Articles about IRAs, Roth IRAs, self-directed iras and IRA LLCs.
USA Today: “A self-directed IRA allows you to invest in things other than securities registered with state or federal authorities. For example, you can use the assets in a self-directed IRA to buy a rental property, or even as the down payment for a mortgage on a rental property. There are restrictions, however, on self-dealing: You can’t rent the place to yourself, for example. And you must have a qualified third-party custodian for the IRA. Self-dealing restrictions on investing in small businesses — especially sole proprietorships — are also complex, and you should see a tax lawyer before you put IRA money into a small business. ‘Self-directed IRAs have helped fund thousands of small businesses that otherwise wouldn’t be there, says Tom Anderson, president of the Retirement Industry Trust Association, a trade group.”
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.”
Wall St. Journal on leaving IRAs or retirement accounts outright to children vs. to a trust for the children: “Every tax practitioner has seen parents leave a lot of money that took a lifetime to save, and then watched the children go through it in less than five years . . . . some estate lawyers and accountants are advising parents to name an irrevocable trust as the IRA beneficiary—and to name their heirs as beneficiaries of the trust.”
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:
- 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.”
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
t 949.788.2970 | f 866.815.5168
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.”
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 InvestmentNews.com webcast held in New York on March 9. . . . To listen to the archive of the webcast, visit Investmentnews.com/rothtranscript and click ‘View archive’.” One of the panelists was Ed Slott, the renowned IRA expert.
- March 21, 2010. “Many Wealthy Investors Reluctant to Do Roth IRA Conversions” – InvestmentNews: “Many are ideal candidates, but they also face biggest tax bills. Mutual fund companies are reporting a brisk business in Roth IRA conversions as a result of a change in the tax law, but there is one segment of the public that is decidedly cool to the idea, even though their financial advisers are urging them to take the plunge. Wealth advisers said that a lot of their clients, many of whom would benefit the most from an IRA conversion, are rejecting their recommendation to convert their traditional individual retirement accounts or old 401(k) plans to Roth IRAs, because they don’t want to write a fat check to Uncle Sam.”
- 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.”
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.”
We create IRAs and retirement plans to provide income during our retirement years, but we also expect that on our deaths our loved ones will inherit a sizable sum of money from the IRA or the retirement plan. Everyone knows or should know that the proper way to transfer IRA and retirement plan assets on the death of the IRA owner or plan participant is by a beneficiary designation.
I believe that IRA owners and retirement plan participants should do more than simply complete a beneficiary designation form. They should also educate their adult beneficiaries about fundamental IRA concepts to prevent them from immediately cash out the inherited IRA or plan and blow the money on an expensive car or other foolish expenditures.
Forbes has a great article called “Five Rules For Inherited IRAs” that is a must read article for anybody whose IRA or retirement plan may leave substantial assets to loved ones. The article begins:
“Before they inherited $3 million in retirement accounts from their father last year, the three middle-aged siblings didn’t know it was possible for heirs to stretch out the tax benefits of such accounts for decades. But what they also discovered after his death is that doing this is tricky–and in some cases impossible–if the original owner of the accounts didn’t fill out his beneficiary forms just so. Although their 78-year-old dad was a lawyer, “He may never have realized that it made any difference,” says a daughter, who has spent days trying to sort it all out.”
The five rules are:
- Do no harm
- Beneficiary forms rule
- Employer plans are different
- Spouses have more options
- Watch for distribution traps
I recommend you read the article, make a copy of it for your records, give a copy of the article to all of your adult beneficiaries and keep a copy in the file where you keep your estate plan documents or your IRA or retirement plan documents.