U. S. Supreme Court Rules that Inherited IRAs Are Not Protected In Bankruptcy

On June 12, 2014, the United States Supreme Court ruled in a unanimous opinion that inherited Roth and traditional IRAs are not protected from creditors under the “retirement funds” exemption in the U.S. Bankruptcy Code.  The case is Clark v. Rameker, Trustee, 573 U.S. ____ (2014).

In 2001, Heidi Heffron-Clark inherited a traditional IRA worth approximately $450,000 from her mother, Ruth Heffron.  Ms. Heffron-Clark elected to take monthly distributions from the account.  In 2010, Ms. Heffron-Clark and her husband Brandon Clark filed Chapter 7 bankruptcy and identified the inherited IRA, then worth approximately $300,000, as exempt under Bankruptcy Code Section 522(b)(3)(C).  The bankruptcy trustee and unsecured creditors objected to the exemption on the ground that funds in an inherited IRA were not “retirement funds” within the meaning of the statute.  The Bankruptcy Court agreed, and disallowed the exemption.  The Clarks appealed to the District Court, which reversed the decision of the Bankruptcy Court.  Undeterred, the bankruptcy trustee Rameker appealed to the 7th Circuit Court of Appeals, which reversed the District Court and ruled that the inherited IRA was not exempt.  The 7th Circuit Court expressly disagreed with the 5th Circuit’s ruling in In Re Chilton, 674 F.3d 486 (2012), which ruled in favor of the debtor’s exemption of an inherited IRA.  The U.S. Supreme Court decided to hear the case to resolve the conflict between the Circuit Courts.

When an individual debtor files bankruptcy, his assets become part of the bankruptcy estate.  However, the Bankruptcy Code allows debtors to exempt from the bankruptcy estate some limited property.  The exemption in this case allows debtors to protect “retirement funds to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code” (see Sections 522(b)(3)(C) for state exemptions and 522(d)(12) for federal exemptions) .  Traditional IRAs are created under Internal Revenue Code (IRC) Section 408, and Roth IRAs are created under IRC 408A.

The Supreme Court ruled that the ordinary meaning of “retirement funds” is properly understood to be sums of money set aside for the day an individual stops working.  According to Justice Sotomayor, who wrote the unanimous opinion for the Court, there are three legal characteristics of inherited IRAs which provide objective evidence that they do not contain such funds: 1) the holder of an inherited IRA may never contribute additional money to the account; 2) holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement; and 3) the holder of an inherited IRA may withdraw the entire balance of the account at any time, and use the money for any purpose, without penalty.  This interpretation is said to be consistent with the purpose of the Bankruptcy Code’s exemption provisions, which effectuate a careful balance between the creditor’s interest in recovering assets and the debtor’s interest in protecting essential needs.  Nothing about an inherited IRA’s characteristics prevent or discourage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption.  The court was not persuaded by the Clarks’ claim that funds in an inherited IRA are retirement funds because, at some point, they were set aside for that purpose.

So what are the implications of this ruling for those who inherit traditional or Roth IRAs?  If the inheritor of an IRA is a spouse who is under age 59 ½, they would normally want to leave the IRA as a beneficiary (inherited) IRA rather than roll the IRA into their own account.  As long as the funds are being distributed from an inherited IRA there is no 10% premature distribution penalty, and the spouse would not be required to withdraw money from the IRA until their deceased spouse would have reached age 70 ½.  This gives the surviving spouse access to money in the inherited IRA which they may need.  However, now an inherited IRA will not be protected in bankruptcy in most cases, so a spouse who is in financial difficulty may decide to roll the inherited IRA into their own IRA where at least it will have creditor protection.

If a non-spouse beneficiary inherits an IRA, it cannot be rolled into their own IRA and must either be distributed entirely by the end of the 5th year following the year of death or over the inheritor’s expected lifetime.  If the IRA is inherited directly by the non-spouse beneficiary, there will be no way in many cases to protect that IRA in bankruptcy.  One solution that some planners have proposed is the leave the IRA to a properly drafted spendthrift trust rather than to the beneficiary directly.  Having the IRA inherited by a properly drawn spendthrift trust can prevent the IRA funds from going to the beneficiary’s creditors.  This ruling may be a boon to estate planning attorneys.

The news is not all bad, however.  Some states, such as Texas and Florida, specifically protect inherited IRAs from creditors.  Debtors who live in these states will have their inherited IRAs protected from creditors outside of the bankruptcy context and even in bankruptcy (assuming they meet the residency requirements) if they choose to use the state exemptions instead of the federal exemptions.  However, a person with a large IRA should not automatically assume that the IRA would be protected even if they and their children live in a state with creditor protection for inherited IRAs.  The state exemptions apply to the residence of the debtors, not to the residence of the deceased person, and people move around a lot.  Life happens.  Where your beneficiaries live now may not be where they live after inheriting your IRA.  Unexpected events occur, and you must plan for them.

One thing is certain – estate planning for those with beneficiaries who are struggling with financial issues has become even more important.  Also, bankruptcy planning for anyone who has a large inherited IRA just got more complex.

For a more complete analysis of the Clark v. Rameker case see the blog post of Texas bankruptcy attorney Steve Sather at http://stevesathersbankruptcynews.blogspot.com/2014/06/supreme-court-denies-exemption-for.html.  You may read the Supreme Court’s opinion at http://www.supremecourt.gov/opinions/13pdf/13-299_mjn0.pdf.

Nothing in this article is intended as tax, legal or investment advice.  If you need assistance with estate or bankruptcy planning, you should consult with a competent professional who practices law in these areas.

Take advantage of the many FREE educational materials provided by Quest Trust Company, Inc. on our website at www.QuestIRA.com, and plan on attending as many of the live events as possible to network with other self-directed IRA clients.  Our events schedule may be found at www.questira.com/events/. You can also call our offices toll-free at 800-320-5950 or 855-FUN-IRAS (855-386-4727) and ask to speak to one of our highly trained IRA Specialists.  Happy holidays!

H. Quincy Long is a Certified IRA Services Professional (CISP) and an attorney. He is also President of Quest Trust Company, Inc. (www.QuestIRA.com), a self-directed IRA third party administrator with offices in Houston, Dallas, and Austin, Texas, and in Mason, Michigan. He may be reached by email at Quincy@QuestTrust.com. Nothing in this article is intended as tax, legal or investment advice.

© Copyright 2013 H. Quincy Long. All rights reserved.

MAJOR CHANGE in interpretation of 60 day rollover rule

UPDATE

The Tax Court ruled in the case of Bobrow v. Commissioner, T.C. Memo 2014-21, that the one-time per 12 calendar month 60-day rollover rule applies to ALL of the taxpayer’s IRAs, and not to each IRA separately. This is in direct conflict with information contained in IRS Publication 590 and in Proposed Regulation 1.408-4(b)(4)(ii).

UPDATE: In IRS Announcement 2014-15, the IRS has indicated that it will withdraw Proposed Regulation 1.408-4(b)(4)(ii) and will interpret the 60-day rollover rule in accordance with Bobrow. However, in order to give IRA custodians and trustees time to update their administrative procedures and their IRA disclosure documents, the IRS has announced that it will delay the application of the Bobrow interpretation of the 60-day rollover rule until January 1, 2015.
A summary of the ruling is below:

Bobrow, TC Memo 2014-21

The Tax Court has ruled that Code Sec. 408(d)(3)(B)’s one-rollover-per-year rule applies to allof a taxpayer’s IRAs, not to each of his IRAs separately.

Facts. Alvan and Elisa Bobrow, husband and wife, were a married couple who filed a joint federal income tax return. On Apr. 14, 2008, he requested and received two distributions from his traditional IRA in the combined amount of $65,064. On June 6, 2008, he requested and received a $65,064 distribution from his rollover IRA. On June 10, 2008, Alvan transferred $65,064 from his individual account to his traditional IRA. On July 31, 2008, Elisa requested and received a $65,064 distribution from her traditional IRA. On Aug. 4, 2008, they transferred $65,064 from their joint account to Alvan’s rollover IRA. On Sept. 30, 2008, Elisa transferred $40,000 from Taxpayers’ joint account to her traditional IRA.

The taxpayers did not report any of the distributions as income. They claimed that they implemented tax-free rollovers of all of the distributions. IRS asserted that the June 6 distribution to Alvan and the July 31 distribution to Elisa were taxable.

Background. Generally, Code Sec. 408(d)(1) provides that any amount distributed from an IRA is includible in gross income by the distributee. However, Code Sec. 408(d)(3)(A) allows a payee or distributee of an IRA distribution to exclude from gross income any amount paid or distributed from an IRA if the entire amount is subsequently paid (i.e., rolled over) into a qualifying IRA, individual retirement annuity, or retirement plan not later than the 60th day after the day on which the payee or distributee receives the distribution.

Code Sec. 408(d)(3)(B) limits a taxpayer from performing more than one nontaxable rollover in a one-year period with regard to IRAs and individual retirement annuities. Specifically, Code Sec. 408(d)(3)(B) provides: “This paragraph [regarding tax-free rollovers] does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.”

The reference to “any amount described in subparagraph (A)(i)” refers to any amount characterized as a nontaxable rollover contribution by virtue of that amount’s being repaid into a qualified plan within 60 days of distribution from an IRA. The one-year limitation period begins on the date on which a taxpayer withdraws funds from an IRA. (Code Sec. 408(d)(3)(B))

June 6 distribution to husband failed the one-rollover-per-year rule. The Tax Court ruled in favor of IRS, that the June 6 distribution was taxable because Alvan failed the one-rollover-per-year rule.

The Bobrows asserted that the Code Sec. 408(d)(3)(B) limitation is specific to each IRA maintained by a taxpayer and does not apply across all of a taxpayer’s IRAs. Therefore, they argued, Code Sec. 408(d)(3)(B) did not bar nontaxable treatment of the distributions made from Alvan’s traditional IRA and his rollover IRA. The taxpayers did not cite any supporting case law or statutes that would support their position.

The Court said that the plain language of Code Sec. 408(d)(3)(B) limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution. By its terms, the one-year limitation laid out in Code Sec. 408(d)(3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. In support of this theory, the Court emphasized the word “an” in each place that it appears in Code Sec. 408(d)(3)(B).

The Court then explained its rationale for concluding that the June 6 distribution, rather than the Apr. 14 distribution, was taxable. When Alvan withdrew funds from his rollover IRA on June 6, the taxable treatment of his April 14 withdrawal from his traditional IRA was still unresolved since he had not yet repaid those funds. However, by recontributing funds on June 10 to his traditional IRA, he satisfied the requirements of Code Sec. 408(d)(3)(A) for a nontaxable rollover contribution, and the April 14 distribution was therefore not includible in the taxpayers’ gross income. Thus, Alvan had already received a nontaxable distribution from his traditional IRA on April 14 when he received a subsequent distribution from his rollover IRA on June 6.
Finally, the Court took note that Alvan received two distributions on April 14. It said that it would be inappropriate to read the Code Sec. 408(d)(3)(B) limitation on multiple distributions so narrowly as to disqualify one of the April 14 distributions as nontaxable under Code Sec. 408(d)(3)(A). So, it treated the amounts distributed on April 14 as one distribution for purposes of Code Sec. 408(d)(3)(A).
The July 31 distribution to wife was repaid too late. IRS put forth two arguments as to why the July 31, 2008, distribution was ineligible for nontaxable rollover treatment: (1) the funds were not returned to a retirement account maintained for Elisa’s benefit, and (2) repayment of funds was not made within 60 days.

As to argument (1), IRS asserted that because she distributed the funds first to the taxpayers’ joint account and the taxpayers thereafter transferred $65,064 from their joint account to husband’s rollover IRA, the July 31 distribution was paid into an IRA set up for Alvan’s benefit and not into an IRA set up for Elisa’s benefit. The Court disagreed with that argument: it said that money is fungible, and the use of funds distributed from an IRA during the 60-day period is irrelevant to the determination of whether the distribution was a nontaxable rollover contribution.

The Court did agree with IRS’s second argument. Partial repayment was not made until Sept. 30. Sixty days after July 31 was Sept. 29

 

H. Quincy Long is a Certified IRA Services Professional (CISP) and an attorney. He is also President of Quest Trust Company, Inc. (www.QuestIRA.com), a self-directed IRA third party administrator with offices in Houston, Dallas, and Austin, Texas, and in Mason, Michigan. He may be reached by email at Quincy@QuestTrust.com. Nothing in this article is intended as tax, legal or investment advice.

© Copyright 2013 H. Quincy Long. All rights reserved.

Wealth Building Options for Your IRA

In my last article on Option Strategies for Your IRA, I discussed option basics. In this article I will expand on the uses of options and how these strategies might be used to turn small amounts of cash into tremendous wealth in your IRA.

 
Simple Options. The most basic type of option is simply to have an option to purchase a piece of property for a specified price within a certain period of time. This is much better than a loan because it is similar to zero percent interest financing. For example, if a Health Savings Account (HSA) has a five year option to buy a piece of property for $50,000.00, then the HSA does not owe any more for the property at the end of the five years than it did at the beginning, yet the HSA effectively controls the property. This amounts to a five year, zero percent interest loan, but with no unrelated business income tax (UBIT)! You could even structure the option to have monthly or yearly renewal fees, so that it feels similar to a regular seller-financed loan for the property owner. With options all the burdens of owning the property, such as property taxes, insurance, and maintenance, continue to be on the property owner, thereby reducing your IRA’s risk!

 
Fix Up and Sell Options. Many investors are familiar with the typical buy, rehab and resell strategy for real estate. Suppose you created a deal in your Roth IRA where the repairs to be done are the consideration for the option? You and the property owner would agree on a specific list of repairs to be done, and the money for the repairs would come from your IRA. The option price would be based on the value of the property in its current condition. When the repairs are done the value of the property will have substantially increased, but your IRA has an option to purchase the property at the lower price. The value of your Roth IRA’s option is equal to the difference between the current, after repair fair market value and the original option price. As discussed in the prior article, your Roth IRA may, among other choices, 1) exercise its option and purchase the property, 2) assign the option for a fee to a retail buyer and let him purchase the property directly from the property owner, or 3) allow the property owner to sell directly to a retail buyer at a higher price while paying your Roth IRA a substantial fee to cancel the option!

 
Options on Ugly Property. What do you do if you locate a property that you think could probably be sold for a profit, but it is such a trashy piece of property or has so little equity that you are nervous about your IRA taking title to it? The solution is simple: have your IRA purchase an option from the property owner, stick a sign on the property, and try to find a buyer for the property which will give your IRA a profit. Options under these circumstances can often be purchased with very little money from your IRA. Even if your IRA ends up not exercising its option sometimes, overall this can be an incredibly powerful wealth building strategy.

 

 
Options on Partial Interests. What if there were several heirs owning a property you wanted your IRA to buy, but the heirs did not get along or did not agree to a certain price? Rather than giving up, have your IRA buy an option to purchase each heir’s interest separately.

The price would not have to be equal to each heir. Once you have negotiated options with all the heirs, you could add up the price and see if your IRA could market the property for a profit.

 
Low Ball Offers and the Right to Cancel. Suppose you want to make a low ball offer on a piece of property. The seller wants too much for the property, and you think he won’t get his price. On the other hand, he has to sell by a certain date for whatever reason (foreclosure, closing on a new house, moving out of town, etc.). Tell the seller this: “If you sell my daughter’s Coverdell Education Savings Account (ESA) an option to purchase the property for my price, I will give you the right to cancel the option within the next 30 days if you return the option fee plus $2,500.00. That way, if you find someone to pay you more than you would get from me who can close quickly enough you can sell the property to them and cancel the option, but you know you have a guaranteed sale if you can’t sell it to someone else on time.” How’s that for overcoming objections to a low ball offer? Your daughter’s ESA either gets the property at a bargain price or the seller pays her ESA not to buy!

 
Long Term Options. Long term options can be particularly powerful within an IRA, especially if your retirement is not imminent. Although many options used by IRAs are for shorter time periods, a long term option can turn out to be a fantastic investment. For example, in Houston, Texas there is an area called the Heights. This is close to downtown and many urban professionals are purchasing property in the area to avoid the horrible commute. Old properties are being purchased by individuals and developers who knock the houses down and build new homes on the lots. It is an area in transition. Prices have skyrocketed. Wouldn’t it be great if your IRA had 5 or 10 year options on several pieces of property in a redeveloping area such as the Heights or in the growth path of a city? Even if the option was to purchase the property for full fair market value or higher in today’s market, the longer term of the option may allow for a natural increase in the fair market value of the property

 
Rights of First Refusal. Another technique that can be used either alone or in conjunction with an option is a right of first refusal. A right of first refusal by itself is not an option to buy. It only means that the seller agrees not to sell the property to anyone else before first offering it to the holder of the right of first refusal. This is commonly used in business transactions, and can be used in real estate as well. Sales price and other terms are not typically negotiated in a pure right of first refusal, since it is only the right to buy the property at whatever price and on whatever terms the owner wants to sell.
When combined with a long term option, this strategy can pay off even if the option price is as high or higher than the current fair market value. For example, what if your IRA has an option to purchase a property in a growth path area for $100,000.00, and the option has a right of first refusal clause in it. In other words, any time the property owner wants to sell the property to a third party he would have to offer it to your IRA under the same terms. If the property owner wants to sell the property to a third party for $80,000.00, your IRA will also have the option to purchase it for that price because your IRA’s option has a right of first refusal clause. But suppose $80,000 is at or near the current fair market price and so exercising the option is not a good deal for your IRA. Assuming your option agreement is structured in a way that the option does not expire merely because of a transfer of ownership, the new owner of the property will have to take the property subject to that option. This of course limits his ability to sell the property in the future for more than your option price. Also, if a notice of option is filed in the real property records the buyer’s lender may require that the option be released. What is the value of your option under these circumstances, even though it is at a higher price than the current fair market value? The answer is however much the owner and buyer are willing to pay your IRA to cancel the option if that’s what you want!

 
Options and Shared Appreciation Mortgages. Has your IRA ever made a hard money loan and you thought, “I’d sure like my IRA to have a piece of that property! What a great deal!” Here is an interesting concept: loan the money to the investor at a low interest rate in exchange for an option to purchase a certain percentage of the property at the initial purchase price. One investor I know was able to use this method to purchase a property at a discount with a tenant in the property. Because the tenant was already in the property with a long term lease, he could not make the deal work using regular hard money rates. His solution was to borrow the money for the purchase and rehab from a friend’s IRA. The IRA received 6% interest plus an option to purchase a 50% interest in the property at one-half original purchase price. The investor walked away from closing with $3,000 in his pocket, a rental property with cash flow, and 50% of the future appreciation! Another possible structure is a loan with an option to convert from debt to equity.

 
Options on Personal Property. Options are most commonly discussed in terms of real estate. However, there is nothing which says you cannot purchase an option on personal property. For example, in many states the beneficial interest in a land trust is considered to be personal property. You may want to have your IRA purchase an option on a discounted note to see if it can be sold for a profit. I have even heard of people having an option in their IRA on automobiles being purchased by an investor at car auctions.

 
Options can be purchased in all types of Quest self-directed accounts, including Roth, traditional, SEP and SIMPLE IRAs, Individual 401(k)s, Coverdell Education Savings Accounts (ESAs), and even Health Savings Accounts (HSAs). Options are so incredibly powerful and flexible that I cannot discuss all the opportunities in one short article. I hope this article has opened your mind to new possibilities for your IRA. As I always say in the context of self-directed IRAs, “I don’t think outside the box, the box is just bigger than you think!”

To Pay or Not to Pay – That is the Question Unrelated Business Income Tax in Retirement Plans

Most people understand that an IRA is normally not a taxable trust and its income is not taxed until the income is distributed (or not at all, if it is a qualifying distribution from a Roth IRA). However, there are 2 circumstances when an IRA may owe tax on its income. First, if the IRA is engaged in an unrelated trade or business, either directly or indirectly through a non-taxable entity such as an LLC or a limited partnership, the IRA will owe tax on its share of Unrelated Business Income (UBI). Second. if the IRA owns, either directly or indirectly, property subject to debt, it will owe tax only on the portion of its income derived from the debt, which is sometimes referred to as Unrelated Debt Financed Income (UDFI).

I will refer to either tax as Unrelated Business Income Tax (UBIT) in this article.
From a financial planning perspective, the question becomes “Should I avoid doing something in my IRA which may incur UBIT?” Many people just say “Forget it!” when they learn a certain investment may subject the IRA to UBIT. Or worse yet, they ignore the issue and hope they won’t get caught. However, being afraid of UBIT is short sighted and ignores the opportunity it presents for building massive wealth in your retirement plan. Remember, making an investment which may subject the IRA to UBIT is not a prohibited transaction, it just means the IRA has to pay a tax. The best financial advice on UBIT is simple: “Don’t mess with the IRS!” If the IRA owes UBIT, make sure it is paid.
“But,” you object, “doesn’t this mean I am paying double taxation?” Unless your IRA is a Roth IRA, it is true that in these 2 circumstances the tax will be paid by the IRA and again by the IRA holder when the income is distributed. However, in my view this is the incorrect focus. Is the IRA glass 1/3 empty or 2/3 full? At least the IRS is a silent partner. The double taxation issue is no different when investing in stocks traded on the stock exchange, since corporations pay tax on income before issuing dividends to shareholders, and the value of the stock takes into account that the company must pay income taxes.
Two key questions arise when analyzing a “UBIT investment.” The first question to ask in UBIT analysis is “What tax would I pay if I did the same transaction outside of my IRA?” The only “penalty” is the amount of tax the IRA would pay above the amount that you would pay individually. If you make the investment personally, you not only will pay tax on the income from the investment, but also from the next investment, and the next one after that. At least within the IRA you have the choice of making investments with your proceeds which do not incur UBIT. A second question to ask is this: “Will my after UBIT return exceed what I could make on other IRA investments?” Why should you turn away from an investment in your IRA which will give you an incredible return even after paying the tax?
Let me give you one powerful example of how paying UBIT might make a lot of sense. One Quest client purchased a property in her Roth IRA subject to approximately $97,000 in delinquent taxes (this is the same as a mortgage for UBIT purposes). The owner was willing to walk away from the property for $75 just to get rid of the headache and the lawsuit pending against him by the taxing authorities. With closing costs the IRA spent around $3,000 to acquire the property. Only 4 months later the property was sold to another investor, and the Roth IRA netted around $46,500 from the sale after paying delinquent taxes and sales expenses. Because the IRA purchased the property subject to debt (the delinquent taxes), it owed UBIT in the amount of approximately $13,500 on its short term capital gain. This meant that even after paying UBIT the IRA went from $3,000 to approximately $33,000. That is a return of over 1,000% in under 4 months, or an annualized return of over 4,000%! This client will obviously have an easier time making money with her $33,000 Roth IRA than she could have with her $3,000 IRA. Since this was a Roth IRA, no more tax will be owed on this income if it is distributed as a qualified distribution after age 59 ½ or from any other income generated in this IRA from investments that are not subject to UBIT.

Ignorance of the tax law is no excuse. You can find out more on this topic by reviewing IRS Publication 598, or by visiting with your tax advisor. After analyzing a transaction, you may come to the conclusion that paying UBIT now in your IRA may be the way to financial freedom in your retirement. Like I often say, “UBIT? You bet!” The information contained in this article is not intended to be tax or investment advice.

How Do I Invest Thee? Let Me Count the Ways!

Many people find it very easy to see the benefits of self-directing their Roth and Traditional IRAs, SEP IRAs, SIMPLE IRAs, Individual 401(k)s, Coverdell Education Savings Accounts (ESAs) and Health Savings Accounts (HSAs) into something other than the same old boring stocks, bonds, annuities and mutual funds. The central idea of a self-directed IRA is that it gives you total control of your retirement assets. With a self-directed account you can invest your IRA funds in whatever you know best.
When I spoke recently at John Schaub’s Real Estate All Stars conference in Las Vegas, Nevada, I outlined some of the top strategies our clients have actually used to build their retirement wealth. A brief description of these strategies is included in this article. This shows the tremendous flexibility of investing through a self-directed account.

 
Strategy #1 – Purchasing Rental Real Estate for Cash. Even the IRS acknowledges on its website that real estate is an acceptable investment for an IRA. In answering the question “Are there any restrictions on the things I can invest my IRA in?” the IRS includes in its response that “IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.” One of our clients purchased a 10 unit apartment complex for $330,000 cash. In April, 2008 his total rent collection was $5,235. Even after payment of taxes and insurance, his cash on cash return is excellent, and the client believes that the value of the property will increase significantly over time. A discussion of the relative benefits and disadvantages of owning real estate directly in an IRA is beyond the scope of this article, but for those who know how to successfully invest in real estate it is great to know that real estate is an option for your self-directed account.
Strategy #2 – Purchase, Rehab and Resale of Real Estate. In this case study, our client decided not to hold onto the real estate purchased with his IRA. The client received a phone call one evening from an elderly gentleman who said he needed to sell his home quickly because he wanted to move to Dallas with his son. After a quick phone conversation, it was clear that the price the seller wanted was a bargain even considering the needed repairs. Our client dropped what he was doing and immediately headed over to the seller’s house with a contract. The buyer on the contract was our client’s IRA, and of course the earnest money came from the IRA after the client read and approved the contract and submitted it with a buy direction letter to Quest Trust Company. They agreed on a sales price of $101,000. Approximately $30,000 was spent rehabbing the property with all funds coming from the IRA. The property was sold 6 months later for $239,000, with a net profit after sales and holding expenses of $94,000!
Strategy #3 – Purchase and Immediate Resale of Real Estate (Flipping). The previous two examples show the tremendous power of buying real estate for cash with a self-directed IRA. However, both of these strategies require a significant amount of cash in your account. How else can you invest in real estate if you have little cash? One of our clients was able to put a commercial piece of vacant land under contract in his Roth IRA. The sales price was $503,553.60 after acreage adjustments. Using his knowledge of what was attractive for a building site, our client was able to negotiate a sales price to a major home improvement store chain for $650,000. On the day of closing Quest received two sets of documents, one for the purchase of the property for $503,553.60 and the other for the sale of the same property for $650,000. After sales expenses, the IRA netted $146,281.40 from the sale with only the earnest money coming from the account! A word of caution in this case is that if property is flipped inside of an IRA the IRS may consider this to be Unrelated Business Taxable Income (UBTI), causing the IRA (not the IRA owner) to owe some taxes on the gain. Even if taxes had to be paid, it is hard to argue that this transaction was not beneficial to the IRA and ultimately the client! It should also be noted that in this situation everyone involved in the transaction was aware of what everyone else was doing, so there was no “under the table” dealings.

 

Strategy #4 – Assignments and Options – Getting Paid NOT to Buy! Another favorite strategy for building tremendous wealth without a significant amount of cash is the use of options and assignments. One of our clients put a property under contract in his daughter’s Coverdell Education Savings Account for $100. The sales price was a total of $5,500 because the house had burned down. The seller was just getting rid of the property for its lot value since he had already received a settlement from the insurance company and had purchased another house. Our client then used his contacts to find a person who specialized in rehabbing burned out houses. The new buyer was willing to purchase the property for $14,000 cash. At closing one month after the contract was signed, the seller received his $5,500 and the Coverdell ESA received an assignment fee of $8,500 right on the settlement statement. That is an astounding 8,400% return on the $100 investment in only 30 days! Even better, our client was then able to take a TAX FREE distribution from the account of $3,300 to pay for his 10 year old daughter’s private school tuition. In a similar transaction, another client’s Roth IRA recently received an assignment fee of $21,000 plus reimbursement of earnest money for a contract.
Strategy #5 – Using the Power of Debt Leveraging. One of my favorite true stories of building wealth in a Roth IRA involves purchasing property subject to a debt. If an IRA owns debt-financed property either directly or indirectly through a non-taxed entity such as a partnership or LLC taxed as a partnership, profits from that investment are taxable to the same extent there is debt on the property. One of our clients used her knowledge of real estate investing and what she learned from a free Quest educational seminar to tremendously boost her retirement savings. After noticing a large house in downtown Houston which was in bad shape but in a great location, our client tracked down the owner in California who was being sued for approximately $97,000 in delinquent taxes on the property. She negotiated a deal with the seller for her Roth IRA to purchase the property for $75 cash subject to the delinquent taxes. With closing costs her Roth IRA’s total cash in the transaction was only around $3,000. Within 4 months she was able to sell the property for a profit to her Roth IRA of $43,500! Because the property had debt on it and because her Roth IRA sold the property for a short term capital gain, the taxes on the profit were approximately $13,500. Still, using the power of debt leveraging her Roth IRA was able to achieve a 1,000% return in less than 4 months even after paying Uncle Sam his share of the profits!

 

Strategy #6 – Hard Money Lending. Another excellent strategy for building your retirement wealth is through lending. Loans from IRAs can be made secured by real estate, mobile homes or anything else. Some people even choose to loan money from their IRAs on an unsecured basis. As long as the borrower is not a disqualified person to the lending IRA, almost any terms agreed to by the parties are acceptable. In many states there are limits to the amount of interest that can be charged, and loans must be properly documented, but IRA law does not impose any limits other than the prohibited transaction rules. For those wanting to avoid the direct ownership of real estate within their IRA, a loan with an equity participation agreement is often used. Several of my own self-directed accounts combined together recently to make a $25,000, 7 1/2 year, 12% first lien loan against real estate with 6% in points up front. True, this is not exactly setting the world on fire as far as return on investment goes, but I was very pleased with a safe return on a relatively small amount of cash. If I get to foreclose on the collateral my accounts should be able to make a substantial profit, since the land securing the loan was appraised at $45,000. At my office we routinely see hard money loans secured by first liens against real estate with interest at 12%-18% for terms ranging from 3 months to 3 years.
Strategy #7 – Private Placements. Many of the best opportunities for passive growth of IRAs include the purchase of private limited partnership shares, LLC membership units and private stock which does not trade on the stock market. Let me give you two examples from my own retirement account investments. In one case my 401(k) plan invested in a limited partnership which purchased a shopping center in northern Louisiana. The initial investment was $50,000, and in a little over 2 years the partnership has returned $59,321. The plan’s remaining equity is estimated as of 12/31/2007 at $31,598 and the return on investment will be around 82%. Even though the property is debt-financed the taxes on the profit have been almost nothing since the plan has taken advantage of depreciation and all of the normal deductions. Once your IRA or other plan owes taxes due to debt financing, it gets to deduct a pro rata share of all normal expenses. Another of my 401(k) plan investments is bank stock of a community bank in Houston, Texas. The initial shares were sold at $10 per share in February, 2007. The book value after less than 1 year of operations was $11 per share, and shares have recently been selling to other private investors for as much as $14.25 per share! That is a great return for a completely passive investment, and when the bank finally sells the shares are expected to sell for well above these amounts.

 

Strategy #8 – Owning a Business in Your IRA. One of the most innovative strategies we have seen is the ownership of a business by an IRA. Although neither you nor any other disqualified person may provide services to or get paid for working at a business owned by your IRA or other self-directed account, this does not mean that your IRA cannot own a business. Some companies do market the ability for you to start a C corporation, adopt a 401(k) plan, roll your IRA into the plan, and purchase “qualifying employer securities,” but this is different than an IRA owning a business directly. For example, my Health Savings Account invested $500 for 100% of the shares of a corporation which arranges for hard money loans to investors. The company is fully licensed as a Texas mortgage broker. The structure of the company is a C corporation. Since being a mortgage broker is a business operation, profits from the venture would have been taxable to my HSA if the entity formed to own the business was not taxable itself, and the tax rates for trusts such as IRAs and HSAs are much higher than for corporations. While normally dividends from C corporations are taxable a second time to the shareholder, dividends paid to an IRA or HSA are tax free as investment income. The corporation is run by non-disqualified persons who handle the due diligence on the loans and the legal work, as well as by a licensed Texas mortgage broker who sponsors the corporation’s mortgage broker license.

 

Strategy #9 – Using OPI (Other People’s IRAs) to Make Money Now. Even if you have not found the investment strategy of your dreams among the strategies discussed in this article, or if you have no IRA or if you are more focused on making money now to live on, your time spent reading this article can still be of great use to you. For each of the above strategies I have focused on the possibility that your IRA could be the investor. But what if you are the recipient of the IRA’s investment money? Are you a real estate investor having a hard time finding funding for your transactions? If you know people with self-directed IRAs or people who would move their money to a self-directed account, you can borrow their IRA money and virtually create your own private bank! You can also partner with OPI where the IRA puts up the money and you share in the equity for finding the deal and managing the project. Simply by explaining to people that they can own real estate in their IRAs you may be able to sell more property, either as a real estate broker or as the seller. You can even provide financing for your sales by having OPI make loans to your buyers. Finally, OPI can be a great way to raise capital for your business venture, although you must be aware of and comply with all securities laws. One bank I know of told me that 42% of their initial capital came from retirement accounts! Although you cannot use your own retirement account to benefit yourself at present unless you are over age 59 1/2, these are just some of the ways you can use OPI to make money for yourself right now. A good network is the key to your success.
What I have discussed in this article have been some of the more common investment strategies actually used by our clients. The only restrictions contained in the Internal Revenue Code are that IRAs cannot invest in life insurance contracts or collectibles. Almost any other investment that can be documented can be held in a self-directed IRA. As long as you follow the rules and do not invest in prohibited investments, your only real limitation is your imagination!

Top Ten Mistakes I See People Make With Their Self-Directed IRAs

1) Not understanding the “self-directed” part of self-directed IRAs.
Unlike more traditional brokerage style IRAs, self-directed IRAs do not come with any tax, legal or investment advice, nor do self-directed custodians and third party administrators offer or endorse investment products. Self-directed means just that – it is self-directed and you must find your own investments and decide how you want to structure those investments. If you make a million dollars in your self-directed IRA all the glory belongs to you, but if you lose everything you have there is no one to blame but yourself.
2) Not investing in what they know best, but rather investing in something they know nothing whatsoever about.
One of the primary benefits of a self-directed IRA is that it allows you to invest in what you know best, especially if that is not the more traditional IRA investments like stocks, bonds, mutual funds or annuities. Some people get very excited about the idea of self-direction and invest in something they know nothing about, which often leads to an investment disaster. Most of my mistakes in investing have been because I have strayed from what I know how to do best.
3) Not understanding the disqualified persons and prohibited transaction rules.
Disqualified persons are those persons who are deemed to be too close to make a transaction within your IRA an arms-length transaction, which means these persons cannot enter into transactions with your IRA nor can they benefit from those transactions, either directly or indirectly. Prohibited transactions are what your IRA cannot do with any disqualified person. The penalty for entering into a prohibited transaction is DEATH (of the IRA that is) along with taxes and penalties. If you have a self-directed IRA you must have a good basic understanding of these rules as they apply to your investing strategy.
4) Not vesting assets correctly – all assets in self-directed IRAs should be vested as follows: “Quest Trust Company, Inc. FBO Your Name IRA #Your IRA Number.”
A lot of time is spent in attempting to get clients, title companies, and investment providers to understand that all assets must be vested in a specific way in order to be held within a self-directed IRA. Common errors include failing to vest in the name of the custodian or administrator at all, or only putting the client name after the “FBO” so that it appears we are holding the asset on behalf of the individual instead of the individual’s IRA. Another common mistake is where the client attempts to use their own Social Security Number instead of that of the IRA or the administrator or custodian’s trust tax identification number.

 

5) Failing to submit proper paperwork to allow smooth opening of IRAs and processing of transactions.
Another large time waster is chasing down paperwork from improperly completed documents for opening the IRAs, for transferring money into the IRAs and for transactions. This leads to a frustrated client and frustrated staff. Taking the time to learn how to properly submit paperwork and allowing yourself enough time to do so is critical in successfully navigating the self-directed IRA world. Remember, it is better to ask questions in advance than to submit incorrect paperwork and cause a delay.
6) Not understanding what they are investing in.
This is a big one. It is almost incomprehensible to me how some people don’t have any understanding of what they are investing in at all. For example, a person called the other day and thought she had a note and an option agreement. Instead, she had a simple option where she had paid $28,000 for an option to buy 50% of the property for $10. This was meant to help the owner out of foreclosure. The homeowner had the right to buy back the option at a profit to the IRA of about $5,000. The good news is that it worked for a time period and the homeowner got to stay in the house for an extra two years. The bad news is that the homeowner still wasn’t fiscally responsible and the IRA lost every dime when the lien holder foreclosed. Since all the IRA had was an option (not a note as she thought) she could not even sue to recover some of her money, and even if she had exercised her option her IRA would have only owned half of the house.
7) Not understanding Unrelated Business Income Tax and how it may affect your IRA.
IRAs may be taxed in three circumstances. First, if it runs a business, either directly in the IRA or indirectly through a non-taxed entity such as a partnership or LLC. Second, if the IRA owns and rents out personal property (rents from real property are exempt from this tax). Third, if the IRA owns debt-financed property, again either directly in the IRA or indirectly through a non-taxed entity such as a partnership or LLC. Just to be clear, it is not necessarily all bad to make investments which cause your IRA to pay tax, especially within a Roth IRA or other tax free account, but it is something you should understand up front.
8) Trusting someone with your hard earned IRA money without doing proper due diligence and proper paperwork.
Let me give you a hint – con men are very good at what they do. Make sure you understand what you are investing in, and do your due diligence on the investment and on the person you are investing with before making an investment decision. Also, make sure you have proper paperwork. I wouldn’t loan money to my own mother without proper documentation! Proper paperwork protects both your IRA and the person your IRA is investing with. Think about what would happen if either you died or the person you invested with died. Would either party’s heirs understand what the investment was all about? Even if you trusted the person you invested with absolutely, would their heirs know about your handshake deal and honor it? Probably not! An excellent rule of thumb in investing is that if it sounds too good to be true it probably is. Also, a common thread in scams is that it must be done NOW or you will miss out on this incredible opportunity! This is an attempt to draw you in without allowing you time to think about or due diligence on the investment.

 

9) Failing to follow proper strategy when loaning your IRA to other investors.
There are at least 10 simple rules to follow when lending your IRA money out (or even your personal money). They are:
a) Do not loan on something you wouldn’t be excited to own if the borrower defaults.
b) Generally, do not advance money for repairs until the repairs are done, and then inspect the repairs before advancing the funds.
c) Do not loan to someone you would feel uncomfortable foreclosing on!
d) If the loan goes into default, do not delay – take action immediately!
e) Collect interest monthly so you will know if the borrower is getting into trouble.
f) If you are unsure about a loan, hire a professional to help you evaluate the deal (at the borrower’s cost, of course!).
g) Get title insurance on your loan. If done at closing the incremental cost to the borrower is very small.
h) Verify that hazard and, if necessary, flood and wind insurance are in place naming your IRA as an additional insured.
i) Insist on evidence that taxes, homeowners association dues and hazard insurance are paid when they come due during the term of the loan.
j) Get a personal guarantee when lending to a non-individual borrower or a weak borrower.

 

10) Attempting to figure out how to get around the rules to get a benefit for themselves or other disqualified persons rather than simply investing within the rules.
It seems to be very tempting for people to want to use their own IRAs to make money or obtain some other benefit for themselves or other disqualified persons right now instead of letting all the benefits go to the IRA so that they have a nice retirement. To make matters worse, a lot of gurus are teaching how to hide the fact that you are violating the rules instead of teaching people how to use the rules properly to their advantage. My personal motto is, use the law to your advantage but don’t abuse the law. After all, the “R” in IRA stands for Retirement. It is not an INA (or Individual NOW Account)! To make money now, use OPI (Other People’s IRAs), and to make money for your retirement, use your own self-directed IRA.

Fright Night 2013

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Our Annual FRIGHT NIGHT is Back!property manager

If you have been to one of our Fright Night events, you know how much fun there are!  This is our opportunity to say THANK YOU to both Quest Clients and non-clients.  Our Annual event will be the biggest and best we’ve ever had.  We’ve rented the swanky Bell Tower to host this years Fright Night and our entire staff will be in attendance.  This is a great opportunity to network with Quest Staff, Quest Clients, and other investment professionals!  And the best news is…… it’s FREE to attend!  Don’t miss this years FRIGHT NIGHT as it only comes once a year.

  • FREE Food & Open Bar
  • Great Venue
  • Great Networking
  • Open to Everyone
  • Prizes Awarded for Best Scary Investment Stories

October 24th, 2013

From 6-10 pm

The Bell Tower on 34th

Register Here

Just a few pictures from our Fright Night event last year! 
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Quest Trust Company, Inc. will be Sponsoring & Educating at the Following Events!

See what’s going on in your town!

Free Classes

October 8th

Self Directed IRAs 101: Understanding the Uses of Money
9:30-10:30am
 
Create Your  Own Bank: Private Money Lending
6:30-7:30pm

October 22nd

Analyze Roth Conversions 9:30-10:30am

Self Directed IRAs 101: Understanding the Uses of Money

6:30-7:30pm

To attend your local Houston, Dallas, Austin or Michigan Classes

Please Register at:

www.QuestIRA.com/Events

 

For All Cities:

If you are not able to attend our local classes, you can watch them from your computer or even your smart phone. Simply go to www.GoToMeeting.com and enter your meeting ID 

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  Real Estate Preview Meetings and REIAs

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October 8th

Minneapolis REIA

6-9pm

Double Tree by Hilton

1500 Park Place Blvd

Minneapolis, MN

 

October 10th

Dallas Preview Meetings

12:30-2:30pm & 5-6pm

Addison Marriot Quorum

14901 Dallas Parkway

Dallas, TX

Dallas REIA

6-9pm

Addison Marriot Quorum

14901 Dallas Parkway

Dallas, TX

 

October 15th

Houston Preview Meetings

12:30-2:30pm

Quest Trust Company Houston Office.

17171 Park Row, Suite 100

Houston, TX 77084

Houston REIA

6-9pm

Houston Marriot by Galleria

1750 West Loop South

Houston, TX 77027

 

October 17th

Austin REIA

6-9pm

Norris Conference Center

2525 West Anderson Lane

Austin, TX 78757

 

October 22nd

San Antonio REIA

6-9pm

Hilton Airport Hotel

311 NW Loop 410

San Antonio, TX 78216

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The Big Live Event

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October 19-20th

Minneapolis, MN

The Saint Paul Hotel

350 Market Street

Saint Paul, MN

October 26-27th

Austin, TX

Omni Austin Hotel Downtown

700 San Jacinto Blvd

Austin, TX

Register Here

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Houston, TX
  • October 7th 3-4pm
    • Quest Trust Company CEO, Nathan Long, speaking on the Liberty Reak Estate Advisors Radio Show from 3-4pm on KTEK 1110.
  • October 12-13th 9am-5pm
    • The Wealth Club will be holding a 2 day boot camp at their location. This Boot Camp will focus on ways to raise private money for your Real Estate Deals and will also cover “Raising Private Money Through IRAs.”
  • October 15th 12:30pm & 6pm
    • Real Estate Preview Meeting at the Quest Trust Company Office at 12:30pm
    • Houston REIA Monthly Meeting
  • October 16th 7-9pm
    • Quest Trust Company CEO, Nathan Long, speaking at the Rich Club in the Woodlands Library. For more info, contact Alberta Roth(713) 857-3324
  • October 24th 6-10pm
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Dallas, TX
  • October 9th 6:30-9:30pm
  • October 10th 6-9pm
    • Dallas REIA Monthly Meeting
  • October 11th 6-10pm
    • DMI Fall Bash
      • Diversified Metroplex Investors will be holding their annual fall mixer at their location in Dallas, TX. Their theme will be “Learn to Lend Asset Based Lending”
      • Free food, drinks, education and networking
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Austin, TX
  • October 8th 6:30-9:30pm
    • Austin REIC Monthly Meeting
  • October 16th 9am-5pm
    • Realty Round Up 2013: Racing into the Future at the Palmer Events Center.
  • October 17th 6-9pm
    • Austin RENC Monthly Meeting
  • October 26-27th 8am-5pm
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San Antonio, TX
  • October 22nd 6-9pm
    • San Antonio REIA Monthly Meeting
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Webinars are Back!
Quest Trust Company President H. Quincy Long and CEO Nathan Long are bringing webinars back!
 Join us for a Webinar on October 29
Understanding the Uses of Money

Tuesday, October 29, 2013

6:30 PM – 8:00 PM CDT

 

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Our offices will be closed for Columbus Day on October 14th, 2013

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Quest Trust Company, Inc
17171 Park Row, Suite 100
Houston, Texas 77084
www.QuestIRA.com
800-320-5950
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This email was sent to beatriz@questtrust.com by ingrid@questtrust.com |
Quest Trust Company, Inc | 17171 Park Row, Suite 100 | Houston | TX | 77084

 

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Getting Started FAQ

How do I open a self-directed IRA?

The process of opening a self-directed IRA with Quest Trust Company, Inc. is a very simple process. Just complete the application (Get your application here!) or contact one of our world famous IRA Specialists at 800.320.5950.

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How long does it take to open an account?

The Individual Retirement Account will be established within approximately 24-48 hours of receiving the properly filled out application.

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What are the different ways I can fund my Quest Trust Company Account?

  • Rollover/Direct Rollover : Rollovers can be done from employer plans or other IRAs. To avoid taxes or penalties, make sure the rollover is done within 60 days from the time you took the distribution.
  • Transfer: Transfers can be done to move funds over from like accounts. If you have an existing IRA at a different custodian, we can move the funds (cash & privately held assets) via transfer.
  • Deposit: Your IRA can be funded via annual contributions.

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How are my funds protected?

All un-invested funds are FDIC insured up to $250,000. All investments carry risk including loss of principal. For more tips on doing your due diligence, click here.

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What Fees Will I incur with my Self-Directed IRA?

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Who can I name as a Beneficiary to my IRA?

.A beneficiary can be any person or entity the owner chooses to receive the benefits of a retirement account or an IRA after he or she dies. Beneficiaries of a retirement account or IRA must include in their gross income any taxable distributions they receive.

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Will My Will or Trust Override Who I list As My Beneficiary?

Your will or trust will not override what is named on the beneficiary designation of your IRA. The only time a Will would control a non-probate asset is if no beneficiary is designated or the estate is named as the beneficiary.

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When Does My Spouse Need to Sign the Beneficiary Form?

If you do not list your spouse as 100 percent primary beneficiary AND you live in a community property state, your spouse must sign the spousal consent section on our Beneficiary Form.

If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin and you have named your spouse as 100% Primary Beneficiary directly by name, your spouse does not need to sign the “Spousal Consent” signature section. Note: If you are naming a Trust 100% Primary and your spouse is the trustee, your spouse does need to sign.

If you do not live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin; regardless of what your beneficiary is, you do not need to have your spouse sign the “Spousal Consent” signature section.

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General FAQ

 What does Quest Trust Company, Inc. do?

Quest Trust Company, Inc. (www.QuestIRA.com) is a third party administrator of self-directed IRAs in Houston, Austin, and Dallas, Texas, as well as Mason, Michigan. Quest Trust Company, Inc. is the leading provider of self-directed retirement account administration services.  Quest Trust Company has been in business since 2003 with over $600MM in assets under management.  As a neutral party, Quest Trust Company does not offer any investments and therefore has no conflicts of interest with what our clients want to do with their IRAs.  Quest allows you to be in total control of your retirement wealth.

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Who is H. Quincy Long and why do I care?

H. Quincy Long is the President of Quest Trust Company and works in the Houston corporate office.  Quincy has been a licensed Texas attorney since 1991, specializing in real estate, and has been a fee attorney for American Title Company.  In 1990, Quincy received his Doctor of Jurisprudence from the University of Houston, and continued his education, receiving his Masters of Law in 1997.  He has sat on the board of directors of the Realty Investment Club of Houston (RICH), the second largest real estate club in the country, and maintains the title of Certified IRA Services Professional, CISP.  Quincy is also the author of numerous articles on self-directed IRAs and other real estate related topics, many of which can be found on the Quest Trust Company website, and in addition, Dyches Boddiford and George Yeiter, CPA, co-authored with Quincy to write the book “Real Estate Investment Using Self-Directed IRAs and Other Retirement Plans.

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Widely known for his enthusiasm, attention to detail and knowledge of the Self-Directed retirement industry, he is one of the most sought after key note speakers in the nation.  Quincy can often be spotted in his office reading and learning more to prepare for one his many, highly-attended lectures on topics including self-directed retirement plans, real estate, unrelated business income tax, land trusts, mortgage foreclosures, etc.  Quincy enjoys reading, hiking and spending time with family and friends in his free time.

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What is the difference between a “self-directed IRA” and a regular IRA?

There is no legal distinction between a “self-directed IRA” and any other IRA.  The difference is simply this:  Quest lets you take control of your retirement by letting you invest your IRA in what you know best.  There are 2 different sets of rules that govern what you can do with your IRA.  First, there is the Internal Revenue Code, which has surprisingly few restrictions.  Second, there is your account agreement with the custodian.  With most custodians you are restricted in the type of investments you can buy in your IRA.  Quest allows you the maximum amount of control and flexibility.  Almost anything that can be documented can be held in your Quest self-directed IRA.

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Which types of IRAs does Quest Trust Company offer?

Quest offers almost all types of retirement plans, including:

    • Traditional IRAs
    • Roth IRAs
    • SEP IRAs
    • SIMPLE IRAs
    • Individual 401(k)s, including the NEW Roth 401(k)
    • Coverdell Education Savings Accounts (formerly Education IRAs)
  • Health Savings Accounts (HSAs)

All of our plans are self-directed, and all of them can hold the same type of non-traditional assets, such as real estate.

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How much can I contribute to my IRA?

  • Roth and Traditional IRAs –   $5,500 for 2013 (kept the same for 2014) plus $1,000 catch-up if you are age 50 or over by the end of the year.
  • SEP IRAs – 25% of your wages (or up to 20% of your net earnings from self-employment) up to a maximum of $51,000 for 2013 and $52,000 for 2014.  Contributions can be made up to the employer’s tax filing deadline, including extensions (if you are self-employed, you are the employer).
  • SIMPLE IRAs – $12,000 salary deferral plus $2,500 catch-up if you are 50 or over for 2013 and 2014 plus up to 3% of your salary matched by your employer.
  • Profit Sharing/401(k)s – $17,500 in salary deferral for 2013 and 2014, plus catch-up deferral of $5,500 if you are age 50 or older by the end of the year plus 25% of your wages (or 20% of your net earnings from self-employment) up to a maximum of 51,000 ($56,500 including catch-up contributions) for 2013 ($52,000, or $57,500 including catch-up contributions for 2014).
  • Coverdell ESAs (formerly Education IRAs) – $2,000 per year until the child is age 18.
  • Health Savings Accounts (HSAs) – $3,250 for individual coverage in 2013 ($3,300 for 2014) and $6,450 for family coverage in 2013 ($6,550 for 2014) plus $1000 catch-up for 2013 and 2014 if you are over age 55.

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What kinds of investments can be made in an Quest Trust Company self-directed IRA?

You have the broadest possible choice of investments, including:

    • Real Estate, including debt-financed and foreign real estate
    • Deeds of Trust
    • Real Estate Options
    • Lease Options
    • Unsecured Notes
    • Oil and Gas Interests
    • Small, non-publicly traded corporate stock
    • Limited Liability Companies
    • Limited Partnerships
    • Factored Invoices
    • Discounted Commissions
    • Security Agreements and Notes
    • Tax Lien Certificates
    • Foreclosure Property
    • Joint Ventures
    • Race Horses
    • Publicly traded stocks and mutual funds
  • and a whole lot more…

It should be made clear that you are not taking a distribution to purchase these assets.  All assets are purchased within the IRA, and all profits stay in the IRA!

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As a real estate professional, how can knowledge about self-directed IRAs put money in my pocket now?

For those of you who are investors, you can make other people aware that they actually have more money to invest in real estate than they thought since they can use their IRAs to buy real estate.  In other words, your knowledge of self-directed IRAs can increase your pool of eligible buyers for your properties.  Also, you can help others transfer their retirement funds into a self-directed IRA, then you can borrow those funds to make your own investments – in other words, you can create your own private bank!  Finally, you can make your own retirement wealth grow with your knowledge and experience in real estate by buying and selling through your own self-directed IRA.

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Is it really legal to buy real estate in your IRA?

Yes, absolutely!  The Internal Revenue Code does not tell you what you can do with your IRA, only what you cannot do.  Besides restrictions on purchasing life insurance and most collectibles in your IRA, nearly everything else is fair game.  Unless your IRA is self-directed, however, your custodian may not allow investments in real estate.