I went back to the internet and started researching LLCs and Checkbook Control IRAs. After filtering through the companies that offered to help setup an LLC IRA, I finally found a website that had more comprehensive information about the pros and cons of checkbook control. I soon learned I didn’t need an LLC or a checkbook to control my IRA. The good news is there are companies like New Direction IRA that let you open completely self-directed IRAs without the hassle of LLCs or checkbooks. My IRA can own the assets directly. The better news is, when my IRA owns the investment directly, my IRA administrator takes care of the books and IRS reporting for me.

When researching Checkbook Control IRA, it is a good idea to look into the drawbacks as well as the benefits before moving forward.  There are responsibilities for the IRA holder that are important to know about from the outset. You might want to ask yourself, “Do I really want this much control of my retirement funds?” The answer for me was a big NO. I want control of my retirement funds, but I do not want the responsibilities of checkbook control. My advice to someone considering this type of set-up for an IRA is, ask the following questions before proceeding:

Q1: An LLC/Checkbook Control IRA sounds appealing, what are the drawbacks of this type of investment?

There are a couple of drawbacks and some out-right dangers.  For Checkbook Control, you must have an entity created. In most cases, that entity is an LLC.  The LLC is a company for which someone must be responsible. In order to manage the entity, you must know all the rules of both running an entity and all the IRS rules about the IRA itself.   Educating yourself on both sets of rules can take a fair amount of time to grasp.   Although many of them are not hard, if you don’t stay current, you may forget or miss something important. Remember, IRS rules regarding prohibited transactions don’t always make sense.   Applying logic doesn’t always get you to the right answer.  And the consequences for the IRA of breaking IRS rules can be significant taxes and penalties.

Q2: What are my responsibilities as the owner of an LLC and Checkbook Control IRA?

The Checkbook Control IRA-LLC is a company.  The company is authorized by whatever state you worked with originally.  The things you will be responsible for can vary widely.  Following is a list of some items suggested by the state of Colorado.  Of course this is only a partial list, and due to the limited activity in most Checkbook IRA-LLCs, some of these might not apply.  The important thing to remember is – The LLC is a business and needs to be treated as such.

• Establish a corporate bank account.
• What officers are authorized to sign checks?
• Trade name – Are you going to do business under a name other than corporate name? If so, contact the Office of the Secretary of State.
• Business plan, budget, cash flow projections, working capital needs – Can you cover payroll, operating expenses, taxes, etc. for a 6 month period? Books and accounts – Contact your accountant. Do you understand the tax implication of the entity you are using for your business?
• Obtain your federal tax identification number from the IRS.
• Obtain your state tax identification number from the Colorado Department of Revenue.
• Do you have all of the federal, state and local tax information and forms?

• Federal withholding
• Federal unemployment
• State withholding
• State Workmen’s Compensation
• State & Local Sales Tax – Contact City Hall

• Zoning – Is local zoning appropriate for your business use?
• City/County business licenses – Contact City Hall or County Offices.
• Special licenses for certain kinds of business – Contact City Hall.
• Liability
• Fire and Premises
• Business Interruption
• Crime
• Officer and Director liability

Again, this list is partial and specific to Colorado.  Be aware of the requirements of owning a company.

Q3: Fees for this service vary from a couple of hundred dollars to thousands of dollars. What services am I getting for the fee I pay?

The services vary widely based on the vendor you select to set up the LLC, but usually what you are buying is assistance in creating the entity itself.   Most companies charge you up-front to start-up then leave you alone.  For on-going running of the business and maintaining the viability of the entity, you will have to arrange for that yourself.

Q4: What happens to me and my IRA if I don’t follow the rules?

Entering into a prohibited transaction, such as providing goods or services to your IRA- owned LLC or making loans, advances or other transactions with your IRA-owned asset, will result in your IRA being distributed to you as of January 1^st of that year.  Distribution results in you having to pay income tax and/or penalties and interest on the amount distributed.  The penalties and interest can potentially go back multiple years.

Q5: Even if I am following the rules, can I still get in trouble with the IRS?

The rules and laws don’t specifically cover all details of these types of arrangements.  Some activities that the IRA-LLC promoters encourage have not been fully tested by the courts nor formally allowed by the Internal Revenue Code or Department of Labor.  In the future, the courts or federal authorities could declare that these activities are not allowed.   And that could easily put you in the position of having committed a prohibited transaction even though you thought you were following the rules.

How I Resolved my desire to get rid of my Checkbook IRA

Once I understood single-member LLC / Checkbook Control IRAs, I decided it wasn’t for me. I was able to move my account to New Direction IRA. I then distributed my investments back into the IRA (and dissolved the entity following the state rules), which still owns the investments as before, but without the risk.

What is the Five Year Roth Rule?

The five year Roth rule refers to a five year period that restricts tax-free distributions on the earnings/gains in a Roth IRA and distributions of converted funds in a Roth IRA. If a Roth IRA achieves gains in addition the contribution amount(s), distributions of those gains before the five year waiting period will be taxable. Similarly, funds that are converted from a “pre-tax” retirement plan to a Roth IRA must wait five years in order to be distributed tax-free.  The five year period begins when an IRA holder opens a Roth IRA and begins making contributions OR when a new Roth Conversion is performed. In either event, the actual effective date of the five year Roth rule is always backdated to January 1 of the tax year the event takes place. This can be important because if you time things right, your wait time can actually be reduced by more than 20%. Let’s take a look at some math below to get a clearer understanding.

How is the Five Year Roth Rule Calculated?

New Roth IRA Example: If I start a Roth IRA in April, 2012  (remember to backdate) and begin making annual contributions beginning in the tax year of 2011, my five year time clock will have ended on January 1, 2016. Notice that my effective wait time was less than four years, not five. My wait period begins January 1, 2011, not April, 2012.

Traditional to Roth Conversion Example: With my existing Traditional IRA , I can perform a Roth conversion.  With this process, I pay tax on the amount being converted in order to change my retirement funds from “pre-tax” to “post-tax”. I claim the converted amount on my tax return for the tax year during which I perform the conversion. Once I start this process, the five year rule begins. Just like before, the later in the year I perform my conversion, the more my five year rule becomes a four year wait.

How does the Five Year Roth Rule affect my distributions?

As I mentioned above, the five year rule dictates that distributions, over and above the amount contributed and/or the amount converted, that are taken prior to the five year wait period after the establishment/conversion of the account are not tax-free. See the examples below for a comparison of scenarios.

John, at 57 years of age, makes a maximum contribution of $6000 to his Roth IRA on April 15, 2007 for the tax year of 2006. On January 1st, 2011, John decided to withdraw $8000 from his Roth IRA. Of the $8,000 that John withdraws, $6,000 is principle contribution and $2,000 is profitable earnings.

Results: Since John is now over the age of 59.5 and his five year rule has expired (Jan 1, 2006 – Jan 1, 2011), the entire distribution is qualified for a tax-free distribution and isn’t included as taxable-income. In the example above, John made a profit of $2,000 over a period of almost four years but because his first contribution in the Roth IRA was dated back to January 1, 2006, his wait for tax-free distributions was considerably shorter than 5 years.

**Note that he was over the required age of 59.5 for tax-free distributions as well.

Now let’s look at the same example if John takes his distribution after only 3 years of participating in a Roth IRA:

John, at 57 years of age, makes a maximum contribution of $6000 to his Roth IRA on April 15, 2007 for the tax year of 2006. On January 1st, 2009, John decided to withdraw $8000 from his Roth IRA. Of the $8,000 that John withdraws, $6,000 is principle contribution and $2,000 is earnings. Even though John is now over the age of 59.5, his distribution on the earnings is being taken out of the account before the five year rule expires. $2,000 of his distribution must be claimed as taxable income on his tax return.

Results: After age 59 1/2 and once the five-tax-year holding period is met, any distribution from the Roth IRA will be considered a qualified distribution and be tax-free. Remember that each conversion from a pre-tax IRA will start its own individual five year waiting period. You may consider keeping any conversions and/or contribution accounts separated in different Roth IRAs for organization purposes.

If you would like further information regarding the basics of Roth IRAs, consider viewing our Self Directed Roth IRA account page.

Allowable Investments

There are four precious metals in which your IRA can invest: gold, silver, platinum and palladium. However,

There are, however, some restrictions when investing in these metals.

Minimum Fineness Required:

• Gold .995+
• Silver .999+
• Platinum .9995+
• Palladium .9995+

Allowable coins include US-Minted Eagles and coins meeting minimum fineness (purity) standards, provided that they are not collectable. The primary value of the coin should come from the gold itself, and not thanks to the scarcity of and demand for the minted coin among coin collectors.

Examples of coins you can own:

Gold

• American Eagle coins (proof and non-proof)
• American Gold Buffalo coins (non-proof)
• Austrian Gold Philharmonics coins
• Canadian Maple Leaf coins
• Australian Kangaroo/Nugget coins
• Bars and rounds by a refiner/assayer/manufacturer accredited by NYMEX/COMEX, NYSE/Liffe, LME, LBMA, ISO 9000, or national government mint and meeting minimum fineness requirements.

Silver

• American Eagle Coins (proof and non-proof)
• Austrian Philharmonic
• Mexican Libtertads
• Australian Kookaburras
• Canadian Silver Maple Leaf Coins

Platinum

• American Eagle Coins (proof and non-proof)
• Australian Koalas
• Isle of Man Noble Coins

Palladium

Bars and rounds by a refiner/assayer/manufacturer accredited by NYMEX/COMEX, NYSE/Liffe, LME, LBMA, ISO 9000, or national government mint and meeting minimum fineness requirements.

Disallowed Coins:

There are, however, some coins you cannot own within your IRA, because they are not minted with sufficient purity. Some common examples:

Italian Lira
Mexican Peso and Ounza
South African Krugerrand

Creating a Gold IRA with New Directions IRA is very easy.

1. Open the IRA. You can start this process just by calling New Direction IRA at 877-742-1270.
2. Fund the account, via a direct contribution, transfer or rollover.
3. Find a precious metals dealer of your choice.
4. Find a precious metals depository. This is the facility or agent that will actually take possession of the gold or precious metal. IRS rules prohibit you from taking personal possession of the assets themselves. Your dealer may be able to recommend a depository that meets your needs.
5. Direct New Direction IRA to send funds to your dealer from your newly-funded IRA account, with specific direction as to what you want us to purchase (or sell) on behalf of your IRA.
6. New Direction IRA will handle the transaction for you, taking care to ensure the assets are held in the name of the IRA, in accordance with IRS rules. This is important because failure to ensure the proper titling of the assets could cause the IRS to determine that you have made a distribution – and result in unwanted penalties and taxes.
7. Your dealer will then ship the gold or other precious metal to the depository.

Considerations:

Expertise

Self-direction is a specialized field within the financial services industry. It’s important to work with an administrator experienced in handling these kinds of accounts. Many traditional brokerages and other financial advisory firms have very limited knowledge of the rules and regulations that specifically affect self-directed accounts.

Liquidity

Keep in mind that your depository will charge an ongoing fee for storing and securing your precious metals. Be sure to keep sufficient cash or other liquidity on hand within your IRA so that New Directions IRA can pay this fee on your IRA’s behalf.

Valuation Procedure

The valuations used for the IRA assets are estimated bid values. New Direction IRA will update the value of the investments weekly. Please note that the asset value reflected on the IRA statement does not include any dealer mark-ups or commissions. Price spreads can be significantly higher for proof coins than for precious metal bullion.

New Direction IRA does not determine where you buy your metals. You are free to work with your dealer of choice for your IRA’s purchase. Not all dealers operate the same way, so be sure to talk to them about their process. Also, remember that with a self-directed IRA, you are responsible for performing any due diligence needed prior to the purchase.

New Direction IRA – Your Third Party Administrator

New Direction IRA is a third-party administrator of self-directed retirement investments, including real estate IRAs, gold and precious metals IRAs, Solo 401(k) plans, SEP IRAs, SIMPLE IRAs and medical savings accounts. We work in tandem with your existing team of investment, legal and tax advisors to ensure the process goes smoothly, transactions are accounted for, and administration is done in compliance with IRS rules. You should do your own due diligence, in concert with your existing team of advisors, before you invest. However, once you make the decision, our role as the administrator is to carry out your instructions as faithfully as the law allows.  For more information, or to schedule a free consultation with one of our experts, please call us at 877-742-1270.

I was tired of my financial adviser not giving me enough information and not being available when I wanted help.  I was tired of the stock market; tired of not knowing what was really happening with my retirement funds.  I wanted to take control. After some internet searching, I found a company that promised the control I wanted.  They claimed I could invest quickly and limit fees. I called the company, and they explained all the benefits of a single-member LLC to create Checkbook Controlled IRA (I forgot to ask about, and they didn’t mention, the drawbacks of this type of investment).

The company was very eager to help me set up the account and answer my preliminary questions. I set up the account, moved over retirement money, and received the checkbook in the mail. I purchased my first real estate asset directly from my checkbook and was happy because I had control over my retirement.

What I had purchased was a cabin in at a well-known vacation destination. I was able to rent the cabin out to new vacationers weekly. It was booked solid for months. The more vacationers, the more money for my retirement. Seeing the property cash flow was an investor’s dream.

I woke up from that dream in late September when the pipes burst, and the basement flooded.

I called the checkbook control company with questions about handling the gains and expenses. I was told, “It’s your responsibility to track all monies coming into and being disbursed from the IRA.”   They didn’t tell me that when I opened the checkbook control IRA.  I have never been a business owner and have little experience keeping “the books” straight. But I kept up with them the best I could.

Then the IRS came out with an article stating, “The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contributions limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.”

I called back the company that helped me set up the checkbook control IRA. They explained to me that I needed to call my custodian. I called another number and asked if they could answer my questions about my IRA’s books and if the statement from the IRS pertains to me. They had little education on the subject. The checkbook control structure sounded so easy in the beginning. I soon realized I had gotten in over my head.

The happy feeling of having control was replaced by anxiety.

I started to think about that IRS article: how little I knew about tax laws. Is there a target on my back? If the IRS is looking into LLC IRAs, will I get audited? Is my retirement safe? Where can I go for help?

With pensions being a thing of the past, it is often up to the employee to take control of her or his own retirement. If you are anything like me, opening a retirement account is about as exciting as cleaning out the garage, but it’s a lot easier than deciding if you should keep or throw out your VHS tapes. Successful investing now can make an enormous difference for our financial future. Getting started is the most important thing, even if you start with small steps.

Here are some things to know about getting the account open:

1. There is usually a processing fee to open an account.
2. You will have to prove your identity. Sometimes you can answer questions online (i.e. driver’s license number), other times you will have to send in a copy of identification.
3. You will need to know what type of account to open. Traditional IRAs and Roth IRAs are the most popular types.
4. You usually need to fund your account within a certain time period. There are 3 ways to fund an account (contribution, transfer and rollover). This can be confusing; so, I have explained these options below. And remember, you can decide how to fund your account after you open it.
5. You will need at least one beneficiary. This is a person designated as the recipient of funds when you pass away. Of course, you can change this over the years as your life changes.

Once you submit your application, it will take a couple of business days to open the account. After the IRA is opened, you can fund it. Don’t wait too long or your account will close (it’s like a bank account with no money in it).

Here are ways you can fund the account:

1. Contribution – Being new to the professional working world, this was my only option. You can write a contribution check or have an allotted amount of money go from your paycheck to your new IRA. Not having the money to spend is easier than forking it over after it’s been in your possession. Your paycheck will be lower, but the money going to your IRA is tax deductable, which is a good thing.
2. Transfer – If you have had an IRA at an old job, you can move it over with a transfer. All you need to do is request a transfer form from your new IRA provider, fill it out and send it back in. If your funds are tied up in an investment, you will need to call to liquate them and the new IRA provider will handle the rest. Transfers usually take 7-14 business days, depending on where your funds are currently held.
3. Rollover – A rollover is necessary to move a Qualified Plan (i.e. 401k or 403b) to an IRA, and it’s an option to move funds from one IRA to another. To move funds via a rollover, you need to contact the company that currently holds the Qualified Plan and fill out their forms. The sending custodian will file a 1099R to report the distribution. If funds are deposited in your new IRA within 60 days of the distribution, there will be no IRS tax or penalty or consequences. While there is IRA reporting with rollover, they are usually faster than transfers.

There is not a lot more to it than that; now you know how to open and fund a retirement plan. Hopefully it is not as painful as you once thought. And if you are looking to put something off, go with cleaning out the garage…it’s winter and the garage clutter can’t earn tax-benefitted money for you like a retirement plan can.

For visitors and clients alike, we’ve begun the reconstruction of our educational learning library. This section of our website is packed with Self Directed IRA education opportunities ranging from articles to step-by-step guides, and even webinar recordings from past events. Would you like to hear the best part? It’s all FREE. Our business model revolves around providing our clients the account knowledge that they need to capitalize on the opportunities that they come across. Feel free to take advantage of our free library now and write us with any further questions.

In addition to the new look and feel of our website, we’re also revving up production on new infrastructure to better serve our clients. Looking forward, you can expect more valuable and time saving features from your IRA’s online access as well as new channels of communication between you and the New Direction staff. We are aiming to create new industry standards in efficiencies.

Visit our About Us page and learn more about our business!

This year, as in every year since 2003, New Direction’s growth has surpassed all previous records. We continue our mission of education and enlightenment: explaining the rules and nuances of self-directing IRAs as well as opening the doors to non-traditional investing for a revitalized retirement future. Furthermore, now that we are no longer associated with a certain territory, New Direction is free to provide service and education to the entire country without impediment. The independence gained from this move will also allow our business to be more flexible and creative when pursuing its educational mission.

An additional benefit of this change is the opportunity to enhance our client information systems. Over the next few months, we will be implementing several innovative upgrades to our trust accounting system, website, and client web-based interfaces. These upgrades will greatly improve our client experience, communication, and transaction processing efficiency to make your interaction with us as smooth as possible. For example, you may have noticed our new client portal. The software supporting this access will enable our clients to be significantly more informed about their account than in the past.

New Direction IRA has created a more convenient and efficient business by combining its exceptional expertise and customer service with new efficiencies to make self-directed IRAs more accessible than ever. Because much of our business comes from referrals, we would like to extend our thanks to you for telling others about us. Please accept our sincere best wishes for a happy, healthy and prosperous 2012.

Sincerely,

Catherine Wynne & Bill Humphrey

For those with a penchant for real estate investing, IRAs are a potent vehicle indeed. Outside of a tax-advantaged account, such as an IRA or a SEP IRA, rental income is taxable every year, as you receive it, and passive activity rules restrict your ability to claim losses from real estate. If you use a self-directed IRA, or a real estate IRA, however, you can accumulate all that rental income tax-deferred, or tax-free if you hold the asset in a Roth IRA. If you have the patience, liquidity and know-how to be a successful real estate investor, it can make perfect sense to leverage these skills in a self-directed IRA or other retirement account as well.

That said, there are some things that you need to be aware of  that are unique to using an IRA or other retirement account for real estate investing, because if you don’t comply with certain rules and regulations, you risk exposing yourself to unintended penalties and taxes.

Watch Your Cash Flows

Paying attention to cash flow is critical with real estate IRA investing. Remember, the law limits the amount of new money you can contribute to an IRA each year to $5,000 (or $6,000 if you are over age 50.) As any veteran property owner knows, property repairs and renovations can easily exceed many times this amount.

This means you can’t intervene in your IRA-owned property with a massive cash infusion from outside your retirement accounts, no matter how badly your property needs the repairs. For anything over the max $5,000 annual contribution, you will need to pay for it from liquidity you have in the IRA itself, roll the money over from another eligible retirement account, or have your IRA borrow the money.

For this reason, it’s generally best to have some liquid reserves – cash, cash equivalents, reasonably stable securities, or a line of credit your IRA can tap for this purpose. Your checking account won’t do you much good when you have to pay for a $30,000 roof.

Set Aside Cash in Your IRA

Outside of an IRA, the tax code provides a natural means for investment property owners to set aside some reserves. This is part of the logic of depreciation deductions – you’re supposed to set aside the savings to pay for expected repairs, maintenance, upkeep and eventual replacement. But you don’t get a depreciation deduction in an IRA. You need to set aside reserves from operating income within your IRA or be prepared to transfer assets from elsewhere.

Understand Prohibited Transactions

Remember, you can’t lend money to your IRA personally. If your IRA needs to raise cash in a hurry, you can’t be the person to provide it, beyond allowable contributions and rollovers. The same applies to your descendants, your parents and grandparents, and any of their spouses. Ditto for any business entities they control. (The law does not specifically rule out your brothers and sisters, though).

The same people who can’t lend to your IRA also can’t borrow from it, for the same reason (though you can use your self-directed IRA to lend money at interest to whomever else you like.)

Likewise, you can’t do business directly with your IRA, nor can any other disqualified individuals, nor can their spouses or any business entities they control. Some people try to open a property management company, or construction company, and have their IRAs compensate their companies directly for services rendered. This is prohibited by the IRS.

Understand Long-Term Tax Ramifications

If you hold a real estate investment outside a retirement account, and sell it at a profit, you pay tax at capital gain rates. If you held it for more than a year, your capital gain tax will be less than your income tax. However, if you hold the property in a tax-deferred retirement account, you will need to eventually pay income taxes on any gains, rather than the lower long-term capital gains rate. To avoid this, consider using a Roth IRA to hold real estate or capital assets in an IRA. You don’t get a current year tax deduction, and you can’t take depreciation deductions in either case. But any gains are tax free. Additionally, you sidestep the eventual problem of taking required minimum distributions when you get older, which can be a challenge if your retirement portfolio is in illiquid holdings such as real estate.

Don’t Stay in the Property

Ordinarily, rental properties allow you to spend a couple of weeks per year in them without jeopardizing their status as investment properties. This is not true for IRA-owned real estate. You can’t live in the property, even if you’re paying rent. You can’t even stay overnight in the property. What’s more, you can’t let your children, grandchildren, parents, grandparents, or their spouses stay overnight either. If you do, the IRS could consider it a distribution, and impose a tax equal to 100 percent of the amount involved.

Be Careful With Borrowing

Many people are confused by IRS prohibitions on lending to or borrowing from your IRA personally, or pledging your IRA as collateral for a loan, and think that you cannot borrow money for your IRA at all. In fact, your IRA can borrow money. But understand that it’s your IRA that’s borrowing the money – not you. This distinction is crucial. Your IRA can only borrow money from non-disqualified individuals and entities on a non-recourse basis. This means that if the loan should default, the lender can only come after the IRA to collect. Only assets held within the IRA can serve as collateral for the loan. You cannot pledge anything outside the IRA as collateral, nor sign a personal guarantee of any kind.

Beware of Taxes

Taxes? In an IRA? Alas, yes. While your IRA can defer income tax and is generally exempt from capital gains tax, you still have to pay property taxes if you own real estate in your IRA. Additionally, if your IRA employs leverage – as is common for real estate investing – your IRA may be subject to unrelated debt income tax, or unrelated business income tax, depending on the situation. New Directions IRA does not give tax advice, so you should retain the services of a qualified tax advisor, such as a CPA, tax attorney or enrolled agent, for advice specific to your situation.

At that time in ’08, Willie had a 401(k) account and a 457 account.  They were both invested in a variety of publicly traded stocks and bonds etc.  His retirement account provider had offered several packages based on an individual’s risk tolerance from which to choose.  He had chosen the most aggressive option.  At the beginning of the 2008 stock market slide, Willie decided he wanted to take some money out of his 457 (which he could do without penalty because he no longer worked for that employer).  As he monitored his account value for the best time to withdraw the money, he told me that he had a strong intuition to move his 401(k) from the very aggressive, high risk category to the not aggressive, low risk category.  A move like this would cost him almost nothing, and he could move the funds back at any point if he wanted to.  BUT HE DIDN’T DO IT!  He went as far as calling his provider and asking about the process, “What are the forms? etc.” A short time later Willie’s 401(k) was a shadow of its former self.  He lost approximately 50% of his account.  If he had made the move, we calculated later, he would have lost less than 10%!  And if Willie had known about a self-directed IRA and rolled over his 401(k), he might very well have grown his retirement funds using assets like real estate or precious metals and not lost at all.

The bottom line is that in 2008, Willie balked at a time when he needed to act.  It wasn’t for lack of motivation.  It was for lack of empowerment.  I can’t stress enough how important it is to empower yourself when it comes to financial strategies and processes.  To combat the temptation of inaction, Willie and I came up with two important strategies.  The first strategy was to learn enough about finances to feel in command of them.  Despite being a reasonably sharp person, Willie did not really know much about the assets in which he was invested.  Also, he was unaware of what the alternatives were.  He had no clue that his retirement funds could be invested in anything other than the stock market. The second strategy was practicing moving his money around.  Willie would have been well served by making a few low cost moves in his account, even if they cost some money, to practice.  It is like getting that first small dent in a new car.  It hurts, but it changes the car from an object of reverence and over protection to a vehicle with which one has a relationship.  It seems likely that different people may need more and/or different strategies as well to put them in a position to take the reins of their finances.  Whatever that is, it is worth it.  Learn, practice, whatever it takes, but don’t be caught without the agency to act on your own behalf.

1.  An IRA can secure a loan in order purchase an asset.  If you have a property in mind but don’t have the funds in your account to purchase it outright, the IRA may be able to secure a non-recourse loan.  Keep in mind that not all lenders make this type of loan, and, because the lender cannot rely on personal assets as collateral, it is common for them to require a down payment of 30% to 40%.  Also, an asset secured using a loan may be subject to Unrelated Business Income Tax (UBIT).  This may sound like a negative, but needing to pay UBIT means that the investment is making money.

2.  Real Estate has always been an allowable asset in an IRA.  This fact, however, is not widely known.  In fact, the IRS received so many inquiries, IRS.gov issued this statement, “…IRA law does not prohibit investing in real estate, but trustees are not required to offer real estate as an option.”  Because IRA providers are not required to offer real estate, it is up to the IRA holder to establish an account with a provider that will perform the administration and bookkeeping necessary for that asset.

3.  While an IRA holder can provide brain power for his/her Self-Directed IRA, he/she is not allowed to perform physical services for the real estate assets the IRA owns.  It is relatively well known that an IRA holder can’t live in real estate that his/her IRA owns, it is less well known that sweat equity is not allowed.  Many people would like to be able to have their IRA purchase a rental property and then act as the property manager, including making repairs and performing maintenance.  Unfortunately, the IRA holder can only contribute some brain power/strategy to the operation of an IRA-held property.  When the IRA holder goes over to the property to paint a room, do some light plumbing, or some other physical service, he/she is stepping into a prohibited activity.

4.  An IRA can partner with other investors, with other IRAs, or even with the IRA holder’s personal funds to purchase an asset.  In this scenario, the IRA purchases a percentage of the asset and the partners purchase the balance.  It is important to note that all income and expenses need to be divided along the percentage of ownership lines.  For example, if in a partnership, the IRA buys 50% of an apartment building, then 50% of all of the income and expenses come to and are disbursed from the IRA.  So, if your IRA does not have enough money to purchase 100% of a real estate asset, and you don’t want your IRA to secure a loan, it may be a good idea to think about using a partnership to acquire the asset you want.

5.  A real estate asset held in a traditional IRA does not have to be sold in order to be distributed to the IRA holder.  While it is certainly allowable for an IRA to sell a property and then distribute the proceeds, there is another alternative.  The physical asset itself can be distributed, with the obligatory tax on its value.  In addition to a complete distribution of the asset, a percentage of a property can be distributed in a given year.  The way that works is that the real estate is re-titled to reflect a new percentage of ownership between the IRA and the IRA holder.  The IRA holder would then pay the taxes on the value of the percentage distributed in that year.  In this manner, the tax burden could be spread out over a period of years while still holding on to the physical property.