Missed Your 60-Day Rollover Deadline?

Here’s What Self-Directed IRA Owners Should Know

The bad news is that you only have 60 days to complete an IRA rollover, and if you miss that deadline, whether you’re rolling over funds from a conventional IRA or a self-directed IRA, you may find the IRS will force you to treat the entire rollover as a distribution, and demand taxes and penalties on the full amount.

The good news is that there is a way out for some of you – if you qualify.

The IRS recently released a procedure whereby individual taxpayers can self-certify that your transaction meets the IRS criteria for a waiver of the 60-day deadline, so you can avoid the penalties and interest. This is terrific news for many of our clients, who own and regularly engage in transactions with self-directed IRAs.

The IRS lists eleven acceptable reasons why an IRA owner may miss the 60-day rollover deadline and still qualify for the tax-free rollover treatment:

The taxpayer must have missed the 60- day deadline because of the taxpayer’s inability to complete a rollover due to one or more of the following reasons:

  1. an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
  2. the distribution, having been made in the form of a check, was misplaced and never cashed;

 

(c) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;

(d) the taxpayer’s principal residence was severely damaged;

(e) a member of the taxpayer’s family died;

(f) the taxpayer or a member of the taxpayer’s family was seriously ill;

(g) the taxpayer was incarcerated;

(h) restrictions were imposed by a foreign country;

(i) a postal error occurred;

(j) the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or

(k) the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

 

To qualify for the self-certification route, you have to certify in writing to your IRA custodian or third party IRA administrator that your transaction qualifies for the waiver. You can find a model letter that you can use to write your administrator in the Appendix to IRS Revenue Procedure 2016-47.

To use this procedure, you must not have been denied a waiver previously by the IRS.

You aren’t entirely off the hook. If the IRS decides to come back and audit you, they could find that you didn’t qualify for a tax-free rollover after all, and still assess you income tax, penalties and fines. So the self-cert procedure allows you to list the transaction as a valid rollover on your tax return, for now, but that relief can be taken away if the IRS finds out the deal didn’t qualify at a later date.

The IRS is still going to know that there was a late rollover. Your custodian or administrator must report rollover dates to the IRS. So you will be on their radar screen. Consider your chances of being audited to be elevated after going through the self-certification procedure for your IRA or self-directed IRA.

If you violate any other rules besides blowing the 60-day deadline, the self-certification process will not bail you out. So if you are using a self-directed IRA, you still cannot violate rules regarding prohibited transactions or self-dealing and expect your self-certification affidavit to get you off the hook. You also cannot execute more than one 60-day IRA-to-IRA rollover or Roth IRA-to-Roth IRA rollover within a 12-month period.

The best bet is to avoid taking personal possession of rollover funds at all, but to have your administrator or custodian handle your rollovers via a direct trustee to trustee transfer. As long as you don’t take possession of the rollover proceeds and your funds stay within an IRA account, you don’t have to worry about blowing any deadlines at all.

Until you are due for a required minimum distribution, that is.

If you are looking at a rollover transaction soon, or if you want more information about self-directed IRA investing in general, contact American IRA, LLC at 866-7500-IRA(472) before making a move. American IRA, LLC is American’s leading authority on self-directed IRAs and providing administrative services and transactional support and record keeping.

With offices in beautiful Asheville and Charlotte, North Carolina, American IRA serves self-directed IRA owners anywhere in the country.

Call us today, or visit us on the Web at www.americanira.com. We look forward to hearing from you.

What’s Popular Isn’t Always Most Effective: Why You Need a Self-Directed IRA

Famous investment guru Benjamin Graham once said: “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” If someone were to ask you what the most popular way to fund retirement was, you would probably hear some version of the same response: find a wealth manager, use retirement accounts, and keep saving. And that is great. For some people, it is very effective. But what if there are tweaks along the way that could potentially boost your ROI in significant amounts, further bolstering your chances at a fully-funded retirement? The Self-Directed IRA is one such path.

Unfortunately, a recent article in WorldFinance.com—while offering plenty of insight about retirement—did not spend any of its time talking about the Self-Directed IRA. And while they talked about the five most popular ways to finance retirement, it is important to remember one basic fact: effectiveness and popularity are two different things entirely.

Why a Self-Directed IRA Makes Sense

The first item on the list at WorldFinance.com makes a lot of sense: taking advantage of retirement accounts to maximize investment growth. Putting aside money in this fashion allows investors all over the country to build wealth easily and passively. The article went into detail about the types of accounts—including SEP-IRAs—but never addressed what happens when an investor self-directs their own retirement.

A Self-Directed IRA is just that: an account that you control. And while the second item on the list at WorldFinance.com addresses real estate, there is little time spent pointing out that it is possible to hold real estate within a Self-Directed IRA account. Given that real estate is one of the most powerful ways to generate returns on investment, it is clear that what is “popular” is not always the total picture.

Understanding the Self-Directed IRA Landscape

Why is Self-Direction so powerful? It not only helps investors avoid the often-expensive management fees associated with money managers, but it allows investors to tap into those investments they would otherwise make through general accounts. For example, if an investor is strong in real estate, they would typically make the investment using the simple, routine processes of real estate investing. But with a Self-Directed IRA, they can hold real estate within a retirement account.

This does mean that there are some important regulations to keep track of. One cannot simply purchase a home and live in it through a Self-Directed IRA—the IRS prohibits these kinds of investments from being used within a retirement account. A Self-Directed IRA is considered a separate entity from the investor, which means that the property itself will also have to remain separate.

There are other options, such as investing in precious metals.  This opens up the possibilities of a more diversified investment portfolio. See our section on Investing to find out what these are.

Popularity vs. Effectiveness in Retirement Planning

There is nothing wrong with a strategy being popular. The concept of buying and holding mutual funds in an IRA is popular because it is effective, it works. Over the long-term, this can generate amazing returns for investors who have the patience to withstand challenging market conditions.

But that does not mean that what is popular is also the end of the available options, especially in the world of retirement investing. There is more to consider. There are other advantages investors can use. There are different asset classes that can potentially bring wealth to investors who understand them well. It is vital for investors to broaden their horizons so they know each and every potential advantage they can use on the path to financial independence in retirement age.

Want more information about Self-Directed IRAs? Visit our section on Self-Directed IRA accounts or call American IRA at 866-7500-IRA.

Self-Directed IRA Retirement Tips You Need to Hear

Self-Directed IRA Retirement Tips You Need to Hear

When you think about retirement, what are the conventional tips you receive? Diversify. Think about the long-term. But when it comes to a Self-Directed IRA, you’d be surprised at how many important tips even so-called experts might leave out. In order to get a better handle on how you can build wealth for the long term, let’s look at some retirement tips that apply to holding a Self-Directed IRA:

Tip #1: True diversification is about asset classes.

You’ve heard it a thousand times: diversification is the key way to avoid excess risk. You don’t want to put all of your eggs in one basket. So why is it such common advice to do exactly that by putting all of your money in the stock market in one form or another?

Here’s something you might already know: if all you own are mutual funds, there’s a good chance you’re not as well-diversified as you think. Diversification is about asset classes, not just different assets within each class. And while it’s great to own a mutual fund rather than an individual stock, smart investors will think beyond even that in order to achieve true diversification—and more financial security.

Tip #2: Utilize your specific expertise with a Self-Directed IRA.

Know a lot about real estate? Then why, when it comes to your retirement plans, does real estate fall by the wayside? With a Self-Directed IRA you can invest in real estate. Sure, the rules are different—but so are the protections. That means you can have plenty of wealth stored away in an IRA that’s better-protected than any ordinary real estate investment. If you know a lot about real estate and know how to spot a good investment when you see one, holding real estate in an IRA is a great way to build wealth for your nest egg.

Tip #3: Taxes matter—a lot.

When it comes to retirement, you’re talking about compounding interest. That’s a powerful tool in building wealth, because it means you can expand your holdings simply by being patient. But compounding interest works both ways too. The more you lose to taxes now, the more devastating it is for your ultimate retirement nest egg.

Everyone should work hard to comply with all tax rules and laws. But that also means that you should take advantage of the tax protections the government affords you. This includes keeping some holdings in an IRA—and not necessarily just stock funds, either.

If you want your money to grow as efficiently as possible, you have to take taxes into account. IRAs are some of the best ways to reduce your tax burden while your money grows.

Tip #4: Massive growth is possible with the right investments.

The typical idea of holding money in the long-term is that compounding will be responsible for the massive growth. But using a Self-Directed IRA for something like a private company is a different way to get access to massive growth opportunities. Holding private equity in a company before an IPO, for example, can be a tremendous way to yield plenty of value in an IRA.

This isn’t to say that any private investment is a guarantee of massive growth. All investments carry some degree of risk. But holding a Self-Directed IRA can give you the IRA protection you need for investments that really pay off in the long run.

Want to know more about Self-Directed IRAs? Then it’s time to explore. Continue reading our materials here at www.AmericanIRA.com or call us at 866-7500-IRA to learn more about how the Self-Directed IRA works.

Tax Cuts! What the TCJA Means for Small Businesses

Many of our clients and customers own or operate small businesses, including corporations, partnerships and LLCs. The Tax Cuts and Jobs Act of 2017, or TCJA, provides a number of tax breaks that benefit small businesses as well as individual investors in self-directed retirement accounts.

Most notably, the TCJA reduces the corporate income tax rate  from 35 percent to 21 percent. This is a substantial reduction which dramatically reduces the effects of double taxation on C-corporations.

But that is not all. The TCJA also allows for much more generous tax provisions for businesses making capital investments. The new law increases the tax benefits available to small businesses under Section 179. Beginning January 1st, small businesses can expense up to $1 million in deductions on qualified property immediately. This provides a significant cash flow benefit for any company putting qualified capital equipment to work.

Previously, the limit was up to $500,000. The remainder had to be depreciated gradually over time – up to 27.5 years for many investments in residential real estate. The relaxed depreciation rules allow businesses much greater cash flow than they otherwise would have enjoyed.

The new tax law also expands the types of property and capital equipment that is eligible for first-year expensing or bonus depreciation.

Additionally, the new law allows for simplified accounting. Previously, most businesses with less than $5 million were permitted to use the simpler cash method of accounting. Under the TCJA, businesses with qualified revenues of up to $25 million are allowed to use the cash method. This method recognizes revenues and expenses as they actually come in, and not as they are contracted.

Luxury car fans get a treat: Business owners can now expense a greater dollar amount for luxury cars. Under the previous rule, business owners could only deduct up to $15,000 for cars over five years. However, the new rule lets you deduct up to $47,000 over five years.

It is much easier to deduct costs for computers as they have been removed from the definition of listed property. This means that you do not have to jump through hoops to show IRS officials that you actually used the computer in your business. Just keep the receipts!

Drawbacks

The new tax law has a couple of drawbacks for small businesses. First, interest deductions are limited to 30 percent of the business’s adjusted taxable income. Interest expenses are  deductible against income dollar for dollar.

Businesses that have been taking operating losses, or have uneven revenues from year to year, should beware of the restriction on claiming net operating losses against income. Previously, businesses with a net operating loss in a given year could use that loss to offset income. Businesses could offset income going back two years, or going forward 20 years.

The new rules say you can only offset 80 percent of your business income in a given year with net operating losses. You can carry these losses indefinitely into the future, but only certain losses can be carried backwards to offset income in prior years.

Foreclosure Properties in your Real Estate IRA

Buying distressed or foreclosed real estate at a discount and then either fixing and flipping or renting it out as a long-term income property is a tried and true investment strategy for both conventional real estate investors and real estate IRA owners. Real estate IRA owners have the advantage of tax-deferred rental income (within a traditional real estate IRA) or tax-free income (for Roth Accounts.)

But it’s getting trickier in recent months for real estate IRA investors in many markets to find a promising deal at a meaningful discount to intrinsic value – one of the keys to long-term profits at acceptable risk, according to no less an authority than Warren Buffet, chairman of Berkshire Hathaway and one of the most successful investors in history.

The reason things are getting dicey: As the economy improves, the supply of distressed and foreclosure deals is drying up. Fewer people are losing their jobs, more people are getting back to work, and naturally fewer homes are falling to foreclosure, and fewer homeowners are forced into short sales. Banks are also less likely to agree to short sales, because they are more assured of getting a decent price for them if they go to auction.

In all, distressed sales, including foreclosures, short sales, third-party foreclosure auctions and direct SEO sales now comprise 12.5 percent of all home sales, as of the end of the third quarter. That’s the lowest level we’ve seen since Q3 2007, according to the Q3 2017 Home Sales Report from ATTOM Dada Solutions.

So it’s critical for real estate IRA owners to understand this and go into an auction with all their ducks in a row. Here’s why:

    • Discounts are narrower. This means that auction participants have to bid higher prices to pick up properties.
    • Less margin for error. A few years ago, foreclosure properties were selling at relatively large discounts compared to the level of expenditures needed to bring them up to a rentable condition, or to prep them for sale to a retail homebuyer. That left a comfortable margin for mistakes. If you anticipate spending $10,000 to fix a new investment property up and the real number turns out to be $20,000 by the time all is said and done, you wouldn’t be happy about it, but at least you still had a fighting chance to make at least some money on the deal. In today’s market, making a mistake like that can mean the difference beween profit and loss.
    • More competition for a limited number of properties. The total number of distressed/foreclosed properties is down. But there are still lots of investors out there bidding on them! When you show up to an auction, you may find quite a number of other bidders there. The more bidders there are, the more you will have to sweeten your offer, in most cases, in order to maximize your chances of winning the deal.

If you’re out there bidding on foreclosed properties in this environment, consider making these adjustments to improve your odds of bidding and winning on quality properties at a reasonable price.

  1. Show up with proof of funds. Either have a cashier’s check from the bank or a letter verifying funds ready to go when you come to the auction. If you win the bid but can’t prove you have funds that same day (and in many jurisdictions by lunchtime that same day), the auctioneer will cancel your bid and contact the next highest bidder.
  2. Be ready when the high bidder backs out. Sometimes the high bidder can’t show proof of funds, or gets cold feet for some other reason. In any case, be ready to answer your phone for a few days after the auction – especially if you’re the number 2 or 3 bidder.

What Most Investors Don’t Know About the Real Estate IRA

What Most Investors Don’t Know About the Real Estate IRA

You might know that real estate can be a great investment. You might even know that it can be a vital part of a retirement portfolio. But you’d be surprised at just how few people understand the Real Estate IRA and what it entails in terms of protections, limitations, and opportunities for growth.

As the old saying goes, however: “knowledge is power.” If you want to expand the range of possibilities for your portfolio, it’s time to learn what most investors don’t know about the Real Estate IRA:

Real Estate IRA Investment Options and Capabilities

Let’s start with the fun stuff—what you can do when buying real estate through a Self-Directed IRA:

  • Borrowing money. You can borrow money any time you can convince a bank to lend you some, of course. But what many investors don’t know is that they can borrow money within a Real Estate IRA to purchase the real estate. This happens through non-recourse loans, which is a limitation, but also a protection: it means the bank can’t come for the rest of your assets should the IRA default on the loan. It’s rare that you see opportunities and protections packaged into one interaction, but with the Real Estate IRA, it’s possible.
  • Property managing. You don’t have to do it. In fact, you won’t be doing it, as the property manager will be collecting income and handling expenses while any profit left over will go into your retirement account. This keeps the property hands-off for the investor while any profits roll in on a passive basis.
  • Selling property. When you sell property within your Real Estate IRA, it will be a bit like selling stock within an IRA—you’re not going to have to pay capital gains taxes that year. This is a tremendous benefit for investors who are operating on thin margins and need to squeeze profit out of their investments while they build long-term equity.
  • Partnership is still possible. Partnering with others and even yourself can be done when you acquire the asset, although it’s always a good idea to talk to an expert to make sure you’re following all the rules.

Of course, even a great account like an IRA has its limitations.

Real Estate IRA Restrictions and Limitations

Why doesn’t everyone invest in real estate using their IRA? Because there are restrictions designed to keep these investments aimed at long-term growth. Otherwise, any real estate investor could use the IRA for their house-flipping business. Here are some vital limitations to keep in mind:

  • You cannot use the property. Sorry, no owning your own home through a Real Estate IRA—it has to be for investment purposes only.
  • All legal documents should be “vested” in the name of your IRA. Although you own the IRA, the IRA itself is considered a separate entity for a variety of legal and financial purposes. This is why there are some separation limitations, such as…
  • You cannot fix the property yourself. If you want to use a real estate investment to satisfy your DIY nature, you can’t do it within a Real Estate IRA.

These limitations and protections are for keeping your real estate investments as exactly that—investments. Using them in personal ways flies in the face of keeping that separate entity for your retirement investment purposes.

To learn more about Real Estate IRAs and both the limitations and opportunities packed with them, visit our Real Estate IRA guide. The more you learn, the better you’ll be able to make real estate work for your retirement strategy.

An IRA-Owned LLC Offers Checkbook Control – But Is it Right for Me?

When ordinary investors hear phrases like “IRA-owned LLC” and “checkbook control,” they tend to zone out. After all, these concepts sound a little wonky—a little too complicated for something as simple as a long-term retirement plan. But while this type of setup might sound like a lot of work, the truth is that a Self-Directed IRA can be a powerful and, yes, simple plan to help you maximize the results you get from your retirement investments.

But there’s another question that needs to be answered here, and you’ll rarely find it addressed in any articles about IRA-owned LLCs. Is this arrangement right for you? Here’s what you’ll need to know.

Defining the Self-Directed IRA Owned LLC with Checkbook Control

The concept of the Self-Directed IRA is simple: these are like any other retirement accounts, except you’re in charge. You’re not outsourcing investing to someone else or even necessarily investing in stocks. Rather, when you’re in control, you can make IRS-approved investments such as real estate and precious metals, provided you meet the requirements.

One potential avenue of investing is the LLC, or Limited Liability Company. This business structure can be a great way to shelter your assets from potential issues such as litigation—without requiring that you sacrifice the kind of control you would expect over your own retirement plans.

So what exactly does “checkbook control” entail? It means that you’ll have the power of buying and selling within your IRA—the power of the checkbook. This can have advantages and disadvantages, including:

  • Checkbook control means you’re in charge of avoiding IRS penalties. When working with an IRA custodian, these custodians can help make sure that you adhere to all tax requirements. When you have more control, you also have more risk.
  • Checkbook control requires being proactive. If you enjoy the responsibility of seeking out experts including lawyers and tax professionals—great. If not, then you might want to think about working with a Self-Directed IRA custodian instead.

How to Get Started in Atlanta with a “Checkbook IRA”

The so-called “Checkbook IRA” can be of tremendous benefit for those in Atlanta or in the surrounding areas. Not only is Atlanta’s local real estate market a tremendous opportunity for those who live there, but the same investments can perform well within an IRA with checkbook control. That means that it’s possible to make investments in real estate for retirement while still retaining the kind of control you would normally enjoy in other arrangements.

Why Atlanta? As local station WSB-TV recently reported, the current market looks similar to previous housing booms, especially with higher prices than there were in the housing boom of the early 2000s. That could represent a prime opportunity.

Real estate also functions as a way to hedge against inflation. Inflation should be a concern for any investor—after all, it’s vital that your retirement dollar old on to its value. By holding real estate, you move money out of dollars and into real property. That real property then can go up in value, which in turn helps you hold on to the initial investment.

With a Self-Directed IRA owned LLC and checkbook control, you’ll have plenty of options for seeking out opportunities in the Atlanta area. That means that you don’t have to depend on other markets or even look into moving to make retirement happen just where you are. And that’s at the core of Self-Directing: making your own destiny when it comes to your retirement investments.

However, checkbook control also means that you can give yourself too much responsibility in too big of a hurry. What’s right for you? Keep reading. For more information on these “checkbook power” arrangements, keep checking out our website. You can also call American IRA with your retirement inquiries by calling 866-7500-IRA or visiting more of our information right here at www.AmericanIRA.com.

Down to the Wire: Top Tips for Self-Directed IRA Owners About to Retire

The time went by fast, didn’t it? It seems like yesterday we were just starting out, thinking it would be forever when the older people were us. Now the bluehairs are the kids! If you’re approaching retirement age, it’s time to take some important steps to set yourselves up for a successful retirement. That means getting in all the tax-advantaged contributions you can, hitting your Medicare deadlines, and taking an honest look at your expected income and expenses.

  1. Assess your situation. Now’s the time for a realistic assessment of how much you can expect to receive per month and per year, on a sustainable basis from your retirement accounts, personal savings, pensions, taxable investments and Social Security benefits, as well as your required monthly and annual expenses. With interest rates still relatively low, most planners are using a 4 percent withdrawal rate as a rough rule of thumb. Rates much above that amount quickly increase the likelihood that you may outlive your retirement savings. However, owning rental real estate in a Self-Directed IRA, or investments designed to kick off a significant income such as REITs, annuities, preferred stock and the like may help increase those odds.

A good financial planner can help you with those projections.

Whatever income you project for yourself, discount it to account for inflation, and then try to live on that amount for a year or two. No cheating! Let’s see how it goes!

2. Get in your last-minute retirement plan contributions. For IRAs, including Self-Directed IRAs, you have until your tax filing deadline next year to make your contributions for the current year. But you don’t get that break for employer-sponsored plans. If you are participating in a 401(k) plan via an employer (even if you are the owner-employee of your own company), you must complete all your contributions by the end of the calendar year. Time to boost your contribution rate to the maximum possible.

3. Take advantage of ‘catch-up’ contributions. Whether you have a conventional IRA or a Self-Directed IRA, those taxpayers over age 50 are allowed to contribute an extra $1,000 toward retirement. So if you were planning on contributing the maximum of $5,500 per year to your IRA or Self-Directed IRA this year, and you turned 50 or older this year, you can contribute an additional $1,000, for a total of $6,500.

If you’re participating in a 401(k) plan, you get an additional $6,000 in allowable salary deferral contributions if you’re age 50 or older this year – for a total allowable employee contribution of $24,000.

4. Roll back your risk exposure. It’s been nearly 10 years since the stock market collapse in the Great Recession, sparked by the collapse in real estate and mortgage lending. Yes, the stock market has more than recovered since then. And so have most real estate markets (but not all). But back then, you had another ten years or more before you were looking at retirement in the face. You had time to recover. Do you have time to recover from a similar economic dislocation now? Chances are you don’t have the same amount of time. Your time horizon to retirement is now 9 years shorter than it was at this point in 2008. Depending on your situation, it may be time to take a good look at your risk exposure, asset allocation and increase your diversification. Self-Directed IRAs may help you increase diversification and decrease overall investment risk, depending on how you use them. While some Self-Directed IRA investors target quite risky asset classes, it’s also possible to use Self-Directed strategies and alternative asset classes to reduce portfolio risk as well, by picking up assets that may not be closely correlated with the broad U.S. stock market.

5. Don’t miss Medicare Supplement Open Enrollment. If you turned age 65 in the next year and you want to protect your savings against unexpected medical costs, be sure to make your Medicare decisions during your initial open enrollment period. That window opens up three months before the month in which you turn age 65 and enroll in Medicare Part Band closes three months after the month in which you turn 65 and enroll in Medicare Part B.

If you miss this enrollment period, you’ll have to pay higher premiums for Medicare Part B and you may not be able to enroll in Medicare Supplement (Medigap) or Medicare Part C (Medicare Advantage Plans), or you may need to pay higher penalty premiums.

If you don’t enroll, then you face the risk of having to pay significant out-of-pocket costs in the event of a hospitalization.

Common Mistakes in Self-Directed IRA LLC Operating Agreements

Every LLC you put in a Self-Directed IRA needs an operating agreement. But if you don’t draft the operating agreement properly, you could make your LLC nearly impossible to run, and even endanger your Self-Directed IRA’s eligibility for the federal tax advantages we normally associate with these accounts. This could result in substantial taxes and penalties.

Here are several of the most common mistakes LLC principles who own these entities within Self-Directed IRAs make:

Failure to limit compensation to owners. LLCs in IRAs cannot pay compensation to owners outside of the IRA. That means they can’t pay you a salary, no matter how much labor you’re doing and how much consulting you’re doing for your LLC, as long as it’s in the IRA. The same goes for your spouse, your children, grandchildren, parents, grandparents and those of your spouse, as well as any professional advising you on your LLC in a fiduciary capacity.

Prohibited transactions are governed by IRC § 408(e)(2), which disallows most transactions between the IRA and disqualified persons. “Prohibited transactions” and “disqualified persons” are defined in § 4975(c)(1) and § 4975(e)(2).

You should put language to that effect in your LLC operating agreement.

Failure to limit investments. If you own your LLC within a Self-Directed IRA or 401(k), you should specify in your operating agreement that you cannot invest directly in prohibited investments like collectibles, life insurance contracts, alcoholic beverages, jewelry, gems and certain precious metal coins and bullion of inconsistent or insufficient purity.

Failure to plan for the endgame. All operating agreements, in and out of the Self-Directed IRA, should contain language specifying what to do with the interests of any owner in the event that owner dies or becomes disabled. Too many owners fail to come to an agreement, and are asking for trouble if the unthinkable should happen. Think the unthinkable – and plan for it.

Failure to restrict debt to non-recourse. IRA rules strictly prohibit owners from signing personal guarantees on loans or pledging anything outside of the IRA itself as collateral for a loan. Creditors must have no claim on any assets outside of the IRA. Failure to abide by these rules could result in some or all of your IRA’s tax status being revoked, resulting in significant taxes and possible penalties – plus likely legal bills. If you own an LLC within an IRA, 401(k) or any other tax-advantaged retirement account, your operating agreement should reflect these restrictions.

Failure to define “units.” This is a particularly important mistake when there are multiple owners of an LLC, and/or when people are making contributions of capital that are not readily defined. Also, if you ever want to sell an interest in your LLC – or sell the whole business outright – it’s important to define who gets what. LLCs don’t come pre-subdivided the way corporations are with shares. Owners/partners in LLCs must define how the fractional interest of the company is broken up – and the tool for doing this is the operating agreement.

Otherwise, if the company ever issues a dividend, no one will know who is supposed to get how much!

As Stocks Soar, Advisors Suggest Diversifying with Self-Directed IRAs

As major U.S. stock indices continue to climb to ever greater record highs, more financial planners are encouraging their clients to direct a portion of their retirement portfolios to self-directed IRA strategies. Why? Diversification. The higher stocks go, the more potentially dangerous the market becomes for risk-sensitive investors. The time has come to take some of these recent stock market gains and spread them around to asset classes that may still be available at a more reasonable price, with better risk-adjusted expected returns.

One advisor, Miami, Florida-based Michael Rose of Rose Capital Advisors, suggests self-directed IRA strategies to some wealthy clients in order to “get exposure to these asset classes they might not be able to hold at traditional custodians,” according to this piece by Financial Planner magazine.

By going through a boutique custodian or third-party administrator that specializes in self-directed IRAs and other retirement accounts, it’s quite easy for investors to diversify their stock-heavy retirement portfolios into a vast array of different investments that may help diversify their holdings and potentially lower exposure to risk if and when equity markets turn sour.

Common asset classes that self-directed IRA investors seek out that aren’t generally available using traditional Wall Street brokerage and investment firms include:

  • Hedge funds
  • Private equity placements
  • Private credit placements and debentures
  • Direct ownership of real estate
  • Raw land purchase
  • Farming and ranching lands
  • LLCs
  • Partnerships
  • Gold and precious metals
  • Overseas real estate
  • Private lending
  • Closely-held corporations (other than S-corps)

…And many others.

Holding some alternative assets within a self-directed IRA or other tax-advantaged retirement account may have especially attractive benefits for investors in higher tax brackets – particularly for income-oriented investments such as real estate, LLCs and lending. If you hold these assets in a taxable account, federal, state and local taxes will eat up a substantial fraction of the investment’s interest or dividend yield. Holding the asset within a self-directed IRA allows income to compound tax-free. There’s no need to send a sizeable fraction of your yield off to the IRS every year. You can reinvest earnings right back into the company, or elsewhere in your IRA as you see fit. You pay income taxes only on the amount you take out, or on income attributable to borrowed money.

The downside is, you lose the right to have your capital gains taxed at lower capital gains tax rates. Taxes on income and capital gains are deferred until the year in which you take the money out of your self-directed IRA. You also don’t get to take depreciation deductions on real property or business capital investments you put to use, because there is no tax on the earnings to deduct against!