Women in Business – How to Be Successful

Estimated reading time: 9 minutes

Have you ever wondered if your gender could affect how comfortable you are in retirement? This may not be a question on everyone’s mind, but it’s something women are facing every day. Recent studies have shown that the challenges women face during their working years can affect their lifetime earnings and retirement income. In order to feel comfortable and prepared for retirement, being able to overcome those obstacles is key. Today, I will interview Tracy Rewey, a successful note expert who will share her tips for creating success as a woman I the industry. 

Sarah: Thanks for joining me today, Tracy. This article is going to be about successful women in business. I’ve been doing a lot of research lately that shows women don’t feel like they’re prepared for retirement. They feel lost. I want to talk to you – a successful women – how you were able to build up your nest egg, and tips for how others can create success, whether it be now or for retirement. 

Tracy: I love it. I think that everybody struggles with it. This fits right in with what we do.

Sarah: Can you tell me a little bit about who you are and how you got started?

Tracy:  Absolutely. I was introduced to the world of seller financing in the 80s and worked with real estate attorneys, title companies, and servicers in a very small town. There was quite a bit of seller financing there, so I learned about seller financing, notes, and people investing in notes. Then, I went to work for a company where that was all they did. I worked there for 10 years, then I started my own company called Diversified Investment Services with my husband. We founded noteinvestor.com and now I get to work for myself. You have so much more freedom of time and location, and you get to reap the rewards of all your efforts. That’s how I got introduced to the whole business.

Sarah: That’s cool. When you find something you’re passionate about, you stick with it. In the midst of all of this, where did you learn about self-directed IRAs?

Tracy: While I was working for the investment company, we had a lot of people that would refer us deals. Some of them would also buy the notes, keeping some of it in the backend in their retirement account. That was my first exposure. Seeing other people do it and going to conventions showed me, but I didn’t get to do my first deal until I left and converted my 401k to a self-directed IRA. 

Sarah: When you were first getting started, did you have any business partners besides your husband or outside help besides learning from the company that you had been with?

Tracy: I was very fortunate when I worked for 10 years there. I learned from some of the best. Marcus was their main guy in charge, and he was always like a mentor to me. He said, “Look, I have two daughters. They are in the business finance world. I want to teach you and to treat you the way I would want somebody to treat my two daughters.” I think that was unusual back then.

Sarah: Wow. What a kind role model. It’s good that you had someone in your life that to help with those steppingstones. What challenges have you experienced throughout your time in this industry as a woman in business?

Tracy: I think there are benefits and I think there are challenges. Some of the challenges for me is not sounding assertive enough. I don’t have that deep voice to sound more assertive. I’ve found that saying less when I’m in certain situations usually helps instead of saying too much. I tend to be a talker. I also think being underestimated can be a challenge, but that can also work to your benefit.

Sarah: And what have some of those benefits been?

Tracy: I struggle with saying it’s a male or female trait, maybe it’s a personality trait, but I do believe that women tend to be natural listeners, natural fixers, and natural empathizers. In the business I’m in, people are often selling their notes, because they’re trying to solve a problem and they need the funds for something else. Maybe they had a health concern, the note’s not paying, they have to send their kid to college, or they’ve lost a job. It’s important to be a good listener and a good empathizer. I don’t use that as a strategy. It’s just something I do naturally, and I think that has been a benefit. I am also an analyzer and I’m very detail oriented. Sometimes women make up for not being sure by trying to be over sure, but in our business, that is also a benefit. I don’t mind going through the documents, taking the time, and making sure that I don’t take everything at face value. 

Sarah: I love that take on it. You don’t often hear those points you made. Has being a female ever stopped you from a successful investment? Have you ever experienced discrimination?

Tracy: Honestly, if it has, it might only be because I was still learning to trust myself. That’s one of the things I always say: wealth doesn’t know you’re a woman, right? This financial calculator doesn’t know I’m a woman, right? The title policy doesn’t know that when I look at a payment history. It doesn’t know the interest rates. I think it’s a good industry on the finance side. Now, I definitely experienced things that were expected, like really proving yourself before someone would move you up. I always joked that I had to do twice the work and make half the mistakes, but I eventually became a vice president at that company. Another female and I were the first vice presidents the company had. 

Sarah: Oh wow! What a big accomplishment!

Tracy: Thank you! I think you have to grow thick skin. I don’t mean that to discount what anybody has gone through, because I know there are people who’ve had serious discrimination and it’s been very wrong, but I’ve been fortunate. 

Sarah:  Well, that’s good! That’s good that you haven’t! That’s what we like to hear. I’m sure that there were probably some tough times that you had to go through still. How did you persevere through those?

Tracy: When I started out, my first job besides babysitting was in high school, I worked for an attorney’s office. I used to do all the routes, picking up and dropping off papers. There was this one real estate office with this one gentleman and I was young. I’d go to pick up papers and he actually swatted me on the backside as I was walking out the door one time. I was in tears. There was a lady who I worked with, the mother hen of the office, and she was not having any of that. Shortly after, that route was no longer on my route, and they had to bring their own documents to our office. I felt validated, which was nice. 

Sarah:  Wow. I’m glad that they took you off that route. That’s good.

Tracy: I know. I commend them. They didn’t pretend it didn’t happen. I’ve been surrounded by good people in my life that were supportive. I had a very strong mother too, so she learned to make me stand up for myself.

Sarah: Always so much to learn from our mothers! Now, you are quite successful. You have your own business, you’re hosting expos, and you’ve got a solid track record behind you. What would you say is your secret to success?

Tracy: I would say perseverance, being a good listener, being a good problem solver, and not trying to squeeze every last dollar. I know it’s cliche, but I really believe that there are ways to make everybody come out of a situation feeling good about it. I think being able to collaborate with other people is key. I’m so very fortunate I’m at a place in my life where I can support and help other people that are learning the business. I get a lot of enjoyment out of that.

Sarah: That’s great! So, what about self-directed IRA investing? Have you used your expertise to invest with a self-directed IRA? 

Tracy: I’ve done some partials in my IRA. Those have turned out well. I try not to mix income. If I’m putting a deal in my IRA, I keep those separate. If I buy all of it in the IRA, I sell all of it through the IRA and hold it for a certain amount of time.

Sarah: That’s smart to keep those two buckets separate.

Tracy: I’m probably more careful than most. I never want to co-mingle funds in any way.

Sarah: Very smart. It sounds like you’ve been able to balance that quite well. How do you handle your work/life balance? 

Tracy: The real answer is that I still struggle with that. I wish I had words of wisdom. I think we tend to put ourselves last because, and then we think we’re doing it because we love and support all the people around us. Really, what happens is that we end up not being the best form of ourselves when we run ourselves thin. Then, nobody really benefits. I have learned over the years that you have to take time for yourself. You have to have balance and understand that everything will not always get done. We have to make time for ourselves and to nurture ourselves, but sometimes we forget to do that. It’s good when you have somebody around you that you can trust. But I’m still working on that. 

Sarah: I think that’s true. I think a lot of people are continuously working towards finding the right balance. To round it here with some of my final questions, what would you like to achieve next? What are your goals? What’s on the horizon for you?

Tracy: I have a goal to help women become more comfortable and secure in investing, and I think there’s some beautiful trends happening where I’m seeing more of that. I’ve been trying to be part of that movement. Last year, we started the Wise Women Investors Group and the Wise Women Expo. It’s about building that community and supporting women to be confident, to invest with confidence, and to gain freedom so they can live more balanced and free lives. 

Sarah: That really is amazing! And I know there are other educational resources you’ve done. Care to mention that?

Tracy: I’ve written a 400-page manual, but it’s not a digestible book. It’s more of a “how-to”, so that’s on my horizon as well.

Sarah: That’s exciting. You’ve definitely done a lot in your career. My last question for is this: for the women looking to get more involved and grow their retirement accounts, what are your tips for growing a self-directed IRA?

Tracy: We actually did a wonderful webinar with Quest on that. It was about my top 10 tips for buy notes in an IRA. I would definitely refer people to that class. If I had to boil it down to a couple of things, I first would say to just do something and to start wherever you are. We are constantly underestimating ourselves or being frustrated by something we didn’t do. I encourage everyone, no matter where you are at in your time, to let that go and to start. If you don’t have an IRA account, then open one. If you have one and you haven’t fully contributed to it, then figure out how to do that. If you’ve done that and you still haven’t fully invested your money and it’s sitting there uninvested on the sidelines, then do something about that. I’ve certainly been guilty of all those things along the way, so I’m not preaching or judging. I’m just saying, take some action. Learn, invest, and make some mistakes because you learn from those. I have. Lastly, solving problems. They don’t go away by ignoring them.

Sarah: That’s great advice. Everything you mentioned is so true. Tracy, thank you again. I really appreciate the time you’ve set aside to participate in this article. Hearing you share how you’ve been successful as a woman in the industry was really inspiring. You’re a wealth of knowledge and have shared some great advice. 

If you would like more information about the Top 10 Tips for Buy Notes in an IRA, you can rewatch the class on our Youtube page! To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

3 tips for reducing taxes on your retirement income

Estimated reading time: 2 minutes

Minimizing taxes for future retirement income is not always easy, but it is very important for putting together an effective retirement plan. For example, although many retirees expect to pay lower tax rates on their IRA or Individual 401k after they have left the workforce, their tax rates may still go up due to social security taxes and medicare taxes. 

Follow these three steps to reduce taxes on your retirement income and get the most out of retirement savings:

1. Learn about income tax advantages

Despite what many people think, certain types of income are taxed differently from others. A few examples include:

  • Capital gains
  • Real Estate investments
  • Earned income
  • Unearned income

If you buy a physical asset such as gold or an investment property, your tax rates for capital gains will be much lower than it would be for an ordinary earned income. 

Also, if you sell a home you’ve lived in for the past five years, you may qualify to have a large portion of your capital gains excluded from your taxes (double the amount if you are filing jointly as a married couple) by completing a 1031 exchange.

2. Create a budget to keep your expenses low

In order to reduce your taxes, you will want to stay in low tax brackets as much as you possibly can. One of the best ways to do this is to keep your expenses low so you won’t have to withdraw much from your retirement accounts. 

Create a budget to manage your annual spending and withdrawal habits, and if possible, move to a region with lower taxes and a lower cost of living.

3. Convert your traditional IRA or 401k into a Roth IRA

Another strategy is to convert your current retirement account into a Roth IRA. By doing this and paying taxes up-front when your marginal tax bracket is still low, you will reduce the amount of tax you will eventually pay in the future and you will be eligible for tax-free distributions after retirement.

Contact a Quest IRA Specialist today to learn more ways you can reduce taxes on your retirement or register for one of our events.

Questions you should ask before opening multiple IRA accounts

Estimated reading time: 2 minutes

Image Credit: 401kcalculator.org

Many people wonder if you can open multiple IRA accounts, and the short answer is yes, it is something that is legally allowed. However, just because it is legal doesn’t necessarily mean that it’s something you should do.

There are many important things to take into consideration when opening multiple IRA accounts. Here are the key questions you should ask yourself before setting up multiple IRAs.

Do you need the tax benefits of both a traditional and Roth IRA account?

  • This is the main reason why people opt to open multiple IRA accounts. Traditional IRA accounts give you tax breaks for deposits during the year, but Roth IRAs give you tax breaks in the year that you withdraw them. 
  • There are advantages and disadvantages to using both types of IRAs. You might opt to use a traditional IRA for a personal benefit today (such as a tax deduction). 
  • On the other hand, use a Roth IRA for a long-term investments to capture the benefit when you truly retire and withdraw tax free money. 

Are you willing to manage the paperwork for two IRAs?

  • While multiple IRAs can come with tax benefits, they can also come with a lot of extra paperwork. 
  • This means higher chances of making mistakes with your paperwork or taxes, or missing important deadlines that could negatively affect your account’s growth. 
  • Before you get set up with multiple IRAs, be realistic with yourself and decide if you are willing to spend the extra time and energy to manage two accounts.

Do you have a good financial institution on your side?

When opening any financial account, it’s important to work with providers who are going to meet your needs.

Is their staff friendly, knowledgeable, and available to help when you have problems? Do they offer the investment options that you need? Doing your research before choosing an account provider is crucial.

After pondering all the pros and cons of opening multiple IRA accounts vs. one IRA account, you will be ready to make the best choice for you and your financial future. 

If you are interested in opening an IRA account, contact Quest Trust Company today! QTC offers completely self-directed IRAs with flexible investment options and fast processing times. This gives you more control over the way you manage your money and plan for the future.

How to Save for Retirement in Your 20s, 40s, and 60s

Estimated reading time: 3 minutesSaving for retirement can be overwhelming with all of the different investment options available. Some people will put off saving for retirement because they don’t want to make a mistake with their money or think they don’t have enough income to sacrifice each month to make the short-term hits worthwhile. Other people think that they can start saving for retirement later, but they are caught playing catch-up when later finally arrives. It doesn’t matter if you are just entering the workforce or are hoping to exit it soon, the worst thing you can be doing with your finances at any age is not saving for retirement. Below are a few suggestions on how best to utilize your resources throughout your life to successfully save for retirement.

What to think about in your 20s

This may seem like the most difficult age to start saving for retirement with all of the other financial responsibilities weighing people down, like student debt. However, saving a little bit consistently in your 20s will compound into a hefty sum by the time you’re ready to use it for retirement. Because you have time on your side when it comes to investing, you can afford to invest more of your money into riskier, but eventually highly rewarding, options such as stocks. Investing in a niche you’re comfortable with and learning to weather the economy’s ups and downs can help you reach your long-term financial goals more quickly.

If you’re lucky enough to work for an employer who offers matching contributions through a 401k plan, take advantage of the free money by contributing at least the maximum matching amount. You will also want to research the differences between traditional and Roth IRAs, especially if you qualify for both, and determine which will benefit you the most in the long-run. Even though it may seem difficult to start saving now, financial burdens only tend to increase the older you get.

What to think about in your 40s

This is the age where most people fall behind in their contributions for staying on track with their long-term goals. You may have children’s college tuition, aging parents, and other obligations to take care of. However, neglecting retirement contributions or, worse, borrowing from your retirement can have a significant impact on your overall total at retirement. For instance, contributing just $1,000 annually after age 40 versus an IRA maximum contribution of $6,000 throughout your whole life can cause you to lose out on hundreds of thousands of dollars by the time you reach retirement.

As you transition closer to retirement age, you should also think about transitioning some of your more risky stock options into safer investments such as bonds. The closer to retirement you get, the less risky you want to be with your hard-earned money.

What to think about in your 60s

You may be thinking about retirement more than ever at this stage in life, and hopefully you started taking advantage of catch-up contributions for both your IRA ($1,000 more per year) and your 401k ($6,000 more per year) at age 50. Your house should be close to, if not fully, paid off so you don’t have to worry about that expense in retirement. Most of your funds should be in safer investments by now so you don’t have to rely on a turbulent market to swing in your favor when you need to start taking distributions. It’s important to meet with your financial advisor to create an action plan for required distributions and how they will affect your accounts. Lastly, you may want to consider delaying your social security benefits until age 70 to really maximize those payments once they start arriving.

Changing Jobs? Now Might Be The Time For A Self-Directed IRA

Estimated reading time: 3 minutesA recent study by the Bureau of Labor Statistics found that the average younger baby boomer (individuals born between 1957 and 1964) held more than 11 jobs when they were between the ages of 18 to 46. With the job market in much greater flux today, and more people working well into their 60’s (and beyond), it’s probably safe to assume that the number of jobs the average worker holds throughout their career is more likely to increase rather than decrease in the coming years.

Changing jobs can often be an exciting occurrence, but it’s also likely to involve some challenges as well. One of the administrative hassles of changing jobs is managing the employer-sponsored benefit plans that you may have been participating in when you were at those prior jobs. Most often these take the form of 401(k) plans, but they can include other types as well. Managing all of these different accounts can take a significant amount of your time, and it can be difficult to do so in the most efficient and financially productive manner.

That means that for most, they can greatly improve their retirement future by consolidating these various accounts into a single self-directed IRA.

Why choose to conduct your rollovers into a self-directed IRA, over a traditional IRA or even your new employer’s 401(k)? The biggest reason is investment choice.

The self-directed IRA is not a separate legal entity from the IRAs that you see advertised by banks and discount brokers. The difference is that a self-directed IRA custodian such as Quest Trust Company will allow you to invest in all the asset types that are authorized by law, while traditional custodians (such as banks and discount brokers) limit you to investment options that they can facilitate more easily – such as stocks and mutual funds. Even worse are 401(k) plan administrators who often limit a plan participant’s investment choices to a handful of sponsored mutual funds or other collective investment vehicles.

Having a self-directed IRA, and having other asset types, which include private equity and debt instruments, real estate, and even precious metals, provides you with much greater investment opportunities.
In addition, once you have a self-directed IRA setup, you’ll be able to roll over your various other retirement accounts into it as you change jobs over time.

If you choose a self-directed IRA that is set up as a Roth account, then you have a number of additional long-term financial advantages that you wouldn’t otherwise have with a lawyer- sponsored plan. Roth IRAs are not subject to the IRS rules on required minimum distributions, so you can let your investments continue to grow on a tax-free basis even past age 70½. Furthermore, Roth accounts provide significantly more flexibility when it comes to estate planning.

With all the other changes that you’re likely to be facing with a new job, take the extra step and set up a self-directed IRA. You may be surprised at how it can help with your retirement planning.

Checkbook Control IRA-Owned Entities Under Attack

Estimated reading time: 10 minutes

By: H. Quincy Long

 A very popular idea in the self-directed IRA industry is to have what some have termed a “checkbook control” IRA.  Basically this involves the following steps:  1) an IRA is formed with a self-directed IRA provider; 2) a brand new LLC or other entity is formed with the IRA owner as the manager or a director and officer; and 3) the IRA custodian is directed to invest the IRA funds in the newly formed entity.  Voila! The IRA owner has checkbook control over his or her IRA funds and can do deals quickly without anyone looking over their shoulder to see that the rules are being followed.  Admittedly, this sounds like a wonderful idea from the IRA owner’s perspective, but it is fraught with danger and traps for the unwary, as some taxpayers are now discovering.  The IRS has been attacking this type of setup, especially when they involve Roth IRAs.

             The genesis for the idea is largely attributable to the case of Swanson v. Commissioner, a Tax Court case which was decided in 1996.  In that case, Mr. Swanson set up a self-directed IRA at a bank and formed a corporation of which he was appointed the director and president.  He then directed the bank to subscribe to the original issue shares of the corporation so that his IRA became the sole shareholder.  Subsequently Mr. Swanson transacted business between his IRA owned corporation and his privately owned corporation.  These transactions were prohibited transactions, but the IRS’ litigation position was limited to arguing that the purchase by the IRA of the original issue shares and the payment of dividends from the IRA owned corporation back to the IRA were prohibited.  Mr. Swanson had very good lawyers, and the IRS eventually conceded the case as it related to the alleged prohibited transactions.

The Swanson case certainly generated a lot of excitement, but a careful examination of the case reveals that the Tax Court ruling is limited.  Far from approving the entire concept of a “checkbook control” IRA owned entity, as some people allege, Swanson v. Commissioner can only be relied on for two concepts:  first, that the purchase of the original issue stock of the corporation was not a prohibited transaction because prior to the IRA purchasing the stock there were, by definition, no owners, which meant that there could not have been a transaction between the IRA and a disqualified person (the court ruled that the corporation did not become a disqualified person until it was funded, which raises other interesting issues); and second, that the payment of dividends from the IRA owned corporation back to the IRA was not a prohibited transaction as a direct or indirect benefit to Mr. Swanson, since the only benefit of the dividend payments accrued to his IRA and not to Mr. Swanson personally.  As the Tax Court noted in Repetto v. Commissioner, discussed below, in the Swanson case “the central issue was whether the IRS was substantially justified in its litigation position for the purpose of determining whether the taxpayer was entitled to an award of reasonable litigation costs.” Mr. Swanson recovered from the IRS litigation costs in the amount of $15,780.  Significantly, what was not at issue in the Swanson case was the fact that Mr. Swanson did benefit personally from the business transactions between his privately owned corporation and the corporation owned by his IRA, since these transactions were not addressed by the IRS in their litigation position.

On December 31, 2003, the IRS released IRS Notice 2004-8, entitled Abusive Roth IRA Transactions.  The notice generally covers a situation which is very similar to Mr. Swanson’s, in that it typically involves the following parties:  (1) an individual who owns a pre-existing business such as a corporation or a sole proprietorship, (2) a Roth IRA that is maintained for the taxpayer, and (3) a corporation or other entity, substantially all the shares of which are owned or acquired by the Roth IRA.  The privately owned business and the Roth IRA owned entity enter into transactions which are not fairly valued and thus have the effect of shifting value into the Roth IRA in an attempt to avoid the statutory limits on contributions to a Roth IRA.  Also covered by Notice 2004-8 is any transaction in which the Roth IRA corporation receives contributions of property, including intangible property, by a person other than the Roth IRA without a commensurate receipt of stock ownership, or any other arrangement between the Roth IRA corporation and the taxpayer or a related party that has the effect of transferring value to the Roth IRA corporation comparable to a contribution to the Roth IRA.  Under these circumstances the setup is deemed to be a listed transaction, which means that the taxpayers must disclose the transaction to the IRS or face significant penalties.  These transactions may be attacked in a number of ways, including as an excess contribution under Internal Revenue Code (IRC) Section 4973, or in appropriate cases a prohibited transaction under IRC Section 4975.

On April 24, 2009, the Office of Chief Counsel for the Internal Revenue Service released Chief Counsel Advice (CCA) #200917030.  Like Advisory Opinion Letters from the Department of Labor, a CCA does not set legal precedent, but nonetheless they are instructive on how the IRS views the topic and can be influential in the way a case is handled by the IRS and in Tax Court.  This CCA covered a situation in which the taxpayers, a husband and wife, set up a corporation owned by their Roth IRAs into which they would direct payments for consulting, accounting, and bookkeeping services they provided to other individuals and businesses.  The taxpayers provided services to various clients, including the company for which the husband worked but did not own, through the Roth IRA corporation, purportedly as employees of the corporation, but without compensation.  When the Roth corporation filed its corporate income tax return it properly disclosed the listed transaction.  However, the taxpayers did not disclose the listed transaction on their individual tax return.  Instead, they only disclosed an excess contribution to their Roth IRAs on IRS Form 5329, which they said had been removed so as to avoid the 6% excess contribution penalty.  The CCA indicated that in this case, like the transaction described in IRS Notice 2004-8, the structure of the transaction purportedly allowed the taxpayers to create a Roth IRA investment that avoids the contribution limit by transferring value to the Roth IRA corporation comparable to a contribution to the Roth IRA, thereby yielding tax benefits that are not contemplated by a reasonable interpretation of the language and purpose of Section 408A (the Internal Revenue Code section pertaining to Roth IRAs).  Effectively, the taxpayers in this case were transferring the value of their services to the Roth IRA corporation, which in turn paid dividends back to their Roth IRAs.

In the recently released Tax Court Memo 2012-168, Repetto v. Commissioner, the IRS argued and the Tax Court agreed that the Repettos had entered into a listed transaction as contemplated by IRS Notice 2004-8, but had failed to report it properly.  The Repettos formed a partnership called Ozark Future LLC with a builder, Porschen Construction, Inc., to build spec homes.  Eventually the Repettos formed a Subchapter S corporation called SGR and transferred their ownership in Ozark Future to the newly formed corporation.  In 2003 the Repettos met with the CPA for Mr. Porschen and another person who was both an attorney and CPA.  The attorney suggested that the Repettos form 2 corporations, each of which would be owned 98% by their respective Roth IRAs.  The new Roth IRA corporations would provide services to SGR, and the relationship with between SGR and Ozark Future would remain the same.  Although the Repettos did not have a good understanding of the structure, they agreed to have the attorney set it up.  In order to set this up with Roth IRAs, the Repettos made an excess contribution to their Roth IRAs.  After the Roth IRAs and the corporations were set up, SGR entered into 10 year agreements for the Roth IRA corporations to provide services to SGR at SGR’s place of business, which was the Repettos’ home, including bookkeeping, marketing and other administrative functions.  The Roth IRA corporation owned by Mrs. Repetto’s IRA paid her a small salary in 2004-2006, and also had a medical and dental care expense reimbursement plan beginning in 2004.  The total dividends declared to Mr. Repetto’s Roth IRA were $117,600 and the amount declared to Mrs. Repetto’s Roth IRA was $127,400.  The Tax Court relied on the substance-over-form and sham transaction doctrines to find that the service agreements were nothing more than a mechanism for transferring value to the Roth IRAs.  The service agreements did not change who provided the services to SGR, since the Repettos continued to do all the work as they had done prior to when the purported service agreements were entered into. In the end, among other penalties the Repettos had to pay excise tax penalties under IRC Section 4973 based on the value of their Roth IRAs at the end of each year, plus additional penalties for failure to timely file a return since they failed to attach Form 5329 to their tax return to report their excess contributions, plus more penalties for having failed to properly report their participation in a listed transaction.  The Repettos’ reliance on the CPA and attorney who set up the plan did not save them from the penalties, since the advice was from the promoters of the investment or advisers who had a conflict of interest.

As of the writing of this article, there is another case pending before the Tax Court (Peek and Fleck v. Commissioner) involving a Roth IRA owned corporation which was formed by the Roth IRAs of two otherwise unrelated parties.  The corporation was originally owned by traditional IRAs which were later converted into Roth IRAs.  The IRA owned corporation purchased an operating business which was sold some years later for a significant capital gain.  The IRS is alleging that the taxpayers, who were employed by the corporation, violated the prohibited transaction rules by 1) guaranteeing personally a note signed by the corporation owned by their IRAs, and 2) having their IRAs invest in the corporation pursuant to an understanding or arrangement that the corporation would thereafter provide benefits to them as individuals, including the payment of wages to them and lease payments for facilities from the corporation to an LLC owned by their wives individually.  I will update this article when the final decision comes out, but it looks bad for the taxpayers at this time, in my opinion.

It is noteworthy that in each of these cases the IRA owners were actively involved in business activities which allowed them to shift value to their Roth IRAs from their personal services.  Two other issues could arise from checkbook control IRA owned entities, but these issues have not been litigated as far as I know.  First, the direct or indirect provision of goods, services, or facilities between a plan (including an IRA) and a disqualified person (including the IRA owner), is a prohibited transaction under IRC Section 4975(c)(1)(C).  At some point the IRS may allege a prohibited transaction under this section for someone who is a manager or director and officer of a company owned by their IRA.  Second, IRC Section 408(a)(2) requires the trustee of IRA funds to be a bank or non-bank custodian.  It is possible that attempting to avoid the proscription against IRA owners handling their own IRA funds with the simple imposition of an entity might be some day be attacked as invalid by the IRS.

Perhaps the only good news is that none of the attacks on IRA owned entities mentioned in this article have dealt with a situation where the entity only made investments as opposed to running a business and where no prohibited transactions were otherwise involved.  Even in this “perfect” scenario there is danger, as the prohibited transaction rules are somewhat complex and the IRA owner may inadvertently cause the IRA owned entity to enter into a prohibited transaction with complete innocence.  Yet, as stated in the case of Leib v. Commissioner, “good intentions and a pure heart are no defense” when it comes to the prohibited transaction rules.

One thing which is patently obvious to me about this area – if you are going to have your IRA own a checkbook control entity, you and/or your advisor had better have a very good understanding of 1) the prohibited transaction rules under IRC Section 4975, 2) the Plan Asset Regulations contained in 29 C.F.R. §2510.3-101, 3) Interpretive Bulletin 75-2, which is contained in 29 C.F.R. §2509.75-2, and 4) at least when it comes to a business or debt financed property owned by an IRA or an IRA owned entity, how Unrelated Business Income Tax (UBIT) contained in IRC Sections 511-514 comes into play.  If you are being advised by someone to set up a checkbook control IRA owned entity and they cannot explain how these rules apply to your entity clearly and how they interact with each other, then run the other way.  To fail to understand completely the rules is like jumping out of an airplane without a parachute – it may be incredibly fun on the way down, but eventually you’re going to go SPLAT!

© Copyright 2012 H. Quincy Long.  All rights reserved.

“What the Swanson Case Did Not Do For Us”

Estimated reading time: 5 minutesBy Catherine Wynne

The Swanson Decision has been lauded as a “landmark decision” for the “checkbook control IRA”. An entire industry has been built around this decision and the internet has become the platform for launching products designed to give “checkbook control” and “reduction of custodial oversight” to the IRA holder based solely on this case. Briefly stated, checkbook control is accomplished by setting up a single member LLC which is purchased 100% by the IRA. The IRA holder is subsequently appointed the LLC manager after funding the LLC share purchase. The IRA holder has complete control over all monies of the LLC and therefore the IRAʼs monies.

Companies promoting the checkbook control concept have three things in common:

1. They rely entirely on the Swanson Case to justify the legality of the IRA/LLC arrangement

2. They capitalize on the IRA ownersʼ desire for complete control of IRA funds and disenchantment with the securities industry.

3. They promise “checkbook control” of these funds without the “interference” of an IRA custodian.

Mr. Swanson caused a corporation called “Worldwide” to be created and his IRA purchased 100% of the outstanding shares of that corporation. After funding the IRA share purchase, Mr. Swanson was appointed president of the corporation which, in turn, did business with Swansonʼs company, “Swanson Tool”. Swanson Tool paid sales commissions to Worldwide. Note: Worldwide had no employees. The Swanson case attracted attention primarily because a) it was a single member entity where the IRA owned all shares; b) Mr. Swanson was appointed the president with complete control over all monies of the corporation; and c) Worldwide made lots of money in this arrangement.

Very few understand what the Swanson Decision addressed. Many think that this was a decisive case that certified the legality of the single member LLC for IRAs. It was not.

The facts are:
• The Swansons sought to recover legal fees from the IRS after a settlement with the IRS on a number of tax issues. The question put forth in this case was whether or not the IRS was overzealous in pursuing the Swansons during the negotiation and settlement process
in resolution of these tax issues.
• The entity purchased by the IRA was not an LLC at all but a foreign sales corporation.
• The case was decided at the administrative or lowest tax court level and was not appealed by the IRS.
• The IRS behaved badly in this case by misapplying the prohibited transaction rules and choosing to pursue the Swansons in spite of (The IRS admitted) hazy understanding of the facts of the case and application of the rules.
• The IRS confined the defense of their actions to only three potential prohibited transaction areas. They chose wrong.


Only one issue was decided: the Swansons were entitled to monetary relief for excessive legal fees resulting from the long, entrenched battle with the IRS. The issues viewed as “key” to the advocates of “checkbook control” rest on the three arguments the IRS chose to pursue in defense of their actions during the settlement process. The IRS believed that these three actions by Swanson constituted prohibited transactions under IRC 4975.

These issues were:
• Was the purchase of shares in the corporation by the IRA a prohibited transaction?
• Was the appointment of Mr. Swanson as president/ director of the entity a prohibited transaction?
• Was the payment of dividends by Worldwide back to the IRA account a prohibited transaction?
The court decided that none of these three areas constituted a prohibited transaction.

The following issues, which directly impact the operation of the IRA-owned entity, did not come up in the Swanson Case but are of importance to anyone attempting to operate an IRA-owned LLC:

Subsequent funding of entity following initial funding: There appears to be no question that funding the LLC after the IRAʼs initial purchase of shares constitutes a prohibited transaction because the LLC becomes a disqualified entity after funding. IRA holder as manager: What can an IRA holder do as the manager of the LLC? This was not addressed in Swanson and still is not defined. The extent to which an IRA holder can work on behalf of the entity is still in question.

Arrangements: The IRS more recently has looked at entities set up specifically to avoid application of certain tests, such as fiduciary responsibility, and setting up entities as part of a pre-arrangement to avoid a prohibited transaction, as being invalid (C.F.R. § 2509.75-2(c)). What does the IRS view as an “arrangement”? What about circumvention of the custodian requirement set forth in IRC 408?

The IRA holder as manager and signer on the entity account can take money out of and put money into the entity and thus take distributions and make contributions to the IRA without the custodian reporting either of these activities to the IRS. The prohibited transaction rules, such as no personal use, no guaranteeing of credit, and no use of the IRAʼs asset for the IRA holders benefit all of these can happen without custodial involvement because they happen within the created entity.


One thing we can rely on with regards to the Swanson Case is that the IRS is not going to make the same mistake twice. IRA investment in closely held or “checkbook control” LLCs, because of their high profi le, will loom large as an IRS target. When (not if) the IRS decides to challenge “checkbook control” IRAs, they will be ready. The questions not answered by the Swanson Case will most likely be the focus of any future IRS court case.  Lastly, there is a limited understanding of prohibited transaction rules across the spectrum of IRA owners in self-directed investments. There is much inexperience with regards to the use and operation of business entities such as LLCs which may, in turn, result in inadvertent prohibited transactions because of confusion in the relationship between the individual, the LLC and the IRA member as three distinct entities.

In summary, the Swanson Case may only be the start of IRS scrutiny of self-directed IRA investments and single member LLCs in particular. Anyone entering into this type of IRA investment must understand the basis in law on which this type of investment structure is built, what the rules are with regards to both prohibited transactions and how to operate a registered business entity. Lastly, everyone needs to know what the Swanson Case did not do for us!

Catherine Wynne is a principal in New Direction IRA, Inc. New Direction, in Lafayette, Colorado, provides administration services as well as continuing education for tax and investment professionals and the general public.

Self Directed IRA Myths – Groom Law Group

Estimated reading time: 16 minutes

Written by Richard Matta of Groom Law Group

A search of the internet quickly reveals that there are hundreds, if not thousands, of websites promoting one of the hottest financial concepts – the so-called “self-directed individual retirement account.” These range from sites offering simple “hands off” custody and recordkeeping services, to traditional broker-dealers marketing trading accounts, to promoters of “how to” books, to what amount to little more than modern-day snake-oil sales pitches. Similarly, bookstore shelves are lined with guides to building IRA wealth through nontraditional investments.

Many of these products are quite legitimate, and the sponsors work hard to provide meaningful information to help accountholders distinguish between legally acceptable investment practices and activities that may result in unfavorable tax consequences or, worse, complete loss of the tax-advantaged IRA status. Sometimes it is simply impossible to cover a subject in a comprehensive manner, and the materials warn accountholders to hire knowledgeable counsel. Nonetheless, in the opinion of the author, most of these materials perpetuate certain myths – even among the lawyers – that range from merely incomplete to outright wrong.

Why? In part, because neither the Internal Revenue Service (“IRS”) – which has jurisdiction over IRAs themselves – nor the Department of Labor (“DOL”) – which has jurisdiction over prohibited transactions – has in the past devoted significant resources to IRA issues, nor have the two agencies devoted much effort to coordinating their views. Thus, while a great deal of learning has developed under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), in connection with qualified retirement plans, in many cases this information has not carried over to IRAs. Until the last few years, most IRAs were small, and were marketed as “retail” products by different channels (and sometimes different financial institutions entirely) from those that dealt with the “institutional” ERISA market.

What are some of these myths? Mainly, they are concepts that have arisen in connection with the establishment of a limited liability company (“LLC”) as a wholly-owned subsidiary of an IRA, for the purpose of making non-traditional investments – what are often called “alternative investments” on the institutional side – i.e., things other than traditional mutual funds, stocks and bonds such as venture capital, real estate, derivatives and the like. These myths include the following, all taken verbatim from various self-directed IRA websites:

There appears to be no question that funding the LLC after the IRA’s initial purchase of shares constitutes a prohibited transaction because the LLC becomes a disqualified entity after funding

Comment: As discussed below, we believe this is simply wrong.

“Once the LLC is funded, you no longer need the custodian to write the checks. The LLC can write its own checks, and since you’re the manager, you have control

Comment: Though this may be the right answer, the author has not seen a single IRS ruling that confirms this is correct in the case of an LLC owned 100% by an IRA. (Where the IRA owns less than 100%, the authorities are somewhat clearer.) The Swanson case, discussed below, emphatically does not support this conclusion. There are good legal reasons why this may be false.

If you and your brother had a company and you owned 49.5%, then your IRA could buy, sell or loan to it without penalty.”

Comment: Wrong – this is a highly risky proposition. Ironically, the DOL advisory opinion most frequently cited as support for the proposition that this is not prohibited actually says that a prohibited transaction is likely to result.

Can I make a loan to my brother, aunt, cousin or stepchild so that they can use the money as a down payment on a home? Yes. According to IRC 4975, siblings, aunts, uncles, cousin and “step relations” are not included in the definition of disqualified persons. Thus any dealings between your IRA and these would not be a prohibited transaction.” (A variation on this is that you can hire your brother to manage real estate owned by your IRA, and pay him a salary with IRA assets.)

Comment: Also wrong. This is related to the prior question about a company owned by the accountholder and his/her brother, and the answer is the same – it very well  could be a prohibited transaction. Getting it wrong means loss of the IRA’s tax exempt status.

Each of these myths is discussed in more detail below.

Several of these concepts derive from Swanson v. Commissioner, 106 T.C. 76 (1996), cited by at least one IRA custodian as a “landmark” decision around which “an entire industry has been built” but which, in the opinion of the author, was much ado about nothing. The IRS raised the wrong arguments and failed to raise the right ones, and the tax court appears to have arrived at the “right” answer only by accident, via a nearly incomprehensible analysis. As discussed below, one key “holding” of the court was not a holding at all, and is also inconsistent with later authorities. Swanson is a weak foundation on which to rest a multi-billion dollar industry.

Myth No. 1: An entity 50% or more owned by an IRA is a disqualified person

The issue here at first blush appears to be rather straightforward. According to the tax court in Swanson (or as best we can understand the court’s reasoning):

Step 1. The IRA accountholder in that case was a fiduciary with respect to his own IRA. As a fiduciary, he was a “disqualified person” with respect to the IRA.

Step 2. The accountholder was also a “beneficiary” of the IRA. As such, he was deemed “beneficially” to own the shares of a corporation that was owned 100% by his IRA.

Step 3. Under the attribution rules of Code section 4975, any corporation owned 50% or more by a disqualified person (directly or indirectly) is also a disqualified person.

Consequently, once the IRA acquired 50% or more of the corporation, any subsequent dealings between the IRA and the corporation would be a prohibited transaction. Straightforward, yes, but erroneous. The court’s analysis rests upon the following constructive ownership rule:

Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries….

Swanson, 106 T.C. at 86, n. 15 (quoting Code section 267(c)(1)). Because the IRA was a trust, this means that the accountholder, as the trust’s sole beneficiary, was deemed constructively to own stock of any corporation held by his IRA. So far, so good. However, being a beneficiary alone did not make the accountholder a “disqualified person,” and neither would it make the corporation a disqualified person. Rather, the court found the accountholder was a disqualified person because he was a “fiduciary” with respect to his IRA. However – and this is an important but rather subtle point – a fiduciary acting only as such is not a disqualified person. A fiduciary is only a disqualified person when acting in his own interest, or in the interest of other persons, i.e. , “outside” the IRA.

This conclusion was spelled out rather plainly by the Department of Labor only one year after Swanson. And it is the DOL, not the IRS, that has primary jurisdiction to interpret these rules. Specifically, in 1997 DOL issued an advisory opinion to the Financial Institutions Retirement Fund regarding its holding of the stock of a wholly owned corporation named “Pentegra.” DOL Adv. Op. No. 97-23A (Sept. 26, 1997). The plan capitalized Pentegra with $400,000 in exchange for 100% of its stock. The plan’s trustees requested an advisory opinion that subsequent transactions between the plan and Pentegra would not be prohibited transactions. The concern was that because the trustees as plan fiduciaries held legal title to the Pentegra stock, 50% or more of Pentegra’s stock would be deemed “owned” by the trustees, causing Pentegra to become a party in interest and disqualified person with respect to the plan, under the exact same theory that was applied by the court in Swanson. DOL concluded that such ownership would not make Pentegra a party in interest (under ERISA) or disqualified person (under the Code):

Although, pursuant to ERISA section 3(14)(G), plan fiduciaries would hold all the value of Pentegra stock, they would hold such shares on behalf of the plan, not on behalf of themselves or a third party. As explained below, it is the opinion of the Department that, under the circumstances described, such transactions would not be prohibited because, under the terms of the “plan assets/plan investments” regulation (29 C.F.R. 2510.3-101), they would be treated as “intra-plan” transactions rather than transactions between a plan and a party in interest.

It is true that the Pentegra advisory opinion only addressed a 100% owned subsidiary (as did the Swanson case). However, nothing in the opinion suggested that it would not also apply where a plan owns 50% or more, but less than 100%, of the subsidiary entity (the 1980 DOL advisory opinion addressed a single fiduciary owning 100%, but on behalf of multiple plans). However, any remaining doubt was dispelled in a later opinion issued on behalf of Verizon Investment Management Corp. Adv. Op. No. 2003-15A (Nov. 17, 2003). In that case, Verizon set up an investment vehicle for various Verizon plans as well as plans of unaffiliated companies. The Verizon Master Trust, through its bank trustee (a fiduciary), owned more than 50% (but less than 100%) of the fund. Verizon sought confirmation that this ownership would not cause the fund to become a party in interest or disqualified person with respect to the Verizon plans. In confirming this conclusion, DOL noted that:

Consistent with section 3(14) of ERISA, a plan’s ownership of fifty percent or more of a partnership entity will not cause that partnership to become a party in interest with respect to that investing plan. In our view, the application of section 3(14)(G) should not change that result merely because a plan’s interests in a partnership are held by a fiduciary on behalf of the plan. Although [bank fiduciary] would hold more than fifty percent of the value of the [partnership] interests, it would hold such interests on behalf of the Verizon Plans, not on behalf of itself or a third party. As a result, it is the view of the Department that the [partnership] will not be a party in interest with respect to the Verizon Plans. Therefore, transactions between the Verizon Plans and the [partnership], including initial and subsequent contributions to the [partnership] by the Verizon Plans and distributions from the [partnership] to the Verizon Plans, would not be prohibited under section 406(a) of ERISA.

[Emphasis added.] Although the DOL cited only the relevant sections of ERISA, they noted in a footnote that this conclusion also extended to the parallel sections of Code section 4975, and thus it is directly applicable to LLCs or other entities owned by IRAs.

Myth No. 2: Putting your IRA assets into an LLC gives you “checkbook control.”

 Scores of websites tout the “Checkbook IRA LLC” or variations thereon as allowing the accountholder to take control of his or her IRA assets away from the custodian. Under this theory, the IRA accountholder directs the custodian to purchase “shares” (units) of the LLC, opens up a checking account in the name of the LLC, and thereafter simply signs the LLC’s checks without any participation of the custodian.

There are valid legal arguments why this might work if the IRA owns less than 100% of the shares of the LLC (which is a different and more complicated concept), but does it work where the IRA is the sole owner of the LLC? The answer is far from clear. IRS regulations state that an individual retirement account “must be a trust or custodial account” whose assets are “held by a bank” or by an approved non-bank custodian. Proponents of the LLC structure apparently argue that the “assets” of the IRA in this instance are simply the shares of the LLC (which are held by a bank), and that any checking account set up by the LLC belongs to the LLC, not the IRA. This is absolutely true under state law (and has important ramifications in terms of limited liability and asset protection.). But it does not follow that the IRS would agree for tax purposes. In fact, there are good reasons why it may not agree.

A similar issue arises under ERISA, and it is helpful to begin there. Under ERISA, assets of a retirement plan also must be held in trust. DOL has adopted “plan assets” regulations that determine under what circumstances you “look through” an entity (such as an LLC) to determine that its assets are deemed to be assets of a plan. These rules also apply to IRAs. In this case, the rules indicate that when a plan (including an IRA) owns 100% of the shares of an LLC, the LLC’s assets always are deemed to be assets of the plan (they may also sometimes be plan assets even if the plan owns less than 100%). Back to the trust rules – other ERISA regulations expressly state that in the case of a “plan assets” entity such as an LLC, assets held by the LLC (such as a checking account) are exempt from ERISA’s trust requirement.

The IRS has not adopted a similar exemption from the IRA trust/custody requirements. Nonetheless, most practitioners assume that the IRS would apply a similar analysis to IRA investments in plan assets vehicles, and there is certainly evidence that they have not challenged such investments in pooled plan assets funds (hedge funds, for instance).

However, there is a different reason to ask if the IRS would allow checkbook control in the case of a 100% owned LLC. The reason is simple – a single-member LLC that does not elect to be taxed as a corporation 5 is a “disregarded entity” for tax purposes. According to the IRS:

A disregarded entity is [one] that is treated as an entity not separate from its single owner. Its separate existence will be ignored for federal tax purposes unless it elects corporate tax treatment. In other words, for federal tax purposes – and we see no reason why this does not extend to the IRA custody rules – an IRA-owned LLC does not exist. Accordingly, in the eyes of the IRS, assets held in the name of the LLC are no different from any other assets of the IRA, and arguably remain subject to the IRA bank custody requirements.

What is the risk? In theory, the IRS could argue that “checkbook LLC” assets that are controlled by the IRA accountholder have been constructively distributed and are subject to immediate taxation.

Myth No. 3: So long as you own less than 50% of an LLC, you are not prohibited from transacting business between the LLC and your IRA 

In a 1988 advisory opinion, the DOL was asked whether a loan from an IRA to a corporation owned approximately 47% by the IRA accountholder would be a prohibited “lending of money or other extension of credit” under Code section 4975(c)(1)(B). Applying (correctly) the reasoning discussed above under Myth No. 1, the DOL concluded that the IRA accountholder was a “fiduciary” with respect to the IRA, and thus a disqualified person. However, DOL further acknowledged that the corporation was not a disqualified person because the accountholder owned (in his personal, rather than fiduciary, capacity) less than 50% of the corporation’s stock. Accordingly, DOL agreed that the loan was not a prohibited transaction under section 4975(c)(1)(B).

Citing this opinion, more than one website suggests that so long as you keep your ownership in an entity below 50%, you are free to transact business between the entity and your IRA.

However, although it is correct that the transaction was not a prohibited loan, it does not follow that it was not otherwise a prohibited transaction. To the contrary, the last paragraph of the advisory opinion reaches the opposite conclusion:

Accordingly, a prohibited use of plan assets for the benefit of a disqualified person under section 4975(c)(1)(D) or an act of selfdealing under section 4975(c)(1)(E) is likely to result if [the accountholder] directs the IRA to loan funds to the Corporation. [Emphasis added] It is not entirely obvious why DOL was not a bit clearer in pointing out that the applicant did not ask exactly the right question. One possible answer is that while the existence of a prohibited loan essentially is per se a prohibited transaction, whether a transaction involves a “use” of plan assets or “self-dealing” involves an element of subjective intent. However, if you caused your IRA to lend money (or buy, sell or lease assets, or pay fees) to a business in which you have any substantial interest, it is hard to imagine that it is not your intent to derive a personal benefit from the transaction. (Or at least it would be hard to prove.)

In a 2004 decision, the Tax Court concluded that a taxpayer engaged in a prohibited “use” of 401(k) plan assets when he cause the plan to loan money to three entities in which he owned minority interests (roughly 25 to 33%). Rollins v. Commissioner, T.C. Memo 2004-260 (Nov. 15, 2004). In a 1987 decision, the Second Circuit found (among other things) that the investment of a plan’s assets in a company in which two plan fiduciaries collectively owned approximately 11% (one was also president of the company) was an act of self-dealing. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209 (2d Cir. 1987).

Can these cases be reconciled with Swanson, where the taxpayer caused a corporation he owned “outside” his IRA to pay commissions to a corporation owned by his IRA? Perhaps – one possible difference is that in Swanson the flow of funds was from the taxpayer’s personal account to his IRA, not the other way around. However, we may never know, as it is not clear that either the IRS or the court examined the underlying commission payments in that case except for unrelated business income tax purposes.

Myth No. 4: You are free to loan your IRA assets (sell or buy assets, etc.) to anyone so long as that person is not a disqualified person

 This is a variation on Myth No. 3. The idea seems straightforward enough: if a family member (or corporation, or LLC, etc.) is not a disqualified person, then it is not a prohibited transaction to use your IRA assets to loan money to, or buy property from, or pay a salary to, such person. True, the absence of a disqualified person means that there is no transaction “with” a disqualified person. But, the transaction can also involve “self-dealing,” which is a separate prohibited transaction.

How can it be self-dealing if the benefit flows not to me personally, but to my brother? Because the definition of self-dealing is far broader than is commonly understood. Code section 4975(c)(1)(E) provides that self-dealing means any “act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account .” [Emphasis added.] Regulations adopted pursuant to this rule note that:

These prohibitions [against self-dealing and kickbacks] are imposed upon fiduciaries [such as self-directed IRA accountholders] to deter them from exercising the authority, control or responsibility which makes such persons fiduciaries when they have interests which may conflict with the interests of the plans for which they act. In such cases, the fiduciaries have  interests in the transactions which may affect the exercise of their best judgment as fiduciaries. Thus, a person may not use the authority, control or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such person (or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) to provide a service.

Treas. Reg. § 54.4975-6(a)(5). This regulation goes on to say that:

A person in which a fiduciary has an interest which may affect the exercise of such person’s best judgment as a fiduciary includes, for example, a person who is a disqualified person by reason of a relationship with such fiduciary described in section 4975(e)(2)(E), (F), (G), (H), or (I). [That is, certain disqualified persons such as family members and certain businesses in which the person is an owner, officer, director, etc.]

However, the mere fact that a family member or business enterprise is not a disqualified person does not mean that the accountholder does not have an interest in the person that may affect his/her best judgment as a fiduciary. The regulation clearly states that disqualified persons (including certain family members) are examples of persons in which you have an interest that may affect your judgment as a fiduciary. It does not follow that you do not have an interest in your brother, aunt, step-child, etc. DOL in one situation suggested that owning as little as 1.8% of a business was at least relevant to the question of whether a fiduciary had an impermissible interest. At best, some practitioners have suggested that the above regulation might shift the burden of proof from you (to prove you have no interest in a person) to the government (to prove that you do) – it is neither a bright line nor a safe harbor.

If I did make a loan to my brother, how could I prove that I did not have an impermissible personal interest in doing so? Perhaps I could demonstrate that that it was in the best interest of my IRA to make the loan, because he was a good credit risk and had other lenders lined up to make the same loan, or because he agreed to pay a higher-than-market rate of interest and provided excellent collateral. But, is it worth the risk, which could entail loss of the IRA’s tax exemption?


 Mr. Matta is a Principal with the Groom Law Group, Chartered. However, the views expressed herein are the personal opinion of the author and do not necessarily reflect official positions of his firm. The statements contained herein should not be considered legal advice and should not be relied upon by anyone without seeking advice of their own counsel. To comply with U.S. Treasury Regulations, we also inform you that, unless expressly stated otherwise, any tax advice contained in this memorandum is not intended to be used and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code, and such advice cannot be quoted or referenced to promote or market to another party any transaction or matter addressed in this memorandum.


Want to Build IRA Wealth Fast? Know Your Options

Estimated reading time: 6 minutesBy H. Quincy Long for the Self-Directed Source Blog

Have you wanted to buy real estate in your IRA but think you don’t have enough money? Think buying a small property for all cash is your only choice?

Nothing could be further from the truth.

You can invest in real estate using your IRA without a lot of money in several ways, including buying property with debt, partnering with other investors (IRA or non-IRA money), or even utilizing seller financing.  However, in this article we will discuss one of the most powerful and grossly underutilized tools in real estate investing today – the option.

 Option Basics and Motivation

Let’s focus on some option basics. First, what is an option? Once consideration for the option is paid, an option is the owner’s irrevocable offer to sell the property to a buyer under the terms of the option for a certain period of time. The buyer has the right but not the obligation to buy. The terms of the purchase are binding on the seller at the discretion of the buyer.

Why would an owner agree to tie up his property with an option? Advantages to a property owner are many, and include: 1) the owner may be able to time his income for tax purposes, since option fees are generally taxable when the option is either exercised or expires (always check with your tax advisor); 2) if the owner needs money (for taxes, for example), an option may be a way to get money that he doesn’t have to repay, unlike a loan; 3) options are very flexible, and the owner may be able to negotiate an option which allows him to keep the property until a more opportune time – this is especially true of an owner in a pre-foreclosure situation.

Paperwork is Everything!

Options are extremely powerful and very easy to mess up. Get the paperwork right up front! So what forms do you use? The answer is my favorite as a lawyer – it depends! There is not and cannot be a “standard” option for all purposes. They are simply too flexible. You must decide on a specific use for the option and then be very specific, clear and complete about all the details. Remember, with options, you have to negotiate for both the terms of the option and for the terms of the purchase of the property.

Crucial Terms to be Negotiated and Documented

With a well written option, there is a fairly length list of terms to be negotiated and documented in the contract, including:

a)      Who is granting the option? Does it include heirs, successors and assigns?

b)      Who is receiving the option? Does it include assignees of the buyer, or is it an exclusive option to purchase by the buyer only?

c)      What property is being optioned? Property can be anything, including real estate, a beneficial interest in a land trust, a real estate note or nearly anything else.

d)     What is the consideration for the option? Remember, there must be some consideration for the option in the form of money, services or other obligations.

e)      How is the option exercised by the buyer? This is one of the easiest things to mess up in an option. If the procedure is not clear for exercising the option, it is an invitation to litigation!

f)       What will be the purchase price of the property if the option is exercised?

g)      How will the purchase price be paid when the option is exercised? Will it be for cash? Seller financing? Subject to the owner’s existing mortgage?

h)      Will the option consideration be credited to the option price or not?

i)        When can the option be exercised? For example, does the option holder have the right to exercise the option at any time during the option period, or can the option only be exercised after a specified amount of time?

j)        When will the option expire, and under what circumstances? The option should have a definite termination date, but might also include other circumstances under which the option terminates, such as a default under a lease.

k)      When it comes time to close, what are each party’s obligations? For example, who pays for title insurance, closing costs, etc? Are taxes prorated?

Possible Outcomes

Five potential outcomes exist once an option is created.  They are:

Expiration. When you have negotiated and executed an option agreement for your IRA, the first of several choices is to let the option expire on its own terms. Sometimes this is the best course of action if the deal is not what you expected, especially if you only paid a small amount for the option. The consideration paid for the option is retained by the seller.

Extension. If closing within the originally agreed upon timeframe in neither possible or practical, but you still desire to exercise the option, you may wish to negotiate an extension, either by paying additional option consideration, changing the price, or altering some other terms.  Be sure to document this extension as carefully as you did the original option.

Exercise. Another choice is that your IRA could exercise the option and buy the property. Since there are ways to finance property being purchased by your IRA, including seller financing, bank financing, private party financing or even taking over property subject to a loan, this may be a good strategy for your IRA, even if the IRA does not have the cash to complete the purchase. Be aware that if your IRA owns debt financed property, either directly or indirectly through an LLC or partnership, its profits from that investment will be subject to Unrelated Business Income Tax (UBIT). This is not necessarily a bad way to build your retirement wealth, but it does require some understanding of the tax implications.

Assignment. A fourth choice is to assign your option to a third party for a fee. Your option agreement should specifically allow for an assignment to make sure that there are no problems with the property owner. This is a great technique for building a small IRA into a large IRA quickly. I had one client who put a contract on a burned house for $100 earnest money in his daughter’s Coverdell Education Savings Account, then sold his contract to a third party who specialized in repairing burned houses for $8,500. In under one month the account made a profit of 8,400%, and all parties were happy with the deal! The account holder then immediately took a TAX FREE distribution to pay for his daughter’s private school tuition.

Cancellation. A fifth choice that sometimes is overlooked but ideal in the context of self directed retirement accounts (for capital preservation) is the ability to release the option back to the property owner for a cancellation fee. In other words, this is a way for your IRA to get paid not to buy! Let me give you an example of how this might work. Suppose you want to offer the seller what he would consider to be a ridiculously low offer. When the seller balks, you say “I’ll tell you what. You sign this option agreement for my IRA to purchase this property at my price, and we’ll put in the option agreement that I cannot exercise my option for 30 days. If you find a buyer willing to offer you more money within that 30 day period, just reimburse my IRA the option fee plus a cancellation fee of $2,500.”  Either way, your IRA wins!

The creative use of options is one of the most powerful ways to make your IRA or 401K grow astronomically. If used correctly, options maximize the leverage of a small account and offer significant flexibility for the option holder.

Six Widely Held Untruths About Self Directed IRAs

Estimated reading time: 6 minutesBy H. Quincy Long for Self-Directed Source Blog

There is a lot of confusion over self-directed IRAs and what is and is not possible. In this article we will discuss six of the biggest self-directed IRA myths.

1)      Purchasing anything other than CDs, stocks, mutual funds or annuities is illegal in an IRA.

FALSE! According to the Internal Revenue Code for IRAs, the only disallowed investments are life insurance contracts and in “collectibles”, which are defined by the IRS to include any work of art, any rug or antique, any metal or gem (with certain exceptions for gold, silver, platinum or palladium bullion), any stamp or coin (with certain exceptions for gold, silver, or platinum coins issued by the U.S. or under the laws of any State), any alcoholic beverage, or any other tangible personal property specified by the Secretary of the Treasury (no other property has been specified as of this date).

With so few restrictions contained in the law, almost anything else which can be documented can be purchased in your IRA. A “self-directed” IRA allows any investment not expressly prohibited by law. Common non-traditional investment choices include real estate, both domestic and foreign, options, secured and unsecured notes, including first and second liens against real estate, C corporation stock, precious metals, limited liability companies, limited partnerships, trusts and a whole lot more.

2) Only Roth IRAs can be self-directed.

False. Because of the superior tax-free wealth accumulation in a self-directed Roth IRA, many articles are written on how to use a Roth IRA to invest in non-traditional investments. As a result, it is a surprisingly common misconception that a Roth IRA is the only account that can be self-directed. In fact, there are seven different types of accounts that can be self-directed. They include the 1) Roth IRA, 2) the Traditional IRA, 3) the SEP IRA, 4) the SIMPLE IRA, 5) the Individual 401(k), including the Roth 401(k), 6) the Coverdell Education Savings Account (ESA, formerly known as the Education IRA), and 7) the Health Savings Account (HSA). Not only can any of these accounts invest in non-traditional investments as indicated in Myth 1, but they can be combined to purchase a single investment.

3) I don’t qualify for a self-directed Roth or Traditional IRA because I am covered by a retirement plan at work or because I make too much money.

False. Almost anyone can have a self-directed account of some type! Although there are income limits for contributing to a Roth IRA (in 2021 the income limits are $208,000 for a married couple filing jointly and $139,000 for a single person or head of household), having a plan at work does not affect your ability to contribute to a Roth IRA, and there is no Roth IRA age limit either. With a Traditional IRA, you or your spouse having a retirement plan at work does affect the deductibility of your contribution, but anyone with earned income who is under age 72 can contribute to a Traditional IRA. There are no upper income limits for contributing to a Traditional IRA. Also, a Traditional IRA can receive funds from a prior employer’s 401(k) or other qualified plan. Additionally, you may be able to contribute to a Coverdell ESA for your children or grandchildren, nieces, nephews or even my children, if you are so inclined. If you have the right type of health insurance, called a High Deductible Health Plan, you can contribute to an HSA regardless of your income level. With an HSA, you may deduct your contributions to the account and qualified distributions are tax-free forever! It’s the best of both worlds. All of this is in addition to any retirement plan you have at your job or for your self-employed business.

4) If I want to purchase non-traditional investments in an IRA, I must first establish an LLC which will be owned by my IRA.

False. A very popular idea in the marketplace right now is that you can invest your IRA in an LLC where you (the IRA owner) are the manager of the LLC. Effectively you have “checkbook control” of your IRA funds. Providers generally charge thousands of dollars to set up these LLCs and sometimes mislead people into thinking that this is necessary to invest in real estate or other non-traditional investments. This is simply not true. Not only can an IRA hold title to real estate and other non-traditional investments directly with companies such as Entrust Retirement Services, Inc., but having “checkbook control” of your IRA funds through an LLC can lead to many traps for the unwary. Far from protecting your IRA from the prohibited transaction rules, these setups may in fact lead to an inadvertent prohibited transaction, which may cause your IRA to be distributed to you, sometimes with substantial penalties. This is not to say that there are not times when having your IRA make an investment through an LLC is a good idea, especially for asset protection purposes. Nonetheless, you must educate yourself completely as to the rules before deciding on this route. Having a “checkbook control” IRA owned LLC is kind of like skydiving without a parachute – it may be fun on the way down, but eventually you are likely to go SPLAT!

5) Because I have a small IRA and can only contribute $6,000, it’s not worth having a self-directed IRA.

False. Even small accounts can benefit from non-traditional investing. Small accounts can be co-invested with larger accounts owned by you or even others. For example, one recent hard money loan we funded had 10 different accounts participating. The smallest account to participate was for only $1,827.00! There are at least 4 ways you can participate in real estate investment even with a small IRA. First, you can wholesale property.  Simply put the contract in the name of your IRA instead of your name, and have the earnest money come from the IRA. Then, when you assign the contract, the assignment fee goes back into your IRA. Second, you can purchase an option on real estate, which then can be either exercised, assigned to a third party, or canceled for a fee. Third, you can acquire property in your IRA subject to existing financing or using a non-recourse loan from a bank, a hard moneylender, a financial friend or a motivated seller. Realize, however, that profits from debt-financed property in your IRA may incur unrelated business income tax (UBIT). Lastly, as mentioned above, your IRA can partner with other IRA or non-IRA investors.

6) An IRA cannot own a business.

False. A self-directed IRA is an astoundingly flexible wealth building tool, and it can own almost anything, including a business. However, due to the conflict of interest rules you cannot work for a business owned by your IRA and get paid. Some companies have a plan to start a C corporation, adopt a 401(k) plan, roll an IRA into the 401(k) plan and purchase employer securities to effectively start a new business, but this is not a direct investment by the IRA in the business and is fairly expensive to set up. Also, if your IRA owns an interest in a business, either directly or indirectly through a non-taxed entity such as an LLC or partnership, the IRA may owe Unrelated Business Income Tax (UBIT) on its profits from the business. A solution to this problem may be to have the business owned by a C corporation or another taxable entity.