Sep 30

The Self Directed IRA and UBTI

In general, when it comes to using a Self Directed IRA to make investments most investments are exempt from federal income tax. This is because an IRA is exempt from tax pursuant to Internal Revenue Code 408 and Section 512 of the Internal Revenue Codes exempt most forms of investment income generated by an IRA from taxation. Some examples of exempt type of income include: interest from loans, dividends, annuities, royalties, most rentals from real estate, and gains/losses from the sale of real estate.

The Self Directed IRA and UBTIHowever, the IRS enacted a set of rules in the 1950s in order to prevent charities and later IRAs from engaging in an active trade or business and, thus, having an unfair advantage because of their tax-exempt status. These rules can be found under Internal Revenue Code Sections 511-514 and have become known as the Unrelated Business Taxable Income rules or UBTI or UBIT. If the UBTI rules are triggered, the income generated from that activities will generally be subject to close to a 40% tax for 2015. Note – an IRA investing in an active trade or business using a C Corporation will not trigger the UBTI tax.

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

Trade or Business: In defining “unrelated trade or business,” the regulations start with the concept of “trade or business” as used by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.” Although Internal Revenue Code Section 162 is a natural starting point, the case law under that provision does little to clarify the issues. Because expenses incurred by individuals in profit-oriented activities not amounting to a trade or business are deductible under Internal Revenue Code Section 212, it is rarely necessary to decide whether an activity conducted for profit is a trade or business. The few cases on the issue under Internal Revenue Code Section 162 generally limit the term “trade or business” to profit-oriented endeavors involving regular activity by the taxpayer.

Regularly Carried On: The UBIT only applies to income of an unrelated trade or business that is “regularly carried on” by an organization. Whether a trade or business is regularly carried on is determined in light of the underlying objective to reach activities competitive with taxable businesses. The requirement thus is met by activities that “manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.” Short-term activities are exempted if comparable commercial activities of private enterprises are usually conducted on a year-round basis (e.g., a sandwich stand operated by an exempt organization at a state fair), but a seasonal activity is considered regularly carried on if its commercial counterparts also operate seasonally (e.g., a horse racing track). Intermittent activities are similarly compared with their commercial rivals and are ordinarily exempt if conducted without the promotional efforts typical of commercial endeavors. Moreover, if an enterprise is conducted primarily for beneficiaries of an organization’s exempt activities (e.g., a student bookstore), casual sales to outsiders are ordinarily not a “regular” trade or business.

Before it can be determined whether an activity is seasonal or intermittent, the relevant activity must be identified and quantified, a step that is often troublesome.

The type of income that generally could subject a Self Directed IRA to UBTI is income generated from the following sources:

  • Income from the operations of an active trade or business – i.e. a restaurant, gas station, store, etc
  • Business income generated via a passthrough entity, such as an LLC or partnership
  • Using a nonrecourse loan to purchase a property
  • Using margin on a stock purchase

For more information about the Self-Directed IRA, please contact us @ 800.472.0646.

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Sep 28

Which government agency has jurisdiction over determining whether a transaction is a prohibited transaction?

Which government agency has jurisdiction over determining whether a transaction is a prohibited transaction?Through an arrangement between the IRS and the Department of Labor (DOL), it is the DOL’s responsibility to determine whether a specific transaction is a prohibited transaction and to issue prohibited transaction exemptions. When the IRS discovers what appears to be a prohibited transaction in an individual’s IRA, it turns the matter over to the DOL to make the determination. The DOL reviews the situation and responds to the IRS, which in turn responds to the taxpayer. If the IRA grantor wants to apply for a prohibited transaction exemption, he or she must apply to the DOL. The DOL has the authority to issue prohibited transaction exemptions. Some, known as “prohibited transaction class exemptions” (PTCEs), are available for anyone’s reliance, while others, called “individual prohibited transaction exemptions” (PTEs), are issued only to the applicant.

Please contact one of our Self Directed IRA Experts at 800-472-0646 for more information.
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Sep 25

IRA Real Estate Investors Outperforming Wall Street in 2015 Triggering Strong Interest in Self-Directed IRA

Strong housing market helping many self-directed IRA investors generate higher returns than Wall Street

IRA Financial Group, the leading provider of self-directed IRA LLC solutions, announces the finding of its client survey, which showed that a strong percentage of self-directed IRA clients have been happy with their decision to purchased real estate using retirement funds. IRA Financial Group representatives spoke with a sampling of real estate IRA clients that purchased property between 2010 and 2014 with their self-directed IRA and found that a solid majority of IRA LLC clients have been able to outperform Wall Street with their real estate investments. “A large percentage of our Self-Directed IRA clients have been able to diversify their retirement portfolio against a rocky stock market by making real estate investments, “ stated Jacky Ospina, an IRA retirement specialist with the IRA Financial Group. “The use of a self-directed IRA to buy real estate has helped generate strong tax-free returns for a large number of our clients, which has been a great benefit in light of a falling stock market in 2015,” stated Ms. Ospina.

IRA Real Estate Investors Outperforming Wall Street in 2015 Triggering Strong Interest in Self-Directed IRAIRA Financial Group’s Self-Directed IRA for real estate investors, also called a real estate IRA with checkbook control, is an IRS approved structure that allows one to use their retirement funds to make real estate and other investments tax-free and without custodian consent. The Self-Directed IRA LLC involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the Roth IRA custodian) and managed by the IRA holder or any third-party. As manager of the IRA LLC, the IRA owner will have control over the IRA assets to make traditional as well as non-traditional investments, such as real estate.

Using IRA Financial Group’s self directed IRA LLC with “checkbook control” solution, retirement account investors are able to buy real estate and generate tax-deferred or tax-free gains in the case of a self-directed Roth IRA.

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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Sep 24

How to Use Your IRA to Buy a Business

The legality of using retirement funds to purchase employer corporate stock is firmly established in the Internal Revenue Code and under ERISA law. The IRA Financial Group’s in-house retirement tax professionals have spent the last two years developing an IRS and ERISA compliant structure for using retirement funds to acquire or invest in a business tax-free! Because the IRS has stressed the importance of compliance when using retirement funds to purchase a business, it is crucial to work with a company that is operated by a team of in-house tax and ERISA professionals who have worked at some of the largest law firms in the United States, including White & Case LLP and Dewey & LeBoeuf LLP to ensure the structure satisfies IRS and ERISA rules and procedures. The retirement tax professionals at the IRA Financial Group have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new or existing business within 14-21 days.

Step 1 – Establishment of New Corporation

IRA Financial Group’s in-house tax and ERISA professionals will establish a corporation and ensure that the incorporation process is completed accurately in accordance with state law. Our in-house retirement tax professionals have significant experience with the incorporation process in all 50 states and the District of Columbia. Your corporation will be incorporated in the State where you will conduct business or in multiple states if the business will be conducted in more than one state. The IRA Financial Group’s retirement tax professionals will assist you in satisfying all internal corporate formalities, such as establishing a board of directors, appointing officers, and completing the corporate resolution and minutes. Upon the incorporation of the entity, our in-house retirement tax professionals will acquire an Employer Tax ID Number with the IRS for your new corporation.

Step 2 – New Corporation Adopts 401(k) Plan

The IRA Financial Group’s in-house ERISA professionals will establish an IRS approved 401(k) Plan for your new corporation. Plan documents will be drafted so that the new corporation will be the sponsor of the new 401(k) Plan. The Plan documents will appoint the new business owner as the trustee of the plan and will be customized based on the financial goals of you and the business. The Plan will be specifically drafted to allow for investment in your new corporation.

How to Use Your IRA to Buy a BusinessStep 3 – Rollover/Transfer of Funds to your New Corporation

The IRA Financial group’s in-house ERISA professionals will guide you through the process of opening a bank account for your new 401(k) Plan (the account can be opened at any local bank, credit union, or financial institution) as well as helping you complete the necessary transfer/rollover documents to transfer your retirement funds from your previous employer or IRA to your company’s new 401(k) Plan tax-free. Our in-house ERISA professionals will guide you through the entire rollover/transfer process so your retirement funds will be transferred to your new 401(k) Plan in an expedited and tax-free manner.

Step 4 – 401(k) Plan Invests in the new Corporation

The IRA Financial Group’s in-house retirement tax professionals will draft a customized stock purchase agreement detailing the 401(k) Plan’s purchase of new company stock. The IRA Financial Group will coordinate with the selected independent business appraisal to assure that the stock purchase agreement is in compliance with IRS and ERISA rules. Once the 401(k) Plan has purchased stock in the new corporation, the corporation will have the funds to purchase new business assets or help grow the business.

Step 5 – Compliance with IRS and ERISA Rules

Once your retirement funds have been invested in your new business, the retirement tax professionals at the IRA Financial Group will continue to work with you to ensure that the structure remains compliant with IRS and ERISA rules and procedures. In the case of a corporation with employees, the IRA Financial Group will work with a third-party administrator to ensure that the Plan remains compliant so that the structure continues to meet IRS and ERISA rules and requirements.

Work Directly with our on-site tax and ERISA professionals!

Each client of the IRA Financial Group is assigned an individual retirement tax professional who will customize a structure that satisfies his or her financial and retirement needs while ensuring the structure is developed in full IRS & ERISA compliance!

We have developed a process that ensures speed and compliance, by using standardized procedures that work via phone, e-mail, fax, and mail. Your funds will be ready for investment into your new or existing business within 14-21 days.

Call us today at 800-472-0646 to learn more about how you can use your retirement funds to start a new business or grow an existing business tax-free, in full IRS compliance, and without penalties!

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Sep 22

Tax Strategies with a Self Directed Roth IRA

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

Investment Tax Strategies:

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

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

Tax Strategies with a Self Directed Roth IRARoth Conversion Valuation Discount Tax Strategies:

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

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

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

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

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Sep 21

Investing in Real Estate with Your Retirement Funds

It’s a little-known fact that Real Estate can be purchased with retirement account funds. When using a Self-Directed IRA LLC or Solo 401(k) for investments in real estate, your profits are tax-deferred back into your retirement account. More important, if you have full checkbook control over your Self-Directed IRA LLC or Solo 401(k), the purchases can be made on the spot as fast as you can write a check. In the case of a Self-Directed Roth IRA LLC, your gains are tax-free and you can take personal ownership of the property tax-free at the age of 59 1/2.

The purchase of Real Estate in today’s marketplace is a surprisingly advantageous investment for a Self-Directed IRA/LLC or Solo 401(k), since the best deals are typically foreclosures, short sales and estate sales. These characteristics make a perfect investment climate for the individual with full checkbook control of an IRA Financial Group IRA/LLC or Solo 401(k). In fact, the use of a Self-Directed IRA/LLC is one of the most tax efficient ways to finance your real estate purchase.

The Solo 401(k) Plan offers a highly attractive loan feature allowing for the purchase of real estate. Under the Solo 401(k) Plan, a participant can borrow up to either $50,000 or 50% of their account value – whichever is less. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) for any real estate investment purposes.

Our unique, IRS approved structures, created by IRA Financial Group’s in-house retirement tax professionals are personally customized to suit your individual needs. Only a handful of institutions are skilled in these specialized account structures and IRA Financial Group is the “gold standard” for compliance, leadership, customer service, and technological innovation.

Steady Income Generator with no tax bite

Income from a rental property bought with a Self-Directed IRA LLC or Solo 401(k) flows back into the retirement account tax-free.

On a percentage basis, the income from real estate and other alternative investments can be two to eight times higher than today’s fixed-income offerings even after paying expenses such as property taxes and insurance. Meanwhile, the account holder can eventually reap the potential appreciation of the underlying asset, tax-free.

Proceeds from selling an investment property roll back into the IRA or Solo 401(k) tax-free.

The Flexibility to Buy Time-Sensitive Investments

IRA Financial Group’s Self-Directed IRA/LLC allows you to carry a checkbook that is tied to the account while the Solo 401(k) Plan offers the participant the ability to serve in the trustee role. This means that all assets of the 401(k) trust are under your sole authority. This gives you, the investor, an incredible freedom to fund the investment at a moment’s notice. In this arrangement, you can buy Real Estate with the stroke of the pen, without a fund manager or other bureaucrat saying no or otherwise trying to slow down the process.

Make any Domestic or Foreign Real Estate Investment

A Self-Directed IRA LLC or Solo 401(k) Plan allows you to make either domestic or foreign real estate investments. Whether it is residential or commercial real estate property, using a Self-Directed IRA LLC or Solo 401(k) plan to invest in domestic or foreign real estate offers tax advantages, such as tax deferral and/or tax free repatriation of income. Real Estate IRA LLC

Know of a great real estate investment in or outside of the United States? Dream of retiring in your country of birth or spending part of the year overseas? A Self Directed IRA LLC or Solo 401(k) Plan allows you to buy a vacation or retirement home now at today’s prices anywhere in the world, rent it out, and then use it tax-free at the age of 59 1/2.

The IRA Financial Group has experience working with clients who have purchased real estate all over the world including, Canada, Brazil, Argentina, Costa Rica, Puerto Rico, Dominican Republic, Nicaragua, Mexico, India, Israel, Italy, France, Switzerland, Germany, Cayman Islands, Bahamas, and many more countries. Our retirement tax professionals have significant experience in structuring foreign real estate investments that are tax efficient from a U.S. and foreign tax perspective. Contact us at 800-IRA-0646 to learn more.

Tax-Free Real Estate Investing with a Self-Directed Roth IRA LLC

A Self-Directed Roth IRA LLC allows you to invest tax-free in any domestic or foreign real estate investment.

NEW RULES FOR CONVERSIONS FROM IRAS TO ROTH IRAS

For tax years starting in 2011, the $100,000 modified adjusted gross income limit for conversions to a Roth IRA is eliminated and married taxpayers filing a separate return can now convert amounts to a Roth IRA. For any conversation in 2015, any amounts that are required to be included in income are included in your taxable income for 2015.

The Self-Directed Roth IRA LLC, similar to a Self-Directed IRA LLC, allows the IRA holder to:

  • Make a tax-free investment in any type of domestic or foreign real estate property or asset.
  • Purchase a rental real estate project and have all the rental income flow back to your IRA or 401(k) Plan tax-free.
  • Purchase real estate foreclosures and tax liens on the spot, or make personal loans by simply writing a check and generate profits tax-free.
  • Buy your retirement home now at today’s prices, rent it out, and then move in tax-free at the age of 59 1/2!
  • Buy a vacation home now at today’s prices anywhere in the world, rent it out, and then use it tax-free at the age of 59 1/2!
  • Buy an office building now at today’s prices, rent it out, and then move your business in tax-free at the age of 59 1/2.

The IRA Financial Group, Self-Directed IRA LLC and Solo 401(k) enables you to:

  • Invest in real estate tax-free – all real estate related income or gains goes back into your Self-Directed IRA LLC tax-free.
  • Buy and sell domestic, foreign, commercial, residential, and rental properties as real estate IRA investments.
  • Invest in foreclosed properties and tax liens on the spot, or make personal loans by simply writing a check.
  • Buy your retirement home now at today’s prices, rent it out, and then occupy it tax-free with a Self-Directed Roth IRA LLC.
  • Buy and sell mortgages, notes, tax liens, tax deeds, etc.

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

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Sep 18

How Does the Self Directed IRA Structure Work?

Working with our IRA Experts, establishing a Self-Directed IRA LLC is quick and easy. Our IRA Experts will take care of everything for you. The whole process can be handled by phone, email, fax, or mail. Our expert tax and ERISA professionals are on site, greatly reducing the set-up time and cost.

1. Tax-Free Transfer of Funds.

Our IRA Experts will assist you in transferring your retirement funds tax-free from your current custodian to a new FDIC backed/IRS approved Passive Custodian that allows for truly Self Directed IRA investments. With a Self Directed IRA LLC with “checkbook control” you no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with a “checkbook control” Self-Directed IRA LLC, an FDIC backed IRS approved passive custodian is used. The custodian in the “checkbook control” Self Directed IRA LLC structure is referred to as a “passive” custodian largely because the custodian is not required to approve any IRA related investment and simply serves the passive role of satisfying IRS regulations. By using a Self Directed IRA LLC with “checkbook control” you can take advantage of all the benefits of self-directing your retirement assets without incurring excessive custodian fees and custodian created delays.

What Type of retirement Funds May be Transferred Tax-Free?

  • Traditional IRA
  • Roth IRA
  • SEP
  • SIMPLE
  • 401(k)
  • 403(b)
  • Plans for Self-Employed (Keoghs)
  • ESOPs
  • Money Purchase Pensions Plans

Our IRA Experts will assist you in completing all the necessary custodian documents so your retirement funds are transferred to the new passive custodian quickly and without any tax.

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

How Does the Self Directed IRA Structure Work?2. Creation of the Self-Directed IRA LLC

Our in-house tax professionals will form your customized Self-Directed IRA LLC in the state of your choosing. Typically the LLC is formed where the initial IRA investment will be made. Because your IRA and not you will be the member of the LLC, your state residence is not relevant in determining the state in which your LLC will be formed. In addition, a specially drafted Self-Directed IRA LLC Operating Agreement, which is required, will be drafted by our tax professionals as well a Tax ID# will be acquired as part of the LLC formation process.

Our IRA Experts will consult with you on the formation of the new Self-Directed IRA LLC to assure that the LLC is formed in the appropriate state.

3. Open a local bank account for the LLC

Our tax professionals will provide you with the appropriate LLC documents so you can open your IRA LLC checking account at any bank or credit union of your choice.

4. Transfer of IRA Funds to New LLC Bank Account

You, as IRA owner, will direct the Passive Custodian to transfer the IRA funds to your new Self-Directed IRA LLC bank account. The IRA would then become a member of the Self-Directed IRA LLC.

5. Appointment of Manager of LLC

As the Manager of the Self Directed IRA LLC with “Checkbook Control”, you will have the freedom to make all investment decisions for your Self Directed IRA LLC quickly and without custodian consent. As Manager of the Self Directed IRA LLC, you will be able to write a check or wire money from the LLC bank account to make an Investment.

6. Self-Directed IRA Investment is Made

As manager of the LLC, you will have the authority to make investment on behalf of your IRA LLC. The Investment must be made in the name of your Self Directed IRA LLC. All income and gains generated by your IRA LLC will generally flow back to the IRA tax-free!

Self-Directed IRA LLC Structure

To view a diagram of the Self Directed IRA LLC structure, please select the image below.

Chart

For additional information on the advantages of using a Self-Directed IRA LLC with “checkbook control” to make investments, please contact one of our IRA Experts at 800-472-0646.

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Sep 17

Converting Your Retirement Plan to a Self Directed Roth IRA

IRA Rollovers to the Self-Directed Roth IRA Conversion

In general, Roth IRA conversions and retirement plan rollovers to a Roth IRA are taxable events. The reason for this is a Roth IRA is an after-tax account that allows for tax-free distributions if certain rules are satisfied.

A conversion is a taxable movement of cash or other assets, such as real estate from a Traditional IRA, SEP IRA, or a SIMPLE IRA to a Roth IRA. Note – a SIMPLE IRA can only be converted to a Roth IRA after a two-year period, which begins on the date that the first SIMPLE IRA contribution was deposited.

Are there any Eligibility Requirements to do a Roth IRA Conversion?

Under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) eliminated the eligibility restrictions for Roth IRA conversions, beginning with conversions made after January 1, 2010. Thus, beginning in January 1, 2010, there is no longer any eligibility requirements for making a Roth IRA conversion.

Due to this change, many individuals who earn to much to make a Roth IRA contribution, because earning limitations continue to apply to Roth IRA contributions, can contribute to a Traditional IRA and then complete a Roth IRA conversion.

Roth IRA Conversion Tax & Penalty Applications

An individual engaging in a Roth conversion to a Self-Directed Roth IRA LLC structure must pay tax on the Roth IRA conversion on a pro rata basis – the portion representing pretax assets is taxable in the year of the conversion, and the portion representing after-tax assets is not taxable. The taxpayer must file Form 8606 to determine the taxable portion of the conversion. The taxpayer must aggregate all the pre-tax IRA assets to determine the taxable and nontaxable assets.

Procedures for Doing a Self-Directed Roth IRA Conversion

A Roth IRA conversion can technically be completed either via a direct or indirect rollover. A conversion in which the check is made payable to the receiving financial institution for the benefit of the individual’s Roth IRA is a direct conversion. An indirect conversion occurs when the IRA holder requests and receives a distribution from his or her pre-tax IRA custodian and deposits the amount into a Roth IRA account within 60 days. Note – with an indirect Roth IRA conversion, the one rollover per 12-month restriction does not apply.

Reporting a Roth IRA Conversion to a Self-Directed Roth IRA

Because all conversions are generally subject to taxation, the financial organization distributing the pre-tax IRA assets must apply the withholding rules under Internal Revenue Code Section 3405. However, an exception applies to IRA funds that are being converted to a Roth IRA. The financial institution executing the Roth IRA conversion would report the conversion on the IRS Form 1099-R. On IRS Form 1099-R the amount being converted would be reported in Box 7, using distribution reason code 2, Early distribution, exception applies.

A Roth IRA conversion is a reportable transaction regardless of whether it was handled directly or indirectly.

Retirement Plan Rollovers to a Self-Directed Roth IRA

Eligible participants of a qualified retirement plan, such as a 401(k), 403(b), or 457(b) plan have been able to roll over plan assets to a Traditional IRA for several years. Since 2006, individuals have been allowed to roll over designated Roth account distributions to Roth IRAs, but not Traditional IRAs. However, beginning January 1, 2008, individual may roll over all employer plan assets to a Roth IRA.

Retirement Plan Rollovers to a Self-Directed Roth IRA

Eligible individuals may directly or indirectly roll over retirement plan assets to a Self-Directed Roth IRA. Like a Roth IRA rollover, indirect rollovers must be completed within 60 days after constructive receipt of the IRA assets.

Direct Rollover to a Self-Directed Roth IRA

When an individual directly rolls over an employee sponsored retirement plan distribution to a Self-Directed Roth IRA (excluding a designated Roth account rollover to a Roth IRA), the financial institution transferring the retirement funds must report the tax-free direct rollover distribution on IRS Form 1099-R, using code G, Direct rollover and rollover contribution. The receiving Self-Directed Roth IRA custodian must report the amount as a rollover contribution in Box 2 of IRS Form 5498.

Indirect Rollover to a Self-Directed Roth IRA

If an individual is eligible and takes a distribution from an employer sponsored retirement plan (i.e. 401(k) Plan), the financial institution sending the payment should make the check payable to the individual. If the distribution is eligible for a rollover, the payer financial institution must apply withholding. The payer financial institution must report such distributions on IRS form 1099-R using the applicable distribution code ( code 1,4,7).

The plan participant would then be required to deposit the amount into a Traditional IRA account within 60 days. Once the funds have been deposited in a Traditional IRA account, the IRA funds can be converted into a Roth IRA. The new Self-Directed Roth IRA custodian receiving the rollover assets must report the amounts on IRS Form 5498 as a rollover contribution in Box 2.

To learn more about the Self-Directed Roth IRA conversion rules, please contact a tax professional at 800-472-0646.

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Sep 15

Flipping Homes with an IRA and the UBTI Rules

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

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

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

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

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

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

How does the UBTI Rules Apply to Flipping Homes?

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

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

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

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Sep 14

How Long Does it Take to Set Up a Self Directed IRA

The IRA Financial Group will take care of setting up your entire Self Directed IRA LLC structure in a matter of days. Our in-house tax and ERISA professionals will work with you directly to customize a structure that satisfies your tax and investment goals.

How Long Does it Take to Set Up a Self Directed IRAThe whole process can be handled by phone, email, fax, or mail. Our expert tax and ERISA professionals are on site greatly reducing the set-up time and cost. Our in-house retirement tax professionals will complete all the necessary IRA rollover or transfer paperwork and assist you in transferring your funds to the new passive custodian so that your funds will be available for investment in a matter of days. Typically it takes anywhere between 7 and 21 days for your funds to be transferred to your new “Checkbook Control” Self Directed IRA LLC. In most cases, we are able to complete the IRA LLC facilitation aspects of the transaction within a few days; however, the transfer of funds from one custodian to another can take some time depending on the financial institution and the type of assets being transferred. Most importantly, you will find that our fee for this service is significantly less than other companies that perform the same or similar services.

To get started or to learn more about the Self-Directed IRA LLC Structure, please contact one of our IRA Experts at 800-472-0646.

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