Posts Tagged ‘checkbook control ira’

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Using Your Checkbook with a Self-Directed IRA

Monday, June 21st, 2010

Have you been thinking lately that using a checkbook is most certainly becoming a thing of the past?  If you want to have authority over your financial planning future, you might think again.  Using your checkbook with a Self-Directed IRA is now the way to put yourself in the driver’s seat.

There is a growing trend among in the know Individual Retirement Account (IRA) owners who are taking the steering wheel of their financial future. They are using their retirement funds in their own personal accounts with checkbook control to make alternative investments of their choice. This includes use of traditional, Roth IRA, SEP-IRA and 401k plan owners.

They are using that Self-Directed IRA to purchase non-traditional IRA investments such as real estate investments (including international real estate), mortgages and trust deeds, tax liens, private partnerships, private placements, limited liability companies (LLC’s), business opportunities, and much more.

The most common IRA account custodians are banks and brokerage companies.  They tend to limit your choices to certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments as it is in their own self interest to do so. They make their money from the sale of these types of investments and they usually only offer their own commissionable products to their account holders.

Using a Self-Directed IRA with checkbook control in your financial planning will put you in control of your retirement funds and will enable you to determine how, when and where your retirement plan and pension plan funds are invested.  A new world of investments beyond your bank or brokerage company is opened up to you.

When you find an investment that you are interested in purchasing…you simply write a check from your bank account to purchase the investment product. There is no need to secure approvals from your account custodian. There are no time delays in awaiting approval from your custodian. There are no review and transaction fees to pay.

By using a Self Directed IRA to make the investment, you, acting as the manager, have checkbook control of your retirement funds…you alone make the decisions of when and where your retirement funds will be invested.

If you have been discouraged with the amount on returns or are you concerned about the safety of your Individual Retirement Account (IRA) then you need to take direct control of your IRA, 401k or other retirement funds using checkbook control.

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How Self Directed IRAs work with Investment Purchases

Friday, June 11th, 2010

Self directed IRAs provide great investment opportunities. You can use your SDI account to make investments that are then used specifically for your retirement funds. SDIs are a popular choice for many people.

The reason they are such a popular choice is because it allows you the chance to have complete control over your investments. You can use traditional investments, such as stock options and bonds. It also allows you to have alternative investments, such as real estate, etc.

Self directed IRAs allow you to invest in alternative investments that you would like to use towards your retirement plan. Real estate, personal loans, private businesses, tax liens, and much more are able to be invested in with SDIs.

These alternative investments are specially used through SDIs. Other IRAs are not able to make these types of investments.

Another reason that SDIs are popular is because they are easy to use. You simply make your investment and you do not have to worry about transaction fees. A custodian is not used, so you don’t have to worry about high fees because of him, or holding or asset-based fees either.

Account owners of SDIs can be a form of their own custodian. They can save literally hundreds, to thousands, of dollars in savings because they do not have to pay for those transaction and asset-based fees. Self directed IRAs also can diversify their retirement account money too through 401(k)s, IRAs, etc.

SDI owners can use the same self directed IRA LLC to purchase both nontraditional and traditional investments. That means they can invest in real estate as well as stocks or bonds. If they follow the specific guidelines in regards to real estates purchases, they can even buy their retirement home now at today’s prices, rent it out, and then move in to it later once they qualify for their IRA distribution.

Other perks are that owners can buy foreclosed properties and tax liens right then because they do not have to deal with custodial delays. They can also buy and sell their properties they have as self directed IRA investments. This can be domestic, residential, rental, commercial and foreign properties that will have profits tax-deferred and put in your retirement account.

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What are valid investments with IRAs?

Monday, June 7th, 2010

IRAs are only meant to be funded with actual money. This means cash, or at least an equivalent of cash. You are not allowed to transfer any other type of asset over, such as a home or car. Money is needed.

You are allowed to mix and match your IRAs. You can have a Roth IRA and a Self Directed IRA. Rollovers or transfers between IRA accounts can include any asset.

There are maximum limits to how much you can put in your IRA accounts. For example, this year the limit that you can put in is $5,000 if you are under 50. Those who are older may contribute $6,000.

This limit is for Roth IRAs and Traditional IRAs. You cannot put more than $5,000 in either, or $6,000 if you are over 50. So if you have $4,000 in your Roth IRA, you are only allowed to put an additional $1,000 in either your Roth or Traditional IRA.

Traditional IRAs do have a deductibility phaseout limit. This is for those that are covered by a work retirement system. Roth IRAs also have an income level phaseout system as well.

Once funding has been put inside the IRA, the account owner can have the custodian use the cash to purchase types of securities. Some assets are not going to be able to be purchased, such as collectibles or life insurance. Other assets are allowed but come with certain stipulations.

Custodians handle the IRA. The IRS has given the custodians precedence to have their own policies, in addition to the rules the IRS imposes. Custodians are, however, not supposed to provide advice to IRA account holders.

Self directed IRAs are a little different than the other IRAs. Self directed IRA custodians can allow non-traditional assets and real estate in as investments for their retirement. They stand alone in allowing non security investments, and tend to be a little more complicated – so it is important to set these up with professionals who know the ins and outs of self directed IRAs.

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NEW! Self Directed IRA Video!

Tuesday, June 1st, 2010

This is our latest educational/promotional video detailing the Self Directed IRA.

Offering a simple diagram explanation of how the Self Directed IRA with Checkbook Control works, and provides a simple example of a SDIRA Real Estate Transaction.

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Posted in Uncategorized, checkbook control ira, self directed ira, self directed ira custodian | 11 Comments »

Self Directed IRA – Unrelated Debt Finance Income (UDFI)

Sunday, February 7th, 2010

A subset of UBIT is the Unrelated Debt-Financed Income (UDFI) tax. Under IRC § 514, the IRS will assess a tax on any income that is derived from the use of “acquisition indebtedness” in passive Self Directed IRA investments. For example, if your Self Directed IRA uses $30,000 of its own funds and also borrows $70,000 (using a non-recourse note, of course) to purchase a $100,000 rental property that generates $10,000 annual rent, the IRS would assess UDFI tax on about $7,000 of the profit (since 70% of the investment came from leverage). It is “about $7,000” because it is not simply a one-time fraction of loan-to-value. When calculating your UDFI tax percentage, you use the average indebtedness of the past 12 months and divide that by the adjusted basis in the property (typically, the original purchase price). So, as you pay down the mortgage each year, the UDFI tax percentage becomes less. One year after paying your final mortgage payment, the UDFI tax disappears altogether. When selling passive investments for a profit, the UDFI fraction will determine the taxable amount. Then, appropriate capital gains rates are applied to that amount (trust rates for short-term gains; capital gain rates for long-term gains. [See IRS Pub. 598.]

Remember that UDFI rules apply only to passive investments. If your IRA makes an investment, regardless of leverage, in an active (pass-through) business, including any active real estate business (flipping, rehabbing, developing raw land, etc), then the net income (above $1,000) is subject to UBIT.

Disclaimer

This brief discussion of prohibited transactions and UBIT/UDFI is not intended to be relied upon as legal or tax advice. It is very general information and is designed only to make you aware of some issues you might not have thought of and may need to discuss with your advisors. These rules can be very complex. Some of the rules have exceptions (and even exceptions to the exceptions!) and rules can and do change

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New Self Directed IRA Video*

Wednesday, January 6th, 2010

Just a heads up: NAFEP will be releasing a new overview video on the Self Directed IRA, or Checkbook IRA product. This new video will be part of a series of videos we will produce this year. Our goal is to get people educated, and excited about taking control of their own IRA and starting their own wealth building strategies.

Be sure to check back often to see this new video, and the continuing series that is to follow. http://www.nafep.com

-jeff

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Posted in checkbook control ira, self directed ira | 7 Comments »

Top 10 Self Directed IRA/401k Mistakes – #10 Self Directed IRA Owners Flipping Real Estate is Not UBTI

Sunday, November 22nd, 2009

The receipt of rental income is considered to be passive income and therefore not subject to UBTI. However, some self directed IRA owners fall into the trap of thinking that this means that they can buy and sell properties on a routine basis (i.e. flipping), and that this would not be active income or running a business.

Even though there are not any bright lines as to when buying and selling real estate through your self directed IRA would constitute UBTI, the general guidelines will be based facts and circumstances. Some of the factors that would be used to determine if the real estate transactions would meet the requirement for UBTI are:

  • The purpose for which the property was acquired
  • The frequency, continuity and size of sales
  • The extent of improvements
  • The activities of the owner in improving and disposing of the property
  • The purposes for which the property was held
  • The proximity of purchase and sale (i.e. how close together were the transactions)

In general we advise clients that flipping or turning one property may or may not meet the UBTI standard. However, if you show a routine pattern of buying and selling property and if there appears to be the intent of turning properties for profit, then you will most likely be subject to UBTI.

For more information on self directed IRAs go to:

www.iracentral.com

www.nafep.com

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Top 10 Self Directed IRA/401k Mistakes – #9 Self directed IRA owner attempts to receive fees and commissions from IRA transactions

Sunday, November 22nd, 2009

There are cases where the self directed IRA owner is a real estate agent and they want to earn a commission from selling property to their IRA or some other disqualified party’s self directed IRA. Such a transaction would be viewed as conducting a transaction with your IRA or receiving an indirect benefit. Either way, it would be considered a prohibited transaction.

Another common scenario is that someone is a good money manager or investment guru type and they want to bring in or combine several family member’s IRA account and manage it as a pool. In exchange, the money manager (a related and disqualified party) wants to earn fees or commissions from their activities. In this case the money manager is a disqualified party, and they receiving a direct benefit from the IRA accounts of disqualified persons. This clearly would not be allowed.

A disqualified person can be paid reasonable fees and expenses for providing services to the IRA. Such an example could be that your spouse is a CPA and your self directed IRA LLC hires your spouse to do tax work. There are not any clear lines as to what constitutes reasonable. So, our position on any transactions with any disqualified party is just don’t do it!

As tempting and harmless as some of these transactions appear to be, we feel its better to steer clear of having to potentially defend your actions in the event of an audit.

These scenarios and opinions expressed above are for informational and educational purposes and are not intended to be an exhaustive list of scenarios. If you feel your situation may have an exception or you require a more definitive opinion then you should contact your personal tax advisor.

To learn more about self directed IRAs go to:

www.nafep.com

www.iracentral.com

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Top 10 Self Directed IRA/401k Mistakes – #8 Self directed IRA owner thinks a passive investment in active business is not subject to UBTI

Sunday, November 22nd, 2009

UBTI is the tax that levels the playing field for tax exempt entities that invest and compete against businesses that pay taxes. Self directed IRA account owners find unique business or investment opportunities in small businesses. Even though the opportunity is compliant and reasonable, and the IRA is passively invested, this does not necessarily mean that that the self directed IRA is not engaged in an active businesses.

Regardless of how involved the self directed IRA account owner is in the business, the business is active and it is competing against other businesses that are required to pay taxes. As such, the IRA would be subject ti UBTI tax regardless of the account owners involvement in the business.

To learn more about self directed IRAs go to:

www.nafep.com

www.iracentral.com

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Posted in checkbook control ira, self directed 401k, self directed ira, self directed ira custodian | 6 Comments »

Top 10 Self Directed IRA/401k Mistakes – #7 IRA owner uses personal assets or “Sweat Equity” for the benefit of the IRA

Sunday, November 22nd, 2009

A self directed IRA owner is clearly allowed to guide and manage the investments of the self directed IRA. The management can be relatively involved and substantial. As an example, the self directed IRA owner (or even the self directed IRA LLC manager – the account owner), could potentially expend considerable effort in finding the right real estate investment for the self directed IRA. This effort could likely be in the form of visiting many properties, speaking with many real estate advisors and experts, crunching numbers, etc.

However, a prohibited transaction or indirect benefit line could be crossed if the self directed IRA owner (or as the IRA LLC manager) were to use their personal tools and equipment to improve the property (e.g. use your saws, materials, truck, employees, to add a new roof). Another potential mistake is the self directed IRA owner provides all of the labor for making the improvements.

The general rule of thumb is that you are allowed to provide the necessary care and management of the self directed IRA’s assets, but you should draw the line at providing “sweat equity” or use and benefit of your personal assets.

To learn more about self directed IRAs go to:

www.nafep.com

www.iracentral.com

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Posted in checkbook control ira, self directed 401k, self directed ira, self directed ira custodian | 1 Comment »

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