Dec 14

IRA Financial Trust – Your Bitcoin IRA Custodian

IRA Financial Trust Company has helped hundreds of clients use their retirement funds to invest in cryptocurrencies, such as Bitcoins and Ethereum.

IRA Financial Trust is proud to offer Checkbook IRA custodial services along with its full service IRA administration services all for one low price without any transaction or asset valuation fees. IRA Financial Trust Company is one of the few full-service IRA custodians who specialize in establishing Checkbook Control IRA LLC accounts, which allow for Bitcoin and other cryptocurrency type investments. With IRA Financial Trust, buy, hold, or sell cryptocurrencies from a local LLC bank account and have total control over your cryptocurrency investment.

What is Cryptocurrency?

For a growing number of investors, cryptocurrency is not only the future of money, but also an attractive and potentially profitable investment asset, though highly risky and volatile. Bitcoin has become the public’s most visible and popular cryptocurrency and it is also among the oldest, having first emerged in 2009. Over one year, the market capitalization for Bitcoin has increased enormously, from around $7.16 billion in May 2016 to $27.9 billion today. As the price of Bitcoin has risen over the last year or so has the confidence among investors, including retirement account investors.

IRA Financial Trust - Your Bitcoin IRA CustodianThe process of buying cryptocurrency is still somewhat unclear for a lot of people. It’s not a stock or a traditional investment. For most people in the U.S., Coinbase would be the easiest option to buy cryptocurrency, such as Bitcoins, Ethereum, or Litecoin. After verifying the account, the investor can add a number of payment methods including credit or debit cards, U.S. bank accounts, or even wire transfers of funds. Cryptocurrency transactions are not anonymous and the identify of the currency owner can be traced back to a real-world identity.

As a cryptocurrency, Bitcoin is generated through the process of “mining” – essentially using your computer’s processing power to solve complex algorithms called “blocks.” One can buy and sell Bitcoin on an exchange, much like a physical currency exchange, converting wealth from Bitcoin to US dollars to other national currencies, back to dollars or Bitcoin. And that’s how money is made.

Tax-Treatment of Buying Cryptocurrency with Non-Retirement Funds

Even though Bitcoin is labeled as a “cryptocurrency”, from a federal income tax standpoint, Bitcoins and other cryptocurrency are not considered a “currency.” On March 25, 2014, the IRS issued Notice 2014-21, which for the first time set forth the IRS position on the taxation of virtual currencies, such as Bitcoins. According to the IRS Notice, “Virtual currency is treated as property for U.S. federal tax purposes.” The Notice further stated “general tax principles that apply to property transactions apply to transactions using virtual currency.” In other words, the IRS is treating the income or gains from the sale of a virtual currency, such as Bitcoins, as a capital asset, subject to either short-term (ordinary income tax rates) or long term capital gains tax rates, if the asset is held greater than twelve months (15% or 20% tax rates based on income). By treating bitcoins and other virtual currencies as property and not currency, the IRS is imposing extensive record-keeping rules – and significant taxes – on its use.

Advantages of Using a Self-Directed IRA LLC to Invest in Cryptocurrency

The IRS tax treatment of virtual currency has created a favorable tax environment for retirement account investors. In general, when a retirement account generates income or gains from the purchase and sale of a capital asset, such as stocks, mutual funds, real estate, etc., irrespective of whether the gain was short-term (held less than twelve months) or long-term (held greater than twelve months), the retirement account does not pay any tax on the transaction and any tax would be deferred to the future when the retirement account holder taxes a distribution (in the case of a Roth IRA or Roth 401(k) plan no tax would be due if the distribution is qualified). Hence, using retirement funds to invest in cryptocurrencies, such as Bitcoins could allow the investor to defer or even eliminate, in the case of a Roth, any tax due from the investment. Note – retirement account investors interested in mining Bitcoins versus trading, could become subject to the unrelated business taxable income tax rules if the “mining” constituted a trade or business.

How to Use a Self-Directed IRA LLC to Invest in Cryptocurrency?

Working with IRA Financial Trust to purchase cryptocurrencies, such as Bitcoins, Ethereum, Ethereum Classic, or Litecoins with a self-directed IRA is quick and easy.

1. Establish a self-directed IRA account with IRA Financial Trust Company.

2. Rollover of retirement funds, cash or in-kind, tax-free to new self-directed IRA account.

3. The IRA assets will then be transferred to the LLC tax-free in exchange for 100% interest in the newly established IRA LLC.

4. You as manager of the LLC will open a bank account for the LLC at any local bank. IRA Financial will draft LLC Operating Agreement identifying you as manager of the LLC and the IRA as the sole member.

5. You as manager of the LLC will then have checkbook control over all the assets/funds in the IRA LLC to make the cryptocurrency investment.

6. Since the LLC is owned 100% by an IRA, it will be treated as a disregarded entity for tax purposes. No Federal income tax return is required to be filed and all income and gains from the cryptocurrency investment will flow back to the IRA without tax.

Cryptocurrency investments, such as Bitcoins, are risky and highly volatile. Any investor interested in learning more about Bitcoins should do their diligence and proceed with caution.

IRA Financial Trust Company was founded by tax attorneys who worked at some of the largest law form in the world, including White & Case LLP and Dewey and LeBoeuf LLP, and have helped over 15,500 clients self-direct their retirement funds through their ownership in the IRA Financial Group LLC.

IRA Financial Trust Company is a regulated non-banking financial institution that is made up of retirement tax specialists committed to helping you make Self-Directed retirement investments quickly while minimizing annual fees. IRA Financial Trust is a non-banking IRA custodian.

The IRA Financial Trust Advantage

· One low annual fee

· No transaction or annual account asset fees

· IRA Financial Group has helped over 15,500 clients establish Self-Directed retirement accounts totaling nearly 4.9 billion dollars since 2010

· Work with Self-Directed IRA experts

· Experience our Continuing Retirement Education (CRE) Platform

· Invest in what you know and understand from the comfort of a local bank

· Specializing in Checkbook Control Self-Directed IRAs

To learn more about the advantages of using the IRA Financial Trust to establish your Self-Directed IRA, please contact a Self-Directed retirement expert at 1-800-472-1043.

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Nov 20

Maximum Contributions for Your Self Directed IRA and Roth IRA

The maximum contribution limit for a self-directed IRA for 2017 is $5,500 or $6,500 if you’re age 50 or older, or your taxable compensation for the year, if less. Contributions to a self-directed Roth IRA may be limited based on your filing status and income.

Contributions made to a self-directed IRA LLC must be made to the IRA administrator/custodian and may not be contributed directly to the LLC. Once the IRA contribution is made to the IRA administrator/custodian, the funds can then be transferred to the IRA LLC.

Is my IRA contribution deductible on my tax return?

If neither you nor your spouse is covered by an employer retirement plan, such as a 401(k), your deduction is allowed in full.

For contributions to a traditional IRA, the amount you can deduct may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. In the case of a Roth IRA, contributions aren’t deductible.

Maximum Contributions for Your Self Directed IRA and Roth IRACan I contribute to a traditional or Roth Self-Directed IRA if I’m covered by a retirement plan at work?

Yes, you can contribute to a traditional and/or Roth self-directed IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA plan). If you or your spouse is covered by an employer-sponsored retirement plan, such as a 401(k) plan and your income exceeds certain levels, you may not be able to deduct your entire contribution.

Can I establish a self-directed IRA if only one spouse has earned income for the year?

Yes. If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return and cannot exceed the maximum IRA contributions for the year (for 2017 $5500 or $6500 if over the age of 50). It doesn’t matter which spouse earned the compensation.

How can I make a Roth IRA contribution if I earned too much money in 2017?

For 2017, if your modified adjusted gross income is below $181,000 and you file a joint return, you can make a Roth IRA contribution. For those who earned greater than $181,000 during the year, the IRS provides a formula, which will set forth the reduced maximum amount of Roth IRA contributions permitted for the year, if any.

One way to circumvent the Roth IRA income threshold rules, if to simply make an after-tax traditional IRA contribution and then convert the Traditional IRA into a Roth IRA. Since the Traditional IRA contribution was made after-tax there would be no tax on the Roth IRA conversion. This tactic was made possible when the IRS removed the income level restrictions for making Roth conversions in 2010.

Can I Make IRA contributions after age 70½

You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.

To learn more about the self-directed IRA and self-directed Roth IRA contribution rules, please contact a self-directed IRA tax expert at 800-472-0646.

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Nov 13

How To Invest in Coins with a Self-Directed IRA LLC

The IRS does not list the type of assets or investments that may be purchased with retirement funds, but does indicate which categories of assets or investments are not permitted.

The categories of transactions that are not permitted to be purchased using a Self-Directed IRA LLC can be found in Internal Revenue Code Sections 408 & 4975.

When it comes to coins or metals, Internal revenue Code Section 408 is generally the provision that applies. In general, collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within a Self-Directed IRA LLC, pursuant to Internal Revenue Code Section 408.

How To Invest in Coins with a Self-Directed IRA LLCInternal Revenue Code Section 408 is specific as to what defines a collectible. Some notable exceptions are allowed for certain gold (such as American Eagle) and silver coins and any coins issued by a state. Legislation in 1997 further liberalized the rules for IRAs by making reference to specific definitions of acceptable coins in USCS, title 31; IRC sections 5112(a), (e) and (k); the Commodity Exchange Act; and IRC section 408(m)(3).

This change, in general, resulted in a windfall for individual collectors as well as coin and precious metal dealers (all of the coins allowed must be minted by the U.S. government or the states).

The Law

Internal Revenue Code Section 408(m):

(3) Exception for certain coins and bullion

For purposes of this subsection, the term “collectible” shall not include —

(A) any coin which is —

(i) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112 (a) of title 31, United States Code,

(ii) a silver coin described in section 5112 (e) of title 31, United States Code,

(iii) a platinum coin described in section 5112 (k) of title 31, United States Code, or

(iv) a coin issued under the laws of any State, or

(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) requires for metals which may be delivered in satisfaction of a regulated futures contract if such bullion is in the physical possession of a trustee described under subsection (a) of this section.

Subsection (a) states:

(a) Individual retirement account

For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:

(1) Except in the case of a rollover contribution described in subsection (d)(3) in section 402 (c), 403 (a)(4), 403 (b)(8), or 457 (e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219 (b)(1)(A).

(2) The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.

(3) No part of the trust funds will be invested in life insurance contracts.

(4) The interest of an individual in the balance in his account is non-forfeitable.

(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401 (a)(9) and the incidental death benefit requirements of section 401 (a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.

Hence, it is clear that in the case of physical metals, such as gold, the metals must be held in the physical possession of a U.S. trust (i.e. bank or depository), however, the “physical possession” requirement does not appear to relate to the possession of coins. A more detailed analysis will follow below.

31 U.S.C. 5112 refers to Denominations, specifications and design of coins.

(a) The Secretary of the Treasury may mint and issue only the following coins:

(1) a dollar coin that is 1.043 inches in diameter.

(2) a half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.

(3) a quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.

(4) a dime coin that is 0.705 inch in diameter and weighs 2.268 grams.

(5) a 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.

(6) except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.

(7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.

(8) A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold.

(9) A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold.

(10) and contains one-tenth troy ounce of fine gold.

(e) Notwithstanding any other provision of law, the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which —

(1) are 40.6 millimeters in diameter and weigh 31.103 grams;

(2) contain .999 fine silver;

(3) have a design —

(A) symbolic of Liberty on the obverse side; and

(B) of an eagle on the reverse side;

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

How do I hold IRS Approved Coins with a Self-Directed IRA LLC?

Now that you have a clear idea of the types of coins that the IRS allows to be purchased using retirement funds, the next questions becomes how can the coins be held without violating IRS rules.

Most people don’t realize that a coin can be treated as bullion. As a result, based on the language in IRC 408(m)(3)(B), all coins defined in IRC 408(m), including American Eagle and State minted coins must be held in the ‘physical possession’ of a U.S. trustee, just like all precious metals (i.e. pure gold and silver bars). Since IRS approved coins, such as American Eagle and State minted coins are considered bullion for purposes of Internal Revenue Code Section 408(m), all IRS approved coins, just like precious metals, should be held in the “physical possession” of a U.S. bank or depository.

Although, bullion may be cast into bars or minted into coins. The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value as money. Hence, it appears that the “physical possession” requirement outlined for bullion in IRC 408(m)(3)(B) does pertain to coins, such as American Eagle coins, as defined in IRC 408(m)(3)(A), since they can be defined as bullion. That being said, it is best for retirement account holders to hold all IRS approved coins outlined in IRC 408(m) at a depository or bank safe deposit box and not in their personal possession. It is best practice to hold all IRS approved coins at a bank or depository, including the American Eagle and State minted coins.

Holding IRS Approved Coins in a Safe Deposit Box

IRC Section 408(m) clearly states that gold, silver, or palladium bullion, which includes IRS approved coins, must be held in the physical possession of a U.S. trustee, otherwise known as a U.S. bank or financial institution.

Here is the exact language from the tax code under IRC 408(m)(3)(B):

“Any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, U.S.C.) requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section.”

The tax code clearly states that any IRS approved metals (bullion) must be held in the physical possession of a trustee, which we now know means a U.S. bank. So the question then becomes is whether holding IRS approved coins (bullion) in a safe deposit box at a U.S. bank in the name of the Self-Directed IRA LLC or Solo 401(k) plan that would be considered to be in the ‘physical possession’ of a U.S. trustee or bank and satisfy the definition under IRC 408(m)?

An argument can then be made that holding precious metals (bullion) at a U,S. bank safe deposit box would not be considered to be in the physical possession of the IRA holder since the bullion will physically be held in a safe deposit box of the bank in the name of the IRA LLC or Solo 401(k) plan. However, the safe deposit box is in the constructive control of the Self-Directed IRA LLC manager or Solo 401(k) plan trustee. That being said, the Internal Revenue Code under Section 408 clearly states ‘physical possession’ and not possession or ‘constructive control.’ From a legal standpoint, possession is not defined to represent control, meaning you can be in possession of an item but not in control or ownership of it. Therefore, many tax practitioners take the position that holding bullion in a safe deposit box in the name of the Self-Directed IRA LLC or Solo 401(k) plan would satisfy the ‘physical possession’ requirement under Internal Revenue Code Section 408(m).”

Unfortunately there is no IRS guidance on this. What is clear is that, IRS approved precious metals should not be stored in the home or personal possession of the Self-Directed IRA holder, individual Solo 401(k) plan participant, or any person that does not satisfy the definition of a trustee according to the Internal Revenue Code. It is good practice to hold IRS approved precious metals or coins owned by a retirement account at an IRS approved depository where it is clearly in the ‘physical possession’ of a US Bank (trustee as defined under IRC 408(a).

To learn more about purchasing and holding coins with a Self-Directed IRA LLC, please contact one our tax professionals at 800-472-0646.

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Nov 09

Rules for a Self-Directed IRA when Investing in Real Estate

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

The basis of the prohibited transaction rules are based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. These rules can be found in Internal Revenue Code Section 4975. In general, the definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

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

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

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

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

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

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

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Nov 07

IRA Financial Group & IRA Financial Trust Company Partner to Introduce Platform to Trade Cryptocurrency

New Crypto IRA Platform will allow one to use IRA or 401(k) funds to buy and sell bitcoins & other cryptocurrencies through special purpose LLC

IRA Financial Group, the leading provider of self-directed IRA LLC and Solo 401(k) Plan & IRA Financial Trust Company, a leading self-directed IRA custodian, announces that it has partnered to offer a platform for using IRA or 401(k) plan funds to purchase cryptocurrencies, such as bitcoins. The Bitcoin IRA platform will allow one to invest IRA or 401(k) plan funds via a special purpose limited liability company (“LLC”) that will be controlled by the IRA owner, as manager of the LLC. “The great thing about using a special purpose self-directed IRA LLC to purchase bitcoins with retirement funds is that you have total control over the bitcoin investment,” stated Adam Bergman, a partner with the IRA Financial Group.

IRA Financial Group & IRA Financial Trust Company Partner to Introduce Platform to Trade CryptocurrencyAccording to Mr. Bergman, one of the main issues with using a full-service IRA custodian to purchase cryptocurrencies is that due to the high volatility involved in the investment, relying on an IRA custodian to make investments will result in time delays and missed opportunities, which can have a negative financial impact on the IRA holder.

IRA Financial Group & IRA Financial Trust Company’s Crypto IRA platform with checkbook control will allow retirement account holders to buy, sell, or hold Bitcoins and other cryptocurrency assets and generate tax-deferred or tax-free gains, in the case of a Roth IRA. The primary advantage of using a self-directed IRA LLC to make Bitcoin investments is that all income and gains associated with the IRA investment grow tax-deferred or tax-free in the case of a Roth IRA.

IRA Financial Group & IRA Financial Trust Company has partnered to offer a Crypto self-directed IRA LLC platform for cryptocurrency investors. The self-directed IRA LLC is an IRS approved structure that allows one to use their retirement funds to make Bitcoin and other investments tax-free and without custodian consent.

IRA Financial Group is the market’s leading provider of self-directed retirement plans. 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.

The IRA Financial Trust Company, a self-directed IRA custodian, was founded by Adam Bergman, a partner with the IRA Financial Group.

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

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Nov 01

Is Your Self-Directed IRA Protected from Creditors?

Retirement accounts have become many Americans’ most valuable assets. That means it is vital that you have the ability to protect them from creditors, such as people who have won lawsuits against you.

In general, the asset/creditor protection strategies available to you depend on the type of retirement account you have (i.e. Traditional, IRA, Roth IRA, or 401(k) qualified plan, etc), your state residency, and whether the assets are yours or have been inherited.

Using a Self-Directed IRA LLC will offer you the ability to make a wide range of traditional as well as non-traditional investments, such as real estate, in addition to offering you strong asset and creditor protection. In addition, by using an LLC wholly owned by your IRA, you will also gain another layer of limited liability protection. In this regard, using a Self-Directed IRA LLC to make investments offers you far greater asset and creditor protection versus making the investment personally. For this reason, growing and investing your retirement funds through a Self-Directed IRA LLC is a great tool to protect your retirement assets from creditors, inside or outside of bankruptcy.

Federal Protection for IRAs for Bankruptcy

Like 401(k) qualified plans, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA” or the “Act”) effective for bankruptcies filed after October 17, 2005, gave protection to a debtor’s IRA funds in bankruptcy by way of exempting them from the bankruptcy estate. The general exemption found in sec­tion 522 of the Bankruptcy Code, 11 U.S.C. §522, pro­vides an unlimited exemption for IRAs under section 408 and Roth IRAs under section 408A. IRAs created under an employer-sponsored section 408(k) sim­plified employee pension (a “SEP IRA”) or a sec­tion 408(p) simple retirement account (a “SIMPLE IRA”), as well as pension, profit sharing, or qualified section 401(k) Plan wealth transferred to a rollover IRA.

Traditional and Roth IRAs that are created and funded by the debtor are subject to an exemp­tion limitation of $1 million in the aggregate for all such IRAs (adjusted for inflation and subject to increase if the bankruptcy judge determines that the “interests of justice so require”). It is understood that a rollover from a SEP or SIMPLE IRA into a rollover IRA receives only $1 million of protection since such a section 408(d)(3) rollover is not one of the rollovers sanctioned under Bankruptcy Code section 522(n).

Protection of IRAs from Creditors Outside of Bankruptcy

In general, ERISA pension plans, such as 401(k) qualified plans, are afforded extensive anti-alienation credi­tor protection both inside and outside of bankrupt­cy. However, these extensive anti-alienation protections do not extend to an IRA, including a Self-Directed IRA, arrangement under Code section 408. Therefore, since an individually estab­lished and funded Traditional or Roth IRA is not an ERISA pension plan, IRAs are not preempted un­der ERISA. Thus, for anything short of bankruptcy, state law determines whether IRAs (including Roth IRAs) are shielded from creditors’ claims.

Note – on June 12, 2014, the Supreme Court unanimously upheld a Seventh Circuit decision that said inherited IRAs do not enjoy the protections of IRAs in bankruptcy proceedings.

The following table will provide a summary of state protection afforded to IRAs, including Self-Directed IRAs, from creditors outside of the bankruptcy context.

State State Statute Special Statutory Provision State Traditional IRA Exemption from Creditors State Roth IRA Exemption from Creditors
Alabama Ala. Code §19-3B-508 Yes No
Alaska Alaska Stat. §09.38.017 The exemption does not apply to amounts contributed within 120 days before the debtor files for bankruptcy. Yes Yes
Arizona Ariz. Rev. Stat. Ann. § 33-1126C The exemption does not apply to amounts contributed within 120 days before a debtor files for bankruptcy. Yes Yes
Arkansas Ark. Code Ann. §16-66-220 Yes Yes
California Cal. Civ. Proc. Code § 704.115 Yes – IRAs are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires. No
Colorado Colo. Rev. Stat. §13-54-102 Yes Yes
Connecticut Conn. Gen. Stat. §52-321a Yes Yes
Delaware Del Code Ann. § 10-4915 Yes Yes
D.C. D.C. Code § 15-501(a)(9) & (10) Yes Yes
Florida Fla. Stat. Ann. §222.21 The debtor’s IRAs are exempt from creditors, but one Florida court has held that inherited IRAs are not exempt from creditors (Robertson v. Deeb, 16 So. 3d 936 (Fla. 2d Aug. 14, 2009). Yes Yes
Georgia Georgia Code Ann. § 44-13-100(a)(2.1) IRAs are exempt only to the extent necessary for the support of the debtor and any dependent. Yes No
Hawaii Hawaii Rev. Stat. § 651-124 The exemption does not apply to contributions made to a plan or arrangement within three years before the date a civil action is initiated against the debtor. Yes No
Idaho Idaho Code §§ 11-604A, 55-1011 Yes No
Illinois I.L.C.S. § 5/12-1006 Yes Yes
Indiana Ind. Code Ann. § 55-10-2(c)(6) Yes No
Iowa Iowa Code Ann. § 627.6(8)(e), (f) Yes Yes
Kansas Kan. Stat. Ann. § 60-2308 Yes Yes
Kentucky Ky. Rev. Stat. Ann. § 427.150(2)(f) The exemption does not apply to any amounts contributed to an individual retirement account if the contribution occurred within 120 days before the debtor filed for bankruptcy. The exemption also does not apply to the right or interest of a person in individual retirement account to the extent that right or interest is subject to a court order for payment of maintenance or child support. Yes Yes
Louisiana La. Rev. Stat. Ann. §§ 20:33(1), 13:3881(D) No contribution to an IRA is exempt if made less than one calendar year from the date of filing bankruptcy, whether voluntary or involuntary, or the date rights of seizure are filed against the account. The exemption also does not apply to liabilities for alimony and child support. Yes Yes
Maine Me. Rev. Stat. Ann. Tit. 14, § 4422(13)(E) Exempt only to the extent reasonably necessary for the support of the debtor and any dependent. Yes Yes
Maryland Md. Code Ann. Cts. & Jud. Proc. § 11-504(h)(1) Yes Yes
Massachusetts Mass. Gen. L. Ch. 235 § 34A; 236 § 28 The exemption does not apply to an order of court concerning divorce, separate maintenance or child support, or an order of court requiring an individual convicted of a crime to satisfy a monetary penalty or to make restitution, or sums deposited in a plan in excess of 7% of the total income of the individual within 5years of the individual’s declaration of bankruptcy or entry of judgment. Yes Yes
Michigan Mich. Comp. Laws Ann. §§ 600.5451(1), 600.6023(1)(k) The exemption does not apply to amounts contributed to an individual retirement account or individual retirement annuity if the contribution occurs within 120 days before the debtor files for bankruptcy. The exemption also does not apply to an order of the domestic relations court. Yes Yes
Minnesota Minn. Rev. Stat. Ann. § 550.37(24) Protection limited to $60,000 (adjusts for inflation). Yes Yes
Mississippi Miss. Code Ann. § 85-3-1(e)Applies to solo 401k plans Yes Yes
Missouri Mo. Ann. Stat. § 513.430.1(10)(e) and (f) Exemption limited to extent reasonably necessary for support. Yes Yes
Montana Mont. Code Ann. §§ 19-2-1004, 25-13-608, 31-2-106 Yes Yes
Nebraska Neb. Rev. Stat. § 25-1563.01 For IRAs – Limited to the extent reasonably necessary for support.Individual Retirement Accounts are generally protected from attachment and garnishment to the extent the funds contained therein are reasonably necessary for the support of the debtor or any dependent of the debtor. Novak v. Novak, 245 Neb. 366, 513 N.W.2d 303 (1994). Yes Yes
Nevada Nev. Rev. Stat. § 21.090(1)(q) The exemption is limited to $500,000 in present value held in an IRA. Yes Yes
New Hampshire N.H. Code Ann. § 511:2, XIX Yes Yes
New Jersey N.J. Stat. Ann. § 25:2-1(b) Yes Yes
New Mexico N.M. Stat. Ann. §§ 42-10-1, 42-10-2 Yes Yes
New York N.Y. Civ. Prac. L. and R. § 5205(c) Yes Yes
North Carolina N.C. Gen. Stat. § 1C-1601(a)(9) Yes Yes
North Dakota N.D. Cent. Code § 28-22-03.1(3) Retirement funds that have been in effect for at least one year, to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986. The value of those assets exempted may not exceed one hundred thousand dollars for any one account or two hundred thousand dollars in aggregate for all account. Yes Yes
Ohio Ohio Rev. Code Ann. § 2329.66(A)(10)(b) and (c) SEP and SIMPLE IRAs are not protected. Yes Yes
Oklahoma 31 Okla. St. Ann. § 1(A)(20) Yes Yes
Oregon 42 Pa. C.S. §§ 8124(b)(1)(vii), (viii), (ix) Yes Yes
Pennsylvania 42 Pa. C.S. §§ 8124(b)(1)(vii), (viii), (ix) 100%, except for amounts (1) contributed within 1 year (not including rollovers), (2) contributed in excess of $15,000 in a one-year period, or (3) deemed to be fraudulent conveyances. Yes Yes
Rhode Island R.I. Gen. Laws § 9-26-4(11), (12) Yes Yes
South Carolina S.C. Code Ann. § 15-41-30(12) IRA exemption limited to the extent reasonably necessary for support. For Solo 401(k) Plans, not limited to the extent reasonable necessary for support. Yes Yes
South Dakota S.D. Cod. Laws §§ 43-45-16

S.D. Cod. Laws §§ 43-45- 17

Exempts “certain retirement benefits” up to $1,000,000. Yes Yes
Tennessee Tenn. Code Ann. § 26-2-105 Distributions 100% exempt to the extent they are on account of age, death, or length of service and debtor has no right or option to receive other than periodic payments at or after age 58. Yes Yes
Texas Tex. Prop. Code § 42.0021 Yes Yes
Utah Utah Code Ann. § 78-23-5(1)(a)(xiv) The exemption does not apply to amounts contributed or benefits accrued by or on behalf of a debtor within one year before the debtor files for bankruptcy. Yes Yes
Vermont 12 Vt. Stat. Ann. § 2740(16) Yes Yes
Virginia Va. Code Ann. § 34-34 Limited to interest in one or more plans sufficient to produce annual benefit of up to $25,000 (pursuant to actuarial table in statute). Yes Yes
Washington Wash. Rev. Code § 6.15.020 Yes Yes
West Virginia W. Va. Code § 38-10-4(j)(5) Principal 100% protected. Exemption for distributions limited to the extent reasonably necessary for support. Yes No
Wisconsin Wisc. Stat. Ann. § 815.18(3) Yes Yes
Wyoming Wy. Stat. Ann § 1-20-110(a)(i), (ii). No statutory exemption for IRAs. – only mentions retirement plans No statutory exemption for IRAs. – only mentions retirement plans No No

 

IRA Asset Protection Planning

The different federal and state creditor protection afforded to 401(k) qualified plans and IRA, including Self-Directed IRAs, inside or outside the bankruptcy context presents a number of important asset protection planning opportunities.

If, for example, you have left an employer where you had a qualified plan, rolling over assets from a qualified plan, like a 401(k), into an IRA may have asset protection implications. For example, if you live in or are moving to a state where IRAs are not protected from creditors or have in excess of $1million dollars in plan assets and are contemplating bankruptcy, you would likely be better off leaving the assets in the company qualified plan.

Note – If you plan to leave at least some of your IRA to your family, other than your spouse, the assets may not be protected from your beneficiaries’ creditors, depending on where the beneficiaries live. IRA assets left to a spouse would likely receive creditor protection if the IRA is re-titled in the name of the spouse. However, you will likely be able to protect your IRA assets that you plan on leaving to your family, other than your spouse, by leaving an IRA to a trust. To do that, you must name the trust on the IRA custodian Designation of Beneficiary Form on file.

The IRA Asset & Creditor Protection Solution

By having and maintaining an IRA, you will have $1 million of asset protection from creditors in a bankruptcy setting. However, the determination of whether your IRA will be protected from creditors outside of bankruptcy will largely depend on state law. As illustrated above, most states will afford IRAs full protection from creditors outside of the bankruptcy context.

Why Work With the IRA Financial Group?

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. Over the years, we have helped thousands of clients establish IRS compliant Self-Directed IRA LLCs specifically for asset and creditor protection purposes. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and IRA knowledge in this area is unmatched.

To learn more about using a “Checkbook Control” Self-Directed IRA LLC to make real estate and other investments without tax, please contact one of our Self-Directed IRA Experts at 800-472-0646 for more information.

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Oct 26

Here’s What You Need to Know About the 2018 IRA Contribution Limits

Last week, the IRS announced the new limits for retirement plans for 2018.  Here’s what you need to know about your IRA Contributions –

2018 IRA (including Self-Directed IRAs) Contribution Limit – Limits remain the same as 2017.  For individuals under age 50, the limit is $5,500.  For those 50 and older, you can make an additional $1,000 catch-up contribution, bringing the total limit to $6,500.

Here's What You Need to Know About the 2018 IRA Contribution Limits2018 Deductible IRA Phase-outs – If you participate in en employer-sponsored plan (such as a 401(k) plan), there are income restrictions for a deduction.  If you are single or head-of-household, you can get a full deduction if your adjusted gross income (AGI) is $63,000 or less.  It phases out until an AGI of $73,000.  An AGI above that means you cannot deduct your IRA contribution for the year.  If you are married filing jointly, you receive a full deduction if your AGI is $101,000 or less.  This phases out until an AGI of $121,000.  If you are married filing jointly and your spouse participates in an employer’s plan, the phase-out starts at $189,000 and you are not eligible for a deduction if your AGI is above $199,000.

2018 Roth IRA (including Self-Directed Roth IRAs) Contribution Limit – Again, these are the same as last year (and the same amount as traditional plans).  $5,500 if you are under age 50 and $6,500 if you are age 50+.

2018 Roth IRA Income Limits – You may only contribute directly to a Roth IRA if you are below the income limits.  If you are single or head-of-household, you may make a full contribution if your AGI is less than $120,000.  Your contribution limit phases out until $135,000, in which you may not contribute to a Roth directly.  If you are married filing jointly, an AGI of less than $189,000 allows for a full contribution.  This amount phases out until it reaches $199,000.

Note: You must have earned income in the year(s) in which you wish to contribute to an IRA.  The amount you may contribute is the lesser of the annual limit or your earned income for the year.

SEP IRA – Contribution limit increases $1,000 to $55,000 for 2018.

SIMPLE IRA – The limit remains the same as 2017 at $12,500 with a $3,000 catch-up for those age 50 and up.

For more information about the IRA Contribution limits, please contact us @ 800.472.0646.

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Oct 12

IRA Financial Group – Leading Self-Directed IRA Provider – Introduces New Cryptocurrency Forum for Self-Directed IRA Clients

Bitcoin IRA forum for IRA Financial Group clients will allow clients to share information and tips on all matters involving cryptocurrency investing with IRA funds

IRA Financial Group, the leading provider of self-directed IRA LLC and Solo 401(k) Plan solution is proud to announce the introduction of a new cryptocurrency forum for all IRA Financial Group clients who can share information, tips, recommendations, and review of all matters involving the use of self-directed IRA and Solo 401(k) plans to make cryptocurrency investments, such as bitcoins. “We have received a tremendous amount of feedback from clients looking for a way to communicate with our clients and discuss matters involving using retirement funds to buy cryptocurrencies, such as bitcoins,” stated Adam Bergman, a partner with the IRA Financial Group.

IRA Financial Group’s Bitcoin IRA solution with checkbook control will allow retirement account holders to buy, sell, or hold Bitcoins and other cryptocurrency assets and generate tax-deferred or tax-free gains, in the case of a Roth IRA.

The primary advantage of using a Self Directed IRA LLC to make Bitcoin investments is that all income and gains associated with the IRA investment grow tax-deferred or tax-free in the case of a Roth IRA.

IRA Financial Group’s Bitcoin IRA LLC for cryptocurrency investors, is an IRS approved structure that allows one to use their retirement funds to make Bitcoin and other investments tax-free and without custodian consent.

IRA Financial Group is the market’s leading provider of self-directed retirement plans. 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.

The IRA Financial Trust Company, a self-directed IRA custodian, was founded by Adam Bergman, a partner with the IRA Financial Group.

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

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Oct 03

How Do You Make an Investment with a Self-Directed IRA?

Making an investment through a Self-Directed IRA LLC can be done in a few easy steps:

1. Set up a Self-Directed IRA LLC.

With IRA Financial Group, you no longer have to spend $2,000 to $5,000 or more to set up your Self-Directed IRA LLC.

We provide the following all for one low price

  • Free tax consultation with our in-house retirement tax professionals
  • Setup your LLC in the State of your choice
  • Prepare and file the Articles of Organization with the State
  • Generate a special purpose, IRA Custodian approved Self-Directed IRA LLC Operating Agreement
  • Generate a special purpose, IRA Custodian approved Subscription Agreement, as required by the Custodian
  • Obtain the EIN from the IRS
  • Co-ordinate setup with the Custodian of your Choice
  • Free tax and IRA support regarding the Self-Directed IRA LLC Structure
  • Expedited Service Guarantee!
  • Satisfaction Guaranteed!

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

2. Transfer of Retirement Funds Tax-Free.

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, such as real estate, tax liens, precious metals, and much, much more.

What is a Passive Custodian?

The IRS approved and FDIC backed 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. The passive custodian business model is built around the establishment and maintenance of IRAs, whereas, a traditional IRA custodian generates income through the marketing and sale of investment products.

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 the funds.

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. 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.

3. Open IRA LLC Bank Account.

Open a local bank account for the LLC at any bank of your choice. You can open a bank account for your Self-Directed IRA LLC at any bank or credit union.

4. Tax-Free Transfer of Funds to LLC Bank Account.

Direct the passive custodian to transfer the IRA funds to your new Self-Directed IRA LLC bank account. The IRA LLC checking account can be opened at any bank or credit union.

5. “Checkbook Control”.

As the Manager of the Self-Directed IRA LLC, you will have the freedom to make all investment decisions for your Self-Directed IRA LLC. In other words, you will have “checkbook control” over your IRA funds allowing you to make an IRA investment by simply writing a check or wiring funds directly from the IRA LLC bank account.

6. Tax-Free Investing.

Since your IRA will become the owner(s) (member(s)) of the newly formed IRA LLC, all income and gains generated by an IRA LLC investment will generally flow back to your IRA tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes, all income and gains are taxed at the owner level not at the entity level. However, since an IRA is a tax-exempt party pursuant to Internal Revenue Code Section 408 and, thus, does not pay federal income tax, all IRA investment income and gains will generally flow through 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.

Self Directed IRA LLC

For more information about the Self-Directed IRA, please contact one of our IRA Experts @ 800.472.0646.

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Sep 25

Is a Self-Directed IRA LLC Approved by the IRS?

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

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

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

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

The relevant facts of Swanson are as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

IRS Field Service Advice Memorandum 200128011

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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