Jeff Nabers’ Self Directed IRA & Solo 401(k) Blog

Ahhh… the single most mis-answered question in the self directed IRA world:

Customer: I’ve noticed it costs more to setup an IRA LLC than it does a general purpose LLC. What’s so special about the IRA LLC?
LLC Facilitator: The Operating Agreement has special language. Putting together an IRA LLC without this magical language will result in a prohibited transaction and hefty taxes.

This is untrue. While it’s advisable to include special language in a special purpose LLC (one that is intended to be owned by an IRA and managed by the IRA accountholder), the absence of such language will not create a prohibited transaction in itself. Believe it or not…

Any newly created LLC can be used with an IRA!

…without necessarily creating a prohibited transaction. The sales pitch that you need the special purpose operating agreement is bogus.

That said, it is still advisable to have an IRA LLC established for you by a company experienced and competent in such facilitation. Not because you have to, but because you should want to. Why?

You want things to look good in the event of an IRS audit

This is probably the main reason why you should have an IRA LLC formed for you by a specialist instead of doing it yourself. If you get audited, the IRS is going to have a first impression about your IRA LLC structure. If it looks like you did everything compliantly and your documents pro-actively address most compliance issues, the IRS’s first impression may be friendly. If it looks like you just threw the LLC together with little regard for compliance, this may negatively affect the IRS decision of how long and excruciating the whole ordeal will turn out to be. This is an important issue. Notice I said “looks like”. Regardless of how compliant you are, (more…)

Probably one of the must unknown facets of retirement planning is that you can distribute before age 59 ½ for any reason without paying the extra 10% early distribution tax. How?

Substantially Equal Periodic Payments

1. Set a distribution schedule calculated using IRS tables
2. The schedule must have regular payments of a certain consistent amount.
3. You must make receive these distributions from your retirement account either until you reach age 59 ½ or for a 5 year period… whichever is longer.

Internal Revenue Code Section 72(t) is where the extra 10% tax for “early distributions” (before age 59 ½) is imposed. However, if you read on to IRC 72(t)(2)(A)(iv) it is explained that the 10% tax is not applicable to any distribution that is part of a series of Substantially Equal Periodic Payments - or SEPP for short.

To give you an idea of how this works using calculations from IRS life expectancy tables, let’s examine a fictional case study with round numbers for simplicity:

Jared is considering early retirement at age 45, and over the years he has grown his IRA to an asset value of $2,000,000. He isn’t sure whether he wants to completely retire, work part time, pursue a career change, or start a new business. Let’s take a look at his options… (more…)

With tens of thousands of self directed IRA investors utilizing LLC structures to enjoy “checkbook control” authority of their self directed IRA investments, this post may serve as great news for those who aim to follow suit.

Solo 401(k) retirement plans can grant direct checkbook control without the use of an LLC or custodian.

The concept of custodian comes from Internal Revenue Code Section 408(a)(2) and is defined in Section 408(n). This entire IRC section 408 is devoted to Individual Retirement Accounts, or IRAs. The code basically explains that an IRA is normally a trust, and the trustee must be a bank. It then defines bank as a bank, trust company, or any company specifically approved by the IRS. This capacity of trustee to an IRA is known as “custodian”. This trustee role is simply that of investing the plan as directed by the accountholder.

A Solo 401(k) plan is a type of 401(k) that is designed for self employed individuals whose businesses have no full time employees. All 401(k) plans are qualified plans, and qualified plans do not have any special restrictions on who can serve as trustee.

So the significant difference is that with a Solo 401(k), the participant can actually be the trustee and handle (more…)

In a world where we see stories unfold such as:

• Enron
• WorldCom
• Tyco
• Subprime mortgage crisis
• Mutual fund mortgage overexposure and misreporting
• Fannie Mae & Freddie Mac accounting scandals
• Insolvency of Investment Bank Bear Stearns

…most Americans are running low on trust when it comes to financial service companies. Who can you trust?

This is an especially important question in light of my recent post about misinformation in the self directed IRA community. My answer: yourself. That is what self directed investing is all about. You have control of your assets.

With the checkbook control provided by an IRA LLC, there is no potential for fraud unless your IRA rollover is handled by someone other than a bank or trust company (aka custodian). With a Solo 401(k) you don’t even have to transfer your assets through a custodian in the first place.

Q: What should I be concerned about?

A: Prohibited transactions and tax compliance, although it is simple to address both concerns. You can search Google for “self directed IRA prohibited transactions” and “IRA UBIT tax” to learn about the basics of both topics. If a service provider claims (more…)

I work in the field of Self Directed IRAs & 401(k)s. Based on the phone calls and emails we receive, by far the most discussed topic is checkbook control. Some people want it; others don’t. Some service providers support it; others discourage it.

What is it?

What most people are referring to when they say checkbook control is an investment structure that is formed as follows:

1. A person opens an IRA account at a self directed custodian and transfers other retirement account funds into it.
2. The accountholder has a Special Purpose LLC created and names themselves as LLC manager.
3. The accountholder directs their custodian to invest some or all of the IRA funds into the newly created LLC.
4. The LLC further invests its funds, often into real estate, private companies, or mortgage notes. The LLC is owned by the IRA, but managed by the IRA accountholder. Because the manager is the authorized signor on all LLC accounts, this is known as checkbook control.

The legitimacy of this structure was verified in a tax court decision.

Why would somebody WANT checkbook control?

• Eliminate transaction based custodian fees
• No delay for custodian to process the transaction
• Remove custodian’s prohibition on certain legally allowable investments
• Invest in stock market with margin
• Invest in foreign assets with more ease

Why would somebody NOT want checkbook control?

Here’s where the confusion and disagreement occurs. The argument against checkbook control is based on compliance, mostly with prohibited transactions, which in a nutshell are “self dealing” transactions. Self dealing means the accountholder causing the retirement account to buy, sell, or otherwise enter into a transaction with a disqualified person. This category of people includes the accountholder, most of his relatives, and anyone who provides services to the retirement account. So the argument goes like this:

“Prohibited transactions are costly. Without a custodian overseeing your transactions, you are at higher risk of doing a prohibited transaction and paying large tax penalties as a consequence.”

I always do my best to maintain an objective, balanced viewpoint. In light of the above argument, I formed the opinion that it’s good for some people to have checkbook control and risky for others. Therefore, whether checkbook control is appropriate is dependent on the circumstances of the accountholder. I operated under this thinking for over a year…

Then I learned more about the actual matter at hand.

… and have come to a completely different conclusion. Here are the newly discovered facts: (more…)