The Self Directed IRA – The Basics all Estate Planners Should Know

Warren Baker’s post on the WealthCounsel blog states: “Let’s assume for a moment that your client’s goal is to invest into a piece of residential rental real estate. Your client can either:  (1) request that the new custodian purchase the property directly on behalf of the IRA; or (2) direct the custodian to first invest the IRA into a Limited Liability Company (“LLC”) that is thereafter 100% owned by the IRA and purchase the property using the LL (note: your client will act as the Manager of this LLC).  The latter option gives your client the flexibility to purchase the property using a check from the LLC’s checking account, which depending on the custodian’s ability to move quickly, will be quicker than option number one.”

The Self Directed IRA – The Basics all Estate Planners Should Know2018-05-13T13:58:52-07:00

Can My IRA Invest in Any Type of Asset?

Question:  Can I cause my self-directed IRA to invest in any type of asset I desire?

Answer:  No.  Section 408(a)(3) of the Internal Revenue Code says that an IRA may not invest in life insurance contracts (life insurance).  The IRS also restriction investments in “collectibles.”  Here is what IRS Publication 590 says about IRAs investing in collectibles:

“If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later.

Collectibles.  These include:

  • Artworks,
  • Rugs,
  • Antiques,
  • Metals,
  • Gems,
  • Stamps,
  • Coins,
  • Alcoholic beverages, and
  • Certain other tangible personal property.

Exception.  Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.”

Can My IRA Invest in Any Type of Asset?2018-05-13T13:58:52-07:00

The Individual 401(k)

The following article was posted by Ryan Rippy, the Business Development Manager of The Entrust Group.

Save more with an Individual 401(k) plan and expand your investment options with a self-directed account.  An Entrust self-directed Individual (k) Retirement Account gives you the maximum flexibility and financial ability in investing for your future. The Individual (k) is similar to a 401(k) but for businesses that employ only the owners, their spouses, and partners.

An Individual (k) plan has two components based on your employer and employee roles:

  • (Employee) Salary deferral, based on earned income, up to the allowed limit
  • (Employer) Profit-sharing contribution, maximum 25% of compensation, up to the allowed limit

With Entrust, you can establish the salary deferral component as either a Roth or traditional tax-deferred plan, which reduces your taxes now and offers tax-deferred savings. With the Roth, you make after-tax contributions to the account, and like a Roth IRA, future withdrawals are tax free.

If you currently have an Individual (k) and want to self-direct your funds into nontraditional investments, you can transfer or rollover the funds to Entrust without penalty.

Consider an Individual (k) retirement account if:

  • You are a sole proprietor with no employees other than your spouse or partners.
  • You are looking for the largest potential contribution for a business without employees.
  • You want the flexibility to invest beyond stocks and  mutual funds.
  • You want the capability of borrowing from your plan.
  • You want to purchase leveraged real estate in your plan and avoid UBIT (Unrelated Business Income Tax).

Consult with your CPA or investment adviser to determine whether an Individual(k) works for you.

Entrust Offer These Administrative Options:

With Entrust, you can choose from various service options. Entrust provides the following, depending on the service model.

  • Traditional Service

Required plan documents

Recordkeeping on your self-directed investments

  • Do Your Own (DYO)

Required plan documents

  • Outsourced Service (you must have your own plan documents)

Recordkeeping on your self-directed investments

Individual 401(k) Contribution Limits

The employee salary deferral can be up to 100% of your earned income, up to the maximum annual contribution limit. The employer portion can be up to 25% of compensation. The maximum compensation amount that can be used for calculating your contribution is $250,000 for 2012.

Ryan Rippy, Business Development Manager
The Entrust Group
7700 Irvine Center Drive, Suite 800
Irvine, CA 92618
949.788.2970  |   f 866.815.5168

The Individual 401(k)2018-05-13T13:58:52-07:00

Department of Labor Regulation 29 CFR 2510.3-101 – the Plan Asset Rules

Department of Labor Regulation 29 CFR 2510.3-101 contains what are commonly called the Plan Asset Rules.  These rules can be complex, but they are important for all IRA LLCs because a violation of the plan asset regulation can be a prohibited transaction. The Department of Labor says:

“The plan asset regulation describes circumstances in which there is a ‘look through,’ which, if applicable, treats not only the interests in an investment fund owned by ERISA covered plans as ‘plan assets,’ but also the assets of the investment fund as ‘plan assets.’  If the look through applies, the ERISA fiduciary and prohibited transaction sections apply to parties dealing with the assets of the investment fund, such as the investment fund’s investment manager.”

The plan asset rules set forth the circumstances that can cause assets owned by an entity to be deemed to be assets of the ERISA qualified plan or the IRA unless an exemption applies.  When the plan asset rules cause the assets of an entity to be deemed to be assets of the IRA, any transaction involving the entity and a disqualified person will be a prohibited transaction.  If an IRA owns 25% or more of any class of equity interests in an entity the plan asset rules say that the assets of the entity are deemed to be assets of the plan.  If your IRA owns 25% or more of the membership interests a limited liability company, the assets of the LLC are deemed to be assets of the IRA.

Here are some additional explanations of the plan asset rules:

Department of Labor Regulation 29 CFR 2510.3-101 – the Plan Asset Rules2019-03-17T14:14:37-07:00

Can the IRA Owner Pay the Costs of Forming an IRA LLC?

Question:  I want to form an IRA LLC to be owned by my IRA.  Can I pay the costs and expenses to be incurred to form the LLC?

No:  The owner of an IRA may not pay any amounts incurred to form an IRA LLC.  If the IRA owner pays any debt or obligation of the IRA LLC, it is a prohibited transaction.  It is the equivalent of a loan from the IRA owner to the plan, which is prohibited under Internal Revenue Code Section 4975(c)(1)(B).  The IRS deems any payment by the IRA owner of the IRA LLC’s debts or expenses as a disguised contribution of money to the IRA.

Notice the net result to the IRA in the following two examples and you will see why it is a prohibited transaction for the IRA owner to pay expenses of the IRA LLC:

Example 1 IRA Owner Pays LLC Formation Expenses

$50,000 = total in IRA account
$  1,000  = IRA LLC  formation expenses paid by the IRA owner from his/her bank account
$50,000 = total capital in the IRA account after paying formation expenses

Example 2Custodian Pays LLC Formation Expenses

$50,000 = total in IRA account
$  1,000  = IRA LLC  formation expenses paid by the IRA custodian
$49,000 = total capital in the IRA account after paying formation expenses

The proper way to pay the IRA LLC’s formation expenses is to:

  • Cause the IRA custodian to write a check payable to lawyer / document preparer who is hired to form the IRA LLC.
  • If your current custodian will not allow self directed investments, open  an account with an IRA custodian that will allow it.  Transfer funds from the current custodian to the new custodian.  Cause the new IRA custodian to write a check payable to lawyer / document preparer who is hired to form the IRA LLC.
Can the IRA Owner Pay the Costs of Forming an IRA LLC?2017-09-10T15:33:14-07:00

Can My IRA Invest More Money into an LLC Partially Owned by My IRA?

Question:  Two years ago my spouse and I caused our IRAs to make self-directed investments into an LLC that purchased a rental home.  Each IRA is a 50% member of the LLC.  The property needs repairs that will cost more money than the LLC has available.  Can we cause our IRAs to make additional capital contributions to the LLC to fund the repairs?

Answer:  No.  If either IRA were to make an additional capital contribution to the LLC, it would create a prohibited transaction under Internal Revenue Code Section 4975(c), which provides that a:

“prohibited transaction” means any direct or indirect— . . . transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan”

Because the two IRAs each own 50% of the LLC, the LLC is a disqualified person under Section 4975(e)(2)(G).  This provision says that a disqualified person is an entity 50% or more of which is owned by a fiduciary.  Each IRA custodian is a fiduciary with respect to its IRA account and because the custodian owns 50% of the LLC, the LLC is a disqualified person.  Therefor a transfer of money from the custodian to the disqualified person (the LLC) to fund the repairs is a prohibited transaction.

Can My IRA Invest More Money into an LLC Partially Owned by My IRA?2018-05-13T13:58:53-07:00

In Pictures: 12 Tips For IRA And 401(k) Heirs

Forbes:  “An inherited retirement account is more than a simple pot of cash. Often, an heir can stretch out withdrawals from an individual retirement account over his or her life expectancy, gaining decades of tax-deferred or (in the case of a Roth IRA) tax-free investment growth. But the IRS rules for doing this can be tricky. If you’re inheriting an IRA or 401(k), here’s what you need to know.”

In Pictures: 12 Tips For IRA And 401(k) Heirs2018-05-13T13:58:53-07:00

Articles on Converting to a Roth IRA

Here are a number of articles that I found on the net that discuss the pros and cons of converting a traditional IRA to a Roth IRA.

  • April 4, 2010.  “The Debate Goes On: To Roth or Not to Roth?” – InvestmentNews:  “For the superwealthy, conversion is a slam-dunk; others should be more careful.  The following is an edited transcript of an webcast held in New York on March 9.  . . . To listen to the archive of the webcast, visit and click ‘View archive’.”  One of the panelists was Ed Slott, the renowned IRA expert.
  • January 16, 2010.  “Ready to Roth: How You Fund an IRA Conversion Through the ‘Back Door’” – Wall St. Journal:  “Individual retirement accounts funded with 401(k) assets count among your traditional IRA assets during a Roth IRA conversion.  The language is confusing, since many custodians refer to such accounts as rollover IRAs.  But they are technically traditional IRAs. Any IRA labeled as a SEP, SIMPLE or contributory is included, as well. . . . Here is where the ‘back-door’ method comes into play:”
  • December 10, 2010.  “Beware the Roth IRA Conversion Trap” – The Wandering Tax Pro:  “For several years now tax professionals, myself included, and personal finance and tax bloggers, again myself included, and financial writers have been talking about 2010 being the year to convert to a ROTH IRA. . . . What we all have forgotten to remind you when discussing this issue is the way one calculates the taxable portion of a ROTH conversion.”
  • November 23, 2009.  “2010 Roth Conversion: Factors to Consider Before Making a Decision” – FreeMoneyFinance:  “For more than a decade, Roth IRAs have been offering investors a number of benefits generally including tax free growth in earnings, tax free withdrawals assuming you begin your withdrawals after the age of 59 1/2 and have held the Roth account for the minimum five-year holding period, and no required minimum distributions as is the case with traditional IRAs.  Through the end of 2009, conversion to a Roth IRA from other retirement accounts including a traditional IRA or 401(k) plan is limited to people with a modified adjusted gross income of $100,000 or less.  But as of January 1, 2010, all investors will be eligible to convert funds from a traditional IRA or 401(k) to a Roth IRA, regardless of income level.  While this change will present some attractive options for certain investors, people should weigh the costs and the benefits unique to their own specific financial plans and tax situation before deciding if a Roth IRA conversion is right for them.”
  • November 8, 2009.  “Roth IRA Conversion has Perks” – Arizona Republic:  “By now, word has gotten out that 2010 will be a big year for converting traditional individual retirement accounts into Roth IRAs.  That’s when tough eligibility rules, which have prevented higher-income people from making the switch, will be repealed.  Plus, traditional-to-Roth conversions done in 2010 come with a special sweetener: Normally, you must pay any taxes due in the year you make the switch, but in 2010 only, investors can elect to defer the tax bite and spread it over the following two years, 2011 and 2012.”
  • September 22, 2009.  “To Roth or Not to Roth: Analyzing the Conversion Opportunity for 2010 and Beyond” – University of Illinois Professor of Law Richard L. Kaplan wrote a popular article on whether to convert a traditional IRA to a Roth IRA (click on the download link then click on the link to one of the download sites).

“Beginning in 2010, all taxpayers will be able to convert their existing Individual Retirement Accounts (IRA) to Roth IRAs, without regard to their level of income or marital status. In effect, taxpayers will be able to lock in current income tax rates on account values that have been eroded by recent investment market declines. This article analyzes who should take advantage of this opportunity, using the barest minimum of arithmetic (and no calculus).”

  • September 6, 2009.  “Is a Roth conversion right for you?” – Arizona Republic business reporter Russ Wiles says in his article:

“Roth individual retirement accounts have emerged as a popular tax-sheltered way to invest, and they’ll only get better next year.  Starting in January, Congress will drop the eligibility barriers so that any investor, regardless of income, will be able to transfer money from traditional, deductible IRAs to a Roth.”

Articles on Converting to a Roth IRA2018-05-13T13:58:53-07:00

Investors Tap Into 401(k) Money Tax-Free for Business Startups

From the using your IRA or retirement account to self-direct investments department. An article in Investment News states, “Hal Mottet, a Lake Oswego, Oregon, businessman bought a family-owned packaging company for $3.5 million in late 2007, and he and a partner financed 40 percent of the sales price with their retirement money. Mottet and his partner used a loophole in U.S. tax law to roll over $1.4 million from their existing 401(k) retirement plans to finance the purchase of Carson, California-based Empire Container Corp. . . . Here’s how it typically works: An investor sets up a corporation, establishes a new 401(k) plan there, rolls over his or her existing 401(k) or Individual Retirement Account, and then uses part or all of the plan’s assets to buy shares of the new company. This funds the new business, while keeping the tax- advantages of the retirement plan.”

Investors Tap Into 401(k) Money Tax-Free for Business Startups2018-05-13T13:58:53-07:00
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