Prohibited Transactions Guide Book - 50 Free Copies September 22, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: 401k, alternative assets, compliance, investing, ira, irc, irs, jeff, legal, nabers, planning, prohibited transaction, real estate, self directed, solo, Solo 401k, tax
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I’ve written a comprehensive guide book on prohibited transactions. These will be available for sale soon for $39 + $5 shipping. I’m making 50 copies available completely free of charge on a first come first serve basis.
If you’d like one of these 50 free copies, please email your name & shipping address to:
specialoffer3 [at symbol] nabersgroup [dotcom]
This blog has been viewed over 20,000 times since April, so act fast ;-)
### Update - October 3, 2008
We have (more…)
Coinvesting with your plan / Partnering with disqualified persons July 24, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: 401k, co-invest, coinvest, department of labor, disqualified person, dol, funds, invest, investing, ira, irs, partnering, prohibited transaction, real estate, self directed, Solo 401k
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What if you could combine your retirement funds with your personal funds and additional monies from other family members? Well, you can… sort of. This question was asked and answered in a Department of Labor Advisory Opinion in July of 2000.
Click that link above to read the opinion in its entirety, but here’s my summary in its most basic form:
Your plan can partner with disqualified persons in certain situations, BUT there are many possibilities for a prohibited transaction in operating the partnership.
A prohibited transaction is when a retirement plan transacts with a disqualified person. The DOL Opinion says (more…)
What’s so special about the IRA LLC? June 9, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: self directed, ira, custodian, prohibited transaction, llc, ira llc, irs, compliance, limited liability company, minutes, operating agreement, special purpose, compliant, facilitator
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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…)
Landlording your IRA LLC’s properties - Is it allowed? May 30, 2008
Posted by Jeff Nabers in Self Directed IRA/401k, real estate.Tags: investment, self directed, ira, 401k, real estate, property, prohibited transaction, llc, ira llc, tax, checkbook control, irs, dol, exemption, landlord, landlording, repair, house, condo, taxes, treasury, regulation, code
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A question I get all the time is “Can I personally mow the lawn, maintain, and/or repair properties owned by my IRA LLC?” My answer is “No” which usually creates the response “But another company said I could.”
First, let’s summarize that the accountholder/participant of a retirement plan generally can’t have a transaction between themselves and their retirement plan. This includes the furnishing of services, sale of property, lending of money, and extension of credit between a plan and disqualified person (such as the accountholder). Next, let’s establish that active landlording means mowing the lawn, repairing, and fixing up properties, while passive landlording means collecting rent, paying mortgages/taxes/insurance, and contracting out the more active tasks to non-disqualified-persons. So is active landlording allowed? No, and I’ll provide two answers - the technical and the layman’s.
The Technical Answer
The argument for why active landlording for your IRA LLC’s property is not a prohibited transaction goes something like this…
As a general rule, the Internal Revenue Code provides (more…)
Loaning money to your IRA/401(k) May 20, 2008
Posted by Jeff Nabers in Self Directed IRA/401k, real estate.Tags: self directed, ira, 401k, real estate, mortgage, property, cash flow, prohibited transaction, nonrecourse, plan, foreclosure, non-recourse, loan, negative, exemption
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Do you have an IRA/401k-owned investment property that has a mortgage and negative cash flow?
Something I’ve been running into lately is Self Directed plan investors who speculatively bought a house or condo in previously hot markets (think Vegas, Florida, Phoenix, etc). Some of these areas have experienced declining values and declining rental income for short term rental properties.
If your plan (IRA or 401k) bought a house & obtained a non-recourse mortgage loan qualified based on short term rental income that has declined, you probably have negative cash flow. How can you avoid foreclosure? Loan money to your IRA/401k.
Loaning money to your IRA or 401k
A little known (more…)
Prohibited Transaction Basics April 24, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: 401k, 4975, account, department of labor, disqualified person, dol, investing, investor, ira, irs, plan, plan asset, prohibited transaction, retirement, self directed
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The most notable difference between endeavors down the path of using a self directed IRA versus traditional investing is the unique rules that apply to the former. The extremely simple rule is that an IRA (specifically) cannot buy life insurance or collectibles (such as rugs, works of art, alcohol, bullion).
The more involved rule is known as “no self dealing” and is described in Internal Revenue Code section 4975. This rule basically says that for each retirement plan/account, there is a list of “disqualified persons” with whom that plan cannot do business. These DQPs include:
- The accountholder/participant and any other fiduciary (person who makes investment decisions for the plan)
- Companies who provide services
- A member of the family of #1 or #2 above (family defined as spouse [husband/wife], ancestor [parents, grandparents, etc], lineal descendants [children, grandchildren, etc], and spouses of lineal descents)
- A corporation (or other entity) that is 50% or more owned (directly or indirectly) by #1, #2, or #3 above
- An officer, director, 10% or more owner, or highly compensated employee of #4 above.
- A 10% or more (in capital of profits) partner or joint venturer of #4 above
Every self directed IRA/401(k) investor should make this DQP list before making any investments.
Too many people seem to think of the list as only “the accountholder and his family”. As you can see it is a bit more involved than that. This doesn’t require calculus, but you should actually write out the list step by step to ensure that it is complete. This list can actually get quite extensive if you, your family member, or anyone who provides services to your plan has ownership in several companies.
So, what is a prohibited transaction?
In a nutshell, when a DQP transacts with a plan it is a prohibited transaction (abbr “PT”). The trick here is what is considered to be a “transaction”. This is generally defined in IRC 4975 as when one of the following happens between a plan and DQP directly or indirectly:
- sale, exchange or lease of property
- lending of money or extension of credit
- furnishing of goods, services, or facilities
So I consider that to be the general rule. There are a couple of special rules and they (more…)
Trust Yourself April 23, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: 401k, accounting, bank, checkbook control, custodian, invest, investing, ira, legal, prohibited transaction, savings, tax, trust, trust company
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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…)
Where to Find Reliable Self Directed IRA & 401(k) Information April 21, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: checkbook ira, conduct, ethics, information, investing, investments, ira 401k, IRA Association, ira llc, llc, member, prohibited transaction, self directed
2 comments
I ran across something today that may surprise you. I was reminded of why I founded the IRA Association of America. I hear some of the craziest things from prospects and new customers, such as
“My understanding is that my IRA can loan money to a Corporation I own part of.”
“I’ve heard that my company can do business with my IRA if things are structured right.”
First of all, these statements are both incorrect, and would each result in a prohibited transaction, triggering hefty tax penalties. Now, when I hear these type of statements I wonder where they come from. I’ve always figured that they must originate from various new, inexperienced companies with educational materials that are simply inaccurate. Today, I found out that I’m half correct. It is coming from inaccurate materials and sources, but to my surprise, these sources aren’t always new and inexperienced.
This post is in reference to an LLC facilitator called CHECKBOOK IRA located at www.checkbookira.net and www.checkbookira.com. These guys may be familiar to you because, at the time of this writing and for the past several years, these web sites come up in search engine results for terms like “ira llc” and “self directed ira”. Now, I’ve never met or spoken with the owner, Steve Sheperd, so I can only comment based on the information on his web sites.
Currently, if you go to CHECKBOOKIRA.net and click “legal rulings” it links to a ruling that says “Your IRA can make a loan to a company owned less than 50% by the IRA owner.” This caught my attention because the claim was contrary to the understanding given to me from seasoned Department of Labor agents. So I clicked the link and read the entire document. (It’s important to note that (more…)
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