Do Annuities Have A Place In Your Self-Directed IRA?

Self-directed IRAs are perhaps the most flexible way to save for retirement while still having the opportunity to gain significant tax advantages. There are a wide range of investment options available (including real estate, precious metals, certain oil and gas development interests, private equity and debt instruments, and even private mortgages), all in an account that offers tax-deferred or tax-free growth, and may even offer the opportunity to take a current year deduction for your account contribution.

Because of concerns about income investment yields, some self-directed IRA account owners have begun thinking about purchasing annuities with their self-directed IRA. Let’s take a closer look at whether that type of investment might be right for your account.

What Are Annuities?
Let’s first take a few moments to discuss the structure and key elements of annuities. An annuity is essentially a contract between you and an insurance company, whereby you pay a lump sum of money to the insurance company and they promise to pay you a monthly benefit in return. It can be helpful (although a bit of an oversimplification) to think of purchasing an annuity as similar to purchasing a pension benefit.

Different Types of Annuities
At the outset, it’s important to understand that there are two basic types of annuities; immediate and deferred. Immediate annuities begin to provide you with a monthly benefit immediately after you purchase it, while a deferred annuity will invest your money for you until a point in the future where you begin receiving income payments (which typically occurs during retirement).

But the distinction between deferred and immediate annuities only generally describes the many variations of annuities that are out there. For example, the benefit term for an annuity can be the life of the person who purchases it, or their life plus the life of their spouse, or their life plus a guaranteed term (so that a beneficiary would continue to receive income if the annuity holder dies before the expiration of that guaranteed term).

Suitability to Purchase With a Self-Directed IRA
If you are concerned about being able to count upon a minimum level of income for you and your spouse during retirement, then an immediate annuity might be the perfect solution if you’re at or very close to retirement age. Certain annuities even provide an annual increase in your benefit to help you keep up with inflation. An immediate annuity might also be structured to help you meet your required minimum distribution obligations if you have a traditional self-directed IRA.

On the other hand, purchasing a deferred annuity when you’re relatively young might not be a good investment because you’re essentially locking investment opportunity down to a low investment return.
In short, the answer to the question “do annuities have a place in my self-directed IRA?” is “maybe.” Depending on your needs, the size of your retirement savings, as well as your current age, there may very well be an annuity product that’s a good fit.

Furthermore, the insurance industry is constantly trying to create new products to make sure that everyone’s needs are met, so if there’s not currently an annuity on the market that makes sense for you, there might be one within the next several years.

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  You may read the Supreme Court’s opinion at

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, 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 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. (, 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 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


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. (, a self-directed IRA Custodian with offices in Houston, Dallas, and Austin, Texas, and clients Nation-wide. He may be reached by email at Nothing in this article is intended as tax, legal or investment advice.

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

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!

“Savers Credit” basics for contributions to a self-directed IRA

In addition to all the other benefits of a self-directed IRA, did you know that you may also be eligible to receive a further tax benefit for contributions to that you make to your account? The Retirement Savings Contribution Credit (sometimes also known as the “Savers Credit”) can reduce an individual’s tax bill by up to $1,000 if their income is below certain thresholds (or up to $2,000 for taxpayers filing joint tax returns). The Savers Credit was created as a way to provide a direct financial incentive for lower income workers to save for retirement.

Below is the key information that you’ll need to be able to determine whether or not you’re eligible to apply the Savers Credit to your tax return for contributions you make to your self-directed IRA.

Income Threshold. In order to be eligible to claim any portion of the Savers Credit, a single person must have an adjusted gross income of less than $28,750 for 2012. An individual filing as a head of household must have an adjusted gross income of less than $43,125. Finally, a person with a tax filing status of married filing jointly must have an adjusted gross income of less than $57,500.

For the 2013 tax year, these amounts will rise to $29,500 for those with a single filer tax status, $44,250 for a head of household, and $59,000 for those with a tax filing status of married filing jointly.

Amount of Credit. For those who are eligible, the amount of the Savers Credit will be 10%, 20% or 50% of the amount of the contribution that an eligible makes to their self-directed IRA (or to any eligible employer-sponsored retirement plan). The exact amount of the credit will depend on the tax filer’s adjusted gross income. IRS Form 8880 contains a chart to help you make the calculation.

Personal Status. Furthermore, in order to claim the Savers Credit, an individual must be at least age 18, not a student on a full-time basis, and not be claimed as a dependent on any other person’s tax return.

Nature of the Credit. The Savers Credit will lower an individual’s overall tax bill on a dollar for dollar basis, but any unused portions of the Saver’s Credit will not increase an individual’s refund.

Contributions Net of Distributions. When you evaluate how much your eligible retirement contributions were for the year, you must first subtract whatever distributions you received from your account within the two-year period before the year that you’re claiming the credit and including the filing year. There are certain types of distributions that are exempted from this general rule.

Setting up and making regular contributions to a self-directed IRA can be a great way to build wealth for your retirement years. Depending on your income you may be able to save yourself even more money by claiming the Savers Credit on your tax return.

Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.

What’s in a Name? – Why It’s Important to Name a Beneficiary for Your IRA

Many people probably don’t think too much about how important it is to name a beneficiary for their IRAs.  However, as my family recently found out, ignoring this important detail when setting up your IRA can be costly from a tax perspective.

I recently received a distribution check from an IRA of my father, who passed away last year.  My father was a very careful planner, so I was quite shocked at his lack of tax planning with his IRA.  When setting up his IRA he named his estate as the beneficiary of the IRA (this is equivalent to not naming a beneficiary at all).  This meant that when he passed away the estate had to be probated, even though the IRAs were the only assets requiring probate in his estate.  IRAs that have named beneficiaries are generally non-probate assets, meaning that they pass directly to the beneficiaries instead of passing through a will.  That was the first problem.

The larger problem came because of the lack of choices he left us by naming his estate as beneficiary.  In a Traditional IRA, required minimum distributions must begin no later than April 1 of the year after the IRA owner turns age 70 ½.  This is known as the required beginning date.  My father died before his required beginning date.  Since his estate is a non-individual beneficiary, the IRA had to be distributed within 5 years, or by December 31, 2011.  If my father had died after his required beginning date without having a named individual beneficiary, the yearly required minimum distributions would have been based on his remaining life expectancy in the year of his death reduced by one for each year following the year of his death.

In contrast, the choices available to our family had my father simply named beneficiaries would have been much more favorable.  Assuming my father wanted his wife and 3 sons to split the IRA in the same percentages he listed in the will, he could have named us specifically instead of requiring the distribution to be made through his estate.  If the IRA was not split into separate IRAs by September 30 of the year following the year of his death, then required minimum distributions would have been based on the remaining life expectancy of the oldest beneficiary, which was of course his wife.  As his wife is a few years younger than he was, this certainly would have been a large improvement over taking the entire IRA over the next 5 years.

Had my father named the 4 of us as beneficiaries specifically, an even better plan would have been to separate the IRAs into 4 beneficiary IRAs with each of us as the sole beneficiary prior to September 30 of 2007 (the year following his death).  In his wife’s case this would mean that she could choose to take all the money out within 5 tax years, leave the IRA as a beneficiary IRA, thereby allowing her to take distributions without penalty even if she was under age 59 1/2, or she could have elected to treat the IRA as her own.  In the case of his sons, we could have taken the IRA over 5 years or we could have stretched the distributions over our life expectancy.  For example, in my case I could have elected to take the distributions over the next 39 years instead of all at once!

Since I expected nothing from my father’s estate and have no critical need for the funds, I would have taken the longer distribution period.  Instead I must add the distribution check to my taxable income for this year, which in my tax bracket means a substantial bite out of the money for taxes.  Since I am reasonably good at investing in my self-directed IRAs, having the ability to stretch the distributions out over 39 years would have meant an inheritance of many times what I will end up with after taxes because I had to take it all within 5 years.

The problem is even worse for my father’s wife, who will have an extraordinarily large tax burden this year, since she chose to take her share of the IRA out all at once instead of over a 5 year period.  While I am certainly grateful that my father thought of me in his will, simply naming specific beneficiaries would have made his legacy worth so much more to his family.

Don’t let it happen to your family!  Review your IRA beneficiary designations, and if you haven’t already done so, name your beneficiaries.  Your family will be glad you did.