Category Archives: Self-Directed 401(k)

The Balancing Act

I traveled to Pompano Beach, FL last week to record a financial segment for “The Balancing Act”, a Lifetime Television show.  A lot of hard work went into this and it went off without a hitch! It was such an honor for me to be on their show, the topic was my personal favorite (and area of expertise), Self-Directed IRAs. I finally got to wear my awesome suit that I have been tweeting about but I wasn’t ready for my lesson on wearing make up and eating spicy food- ha ha!!

See below for the pics And click HERE for the Press Release!

The recording will air on February 19th- Make sure you record your DVRs to watch me appear on National Television!!

Just would like your opinion on the WSJ & SEC article about Lawsuits & Fraud over Self Directed IRA’s

Concerned Investor: Just would like your opinion on the WSJ article about Lawsuits over Self Directed IRA’s: (Read WSJ Article Here)

Is the article of immediate concern?  Is this just scam artists at work?

Also, read the article from the Securities Exchange Commission (SEC) on fraud within self-directed IRAs (Read SEC Article Here)

Question: Thoughts on question Above?  This lawsuit has scared some people for sure. Notice this article is directed at SDIRA’s and not specifically to Equity and Entrust, that could be a perception to people who do not understand. I think I should tell him to go to Quest and not worry about it, but would I love to give a little substance to relieve his concern.  Thoughts?

Answer: Regarding the article and the lawsuit, it basically is a fundamental misunderstanding of what roles the custodian and administrator play versus what role the client plays in making their own decisions.  There is no doubt that scam artists use self-directed IRAs as tools to get money.  But the question is whose role is it to police the investments that the clients choose, the client or the custodian?  The correct answer is that it is the client’s responsibility to do their due diligence on the investment and the people they are investing with.  This is very clearly spelled out in numerous places in the documents signed by every client.  And that’s why the product is called a ‘SELF-DIRECTED IRA.’

Having said this, the industry as a whole is doing as much as we can to help educate our clients and potential clients on how to avoid fraud, and of course we are setting up our own internal auditing processes as well to assess whether it is administratively feasible to handle certain investments.  However, we do not do due diligence for the clients and we do not recommend any investment or service provider.  Clearly a self-directed IRA is not for everyone, and here at Quest at least we do not pretend that it is.  We merely educate people as to what the possibilities are and then it is up to the client to decide if they want to pursue a self-directed IRA, and if they do open an account to find their own investments and do their own due diligence.

The Texas State Securities Board has come out with an explanation of self-directed IRAs which we agree with completely (the SEC issued a similar statement as well).  I have attached a copy.  At first blush you might read it to be against the use of self-directed IRAs, but really what it is saying is that you have to be careful of investment providers who may use self-directed IRAs to take your money.

Let me know if you have any further questions.  Have  a great day!

How do I strucuture a multi-family real estate investment for my IRA?

Question: Hello Quincy, hope all is well with you. I need some guidance in putting a small 20 unit apartment complex deal together at around $600K. On August 1, 2012, I will be given my $105,000 401K funds that I will be transferring over to you because my company is being bought out. Is there any way for me to use these funds towards purchasing this apartment complex? I have a private investor with a 100k self -directed IRA available to me, but the bank is not going to allow a second on the property and they are going to require that the 30% come from me. I am sure that in all your daily dealings you probably see this kind of scenario pop up and that is why I need your advise in structuring this deal? I will more then likely need around 30% ($180,000) to put this deal together which I have available if I include the 401K funds. This property will be held in a LP which is already established, please let me know if there is any other information that you need.

Answer: Regarding the transfer of your 401(k), I assume you will be choosing to do a direct rollover into your IRA.  If you take the funds as a distribution and then roll them over they are required to withhold 20% and send it to the government.  If you wish to rollover the entire amount, then you would be required to pull the 20% out of your pocket and get credit on your next tax return.  Not a good idea.  With a direct rollover the check is made out directly to Quest IRA, Inc. FBO Client Name IRA #[Acccount #].  If you need help with that part, let our new accounts department know and they will be happy to guide you.

As far as the structure of the deal, mixing your personally with your IRA is going to be difficult if not impossible to do without violating the rules.  The reason for this is that you cannot benefit personally from your IRA’s investments (except of course when you take distributions from your IRA).  Also, you cannot personally guarantee any indebtedness of your IRA. This means, for example, that you cannot purchase the property in an LP owned partly by your 401(k) and partly by yourself personally, since the bank would require a personal guarantee from you for the entire loan amount.

Also, even if you found a way to get the deal done with a loan from the bank which was non-recourse (is this possible?), the investment would generate unrelated business income and your IRA may be subject to taxation.  This may be okay if the investment is profitable enough, but you do have to take the taxation into account when deciding whether or not to do the deal.  I have a couple of investments that cause my 401(k) plan to file a tax return and sometimes to pay taxes, but they are such good deals that I find the after-tax returns to be well worth it.>>

You can call me or Nathan Long anytime you like if you need more information, although Quest IRA, Inc. cannot give you tax, legal or investment advice. Have a great day & hope that helps!

Follow Up Question: Thanks for the information, I was not sure how I should do the roll over to Questira. If my final goal is to turn this 401k into a Roth Ira to grow tax free, I roll it over to Quest Ira as a distribution minus 20% to government and I am done? Then this should not effect my income taxes for 2012 since I left the 20% distribution fee behind, is this correct? I know you cannot give tax or legal advise, but I just want to know the possible consequences depending on what I decide to do with the money.

Follow Up Answer: It doesn’t quite work that way.  The amount you convert to a Roth IRA is simply added to your taxable income for the year.  For example, if you have $100,000 in taxable income in 2012 and convert $100,000, now you have to pay taxes as if you made $200,000 of taxable income.  So obviously the higher your marginal tax bracket the higher your taxes will be on the conversion.  The 20% withholding for a distribution from your 401(k) is just like a down payment on your taxes.  Ironically you are both taxed and penalized on that money that is sent to the government!  You are always better off doing a direct rollover and then next year, if you absolutely have to, you can remove some money from the Roth IRA to pay taxes on the conversion.  In this case you would still have to pay the 10% premature distribution penalty next year unless you had a Roth IRA previously and were removing your contributions and/or previous Roth conversion money that had been in the account for at least 5 years. 

Follow Up to the Follow Up: Wow!! I do not see how u keep up with this stuff, but I am glad u are able to explain it in plain English for my comprehension. I will just rollover my 401k to you and figure out what I might want to do later. Thank you so much for spending the time.

Roth IRA Conversions and Re-Characterizations

Question: Dear Mr. Long, I enjoyed you video on the Lifestyles Unlimited website about IRAs.  I am new to Lifestyles here in Dallas and have a question for you if you have time. (I’m 61.)

In your video, “The top 10 things you need to know about Self-Directed IRAs”, you mentioned that a 401k can be rolled over into a Roth IRA and you pay taxes on that rollover.   The Roth IRA can then be used to make a profit from Real Estate (no debt financing).

If I understood you correctly, you then have till Oct 15th to change you mind and put the Roth IRA money back into your 401K and presumably not pay have to pay the taxes incurred from the initial rollover.   (same calendar year)

My question: Can the profit that was incurred within the Roth IRA remain in the Roth IRA while the initial rollover amount is returned to the original 401k?
If this happened, I am assuming the tax liability would be zero or minimal?

Question 2:  My company now offers a Roth 401k.  Can a Roth401k be used like a Roth IRA or must the Roth 401k be converted to the Roth IRA?

Question 3: Do you have an office in the DFW area?

Thank you for your time.

Answer: Yes, it’s true that you have until October 15 of the following year to recharacterize, or “unconvert” to use a more colloquial but not technically correct name.  If you do, then there are no tax implications for the initial conversion.

 Unfortunately, the answer to your first question is no, you cannot leave the profit in the Roth IRA.  Boy, that would be a neat trick, but it just isn’t so!  Also, when you recharacterized it would go back into a traditional IRA, not back into the 401(k).

 On your second question, assuming you mean to ask whether or not you can self-direct your Roth 401(k), the answer is no, unless it is an individual 401(k) plan like what is offered at Entrust.  The company controls what you can do as long as it is there.  When you separate from service you can always roll the Roth 401(k) into a Roth IRA and self-direct it, but you generally cannot access the funds until you leave employment or have another distributable event.  Depending on your situation, it may be an excellent idea to participate in your company’s Roth 401(k) just to build up Roth funds for when you do finally retire.

 Yes, we do have a DFW office just north of downtown Dallas.  Mr. Ryan Kimura runs that office, and I have copied him on this email.

 I’m sure you and Mr. Kimura can get together soon.  We have a “Fright Night” event coming up in Dallas which might be fun to attend.  Have a great day!

Can I loan money to a company I own? And what about Rollover for Business Startup (ROBS)?

Question: A husband and wife both have a Roth IRA & husband has a 401(k). He plans to leave his corporate job & start his own business. If Roth & 401(k) funds are transferred to self-directed IRA, can husband & wife use IRA funds to loan start up money to husband’s new business, as along as they pay interest on the loan to IRA? Is this an acceptable or prohibited transaction and how should the loan be structured? If prohibited, is therea way to structure the loan so as to be an acceptable transaction?

Answer: Thank you for your inquiry.  The short answer to your question is no, neither the Roth IRAs nor your 401(k) which is rolled into an IRA can loan start up money for your new business venture.  There is a list of persons with whom the IRA is not permitted to do business, called disqualified persons.  A business owned entirely by you would be a disqualified person, and therefore the proposed loan would be a violation of Internal Revenue Code Section 4975(c)(1)(B), which says that the direct or indirect “lending of money or other extension of credit between a plan and a disqualified person” is a prohibited transaction.

I have heard of people using their 401(k) plans to start a new business by using what the IRS terms a ROBS arrangement (Rollovers for Business Startups), but the IRS clearly does not like these arrangements and believes that the way many of them operate result in a prohibited transaction.  I have attached some information in this regard.  If you do want to go down this path, be sure that whoever you choose is very familiar with the IRS position and that you feel they have adequately dealt with the issues.  Certainly there are many companies out there offering the ROBS set up.  It is fairly expensive to do, though, since it involves setting up a C corporation, having the C corporation adopt a 401(k) plan, rolling the IRA or former 401(k) into the 401(k) for the new company, and purchasing shares of the company as employer securities.  You cannot roll your Roth IRAs into the 401(k) plan, only traditional IRAs.

Finally, you should be aware that Quest IRA, Inc. cannot give you tax, legal or investment advice, and so we could never advise you on how to structure a particular investment or provide you with the forms to do so.  Good luck with your new business venture.  Have a great day!


IRS ROBS Analysis

IRS ROBS Fail Paper

Debt Financed Property in a Self-Directed 401(k) and UBIT

Question: I attended the seminar with you, Dyches Boddiford, and Hugh Bromma about a year ago.  I was reading the transcript of your February 4 radio interview which was very interesting.  You mentioned the need to file a 990T for your 401K with regard to a debt financed shopping center that your plan owns.  I wondered if that is correct because I thought it was unnecessary to file a 990T for a 401K, especially since there is no UDFI tax on a 401K.  Is there an advantage to filing one in such a situation?

Any insight you could give me on this would be much appreciated.  I have a debt financed property in my 401K so this is a particular topic of interest to me.

Answer:  Yes, the information about the 990T is correct in this case.  The exception you refer to requires either direct ownership by the 401(k), ownership through a special type of corporation, or ownership through a specially designed partnership.  Since most partnerships where non-retirement plans are also partners do not meet the special requirements to maintain the exemption, as mine does not, your plan may still owe UBIT and have to file a 990T.  As noted in the interview, this can still work out great, but you should always go in with your eyes open.  And yes, even if you do not owe UBIT taxes filing the 990T may be of some benefit, since you can carry forward a loss to offset future UBIT from the investment.  For the past two years the partnership my 401(k) invested in has shown a slight loss, but this year it will show a fairly decent profit, and I will use my loss carry forward from the last couple of years to offset the tax.

I have some articles I wrote on the topic, but right now I am in an airport on my way to Florida, so I can’t access them.  I will be back in the office next Wednesday.  The exemption and the restrictions on it may be found in Internal Revenue Code Section 514(c)(9).

I hope that helps some.  Have a great weekend!

H. Quincy Long’s UBIT Paper

Required Minimum Distributions for 2011

Question: Mom received two RMD letters one for her Roth IRA and one for her Roth 401k. As these are both Roth’s isn’t she exempt from mandatory distributions? Regardless she hasn’t owned the accounts for at least 5 years.

Answer: Regarding the RMD letters, your Mom does NOT need to take an RMD from her Roth IRA.  They centralized the process of sending out RMD letters this year, and someone erroneously failed to delete the Roth IRAs from the list.  I apologize for the error made by Quest IRA, Inc.  The only time you ever have to take an RMD from a Roth IRA is if the Roth IRA is an inherited IRA.

However, if your Mom has reached age 70 ½ she DOES have to take an RMD from her Roth 401(k).  Nothing in the 401(k) regulations exempts Roth 401(k)s from the mandatory distribution requirements.  As a 5% or more owner of the company, she cannot defer distributions as she could if she was just a worker bee.  The fact that she has not met the 5 year requirement to make it a qualified distribution doesn’t change the distribution requirements.  Essentially, her contributions and the profits will come out pro rata, so that if 75% of the money in her Roth 401(k) is her contribution and 25% is profit, then the taxable portion of her distribution will be 25% until she meets the 5 year requirement.

Let me know if you have any questions. Have a great day!


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


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


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: