Category Archives: Self-Directed Traditional IRAs

Self-Directed Roth IRA, Self-Directed Traditional IRAs

Can I or When Can I Take Tax Free Penalty Free Distributions From My Converted Traditional to Roth IRA?

Question: My 35 year old son is converting $160,000 form a tradtitiional IRA to a Roth. Assuming a $50,000 tax bite, and assuming he pays the $50,000 with outside money so he converts the whole $160,000, can the $160,000 be accessed penalty free immediately because it becomes the basis and the tax has been paid?

Answer: Unfortunately not.  Assuming the conversion represents the only Roth money your son has, the conversion amount cannot be removed within 5 tax years without paying the premature distribution penalty of 10%.  The ordering rules for distributions from a Roth IRA are 1) contributions 2) conversions, and 3) profits.  So if your son has made contributions to a Roth IRA he can withdraw those at any time without penalty.  Beyond the contributions, conversions can be removed only after 5 years without penalty, unless he meets one of the other exceptions to the penalty rules (most commonly 59 ½).  Profits can only be withdrawn tax and penalty free as qualified distributions, meaning your son has had a Roth IRA somewhere for at least 5 years and meets one of four other tests (again, most commonly 59 1/2).  You may find the description of the ordering rules beginning on page 66 of IRS Publication 590, which you can review and download from the IRS at www.irs.gov.  Good luck with your investing!

Follow Up Question: Thank you for a quick response. I did go to the irs.gov. site. From the website and your email, this is what I understand. Please forgive any repetition. I have received very different answers from seminars and regional offices, so your  expert help is hugely valuable! I want my son to be clear and comfortable as he is concerned about accessible, penalty free rainy day money prior to age 59 1/2. I also want to be able to deliver correct information to other investors. Is this correct: if my son converts $160k of traditional IRA money and pays the taxes out of pocket, in 5 tax years he can access the $160k without penalty at approximately age 41?  He currently has $15k in an existing Roth he has had for 7 years. The contribution portion of the $15k can be taken today penalty free and the profit portion will be penalized if accessed prior to age 591/2. Correct? Any profit is subject to regular Roth rules and those conditions are clearly defined and I understand them. I will not continue to bother you, but knowledgeable experts are hard to find.

Follow Up Answer: Yes, according to the paragraphs describing the additional tax on distributions beginning on page 64 of the 2009 IRS Publication 590, your son must pay the 10% penalty for distributions of his conversion contribution from his Roth IRA made within 5 tax years of the conversion – in other words, if he converts in 2010 and takes a distribution before January 1, 2015 he will be subject to this penalty to the extent that this distribution exceeds his regular contributions to his Roth IRAs.  To figure the taxable part of any non-qualified distribution (as opposed to the penalty) use the Worksheet 2-3 on page 67 of Publication 590.  You will see from that worksheet that the amount of his regular Roth IRA contributions are not includible in income (line 12 subtracts these amounts out) and are therefore not subject to the 10% premature distribution penalty either (see the paragraph entitled Other Early Distributions  at the top of page 66, which indicates “you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions”).

 
Having said this, as you know from the disclaimer at the bottom of my prior emails you are not able to rely on this email as tax advice, so you should absolutely contact your own tax advisor to verify the implications for your individual tax situation.  I would be curious to learn what you have heard from seminars and regional offices if you care to share it.  I know there is a lot of confusion out there on this topic, even by some professionals such as CPAs.  Perhaps the most confusing thing is the fact that there are 2 different 5 year clocks when it comes to Roth IRAs, one being the 5 years necessary for a distribution to be a qualified distribution and the other being the 5 year clock for conversion contributions before you can escape the 10% premature distribution penalty, as we have been discussing here.  Anyway, thank you for your question.  Let me know if I can assist you further. Have a great day!

Self-Directed Roth IRA, Self-Directed Traditional IRAs

Can I invest my IRA into an Oil and Gas drilling project????

Question:

I am interested in investing a small portion of my Roth IRA into an oil drilling project.   I understand the potential risk of loss and am willing to take that risk.  There is substantial opportunity for profit which I would like to shelter from taxes to the extent possible.

Can you tell me:

1.  Is this an acceptable Roth Self Directed IRA use?
2. If so, how long will it take to set up such an IRA if I transfer assets from an existing Roth IRA?
3.  Any idea’s on cost to do this would be appreciated.

Answer:

1. Yes
2. 24-48 hours for us to set up the Roth IRA, and however long it takes your current custodian to process the transfer request (typically 2-3 weeks, unless you move the money by doing a 60 day rollover, which is faster but only can be done once per year per source of funds)
3. $50 to set up the Roth, $95 transaction fee, $30 for a wire or $5 for a check, and an annual administration fee which is either a flat $295 or is based on the value of the account (I have attached our fee schedule for your reference)

The only other thing you should be aware of is that if you take a working oil and gas interest into your Roth IRA then the investment may subject your IRA to Unrelated Business Income Tax (UBIT), whereas a royalty interest would not.  You didn’t mention if your proposed investment was a working interest or a royalty interest, and we don’t give tax, legal or investment advice, but I wanted to make you aware of the issue in case it was important to you.  You can find out more about this topic by reviewing IRS Publication 598.  Please note that just because something may cause your IRA to owe taxes does not mean you shouldn’t do it.  You simply have to take taxation into account when making a decision.  After all, if the after tax revenue from the investment still is a very good return, it would be foolish to not make the investment simply because of the UBIT implications.

I realize the answer to this email may cause more questions, and you may call our offices on Monday and either speak with Nathan Long (800.320.5950 ext 117) or Ryan Kimura (214.800.3488)  in our Dallas office.  Good luck with your investment!

Self-Directed 401(k), Self-Directed Roth IRA, Self-Directed Traditional IRAs

Can I Invest My IRA Internationally???

Question:

I am looking at establishing either a self directed IRA or a Roth IRA. Question # 1 is: I am looking a buying into a Hong Kong private company. Is this allowed by the IRS? When there is a distribution of profits back to the 401(k) or the Roth IRA are these distributions taxable? Question #2. If I do buy a portion of the Hong Kong company with my 401(k) and later wish to convert this to a Roth IRA – can it be done? Will I just pay the 40% tac on the initial investment or what?

Answer:

To answer your first set of questions, yes, the IRS allows you to invest in a Hong Kong private company (or more properly, the IRS doesn’t restrict you from investing in a Hong Kong company), although the investment is reported to the IRS each year on IRS Form TDF 90-22.1 (Report of Foreign Bank and Financial Accounts).  When there is a distribution back to the 401(k) or IRA the distribution isn’t taxed from the U.S. side, but you would have to check with the law in Hong Kong to see if they would tax the distributions. 

To answer your second set of questions, if you have an Individual 401(k) and buy the company stock with it, at this time conversion to a Roth IRA is only possible if you have a distributable event such as termination of your employment or termination of the plan (there have been some proposals to allow conversions within a 401(k) plan but as far as I know they haven’t gotten through Congress as of this writing).  However, if your plan has the Roth 401(k) feature and you have the ability to direct the investment into that portion of your plan, then qualified distributions from the Roth 401(k) are tax free to you.  Whether your plan has a Roth 401(k) feature and whether you have made any contributions to that portion of your plan is something you will need to figure out from your plan document and/or your plan administrator.  Whenever you do a Roth conversion, the value of the assets converted is added to your taxable income for the year in which you did the conversion (except for 2010, when you can divide this “conversion income” 50% into 2011 tax year and 50% into 2012 tax year if you like).  If I understand your last question correctly, you would pay tax based on the value of the stock at the time of conversion, not the value of your initial investment.

I hope this answers your questions.  I realize that sometimes the answer to a question raises more questions, so please feel free to contact Nathan, Ryan or myself if you need more information about self-directed IRAs or Individual 401(k)s.  Thank you for your inquiry, and have a great weekend!

Self-Directed Roth IRA, Self-Directed Traditional IRAs

Managing My 70 yr old Mother Account????

Question:  

Quincy, my mom is 70 yrs.  She doesn’t make very much money.  I was wondering if i opened up an account in her name can I work or manage the account? Instead of my handing her the cash in the account, would this be beneficial to us both?  I’m also thinking about converting her IRA to a Roth IRA.

Answer:  

There could be substantial benefits in doing so.  The good news is that her contributions to the account may be removed at any time tax and penalty free, regardless of her age or the length of time the account has been open.  She may not contribute more than her earnings, so you will have to be careful there.  She can make the contribution all the way up until April 15 of next year for this year.  Because she can withdraw the contribution amount at any time, contributing money to a Roth IRA is a great way for your Mom to save.  Because she is over 59 ½ there would never be a penalty for removing funds from the Roth IRA.  However, if she removed more than her contribution amount (in other words, she took her profits) before she has had a Roth IRA established somewhere for her benefit for at least 5 tax years, the distribution may be taxable even though it is from a Roth IRA.  The magic happens once she has satisfied the 5 year aging requirement.  At that point all distributions are completely tax free.  If she doesn’t end up withdrawing all of the money before she passes away and you inherit the Roth IRA, then you can take tax and penalty free distributions from the account for the rest of your life, regardless of your age.  The bottom line is that in my mind, at least, there would be benefits to both of you if you helped her open and work a Roth IRA.  The key to the benefit is that you actually work the account and not just let it sit there doing nothing. 

Let me know if we can help any further.  Have a great day!

Self-Directed Roth IRA, Self-Directed Traditional IRAs

Can I use self directed IRA to pay off the property that I’ve already own?

Question:

I have a situation where I bought a rental property with 2 step loan. The first loan is IRA loan, actually from Quest IRA, Inc. client. Then when it comes to refinance, it seems like I might have a problem that I could not be qualified for loan. So, I am wondering if I set up IRA, could I use that money to pay off the first loan?

Answer:

Unfortunately, the answer to your question is no, you cannot.  It is a prohibited transaction to use your IRA for your personal benefit right now, as opposed to taking distributions from the IRA when you retire.  If you are under age 59 ½ you can take a distribution from your IRA to pay off the mortgage, but of course that would mean you would have to pay a 10% premature distribution penalty in addition to any taxes owed if the IRA were a traditional or other pre-tax plan.  If you are over age 59 ½ the only issue is whether or not the distribution is taxable, which depends on what type of IRA it is and whether you have any after tax basis in the account.  As you already know, you can use your self-directed IRA to loan money to other investors, but not to yourself or any other disqualified person.

Self-Directed 401(k), Self-Directed Roth IRA, Self-Directed Traditional IRAs

Top Ten Things You Need to Know When Investing in Real Estate Notes in Your IRA

By H. Quincy Long

Many self-directed IRA clients, including me, invest in notes within their IRAs, mostly secured by real estate.  In my years of experience as a hard money lender personally and as a third party administrator for self-directed IRAs, I have seen some common mistakes made.  As a result, I have developed some guidelines for lending your IRA (and non-IRA) money out secured by liens on real estate.  I wish someone had shared these ground rules with me before I made some of the loans in my portfolio, although fortunately I have not been hurt too much by my mistakes.

1) Do not loan on something you wouldn’t be excited for your IRA to own if the borrower defaults.  Loaning money out of your IRA at relatively high interest rates secured by real estate is inherently more risky than leaving the money in a bank certificate of deposit, but it is also more profitable.  We routinely see yields from these loans at 12% and higher.  However, if you would be upset if the borrower defaulted and you had to take the property in foreclosure you probably should not make the loan.  With a properly secured hard money loan the worst thing that can happen is that the borrower pays you back!

2) Generally, do not advance money for repairs until the repairs are done, and then have the repairs inspected before advancing the money.  This is one of the biggest mistakes I see clients make with their IRAs.  They fund the full loan amount expecting the repairs to be done on the property, but the borrower just needs a little more money on another project and diverts some of the loan proceeds to that project.  When the loan goes bad, the IRA can end up with a property which has not had the repairs completed on it.

3) Do not loan money to someone you would feel uncomfortable foreclosing on.  William Shakespeare wrote in Hamlet, “Neither a lender nor a borrower be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.”  For the most part I cannot agree with this advice, because lending and borrowing money drives our economy and increases economic activity.  However, the part about a loan losing a friend is absolutely correct, in my opinion.  If foreclosing on your borrower would cause you heartache, it is best not to make the loan.  I have seen friendships destroyed over a loan gone bad.

4) If the loan goes into default, take action immediately.  No one wants to admit they have made a mistake, but delaying action can be costly.  You can always stop the foreclosure process once it has begun, but you cannot complete the process unless you start it.

5) Collect interest monthly so you will know if the borrower is getting into trouble.  Many borrowers, especially investors, would love to just pay interest at the end of the loan, but this can expose the lender to additional risk.  The purpose of collecting payments monthly is both to make sure the borrower remembers he has to do something with that property in order to avoid the pain of the payment and to let you know if the borrower is in trouble because he starts missing his payments.  Also, unless you have contracted for monthly payments, you may not be able to foreclose even if you find out through other means that the borrower is in financial trouble because the loan may not be in default.  This actually happened to some of our clients.

6) If you are unsure about how to evaluate the loan, hire a professional to help you.  Although a hallmark of the self-directed IRA is that it is “self-directed,” meaning that you make your own decisions and find your own investments, most IRA owners either do not possess sufficient knowledge or, in my case, sufficient time to properly evaluate a loan transaction.  My solution is to hire a professional to help me with the deals.  He checks out the borrower, coordinates with the title company, orders the appraisal and usually a survey, makes sure insurance is in place, and generally evaluates the loan.  Naturally he charges a fee for this service, which is passed through to the borrower, on top of any interest and fees that my retirement plan may charge.  This increases the cost of the loan, but in this case the non-Biblical version of the golden rule applies, which is “He who has the gold makes the rules.”

7) Get title insurance for the loan.  The purpose of title insurance is to shift risk away from you and to the title company.  In Texas, where my office is, the incremental cost of title insurance is very small when issued in conjunction with an owner’s title policy.  Regardless of the cost, making sure that your IRA is protected from title flaws is very important.

8) Verify that hazard and, if necessary, flood insurance is in place naming your IRA as an additional insured.  It is very easy to miss this issue when you are trying to get everything done right before a closing.  Borrowers may get insurance at the last moment and simply forget to add your IRA as an insured.  But if something goes wrong, you will want to make sure your IRA is named on the check.

9) Insist that the borrower provide you evidence of payment when property taxes and homeowners association fees become due.  The same thing would apply to hazard and flood insurance premiums, although normally you would receive notice of cancellation for non-payment of those bills.  Depending on where you live, property tax bills can increase quickly due to penalties and court costs, which reduces your equity position in the property.

10) Get a personal guarantee if lending to an entity or to an individual with some weakness.  When things are going well, you might be tempted not to insist on a personal guarantee, and indeed many borrowers will resist this.  However, as we all have discovered recently, circumstances do change, and a personal guarantee may be helpful in collecting the debt.  I collected on a note once where the property had decreased substantially in value due to vandalism and market conditions.  Instead of foreclosing, I had my lawyer send a letter explaining to the guarantor, who had a significant amount of assets, that he was personally liable on the debt and that if he was unable to satisfy the note I would pursue legal action against him and the borrower.  A week later a cashier’s check showed up satisfying the lien.

This list of suggestions is not meant to be exclusive.  Other issues you will need to understand include your lien position (personally I only invest in first lien loans), any state usury laws that might apply to the loan, and at least a general idea of what the foreclosure process is in your state in case the loan goes into default.  Always get good legal counsel to assist you with loan documentation.  Especially since the borrower traditionally pays for all expenses including legal fees, there is no reason not to have an attorney draw up loan documents.

Lending can be an excellent investment in an IRA.  It is relatively easy to do and if done correctly has a comparatively low risk.  Getting to know successful real estate entrepreneurs who borrow your IRA money may also lead to other, intangible benefits as well.

H. Quincy Long is Certified IRA Services Professional (CISP) and an attorney and is President of Quest IRA, Inc., serving clients in the State of Texas with offices in Houston and Dallas.  He may be reached by email at Quincy@QuestIRA.com .  Nothing in this article is intended as tax, legal or investment advice.

Self-Directed Traditional IRAs

Quick question reguarding self directed IRA and a home I currently live in….

Question:

I have a home I live in. I owe 80K and it is worth 140K. Can I establish an self directed IRA , use 80 K of my traditional IRA (currently in smith barney) and pay off the residence and turn it into a rental? I plan to purchase another house with non ira funds and live in that and rent the afore mentioned property. thanks for your comments.

Quincy’s Response:

Unfortunately the answer to your question is no, unless of course you simply take a distribution from your IRA, which would cost you taxes and possibly a 10% premature distribution penalty if you’re under age 59 1/2.  The prohibited transaction rules do not permit you to benefit personally from your IRA’s investments, except as the beneficiary of your IRA when you take distributions.  Therefore, a payment of your personal debt would be a prohibited transaction which would disqualify your entire IRA as of January 1 of the year in which you did the prohibited transaction.  Also, the prohibited transaction rules would prohibit you from selling the property you own to your IRA.  If I can help with anything else, please don’t hesitate to ask.

Self-Directed 401(k), Self-Directed Traditional IRAs

Hello Quincy, I wanted to ask if I purchased a CD and borrowed against it is that allowed? I could borrow from my 401K. So I figured it would be somewhat the same concept. I just wanted to know for sure. Before I try to pursue doing it.

Quincy’s Response:

Unfortunately, the concept of borrowing from a 401(k) plan is quite different than borrowing from an IRA.  It is a prohibited transaction for you to borrow from your IRA, and also you cannot put your IRA up as collateral for a loan without it being considered to be a distribution.
Occasionally an IRA will borrow money on a non-recourse basis, but in that case the money is used by the IRA, not the IRA owner.  Sorry.

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

Can a 401K Pension Plan own 96% of a C-corporation that owns ones home in which one does business? & Can a 401K PP own an LLC that has collectibles like Ansel Adams photos and historic guns?

Quincy’s Response:

The answer to your first question is no!!! That one is easy.

The second question is more complex.  In answer to a similar question posed about a mutual fund which invested in collectibles, our consultants responded as follows:

“A good question and the answer is not entirely clear. Since the consequences of being wrong are significant (the investment is treated as a distribution), it would be a good idea to apply for a private letter ruling before proceeding.

“According to Regulation section 1.408-10, “The acquisition by an individually-directed account under a plan described in section 401(a) of any collectible shall be treated (for purposes of section 402 and 408) as a distribution from such account in an amount equal to the cost to such account of such collectible.

“For purposes of this section, the term acquisition includes purchase, exchange, contribution, or any method by which an individually-directed account may directly or indirectly acquire a collectible”.

“Needless to say, “indirectly” is not defined.”

I am assuming that the PP is an individually directed account.  Therefore, caution would be urged in making an investment through an LLC.

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

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

Quest IRA, Inc. has been receiving alot of these questions lately so I have decided to repost the original article Quincy wrote about this topic….

BY H. QUINCY LONG

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 #1.

5) A similar arrangement was set up with regards to IRA #2 and a second corporation called Swansons’ Trading Company.

6) Mr. Swanson received no compensation for his services as president and director of Swansons’ Worldwide, Inc. and Swansons’ Trading Company.

The IRS attacked Mr. Swanson’s setup on two fronts.  First, the IRS argued that the payment of dividends from Worldwide to IRA #1 was a prohibited transaction within the meaning of Internal Revenue Code (IRC) Section 4975(c)(1)(E) as an act of self-dealing, where a disqualified person who is a fiduciary deals with the assets of the plan in his own interest.  Mr.

Swanson argued that he engaged in no activities on behalf of Worldwide which benefited him other than as a beneficiary of IRA #1.

The court agreed with Mr. Swanson, and found that the IRS was not substantially justified in its position.  The court said that section 4975(c)(1)(E) addresses itself only to acts of disqualified persons who, as fiduciaries, deal directly or indirectly with the income or assets of a plan for their own benefit or account.  In Mr. Swanson’s case the court found that there was no such direct or indirect dealing with the income or assets of the IRA.  The IRS never suggested that Mr. Swanson, acting as a “fiduciary” or otherwise, ever dealt with the corpus of IRA #1 for his own benefit.  According to the court, the only direct or indirect benefit that Mr. Swanson realized from the payments of dividends by Worldwide related solely to his status as a participant of IRA #1.  In this regard, Mr. Swanson benefited only insofar as IRA #1 accumulated assets for future distribution.

The second issue the IRS raised was that the sale of stock by Swansons’ Worldwide to Mr. Swanson’s IRA was a prohibited transaction within the meaning of section 4975(c)(1)(A) of the Code, which prohibits the direct or indirect sale or exchange, or leasing, of any property between an IRA and a disqualified person.  Mr. Swanson argued that at all pertinent times IRA #1 was the sole shareholder of Worldwide, and that since the 2,500 shares of Worldwide issued to IRA #1 were original issue, no sale or exchange of the stock occurred.

Once again, the court sided with Mr. Swanson.  The critical factor was that the stock acquired in that transaction was newly issued – prior to that point in time, Worldwide had no shares or shareholders.  The court found that a corporation without shares or shareholders does not fit within the definition of a disqualified person under section 4975(e)(2)(G).  It was only after Worldwide issued its stock to IRA #1 that petitioner held a beneficial interest in Worldwide’s stock, thereby causing Worldwide to become a disqualified person.  Accordingly, the issuance of stock to IRA #1 did not, within the plain meaning of section 4975(c)(1)(A), qualify as a “sale or exchange, or leasing, of any property between a plan and a disqualified person”.

On the surface it seems like the court endorsed the idea of an IRA holder being the sole director and officer of an entity owned by his IRA.  In other words, by having the IRA invested in an entity such as an LLC of which the IRA owner is the manager, the IRA owner gets to have “checkbook control” over his or her IRA’s funds.  This sounds like a great idea.  However, before jumping too fast into this area, there are some issues to consider.

One thing to remember is that the LLC does not insulate the IRA from the prohibited transaction rules.  Amazingly, the IRS and the court in Swanson v. Commissioner ignored completely the fact that Mr. Swanson’s non-IRA owned corporation, Swansons’ Tools, paid commissions to Worldwide, thereby reducing Swansons’ Tools’ taxable income and indirectly benefiting Mr. Swanson.  Especially after the recent case of Rollins v. Commissioner, it seems clear that this would be a prohibited transaction.  In the Rollins case, Mr. Rollins loaned money from his 401(k) plan to corporations in which he served as president but of which he owned only a minority interest.  The corporations were clearly not disqualified persons, but the court nonetheless held that there was an indirect benefit to Mr. Rollins, who was the largest shareholder and an officer of each corporation.

The IRS also might have argued that Mr. Swanson’s service as the president and sole director of Worldwide was a prohibited transaction as described in 4975(c)(1)(C), which prohibits the furnishing of goods, services or facilities between an IRA and a disqualified person.  Although Mr. Swanson stated that Worldwide had no “active” employees, one has to wonder at what point the services rendered to an IRA-owned entity become a problem.  Another question which was not raised in the Swanson case was whether or not an IRA owner having checkbook control over his IRA funds through a 100% IRA-owned entity violates IRC Section 408(a)(2), which requires that the custodian of an IRA be a bank or other qualified institution.  Why have that requirement at all if the IRA owner can get around it merely by having his or her IRA own 100% of an LLC managed by the IRA owner?

Although the Swanson case appears to be good case law, a great deal of care is merited when relying on this case.  Several questions which were not raised in the Swanson case remain unanswered.  As noted by the court, Mr. Swanson was “following the advice of experienced counsel.”  Even then, Mr. Swanson had to fight the IRS in tax court to win his case.  For most people, even getting into a battle with the IRS is a losing proposition.  Some people, perhaps through ignorance of the rules, appear to be abusing Swanson-type entities.  For example, in IRS Notice 2004-8 on abusive Roth transactions, the IRS states that it is aware of situations where taxpayers are using a Roth IRA-owned corporation which deals with a pre-existing business owned by the same taxpayer to shift otherwise taxable income into the Roth IRA.  If the IRS has become aware of the problem, there may come a day when they decide to go after these types of arrangements more actively.

When relying on the Swanson case to set up a checkbook control LLC or other entity, always use experienced legal counsel who is very familiar with how to set up this type of entity and who will be there to guide you on issues such as the prohibited transaction rules, the plan assets regulations, unrelated business income tax issues and the other rules and regulations which may apply.  What happens after the LLC is formed is just as important as the initial setup and can get you into just as much trouble.  To attempt a “checkbook control” entity without knowledge of all the rules and regulations or competent counsel to guide you is sort of like jumping out of an airplane without a parachute – it may be fun on the way down, but eventually you’re going to go SPLAT!