Thank you for your interest in a Self Directed IRA (SD-IRA). This presentation will help answer any questions you have about the differences between Individual Retirement Accounts (IRA’s), Self Directed IRA’s and Self Directed IRA’s.
The Secret Is Out – IRA’s Can Invest In More Than Stocks, Bonds & Mutual Funds
Stock Brokers, Mutual Fund Companies and banks are in business to control your money and have done very well at keeping a trillion dollar secret since IRA’s have been in existence. Most people believe stocks, bonds, mutual funds and bank instruments are the only investments you can hold in your IRA. IRS Pub. 590 lists how Individual Retirement Accounts are restricted.
In the section 4975 and 408, it is clear that an IRA “cannot”:
Invest in:
S-corporations
Life Insurance
Collectibles
Alcohol
Property you own
Or:
Directly benefit the IRA participant (Includes vertical bloodline and fiduciaries)
Be encumbered with debt
Breach the plan document
Along with a few other minor rules
You Have Options
Notice that Publication 590 does not mentioned what an IRA can do. Also take note that it is not stated in the code that you are required to utilize a Custodian, Administrator, broker or trustee to manage your retirement funds. That is the dirty little secret of the stock brokerage and financial planning industries. Millions of Americans are invested in unsecured assets on Wall Street and have no control over their life savings because they think it is the only way. Let’s take a look at the way you invest now and a new approach to Alternative Investments™.
Regular Individual Retirement Account
1. An individual puts money aside for retirement and doesn’t touch it until they are at least 59 ½. They choose the investment from stocks bonds and mutual funds, sometime with the help of the broker representative that opened the account for them.
2. Depending on the type of IRA the individual has structured, gains can be realized tax deferred or tax exempt.
3. Contribution limits vary depending on age, employment status and adjusted gross income.
Regular Non-IRA Retirement Account (401K, Defined Contribution)
Most individuals will put money aside for a tax deduction or benefits at work. The money is managed by a traditional Custodian, Administrator or Brokerage firm using mutual funds or index funds and the only interaction by the individual is looking at an annual statement. Sometimes individuals get to choose their own stocks, bonds and mutual funds to hold in their account.
At retirement the account is paid as an annuity or could be rolled into a traditional IRA. The individual is left to choose from thousands of stocks, bonds and mutual funds in which there is no control over performance.
Typically, since the task is so overwhelming, it’s a one shot guess and then the only interaction by the individual is looking at a quarterly or annual statement to check if they guessed right.
Your choices are all on Wall Street only. The financial planners and advisors you can talk to will tell you “buy and hold” (we call it “park and pray”).
Brokerages are now trying to call those arrangements a Self Directed IRA, but it is not. It works like this:
1. An individual puts money aside for retirement savings with a Custodian, Administrator or Brokerage firm or rolls over an existing retirement account.
2. In most cases the individual can trade stocks, bonds and mutual funds from a select inventory under the Custodian, Administrator or Broker.
3. Depending on the type of IRA the individual has structured, gains can be realized tax deferred or tax exempt.
4. Contribution limits vary depending on age, employment status and adjusted gross income.
Non-Traditional Self Directed IRA
If the account funds are held by a Self Directed IRA Custodian, the individual is empowered to purchase non- traditional assets titled in the custodian’s name “for the benefit of” (fbo) the individual. These assets mostly entail real estate. The extent of bureaucracy necessary is at the Custodians discretion and is always paid for out of the IRA. After you have provided them with hours of the required research, they will decide if the investment you’ve chosen is approved for purchase, even if the IRS Publication 590 does not prohibit it. Custodians who offer this type of plan have a fee for everything, below is a small list of fees and certain bureaucracy you can expect.
FEES, FEES, and MORE FEES
Annual Asset Fees
Fees based on % of the account
Wire Fees
Fees to buy
Fees to sell
Return Check Fees
Invoice Fees
RMD Calculation Fees
Entrance Fees
Exit Fees
Check Fees
RED TAPE
Annual Appraisals
Investment Limitations
Attorney Opinion letters
Waiting for Custodian Approval
Waiting for Custodian to cut a check
Mortgage reviews
Asset Evaluation
Minimum Distributions
The list goes on…
The Self Directed IRA (SD-IRA) Must be a Truly Self Directed IRA
Here’s how it works:
1. An individual puts money aside for retirement savings under a special legal structure specifically set up to limit custodial restrictions, red tape and fees.
2. The individual opens an IRA account with a specific custodian.
3. A Limited Liability Company is structured in compliance with IRS rules and regulations to be owned by the IRA and managed by the IRA participant.
4. Depending on the type of IRA the individual has structured, gains can be realized tax deferred or tax exempt.
5. Contribution limits vary depending on age, employment status and adjusted gross income.
About This Type of Self Directed IRA (SD-IRA)
A SD-IRA is only restricted by the rules of the IRS and the regulatory branches of federal and state government, not by a company that is in business to manage your funds. It is that simple, don’t break the simple rules of the law, and there are no problems investing in what you choose.
With a SD-IRA you have many investment options
Tenants in Common
Promissory Notes
Commercial Properties
Fix and Flips
Rentals
Tax Liens
Options
Even Stocks, Bonds, and Mutual Funds
And with LESS HASSLE
You have Checkbook Control
Low annual custodial fee ($78 per year)
No additional custodial fees
Buy what you want without custodial approval
Use Leverage (debt financing)
Use your expertise
Grow your retirement, not theirs
Purchase any investment not specifically prohibited By IRS Publication 590
Here’s how it works:
1. An individual opens up an IRA under a Custodian who allows a truly Self Directed IRA
2. The individual transfers eligible funds to the new IRA account or the individual makes a new contribution to the new Custodian
3. A Limited Liability Company (LLC) is drawn up specifically to be owned by the IRA and managed by the IRA participant. The Operating Agreement in written by a IRA knowledgeable attorney
4. The participant opens a business checking account for the LLC.
5. The participant orders the custodian to transfer the IRA funds at the custodian into the new business bank account.
Maybe this sounds fishy to you. Here’s what you may have heard:
· My Attorney says I can’t do this.
Attorneys are like doctors, they are experts in one area of the law. You’d have to pay him to research it.
· My CPA says he’s never heard of it.
It is typical when a professional isn’t familiar with an area of their expertise, to simply tell you it can’t be done. Ask your CPA where in the tax code it is stated that this cannot be done.
· My Broker said you will run away with my money and real estate is too risky (remember the stock market in 2000 and after 911 – that is risk.)
Your Broker stops getting paid if you move your money. You can rest assured knowing that your money only moves from one qualified custodian to the next; Custodians transfer money by the same safety standards required by banks.
How do I know this is legal? Because there is case law and opinions to support it.
· IRS Case: Swanson vs. Commissioner
· Swanson funded a newly formed company with his IRA and the IRA’s of his children.
· Swanson managed the company as the Director.
· IRS Challenged that Swanson’s IRA was legal in court.
· The IRS lost and had to pay court fees and Swanson's attorney fees.
· Further rulings by the DOL and Tax Court told the IRS to leave these structures alone.
How do I manage this structure?
· Pay expenses out of the LLC account(s).
· Flow revenue back into the LLC account(s).
· File annual LLC forms with the Secretary of State.
· Manage the funds and the investments like you are the fiduciary of a Trust.
· Make annual contributions to the custodian and have them transferred to your LLC
Congratulations you are now in the know about being Self Directed!!!
Need a more complex structure to fit your specific needs?
Have more questions?
We can help. Contact NSIC Today for your free consultation. Please contact us at (888) 788- 4472. We can move you forward with your specific situation.
Roth IRA Distributions Guide
Since Congress created Roth individual retirement accounts (IRAs) in 1997, millions of taxpayers have signed on to the idea of tax-free distributions. However, the idea and reality are not always one and the same. So, how does a person know what’s taxable and what’s not? This article will break down the Roth IRA ordering rules—the rules that help determine taxation of Roth IRA distributions—and review the Roth IRA owner and Roth IRA custodian reporting responsibilities.
Ordering Rules for the Distribution of Roth IRA Funds
When taking distributions, a Roth IRA owner treats all of his/her Roth IRAs as one Roth IRA. For example, if Marty has a Roth IRA at ABC Bank, another Roth IRA at XYZ Credit Union, and a third through a mutual fund family, Marty will treat them as a single Roth IRA for distribution purposes. [Treasury Regulation Section 1.408A-6, Q 9]
Roth IRA owner removes Roth IRA contributions and earnings in the following order:
- Regular/spousal contributions
- Traditional IRA conversion contributions on a first-in, first out basis with taxable amounts before nontaxable (basis) amounts
- Earnings on all Roth IRA contributions
Roth Withdrawal of Contribution Amount is Penalty Free
Regular/spousal contributions for a tax year are the first distributed from a Roth IRA. Because regular/spousal Roth IRA contributions are not deductible, they are not taxable nor subject to the 10 percent penalty tax when withdrawn, regardless of the IRA owner’s age.
Example
Sara contributed $2,000 to her Roth IRA at ABC Bank in 2002; $2,000 to her Roth IRA at XYZ Credit Union in 2003; and $3,000 to her Roth IRA at MNO Mutual Fund Company in 2004. Her earnings total $750.
Treating all of her Roth IRAs as one, Sara can withdraw up to $7,000 (her combined contributions) before she has a potential taxable distribution from any of her Roth IRAs.
Conversion to Roth Contribution Amount is Taxable for 5 Years
The distribution of assets converted from traditional IRAs follows distribution of regular/spousal contributions in the ordering sequence. These Roth IRA assets are nontaxable on distribution because they were subject to income tax when converted from a traditional IRA. The amount attributable to the taxable portion of the traditional IRA distribution is considered withdrawn from a Roth IRA before the nontaxable amount.
Conversion amounts are subject to a 10 percent penalty tax if distributed within five years of the year of conversion. If an individual completes conversions in multiple years, each conversion amount has a different five-year period during which a penalty tax may apply. Distributions occur in the order contributed—first in, first out. The penalty tax does not apply if the Roth IRA owner meets an exception to the 10 percent penalty tax for early withdrawal.
Conversion Contributions
A traditional IRA may contain taxable amounts (deductible contributions, pretax rollovers, and earnings) and nontaxable amounts (nondeductible contributions and after-tax qualified employer plan rollover assets) called basis. Upon distribution from a traditional IRA, the taxable amounts become ordinary income. If an IRA owner has basis, he/she files Internal Revenue Service (IRS) Form 8606, Nondeductible Contributions, with his/her federal income tax return to determine the taxable portion of a traditional IRA distribution, even one converted to a Roth IRA.
Examples
Converted assets removed during the five-year penalty period
Steve, age 38, completed the conversion of two of his traditional IRAs to a Roth IRA─one in 2003 and the other in 2004. The 2003 conversion amount was $14,000; $10,000 taxable and $4,000 nontaxable. The 2004 conversion was $6,000; $5,000 taxable and $1,000 nontaxable. Steve has no other Roth IRAs and made no other contributions to this Roth IRA.
Assume that Steve needs to withdraw $16,000 in 2006 for a family emergency. No exception to the 10 percent penalty tax applies. His distribution sequence is $14,000 from the first (2003) conversion─$10,000 taxable and $4,000 nontaxable─followed by $2,000 of the second (2004) conversion’s taxable portion. Steve will owe the 10 percent penalty tax on $12,000─the $10,000 from the 2003 conversion and $2,000 from the 2004 conversion.
Converted assets removed after the five-year penalty period
Assume that Steve withdraws $14,000 in 2009. Although he is younger than age 59½, no penalty tax applies because five years have passed since the years that Steve completed his conversions.
Roth IRA Distribution of Earnings
Under the Roth IRA distribution ordering rules, earnings are the last Roth IRA assets distributed. This is significant because the featured benefit of the Roth IRA is the ability to avoid paying income tax on the earnings. A distribution of Roth IRA earnings is a qualified distribution, not subject to income tax or penalty tax, if:
- The Roth IRA owner’s five-year holding period has ended, and
- The distribution is for one of four qualified reasons
Five-Year Holding Period
Unlike the separate five-year period that applies to each traditional IRA conversion to a Roth IRA, a Roth IRA owner has only one five-year holding period for determining taxable Roth IRA earnings. Under Treasury Regulation Section 1.408(A)-6, Q&A-2, the five-year holding period begins January 1 of the tax year for which an individual makes his/her first regular/spousal Roth IRA contribution or in which he/she converts traditional IRA assets.
Example
Nancy made a Roth IRA contribution for 1998 on April 15, 1999, at MNO Bank. On January 15, 2002, she made another regular Roth IRA contribution for tax-year 2001 at XYZ Credit Union. Her five-year holding period for determining taxable earnings distributions from either Roth IRA began January 1, 1998, and ended after December 31, 2002.
Qualified Distributions of Earnings
A distribution of Roth IRA earnings after the end of a Roth IRA owner’s five-year holding period is qualified if the Roth IRA owner:
- Has attained age 59½, or
- Is disabled, or
- Is taking a qualified first-time homebuyer distribution, or
- The distribution is to a beneficiary after the death of a Roth IRA owner
Reporting Roth IRA Distributions
IRA custodians/trustees generally report Roth IRA distribution amounts with one of three IRS distribution codes:
- Code Q—if the custodian/trustee knows that the IRA owner’s five-year holding period has expired and he/she has attained age 59½, has died, or is disabled
- Code T—if the custodian/trustee does not know if the IRA owner’s five-year holding period has expired but knows that the IRA owner has attained age 59½, has died, or is disabled
- Code J—if Code Q or Code T does not apply
The IRA custodian/trustee is not responsible for reporting the type of asset (regular/spousal or conversion contributions or earnings) distributed. Note: The 2005 Instructions for Forms 5498 and 1099-R indicate Codes J, T, and Q for most Roth IRA distributions. The IRS currently plans to release the 2006 reporting instructions, and the associated codes, on November 21, 2006.
A Roth IRA owner completes IRS Form 8606 for each year he/she take a Roth IRA distribution with some exceptions (see the Instructions for Form 8606). This helps determine and explain to the IRS the type of asset withdrawn and figures any taxable and penalized portion.
Bottom Line on Roth IRA Withdrawals
To ensure tax-free and penalty-free Roth IRA withdrawals, a Roth IRA owner should:
- Delay distributions of more than his/her regular contribution amounts until the five-year holding period expires
- If younger than age 59½, wait five years from each conversion year before withdrawing converted assets
- Defer distributions of earnings until attaining age 59½
- Seek professional tax advice to determine the taxation of Roth IRA distributions