Category Archives: Self-Directed Traditional IRAs

Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

Questions about Real Estate in a self-directed IRA and about paying or receiving management fees?

Leave a comment

Question:

I have done a pretty good amount of learning about self-directed IRA’s and investing locally in real estate and have talked extensively with Equity Trust and Pensco.  Just learned about your company through a Sacramento real estate investing club and perused a powerpoint you put together.

I had 2 questions for you:

1) I have heard mixed things about whether or not you can pay yourself a management fee from property you purchased with your own self-directed ira funds.  Do you have some clarification as to the perception of the IRS on this issue?  I’ve heard that you can get a letter from a local respected industry professional to verify the amount but I’ve also read this could be perceived as commingling.  (I am aware of the strict rules of keeping all funds separate in all other regards).

2) How does your company compare to Equity Trust with regard to monthly and other fees?

Answer:

Thank you for your inquiry.  The answer to your first question is no, you absolutely may not take any kind of management fees for property owned by your IRA.  When people tell you that, they are misunderstanding Internal Revenue Code Section 4975(d)(2), which is often referred to as the “reasonable compensation exception.”  They may also be looking at IRS Publication 590, which in attempting to explain in plain English the rules makes the statement that taking unreasonable compensation for managing an IRA is a prohibited transaction.  This statement is simply a summary of 4975(d)(2), which many people misinterpret.  What people conveniently tend to ignore is that you have to read the whole statute to understand the rules, and 4975(d) starts out with the phrase “except as provided in subsection (f)(6)…”  Unfortunately, 4975(f)(6) voids the reasonable compensation exception for IRA beneficiaries, which means you are not able to take advantage of the reasonable compensation exception for your own IRA property.  Some people still want to cling to this idea anyway, but the Treasury Regulations for Section 4975 explicitly state “However, section 4975(d)(2) does not contain an exemption for acts described in section 4975(c)(1)(E) (relating to fiduciaries dealing with the income or assets of plans in their own interest or for their own account) or acts described in section 4975(c)(1)(F) (relating to fiduciaries receiving consideration for their own personal account from any party dealing with a plan in connection with a transaction involving the income or assets of the plan).  Such acts are separate transactions not described in section 4975(d)(2).”  Sections 4975(c)(1)(E)-(F) make it a prohibited transaction for a fiduciary to directly or indirectly benefit from the income or assets of the IRA, and you are a fiduciary of your self-directed IRA.  The final result of this legal somersaulting is that the IRA owner cannot be compensated.  Anyone advising you otherwise does not fully comprehend the rules.

The details of the above analysis and many other things you need to know about self-directed IRAs may be found in the book that I co-wrote with Dyches Boddiford and George Yeiter entitled “Real Estate Investment Using Self-Directed IRAs and Other Retirement Plans.”  You may want to obtain a copy of the book for your future reference. Contact Ryan Kimura (Ryan@QuestIRA.com) for a copy. It retails for $19.99 including shipping and handling.

With regards to your second question, I refer you to our fee schedule, which is included in the EZ IRA Starter kit attached.  In some instances we would be cheaper than Equity Trust Co. and in others we would be more expensive.  However, we feel that our knowledge base and more personal service cannot be beat at any price.

Quest IRA, Inc. Application with Fee Schedule

Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

Has my Self-Directed IRA been “invalidated”?

Leave a comment

Question:

Dear Mr. Long,

You are probably going to receive quite a few emails on this subject today.  An “IRA Expert” Tax Attorney (Tim Berry) gave a webinar last night stating that most IRAs (99%) have engaged in a “prohibited transaction” causing them to lose their tax-deferred IRS status and be deemed “fully distributed!”

Naturally, this news was quite disconcerting.  The “prohibited transaction” being an extension of credit between the IRA and a “disqualified person.”  This sentence in the IRA Application is the supposed culprit:

“I agree to release, indemnify, defend and hold the Administrator and/or Custodian harmless from any claims, including, but not limited to, actions, liabilities, losses, penalties, fines and/or third party claims. ansing out of my account and/or in connection with any action taken in reliance upon my written instructions, designations and representations, or in the exercise of any right. power or duty of Custodian and/or Administrator, its agents or assigns.”

By signing the application containing the word “indemnify,” it does seem that I have extended credit on my IRA to a disqualified person, ie: Quest IRA, Inc. as custodian.  Apparently, there was a ruling from the Department Of Labor dated October 2009 clarifying that this is considered a “personal guarantee.”

As an attorney, I hope you are aware of this issue.  The status of my IRA is of great concern and I need to have this issue clarified.  I realize that the attorney giving the webinar was trying to scare us and it worked!  For $1,995 he will go to the IRS, request clemency and get clients’ IRA accounts “re-validated.”  Seems like a bargain considering the taxes and penaties can be up to 60% of the account’s value.  He also stated that the custodian firms were liable for bringing accounts back into compliance.

Please let me know your thoughts on this as soon as possible.  I look forward to hearing from another attorney’s point of view.

Answer:

Thank you for your email.  I understand your concern, but the ruling that is the basis of these claims is NOT the same facts as we have here at Entrust.  If you read the full sentence below, you will clearly see that you are only indemnifying the Administrator against any of your own written instructions, etc.  In other words, all the sentence you refer to says is that if you instruct us to take some action then you cannot turn around and blame us for following your instructions.  I have attached the actual ruling which I believe forms the basis of the statements by Mr. Berry and others.  Read the clause being referred to as the problem.  It has to do with granting a security interest in all accounts held by that individual at the brokerage firm.  Specifically, the language reads:

“All securities and other property now or hereafter held, carried or maintained by us in our possession or control, for any purpose, in or for the benefit of any of your Accounts, now or hereafter opened, including any Account in which you may have an interest, shall be subject to a continuing first lien and first priority perfected security interest in favor of us for the discharge of all indebtedness and your obligations to us, and are to be held by us as security for the payment of any liability or indebtedness of yours to us in any of your accounts.

You authorize us the right to transfer securities and other property so held by us from or to any other of your Accounts held by us, whenever, in our judgment, we consider such transfer necessary for our protection… .”

As you can see, the situation described in the Opinion Letter is not even close to the situation here at Entrust.  Unlike in the brokerage application, you are not granting a security interest in your account to us or extending your credit in any way to your IRA.  Since Quest IRA, Inc. does not handle any accounts other than IRAs, and since the language in our application clearly does not grant a security interest in your IRA for payment of any liability or indebtedness of yours, the ruling should not apply to your IRA at Entrust.

Other facts which you should be aware of when considering Mr. Berry’s offer include the fact that Advisory Opinion letters from the Department of Labor only apply to the person asking for the ruling.  It is not legal precedent, but rather an interpretation based on the particular facts represented to the Department of Labor for that situation.

Finally, if you step back and think logically about what is being represented by Mr. Berry and others, do you honestly think that the lobbyists for the retirement industry and the politicians would allow the IRS to declare millions of IRAs to be invalidated?  This person is attempting to sell you a “service” that is not necessary, at least in your situation.  If anything, the solution to the problem of the language would be a company-wide one for each custodian, not a case by case solicitation of a prohibited transaction exemption.  It is interesting that all of a sudden Mr. Berry and others are attempting to be so helpful when the ruling has been out since October of 2009.  Have you heard news stories of the IRS sweeping in and declaring millions of IRAs invalid in the last year and a half?  I haven’t either.

Link: http://www.dol.gov/ebsa/regs/aos/ao2009-03a.html

Self-Directed IRA & Qualified Plan Information, Self-Directed Traditional IRAs

Prohibited Transaction Question

Leave a comment

Question:

I have a house I directly own outside of an IRA, and I want to sell it to my self directed IRA. I understand that I am a prohibited party and can’t do this directly. HOWEVER, what if I sell it to my mother in law for, say, 30 days, and then she turns around and sells it to my IRA? Is this permissible as somewhat akin to a wash sale, in which I have technically removed myself from the transaction and I’m not running afoul of any IRS rules? Or is the IRS going to view this as a sham/straw transaction and get me in hot water?”

Quincy’s Answer:

Mr. Lambeth, thank you for your inquiry below.  You are correct when you state that you are a prohibited party (disqualified person) as to your IRA and therefore cannot sell property to it which you now own.  Unfortunately, the prohibited transaction rules include both direct and indirect actions, which in this case would mean that to sell it to a non-disqualified third party for 30 days who would agree to sell it back to your IRA would almost certainly be viewed as a prohibited transaction and would definitely, as you say, get you in hot water with the IRS if they discovered it. 

 Also, I would caution you about involving your mother-in-law in transactions with your IRA.  Although she is not a disqualified person as to your IRA (although you ARE a disqualified person as to her IRA since you are married to her daughter), she is a person in whom you have an interest which may affect your best judgment as a fiduciary for your IRA.  Therefore, directing your IRA to enter into a transaction with her could, under certain circumstances, be deemed to be an indirect personal benefit to you and therefore a prohibited transaction. 

Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

Can my Aunt lend me money out of her IRA?

Leave a comment

Question:

My aunt recently retired and transferred her retirement to a Merrill lynch account. She is going to loan me money for a real estate purchase. Could this be done in a self directed account?

Answer:

Loans may certainly be made from self-directed IRAs, including those secured by real estate.  This is an everyday occurrence at Quest IRA, Inc.  The only word of caution I want to give you is to be aware of the prohibited transaction rules.  There are a list of persons with whom an IRA is not permitted to do business, called “disqualified persons.”  Fortunately, you would NOT be a disqualified person as to your aunt’s IRA.  However, your aunt should be aware that a benefit to a person in whom she has an interest which would affect her best judgment as a fiduciary for her IRA may be deemed to be an indirect benefit to her, in which case the IRS might argue that it was a prohibited transaction if they ever audited her account.  At a minimum you should be sure that the loan is on commercially reasonable terms.

Unfortunately, a full discussion of the prohibited transaction rules is not possible in a short email.  The good news is that we have tons of articles and other materials on various topics related to self-directed IRAs on our website at www.QuestIRA.com.  Also, you may contact either Nathan Long in our Houston office at extension 3574 or Ryan Kimura in our Dallas office at extension 3584 if you want to have a fuller discussion.  Either of them can provide you with the necessary materials for your aunt to open an account.  Good luck with your investing, and I wish you a happy, healthy and prosperous 2011!

Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

The Road to Tax Free Wealth: Roth Coversion in 2011 and Beyond

Leave a comment

Luckily for Americans the income limitation for converting tax deferred funds (Traditional) to tax free funds (Roth) is still lifted. Will it be lifted for good? We don’t know the answer to that and have to take advantage of the opportunity when it arises as the government frequently changes it’s mind and it policies.

By now you have probably heard about the opportunity to convert your tax deferred funds in your retirement account into tax free funds. There are many questions that arise with this opportunity that is being presented to all Americans. This special FREE webinar iis for those that want to hear about one expert’s analysis, H, Quincy Long, on this great opportunity. He will be analyzing this in the hopes that whether you are a high net worth individual, or someone who is just trying to make up loses from 2008, it will be evidently clear that the information applies to anyone with a retirement account that is interested in tax free gains for themselves and/or their heirs. This is one FREE webinar, your family and all of your advisors will want to attend.

(Register Here for 2012 Roth Conversions Webinar: “The Road to Tax-Free Wealth” – 4/12/2012)

Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

Roth Conversion in 2011?

Leave a comment

Question:

Hi Quincy.  I’m hoping you can give me your take on 2011 Roth conversions.  I have spoken to Nathan and Ryan and they seem to have different perspectives on this.  I have already done one Roth conversion this year and have recently closed on another property which I would like to convert to a Roth in 2011.  Nathan seems to think that this should not be a problem yet Ryan feels that it is unlikely that they will be allowed in 2011 (assuming I exceed that income limitations).  Is there any actual rules in place for 2011?  What are your thoughts on this?  Since we are very near year end I’d appreciate a response ASAP.. Thank you. (This question came in in 2010 where we now know the conversion rules for 2011)

Answer:

Yes, I can.  The rules as they stand right now are that the $100,000 income limitation for converting to a Roth IRA has been permanently removed, which means that unless Congress changes the rules you will be able to convert in 2011.  The decision to convert or not is a complex one which can be affected by other tax issues, so you should always consult with your tax advisor before making a final decision.

Self-Directed 401(k), Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

Eyes on Investors Radio Show with Special Guest H. Quincy Long

Leave a comment

Title:

Quincy Long: How To Get Private Real Estate Loans and How They Work

Description:

Quincy knows private lending. In depth. In this interview he explains how to get fully financed from private lenders even if you don’t have a lot of money.

I talked to Quincy about how to make private loans, how to get them, and several ways to find properties that are less common but highly effective and profitable.

We also talked about self-directed retirement accounts to buy investments which he helps people do through his Texas company Quest IRA, Inc.

Leave a comment, let us know what you think of the interview!

link to interview:

http://eyesoninvestors.com/quincy-long/

Self-Directed IRA & Qualified Plan Information, Self-Directed Roth IRA, Self-Directed Traditional IRAs

How can I take possesion of a real estate property without selling it from my IRA?

Leave a comment

Question:

Can I make a total distribution without selling the property in my IRA?  I would like to make a 60 day rollover and replace the IRA property with cash.  This would allow me to purchase another property.  Ultimately, I want my business to own the property outright.  Can I have an investor willing to buy the property and sell back to my business at a market rate?

Answer:

Yes, you can take a distribution of property from your IRA without selling it.  Simply get an appraisal of the property and request a distribution.

Unfortunately, you would not be able to replace the property with cash, since you can only roll over the same property as you distributed.  Also, if the IRS was able to detect that you sold the property to an investor who turned around and sold it to your business this would be an indirect prohibited transaction which would cause your IRA to be distributed as of January 1 of the year in which you did the prohibited transaction, so that should not be a path you pursue.

Health Savings Accounts, Self-Directed Traditional IRAs

Real Estate Options Contracts In An IRA

Leave a comment

Question:

I received a copy of the Notes from the Options seminar and in section II “Types of Options” you mention using an option with a Deed in Escrow. My question is would the Deed held in Escrow be signed/executed by the seller and buyers just as I would find any other typical deed in the county land records (of course it would not be filed).   If the option is not exercised, is the deed simply torn up or is there a clause in the Deed that nullifies the Deed if the Option is not exercised…  And with IRA’s and HSA’s, would the escrow agent/company be Quest IRA, Inc…or any agreed upon third party escrow agent?

Answer:

Yes, the deed would be signed, notarized and escrowed.  The deed in escrow language outlines the procedure.  Since Quest IRA, Inc. in this case is only a representative of your IRA we would not be an appropriate escrow agent.  You would need to find an independent third party such as an attorney.

Follow Up Question:

Is the deed in escrow language found in the Option or in a separate document separate from the deed.  And does the language govern the signed deed whether the deed is good(valid) or not based on the Option being exercised?   And if not valid, does the signed deed get shredded by the escrow agent?

Follow Up Answer:

Ultimately it is up to you and your lawyer to decide how to handle it.  On our options disk of forms, which are for example purposes only and are not to be confused with legal advice, I have the attached examples of additional paragraphs you might or might not want to include in your option agreement.  The deed in escrow is paragraph 5.

I sense that you are seeking absolute answers on options.  Unfortunately there are none.  Options are simply too flexible.  You have to structure the option for the way you want to use it. 

If you are interested in purchasing the disk, please contact Ryan Kimura in our Dallas office.  He can help you out.