Category Archives: Self-Directed IRA & Qualified Plan Information

Precious Metals in a Quest IRA

How are you? A couple months ago I was inquiring about a self directed IRA and home storage for gold. I was looking back through email, but did not find an answer. I think we might have spoken, but I do remember that Quest did not support home storage in an IRA. One question I still have is if not home storage, how does Quest store and manage gold in a self directed IRA. Also, if you don’t mind, what are the caveats associated with home storage? I have another service I investigated that is still pushing their home storage option. Thank-you for your time and assistance.


In the past we have simply used one of the gold depositories. There are a number of them that store physical gold for custodians. However, it always was a tiny part of our business.

In general Internal Revenue Code Section 408(m)(3)(B) contains the exception to the general rule that investments in collectibles, including any metals, is treated as a distribution from the account (see IRC 408(m)(1)). The exception applies ‘if such bullion is in the PHYSICAL POSSESSION of a trustee…’ (emphasis added). I assume, and I may be wrong, that the ‘home storage companies’ (for lack of a better term) have you open some type of LLC or other entity of which you are the manager, and argue that your IRA’s investment is therefore not in metals directly but rather in the shares of an LLC that owns metals. They believe this gets around the statutory requirements for the physical possession of the metals to the in the name of the trustee or custodian.

As you have noted, we have found it administratively infeasible to hold investments in the way that we understand the home storage companies propose. Neither Quest IRA, Inc. nor I may provide you with tax, legal or investment advice in this or any other area. In a self-directed IRA of any type, it is up to you to make the determination of whether or not the proposed investment is acceptable for an IRA. If you decide to go down this path, then you should look carefully at the documents to satisfy yourself that their method passes IRS scrutiny. Perhaps they even have a ruling that you can look at to help you feel more confident.

I wish you the best of luck, and I’m sorry I can’t be of any further assistance to you at this time.

UBIT on Assignment Fees


In the attached article you discuss assignment fees within an IRA. Client is a HomeVestors franchisee in the business of real estate. Do you think doing a contract assignment within a Solo 401(k) would be subject to UBIT? I’m worried that his status of being in the business of real estate could subject his other activities to taxation.


You didn’t attach the article, but you’re right the whole assignment issue, or even buy, fix and flip, is lot trickier for Homevestor franchisees and other real estate dealers. The easiest way to think about when UBIT attaches is to think of how that income would be taxed if reported outside of the IRA or 401(k) context. For a Homevestor franchisee it’s pretty easy to see where the problem might be, since a house is merely inventory to be sold to its customers in the ordinary course of business- the very definition of Unrelated Business Income in this context. Another potential challenge for a client like that is that there could be an excess contribution or even a prohibited transaction issue (the PT issue because of possibly providing services to their plans) when they are using their company’s resources to find the deals they invest in. Generally you have a better argument that it was purely an investment if a different Homevestor franchisee happens to find the deal if they will invest through their retirement account. Added to this is the fact that a 401(k) plan has a much higher chance of audit and caution is warranted in the investment selection within a Homevestor franchisee’s plan. I did have one real estate dealer who got his plan audited a few years ago and although they let him get away with some flipping in his plan they did charge him for some UBIT. In this case and many others the old adage that piglets get fed but hogs get slaughtered applies – you may get away with some such activity, but the more you do, especially if that’s your only type of investment activity, and the more money you have for the auditor to be jealous of, the more chance you have for a negative result of some sort. That’s the best I can do for a Sunday afternoon. I hope it makes some sense. There are times when it’s a lot more fun to only provide education as opposed to scary things like tax, legal or investment advice!

Roth Guidelines for my investment

You asked:

If my PPT options a note with the intent of finding another buyer, how much if any earnest $$ does the PPT have to put down to be in compliance with the ROTH guidelines? The ROTH is not keeping the tale of the note.   I assume the same pertains for a real estate transaction.

My answer:


Thanks for the question. Unfortunately, there is no good answer.


I would be a little concerned with your verbiage below, however. You state that you want your PPT to option a note “with the intent of finding another buyer.” That sounds definitively like note brokerage, as opposed to a great investment. Note brokerage is a service, which would normally be subject to self-employment taxes outside of the context of an IRA. If so, then it is a service inside of an IRA as well, meaning there is the dual risk of it being called Unrelated Business Income (UBI), which as you know is taxable to your IRA, or worse a prohibited transaction because you are providing services to your IRA.


This reminds me of the bankruptcy case in Atlanta, Georgia earlier this year (Cherwenka v. RES-GA Gold, LLC). In that case a house flipper was accused of entering into a prohibited transaction by providing ‘services’ to his IRA. Fortunately, the house flipper won in bankruptcy court and preserved his IRA. He argued successfully that all he did is make investment decisions. Unfortunately, it is not a Tax Court case, so it doesn’t have as much impact as we would like. It does frame the argument nicely, though, so it is definitely worth reading. I’m not at all sure the case would have turned out the same way in Tax Court. It will be interesting to see if the IRS picks up on this argument in future cases.


The important point is that you are permitted to make great investments in your IRA. You are not permitted to provide services to your IRA or make an excess contribution to your IRA, whether that be in the form of services or manipulating the paperwork to get a grossly undervalued asset into your account, especially from related parties. The Tax Court has the power to look at the substance of a transaction over the form of documentation used. You must always structure any transactions in your account as investments. For this reason I generally encourage people to stay in the deal in some way, because in that way it is more easily understood to be an investment.


Of course this is fun to talk about from an academic viewpoint, but in the real world you must be practical. Look at risk vs. reward. Remember that piglets get fed, but hogs get slaughtered. The size of your IRA and the nature of your transactions will influence what the IRS position might be in the unlikely event of an audit.


I’m sorry there isn’t a clearer answer to your question. As you know, Quest IRA cannot provide you with tax, legal or investment advice. I’ve tried to give you some things to think about, but you should definitely check with knowledgeable tax and/or legal counsel before entering into any type of investment.

Roth Conversions and their 5 year clock

You asked:


“I converted $18,000 in a traditional IRA to a Roth IRA in 1998. I also made $20,000 in contributions over the years 1998-2010. Last year I took a distribution of $38,000. I am under age 59 1/2.
Do I have any taxes or penalty on this withdraw?”


My answer:


No, as you describe the situation. Regular contributions come out first, followed by Roth conversions, and finally profits. The rules for calculating any taxable amounts from a Roth IRA distribution are described in IRS Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs). The explanation begins on page 30. You can access this information by clicking on the link below:



As you will see, you will need to attach some tax forms to your return to claim this exemption. If you’re not sure how to complete the forms, the assistance of a tax professional may be advisable.  

There are plenty of articles on the web which explain the rules. Many tax preparers get very confused because there are two different 5 year clocks which apply to Roth IRAs. One is the qualified distribution clock, which requires you to have a Roth established somewhere for your benefit at least 5 years prior to the distribution for it to be qualified, and additionally you have to be 1) over 59 ½, or 2) totally and permanently disabled; or 3) dead and the distribution is to your heirs; or 4) you are taking no more than $10,000 for a first time home purchase. A qualified distribution is one on which there is no penalty and no taxes. Once you are into qualified distributions, the 5 year conversion clock becomes wholly irrelevant.


The second 5 year clock, which applies in your case, is the Roth conversion clock, and it is used to determine whether or not you owe a 10% premature distribution penalty if you are under 59 1/2 and don’t meet any of the other exceptions. This conversion clock has nothing whatsoever to do with taxation of the distribution, it only has to do with the 10% premature distribution penalty.


As you already know, Roth distributions come out of the account in a certain order, which is:


1)     Regular contributions;

2)     Taxable Roth conversion contributions;

3)     Non-taxable Roth conversion contributions; and

4)     Profits on all contributions.


In the first three categories, the taxes have already been paid on the money, so there is no tax due and it is only a question of the penalty. If you get into the profits and it is not a qualified distribution, then taxes are owed on that portion. So how are the penalties figured? Your regular Roth contributions are never taxed or penalized upon withdrawal, even if you are under 59 ½ and meet no other exception. Once you go past your regular Roth contributions you have to figure out whether a penalty applies, again assuming you do not meet one of the other exceptions to the penalty.


With taxable Roth conversion contributions, which appears to be what you are describing in your email, the penalty will apply if you withdraw the money within 5 tax years of the conversion. After this, no penalty applies. In your case, if you converted in 1998, no penalty should apply because it has been in your Roth IRA for more than 5 tax years, even though you are under age 59 ½. Each Roth conversion has its own 5 year clock, and the conversion withdrawals are taken on a first in, first out basis.


The purpose of the 5 year conversion clock is to prevent abuse of the rules. For example, I am under 59 ½ (although some days I don’t feel that way!). If I do a Roth conversion, of course I pay taxes on the conversion but no penalty. If the 5 year conversion clock were not in place, I could simply withdraw the money from the Roth IRA and avoid the 10% premature distribution penalty entirely. The rule was put in place to prevent this from occurring. It forces you to recapture the 10% penalty you would pay if the money was still in the traditional IRA.


Hopefully that helps clarify where this is coming from. I find often that understanding the background of a rule makes what is otherwise confusing a little more clear. I do think that if your tax preparer follows through on the calculations in Publication 590-B that should resolve any doubts.

UBIT? You Bet!


I think the answer to my question. Does Arkansas charge tax on UBIT and UDFI?

in the book 2009 Multistate Guide to Regulation and Taxation of Nonprofits By Steven D. Simpson. Which is found in full online through google books at:

It says that Arkansas does not have IRS code sections 501-529, but that it does tax unrelated business income on income attributable to Arkansas. Since UDFI is Section 514 I assume that there is no state income tax on UDFI. I also believe that attributable to Arkansas means the source of the income is physically inside the state.

This book seems to be a source of answers on UDFI and UBIT for all 50 states or at least a starting place.

I still have the following 3 questions from yesterday in a more simplified form:


1) If you pay UDFI on the sale of a depreciated rental property do you also recapture depreciation at a 25% rate?


2) If my IRA purchases a condo for nightly rental using debt will it owe UBIT on the nightly rental and UDFI on the profit percentage of the debt?


3) In the following  published article you state that UDFI is on Acquisition debt. Does this infer that if I pay cash for the house and then borrow against it later there is no UDFI? In other words is UDFI on all debt or just aquisition debt.


Definition of “Debt Financed Property.” In general, the term “debt-financed property” means any property held to produce income (including gain from its

disposition) for which there is an acquisition indebtedness at any time during the taxable year (or during the 12-month period before the date of the property’s disposal if it was disposed of during the tax year). If your retirement plan invests in a non-taxable entity and that entity owns debt financed property, the income from that property is attributed to the retirement plan, whether or not the income is distributed.





Thanks for the reference and the questions yesterday. Sorry we couldn’t get to all of them on the call.  As far as your questions:

1) I believe the IRA would owe this tax, but I have heard different arguments on this. If you think about it, it wouldn’t make sense to be able to deduct depreciation from current UDFI and then escape it on the sale of the property. However, one CPA told me that if the property had been paid off for more than 12 months so there was no capital gains tax then there wouldn’t be depreciation recapture either. I think this was based on the theory that ‘depreciation recapture’ is really another form of capital gains, technically called ‘unrecaptured section 1250 gains.’ To be honest, I just don’t know.

2) That’s a good question. Certainly running a hotel is considered to be a business operation as opposed to just rental income, so I see where you could assume that the nightly rentals would be UBI and not UDFI. I think that if it is considered to be a business operation then probably all income from that business would be UBI not UDFI. I don’t think you can split the capital gains in that case away and call them UDFI, but once again I’m really not that confident, especially this early in the morning. On the other hand, if it were me I would probably just report it as UDFI and see if the IRS disagreed. There is a lot of ambiguity in this area, unfortunately.


3) Another good question, but this one I can actually help you with. 🙂 Acquisition indebtedness is 1) when acquring or improving the property; 2) before acquring or improving the property if the debt would not have been incurred except for the acquisition or improvement; or 3) after acquiring or improving the property if (a) the debt would not have been incurred except for the acquisition or improvement, and b) incurring the debt was reasonably forseeable when the property was acquired or improved. So most likely in your scenario the debt would still be considered ‘acquisition indebtedness.’


Here is an interesting brain twister: what if my IRA owns a piece of land with no debt which produces no income but which is expected to be sold within a year. If my IRA borrows money to purchase bank stock, which will not be sold for several years, which property is considered debt-financed, the land or the bank stock? If the answer is the bank stock, then can my IRA escape taxation entirely on the gains from the bank stock because the debt will have been paid off from the sales proceeds of the land for more than 12 months prior to the sale of the bank stock?

Flipping Real Estate Options in an SDIRA

You asked:


” Hi,


Quincy Long said in the following article* that you can flip real estate options in a SD-IRA.  Can this be done multiple times per year without being classified as a “dealer” ?  Because it’s options and not physical real estate would the “dealer” status not apply ?


Also, if the option flipping is done frequently, would I incur UBIT because I’m carrying on an “active business” ?


Are there ways to avoid UBIT and still do multiple option flips in a SD-IRA ?




My answer:


You ask some very good questions in your email about flipping options.  The key to understanding the rules for self-directed IRAs is to always remember that an IRA is intended to be for investment purposes only.  People make the mistake all the time of trying to effectively run a business using their personal services for the benefit of their IRA, which is a prohibited transaction.  The Tax Court has given the IRS a win in a number of cases where people have done this.


IRS Publication 598 may be of some assistance in answering your questions about Unrelated Business Income Tax as it applies to options.  According to Publication 598, “Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.”  So the question as it pertains to options is whether or not the activity would be considered a ‘trade or business’ which is ‘regularly conducted.’  One way of determining how the IRS might view this is to ask your CPA how he would report the income on your personal income tax return if it was done outside of the IRA.  If his answer is that it would be reported on Schedule C, then it almost certainly will cause the IRA to owe UBIT, and may cause even more problems, depending on the circumstances.


Specifically on options, IRS Publication 598 states (on page 10), when speaking of exclusions from UBI, “Lapse or termination of options. Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. The exclusion applies only if the option is written in connection with the exempt organization’s investment activities. Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business.” [emphasis added] While not precisely speaking about real estate options, it is pretty clear that if you trade options at a level where they would be considered as inventory for sale to customers in the ordinary course of a trade or business it will cause the IRA to owe taxes.  This is analogous to a flipper of real estate.  Think of the company who ‘buys ugly houses.’  To a franchisee of that organization, a house is just inventory, because they are a real estate dealer.  I think if you trade too many real estate options you could land in the same situation as a real estate flipper.


So how many options can you do? How much can you do before you are providing ‘services’ to your IRA in violation of the prohibited transaction rules, as opposed to merely making investment decisions?  These are questions that cannot be answered with certainty.  The best guideline I can provide you with is to make sure all of your IRA transactions are structured and treated as investments, and not the resale of inventory.  Purchasing and selling an option on real estate once is most likely not a business activity, and you are not likely to be considered to be providing a service to your IRA other than investment selection.  Do that same transaction 25 times in the same year in the same account and it changes character.  Where the line is I cannot tell you.  Remember also that you can self-direct a traditional IRA, a Roth IRA, a SEP IRA, a SIMPLE IRA, an individual 401(k), an HSA, and a Coverdell Education Savings Account (CESA).  You may have multiple accounts for you and your family.  Unless you are very active, in general you should have no problems with having your IRA become a dealer in options.


The best advice is to have a mix of different types of investments in your IRA.  If you hit a home run on some of them then that’s great for your retirement.  Good luck with your investments!

Using the same Trustee for various entities

Hello Quincy,

It was great spending time with you on the cruise.  We all

enjoyed it immensely.  Can’t wait for the next one.

Question below:  Names have been changed to protect the innocent.

1) Ann is trustee of our land trust for our LLC in Georgia (normal entity not in our Roth).

Can we also do transactions with Ann in our Roth IRA?

2) Can we do transactions with the same person/entity inside and outside of the Roth?




Great questions!  I’m not so sure about protecting the ‘innocent’ though.


Anyway, to answer your first question, you have to go to Internal Revenue Code Section 4975(e)(2)(G)-(H).  Per 4975(e)(2)(G), a trust of which 50% or more of the beneficial interest is owned directly or indirectly by a fiduciary of the IRA (which includes ownership by close family members of the fiduciary/IRA owner) is a disqualified person.  So, assuming you or you and your husband own 50% or more of the trust through the LLC, the trust would be a disqualified person to your IRA.  No surprise there.  When you have a disqualified entity, you then must look further to see who in the entity also becomes a disqualified person to your IRA.  Per 4975(e)(2)(H), an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10% or more of the yearly wages of an employer) of any disqualified entity becomes a disqualified person to the IRA as well.  In this case I would argue that the trustee of an otherwise disqualified trust would be considered to be “an individual having powers or responsibilities similar to those of officers or directors” and therefore would be considered a disqualified person to your IRA.  So just based on the information provided it appears that a transaction with Ann would be a prohibited transaction.


The answer to your second question is, it depends (of course).  There would be many circumstances when a transaction outside of an IRA would not cause the person to become a disqualified person to the IRA.  For example, if I just simply made a hard money loan to an individual outside of my IRA, that person does not, merely by virtue of that loan, become a disqualified person to my IRA.  In other situations dealing with the same person inside and outside of the IRA might be a prohibited transaction.  Unfortunately, there is no way to answer your second question absent the specific facts of the transactions in question.


I realize that may not be the answer you’re looking for, but that’s why they call me Dr. kNOw.  J As always, keep in mind that I cannot give you tax, legal or investment advice.  Hopefully the information about will help guide your legal counsel anyway.  Have a great day!”

Using IRA to invest in Laundromat Business?


I appreciate if you can answer my two questions below:

1- Can I use my IRA and invest in a Laundromat business as my down payment and borrow rest from SBA?

2- Can I buy a 2nd home with my SDIRA?


1) Not directly in the IRA, no.  Your IRA is to be invested for your future, not for your current benefit (or to benefit any other disqualified person).  Some people say that you can set up a ROBS arrangement (Rollovers for Business Startup).  This works like this:  a) you set up a C corporation; b) you appoint yourself the sole director and officer; c) you have the corporation adopt a 401(k) plan; d) you roll your IRA into the 401(k) plan; e) you, as trustee of the 401(k) plan, purchase all of the shares of the C corporation; and (f) you hire yourself to run the corporation.  If this sounds a bit complicated to set up and a little expensive, that’s because it is.  The IRS has issued some guidance on concerns it has with ROBS arrangements, so if you go down that path you will need to work with someone who is very knowledgeable about this area and can satisfactorily address the IRS’ concerns.  Investing your retirement money into what is essentially a start up business certainly can be risky.  I would encourage you to do some research on ROBS arrangements and do some soul searching before setting this up.  Many companies offer to set up ROBS arrangements.  One such firm in Houston is DRDA, Inc.,  I am not qualified to make a judgment as to the validity of the structure, so that is something you must decide for yourself.  Good luck!


2) Self-directed IRAs do buy real estate all the time.  However, if you are asking can you buy a second home which you intend to use periodically personally then the answer is no, for the same reason the first answer is no.  You cannot either directly or indirectly gain a personal benefit from your IRA’s assets, other than in the form of a distribution from the IRA.


Good luck with your investments, and let me know if you have any further questions.


Have a great day!