS.

Interestingly, by investing in real estate through a Solo 401K Plan, if one uses nonrecourse financing, the Solo 401K plan will escape the UBTI/UBIT tax due to an exception to the Unrelated Debt Financed Income (UDFI) rules found under IRC 514(c)(9). This is one reason why the Solo 401K Plan is such an attractive investment vehicle.

To learn more about the rules surrounding using a loan with a Self-Directed IRA to make an investment please contact a Self-Directed IRA Expert at 800-472-0646.

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May 26

New Podcast – Understanding the IRA Rollover Rules

IRA Financial Group’s Adam Bergman discusses the rules surrounding IRA Rollovers, covering the types of rollovers that are possible and what you can and can’t do when it comes to rollovers.

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May 22

The Self-Directed Roth IRA Distribution Rules

The advantage of contributing to a self-directed Roth IRA is that income and gains generated by the Roth IRA investment can be tax-free and penalty-free so long as certain requirements are satisfied. Unlike with a traditional self-directed IRA, contributions to a self-directed Roth IRA are not tax deductible.

Unlike the self-directed Traditional IRA, there is no 70 1/2 age limit on making contributions. Individuals of any age with compensation are eligible to contribute to a self-directed Roth IRA. The total amount you may contribute to a self-directed Roth IRA for 2015 cannot exceed the lesser of $5,500 ($6500 if over the age of 50) or 100% of compensation ($11,000 for married couples – $13,000 if over the age of 50).

If you maintain a Traditional self-directed IRA, the maximum contribution to your self-directed Roth IRA is reduced by any contributions made to your Traditional self-directed IRAs.

Amount of Roth IRA Contributions That You Can Make for 2015

If your filing status is… And your modified AGI is… Then you can contribute…
married filing jointly or qualifying widow(er) < $181,000 up to the limit
> $181,000 but < $191,000 a reduced amount
> $191,000 zero
married filing separately and you lived with your spouse at any time during the year < $10,000 a reduced amount
> $10,000 zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year < $114,000 up to the limit
> $114,000 but < $129,000 a reduced amount
> $129,000 zero

Self-Directed Roth IRA Distributions Rules if Age 59 and under.

You can withdraw contributions you made to your self-directed Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.

Withdrawals from a Roth IRA you’ve had less than five years and under the age of 59½

If you take a distribution of self-directed Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  • You use the withdrawal to pay for qualified education expenses.
  • You’re at least age 59½.
  • You become disabled or pass away.
  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
  • The distribution is made in substantially equal periodic payments.

The Self-Directed Roth IRA Distribution RulesWithdrawals from a self-directed Roth IRA you’ve had more than five years

If you’re under age 59½ and your self-directed Roth IRA has been open five years or more, your earnings will not be subject to taxes if you meet one of the following conditions:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  • You use the withdrawal to pay for qualified education expenses.
  • You’re at least age 59½.
  • You become disabled or pass away.
  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
  • The distribution is made in substantially equal periodic payments.

Self-Directed Roth IRA Distributions Rules if Over Age 59½

Withdrawals from a Roth IRA you’ve had less than five years

If you have a self-directed Roth IRA LLC and you have not met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

Withdrawals from a Roth IRA you’ve had more than five years.

If you’ve met the five-year holding requirement for the self-directed Roth IRA, you can withdraw money from a Roth IRA with no taxes or penalties.

Penalties on Conversions From a Traditional IRA to a Roth IRA

The penalty rules regarding conversions are a bit different than those for annual contributions, which may be taken at any time for any purpose free of income taxes and penalty. An early withdrawal of a conversion contribution has a different twist. The early withdrawal penalty applies to a distribution of conversion money from a Roth IRA when:

  • 1. The distribution is made within the five-tax-year period starting with the year that the conversion was distributed from a regular IRA; and
  • 2. Only to the extent that the distribution is attributable to amounts that were includable in gross income as a result of the conversion.

In general, when doing a Roth conversion, one can take a distribution of the funds that were converted at any time without tax, however, an early distribution penalty of 10% would apply if the five-year holding period from date of conversion was not satisfied.

For example, Joe made a $20,000 conversion from his regular IRA to a Roth IRA in 2008. The entire amount converted was includable in Joe’s income for 2008. Joe made no additional contributions or conversions to a Roth IRA in 2008 or in later years. In 2011, before he is age 59 1/2, Joe withdraws $10,000 from the Roth IRA. Joe will have no tax to pay on this withdrawal because he paid income taxes on the full $20,000 he converted in 2008; however, he will have to pay a 10% penalty (or $1,000) unless one of the IRA early withdrawal exceptions apply. Why? Because Joe didn’t keep the conversion amount in his Roth IRA for the required five-tax-year period since his original conversion.

So, if you are going to take funds “early” from your Roth IRA, weigh your conversion decision very carefully.

Deciding between a Traditional Self-Directed IRA and a Self-Directed Roth IRA?

Unfortunately there is no right or wrong answer when it comes to deciding whether one should make contributions to a self-directed IRA or self-directed Roth IRA. The decision generally depends on a variety of factors, which are generally facts and circumstance based, such as:

  • If you are not eligible to take advantage of tax-deductible contributions to a Traditional self-directed IRA, but qualify for after-tax contributions to a self-directed Roth IRA, then the Roth IRA is the better choice. Roth IRA contributions are made in after-tax dollars while earnings are generally are not taxable.
  • If contributions to a Traditional self-directed IRA contribution are tax deductible and you are also eligible to contribute to a self-directed Roth IRA, then:
    • if you expect your retirement tax rate to be equal or higher than it is today, a self-directed Roth IRA should yield the greatest benefit.
    • if you expect your retirement tax rate to be much lower than it is today, you may want to choose making contributions to a self-directed Traditional IRA.
    • If you expect your investment to generate strong returns, then a self-directed Roth IRA could be a option
  • The younger one is the more attractive a self-directed Roth IRA is because your Roth IRA will have more time to grow without paying any tax

To learn more about the self-directed Roth IRA and the rules surrounding contributions and distributions, please contact an IRA Financial Group tax professional at 800-472-0646.

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May 21

Is a Self-Directed IRA Right for You?

Here’s an interesting read about Self-Directed IRAs from Investopedia:

Many of us have heard the term, “the world is your oyster.” That is exactly how moving to a self-directed IRA can make people feel – that the world of investing has opened up to them due to the multiple investment options they are now able to employ.

The investment world is full of stories of investors who have benefited from taking the nontraditional route of the self-directed IRA – and other stories of people who have been penalized for not following the complicated rules or have been scammed.

To understand whether a self-directed IRA is right for you, you must first understand exactly what it is – and isn’t – and how to avoid the pitfalls.

What is a Self-Directed IRA?

A self-directed IRA (SDIRA) is a retirement account in which the individual investor, not a custodian, makes all the investment decisions. It permits greater asset diversification outside of the stocks, bonds and mutual funds generally available to investors in traditional and Roth IRAs. The money can be invested in real estate, private tax liens, notes and even gold. All securities and investments are held in an account administered by a custodian or trustee.

Self-directed IRAs may seem like a new way to save for retirement, but the option has been around since the advent of IRAs in 1974. Many people have not heard of SDIRAs because the account requires a custodian and many investment firms only allow traditional investments.

Phillip Christenson, CFA and financial advisor at Phillip James Financial in Plymouth, Minn., explains the self-directed IRA, “Picture your last IRA statement and the types of investments held in your account. There may be some individual stocks, maybe some bonds and most likely mutual funds and ETFs. Stocks and bonds are fine and should be a core part of your investment portfolio, but maybe you want to take more risk or diversify into non-traditional assets. That’s where a SDIRA comes in.”

Christenson explains that if you want to invest in rental property or flip a house (buy a home at a low cost that needs repair and sell it), you can do this with a self-directed IRA. “This type of IRA account provides the flexibility to invest in alternative assets like physical real estate, gold bullion, mortgages, franchises and other assets.

“The reason for opening up a self-directed IRA has to do with accessibility, control and the potential rate of return on your investments,” says Christenson. “When your money is held in an IRA you generally cannot get access to it until you reach age 59 ½. Therefore, while the money is in a traditional or Roth IRA, you can only invest in things such as stocks, bonds and mutual funds.”

With an SDIRA, people have access to their IRA money for non-traditional investments, Christensen says. The other major benefit is that investors might believe they can get better rates of return from these alternative investments than they can earn in the stock or bond market.

How to Set Up a SDIRA

Christenson says the first thing you need to do is evaluate what you’re trying to accomplish with your SDIRA. “Are you trying to purchase real estate, flip properties, invest in gold or fund a start- up company? This will help when finding a custodian, setting up the account and determining if a self-directed IRA is going to help accomplish these goals.” Here’s what to do.

Consult with a an objective professional, such as a CPA, financial advisor or attorney. Review what you want to accomplish, learn the rules associated with a SDIRA and consider the risks.
Find a custodian: This will be the company that will hold your assets and administer the account. You can find a company online, but investors must do due diligence by checking reviews, asking other investors and comparing fees. Your custodian will be able to help you follow IRS regulations, but not analyze and choose investments.
Fill out the required paperwork provided by the custodian.
Deposit money or roll over funds from an old IRA or 401(k) account into your new self-directed IRA.

The Pros of a SDIRA

It allows investors to use tax-advantaged money held in their IRA for nontraditional investments, such as gold and real estate.
Investors gain greater flexibility and control over their money.
It provides greater diversification and reduces the risk of too narrow a retirement portfolio.
It has the potential for greater return, given the increased investment opportunities.

The Cons of a SDIRA

Additional rules make it complex and more costly to administer.
Alternative assets can be hard to value and analyze.
There is a risk of not correctly following IRS regulations and losing the tax-advantaged status of the account, which may lead to taxes and penalties. One of those rules prohibits “self-dealing.” These are investments in which you or your family members of lineal descent have prior ownership. In addition, some investment types, such as life insurance, are still not permitted in an IRA. It is entirely up to the investor to follow all of the IRS regulations regarding a self-directed IRA.
There is a greater time commitment needed to set up and direct investments.
Depending on the amount you invest and the type of investments, you could greatly increase the overall financial exposure of your retirement portfolio.
SDIRAs have a greater risk of fraud due to their complexity and the prevalence in the SDIRA market of custodians from small operations, rather than mainstream firms.

The Bottom Line

Many investment professionals believe that the SDIRA doesn’t typically provide enough benefit or ROI for the amount of work investors need to do to maintain it. What’s more, only a savvy and sophisticated investor can benefit from the greater freedom without falling into the many traps that await the untutored.

“The bottom line is tread lightly,” says Greg Ostrowski, CFP and managing partner at Scarborough Capital Management in Annapolis, Md. “If an investment sounds too good to be true, it likely is. Conduct comprehensive due diligence and seek counsel from a trusted professional.”

For more information, or to set up your own Self-Directed IRA, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646 today!

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May 19

Contributing to an Inherited IRA

Once an IRA account owner dies, his or her IRA will be passed on to the beneficiary.  Typically, this will be a spouse or child, but can be anyone the account owner has named.  If there is no beneficiary, then the account will usually go through probate.  Contributions, in addition to taxes, will depend on who the beneficiary is.

If you inherit your spouse’s IRA, you have two options.  First, if you’re the sole beneficiary, you can designate the account in your name and treat it as your own.  You may continue to contribute to the plan, assuming you are qualified to do so.  The type of account (traditional or Roth), your age and income are all factors in deciding if you can contribute to the plan.  Secondly, you have the option of cashing out the IRA.  Note that taxes will become due if you choose this option.

Contributing to an Inherited IRAIt’s important to note the type of IRA you are inheriting.  You must follow the same rules as the original account.  If you inherit a traditional plan, you contributions are tax deductible (if you qualify), you must start taking required minimum distributions (RMDs) once you hit age 70 1/2 and you cannot contribute after that age.  Roth IRAs do not benefit from tax breaks since taxes are paid before contributions.  Qualified withdrawals are tax free, there are no RMDs and there are no age restrictions for contributions.

Whether you’re a spouse or not, you always have the option of withdrawing the funds.  A spouse has the option of taking that money and rolling it over into a new IRA and continuing to contribute.  However, a non-spouse cannot do this.  Moreover, a non-spouse cannot contribute to an inherited IRA and cannot rollover funds into or out of the IRA.

Lastly, non-spouse beneficiaries must continue to take RMDs if the original owner had begun doing so.  If not, you must take RMDs based on your own life expectancy, as per the IRS.  You must start these no later than December 31 the year following the year of the original IRA owner’s passing.  Note, you have five years to cash out the entire IRA in lieu of this.

If you have any questions about Inherited IRAs, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646.

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May 18

Passing on a Roth IRA

Here are three important questions to ask when a Roth IRA owner passes away:

What happens to the Roth IRA after the holder dies?

Once the Roth IRA holder dies, the distribution rules for Roth IRAs merge with those of Traditional IRAs. All of the post-death required distribution rules apply to Roth IRAs in the same way they apply to Traditional IRAs. Thus, if you die before your Required Beginning Date for distributions, the life expectancy rule or five-year rule will apply.

What happens to the spouse of a Roth IRA Owner who dies?

A surviving spouse succeeding to the interest of the owner of a Roth IRA may designate the account or annuity as a Roth IRA of his or her own. An electing spouse is, from the date of the election, treated as owner of the IRA. For example, an electing spouse is treated as owner, not beneficiary of the account, for purposes of applying the distribution rules, including the penalty tax imposed by Internal Revenue Code Section 72(t).

Are Distributions to beneficiaries from a Roth IRA subject to tax?

No. Because distributions to beneficiaries from a Roth IRA are not subject to tax, beneficiaries have access to 100% of the funds when the IRA holder dies.

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

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May 14

Self-Directed IRA Clients Continue to See Strong Returns from Flipping Homes but Market Becoming More Difficult

Increase popularity of flipping homes causing tighter market conditions for self-directed IRA real estate clients

IRA Financial Group, the leading provider of self-directed IRA LLC solutions for real estate investors, has seen continued demand from real estate investors looking to use their retirement funds to flip homes. According to an IRA Financial Group internal customer survey that involved clients from across the country, a strong majority of the respondents indicated seeing string returns from flipping homes but have noticed a tightening real estate market which could limit profit down the road.

“We have heard from a number of our self-directed IRA clients who find the real estate market a lot more competitive now, “ stated Adam Bergman, a tax partner with the IRA Financial Group. “The feedback we have heard from our clients is that because real estate has become very trendy, you have a lot of people who didn’t invest in real estate before 2009 that are now wanting to get involved in real estate because it is so prevalent on TV,” stated Mr. Bergman.

Self-Directed IRA Clients Continue to See Strong Returns from Flipping Homes but Market Becoming More DifficultAccording to Mr. Bergman,“a self-directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment without tax, including real estate. The IRS has always permitted an IRA to purchase real estate, raw land, or flip homes”.

“With IRA Financial Group’s IRA LLC solution, buying and flipping rental properties is as simple as writing a check and is tax-free, “ stated Jacky Ospina, a tax specialist with the IRA Financial Group. “As the manager of your Real Estate IRA LLC, the IRA holder will have control over his or her IRA funds so that flipping a home can be made by simply writing a check,” stated Ms. Ospina.

Unlike a conventional Self Directed IRA which requires custodian consent and requires high custodian fees, a self-directed IRA LLC with Checkbook Control will allow one to buy real estate, including rental properties by simply writing a check. With a traditional custodian controlled self directed IRA, one will have total control to make a real estate purchase, pay for improvements, and then sell the property without ever talking to the IRA custodian. Since all the IRA funds will be held at a local bank in the name of the self-directed IRA LLC, all one would need to do to engage in an IRA house flipping transaction is write a check straight from the IRA LLC account or simply wire the funds from the Real Estate IRA LLC bank account. With IRA Financial Group’s real estate IRA LLC 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 call 800-472-0646.

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May 13

The Advantages of the ROBS Solution vs. the Self-Directed IRA to Buy a Business

The Business Acquisition & Compliance Solution Structure (BACSS) also known as the “Rollover Business Start-Up” (“ROBS”) Solution is an IRS and ERISA approved structure that allows an individual to purchase a new or existing business with retirement funds and be active in the business without triggering any of the IRS prohibited transaction rules. The ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules, which do not apply to a Self-Directed IRA structure.

How Does the ROBS structure work?

The ROBS arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsored, and then investing the rollover 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes.

The following is how a typical ROBS structure works:

  • 1. Jim, an entrepreneur or existing business owner, establishes a new C Corporation in the state where the business will be operating. The ROBS structure must involve a C Corporation and not an LLC or S Corporation because the exemption to the IRS prohibited transaction rules under IRC 4975(d) involves the purchase of “Qualifying Employer Securities”, which is defined as stock of a Corporation. Using an LLC would not satisfy this definition and only individuals can be shareholders of an S Corporation and a 401(k) Plan is a trust.
  • 2. The new C Corporation adopts a prototype 401(k) plan that specifically permits the plan participants, including Jim, to direct the investment of their plan accounts into a selection of investments options, including employer stock, also known as “qualifying employer securities.
  • 3. Jim elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover of a prior employer’s 401(k) Plan funds into the newly adopted 401(k) plan.
  • 4. Jim then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that Jim wishes to invest in the new business).
  • 5. Jim also invests personal funds equal to more than 1% of the purchase price so that the structure is not considered an Employee Stock Option Plan (ESOP).
  • 6. The C Corporation utilizes the proceeds from the sale of stock (the amount of rollover funds and personal funds used) to purchase the assets for the new business.
  • 7. Joe would be able to earn a salary from the revenues of the business as well as personally guarantee any business loan.

What is the Difference between using a Self-Directed Vs. ROBS structure to buy a business?

The Advantages of the ROBS Solution vs. the Self-Directed IRA to Buy a BusinessIn a lot of respects, using a Self-Directed IRA LLC or a 401(k) Plan to purchase stock in a corporation would seem to be subject to the same rules. However, as described above, using 401(k) Plan funds and not IRA funds allows one to take advantage of the prohibited transaction exemption under IRC 4975(d) for “Qualifying Employer Securities.”

The recent U.S. Tax Court case Peek v. Commissioner, 140 T.C. No. 12 (May 9, 2013), highlights the risk and limitations involved when using a Self-Directed IRA to purchase business assets. In the Peek case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. Because Mr. Peek used an IRA and not a 401(k) Plan to purchase the C Corporation stock, Mr. Peek was not able to earn a salary or personally guarantee a business loan, which ultimately was the cause of the IRS prohibited transaction rule violation.

The limitation of using a Self-Directed IRA LLC to buy a business is that the individual retirement account business owner would not be able to be actively involved in the business, earn a salary, or even personally guarantee a business loan. Whereas, if the business owner used a ROBS strategy, that individual would be able to be actively involved in the business, earn a salary, as well as personally guarantee a business loan without triggering the IRS prohibited transaction rules.

To learn more about the benefits of the ROBS strategy, please contact a retirement tax expert at 800-472-0646.

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May 11

New Podcast – New IRS Form 5498 And Its Potential Impact On IRS Audits Involving Self-Directed IRA Accounts

IRA Financial Group’s Adam Bergman discusses IRS Form 5498 and the potential impact on IRS audits involving Self-Directed IRAs.

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