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There are 2 ways in which an IRA or 401(k) investment in an entity may cause the retirement plan to owe tax on its income or profits. Learn more here.

  • Entity Investments in Your IRA – Advantages, Cautions and Legal Considerations

    This article is part of a series of articles discussing some issues arising when investing your IRA into an entity, such as a limited liability company, corporation, limited partnership, or trust.  Other articles in this series include prohibited transactions and disqualified person, unrelated business income (UBI) and unrelated debt-financed income (UDFI) as it relates to entity investments, the plan asset regulations and other regulations which may apply, and formation and management issues, including the “checkbook control” LLC which has become so popular in the self-directed IRA industry. There are advantages, cautions, and legal considerations when investing in an entity within your IRA.  Advantages of having your IRA own an entity include: 1)         Your IRA’s funds may be held in the entity’s name at a local bank.  This can be an advantage when getting cashier’s checks for the foreclosure or tax lien auction, paying earnest money or option fees, or paying contractors who prefer local checks, among other things. 2)         Certain types of investments, such as real estate closings or investments at foreclosure auctions, may in some circumstances be easier to facilitate through an entity. 3)         Investing your IRA’s funds through an entity may give your IRA some asset protection.  Always check with local legal ...

  • Self Directed IRA Myths – Groom Law Group

    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 ...

  • Checkbook Control IRA-Owned Entities Under Attack

    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 ...

  • Checkbook IRA LLC Pros and Cons with Quincy Long Hosted by Cash Flow Depot (Teleconference)

    A very popular idea in the self-directed IRA industry is to have what some have termed a “checkbook control” IRA. These have been under attack by the IRS. Click the link below to listen to Quest Trust Company President H. Quincy Long talk about the dangers of Checkbook Control IRA LLCs Click Here To Listen

  • Owning a Checkbook Control IRA

    Checkbook IRA is a term that makes reference to IRA accounts that gives holders of a certain account complete control of their investments by using a checking account. To do this, the person in control of the account makes sure things like a trust are created, and these are only able to be managed by the administrator for the account or the holder of the account. Then, a bank account is opened by the IRA, which leads to the owner receiving a checkbook for the account. Investments can now be made by writing a check. So what are the pros and cons of owning a checkbook IRA? Pros There are many pros to having a checkbook IRA, but the main benefit to having a checkbook IRA is how much control the owner of the account is given. If there is not a checkbook connected to the account, the holder of the account must regularly stay in contact with the manager of the account so that investments can be made. Checkbook IRAs can also create savings on custodial fees. Usually, a fee will be charged on each investment made using an IRA. Directly making investments allows an owner of an IRA account ...

  • Entity Investments in Your IRA – Swanson v. Commissioner and the “Checkbook Control” IRA-Owned LLC

    One of the most popular ideas in the self-directed IRA industry today is the “checkbook control” IRA.  You may have wondered what exactly it means to have “checkbook control” over your IRA’s funds.  In this article we will examine the celebrated case of Swanson v. Commissioner, on which the idea of “checkbook control” is based.  The entire text of the Swanson case is available on our website at www.QuestIRA.com. The essential facts of Swanson are as follows: 1)         Mr. Swanson was the sole shareholder of H & S Swansons’ Tool Company (Swansons’ Tool). 2)         Mr. Swanson arranged for the organization of Swansons’ Worldwide, Inc. (Worldwide). Mr. Swanson was named as president and director of Worldwide.  Mr. Swanson also arranged for the formation of an individual retirement account (IRA #1). 3)         Mr. Swanson directed the custodian of his IRA to execute a subscription agreement for 2,500 shares of Worldwide original issue stock. The shares were subsequently issued to IRA #1, which became the sole shareholder of Worldwide. 4)         Swansons’ Tool paid commissions to Worldwide with respect to the sale by Swansons’ Tool of export property. Mr. Swanson, who had been named president of Worldwide, directed, with the IRA custodian’s consent, that Worldwide pay dividends to IRA ...

  • Entity Investments in Your IRA – Who Cares About the Plan Asset Regulations?

    This article is part of a series of articles discussing some issues arising when investing your IRA into an entity, such as a limited liability company, corporation, limited partnership, or trust.  In this article we discuss the plan asset regulations and how they may impact your investment in an entity. What are the plan asset regulations and why should you care about them if you are investing your IRA through an entity?  If the plan asset regulations apply to your entity investment, there are two major effects.  First, your IRA is deemed to own not only the equity interest in the entity but also an undivided interest in the underlying assets of the entity for purposes of the prohibited transaction rules of Section 4975.  To see how this works, suppose you want to sell a piece of real estate to your IRA.  Unfortunately, the prohibited transaction rules say you cannot sell any property to your IRA.  So can you form an LLC owned by your IRA and sell the property to that LLC instead?  The answer is no, because under the plan asset regulations selling the property to your IRA-owned LLC is the same as selling it directly to your IRA, ...

  • Entity Investments in Your IRA – Prohibited Transactions and Disqualified Persons

    This article is part of a series of articles discussing some issues arising when investing your IRA into an entity, such as a limited liability company, corporation, limited partnership, or trust.  Other articles in this series include advantages and cautions when making entity investments, unrelated business income (UBI) and unrelated debt-financed income (UDFI) as it relates to entity investments, the plan asset regulations and other regulations which may apply, and formation and management issues, including the “checkbook control” LLC which has become so popular in the self-directed IRA industry. As with any self-directed IRA investment, when investing your IRA in an entity you must know what transactions are prohibited and who is disqualified from doing business with your IRA or benefiting from your IRA’s investments. The general rule, as defined in Internal Revenue Code (“IRC”) Section 4975(c)(1), is that a “prohibited transaction” means any direct or indirect – A)       Saleor exchange, or leasing, of any property between a plan and a disqualified person; B)        Lending of money or other extension of credit between a plan and a disqualified person; C)        Furnishing of goods, services, or facilities between a plan and a disqualified person; D)        Transfer to, or use by or for the benefit of, a disqualified ...

  • Entity Investments in Your IRA – Is Your Investment Income Taxable to the IRA?

    This article is part of a series of articles discussing some issues arising when investing your IRA into an entity, such as a limited liability company, corporation, limited partnership, or trust.  In October I will be delivering one of the breakout sessions on entity investments at the Entrust Client Education Conference in Las Vegas,Nevada. Many people are surprised to learn that, as discussed below, there are 2 ways in which an IRA’s investment in an entity may cause the IRA to owe tax on its income from that investment.  This does not necessarily mean that you should not make the investment in the IRA.  It does mean that you must evaluate the return on the investment in light of the tax implications. The first situation in which an IRA might owe tax on its entity investment is if the entity invested in is non-taxable, such as a limited partnership or an LLC treated as a partnership for tax purposes, and the entity operates a business.  Although investment in an entity which is formed for the purpose of capital investment, such as the purchase and holding of real estate, should not generate taxable income for the IRA (unless there is debt financing), any ...

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