Tag Archives: 4975

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

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 Paper

IRS ROBS Analysis

IRS ROBS Fail Paper

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

Any Loops Holes Around Prohibited Transactions of Real Estate for Personal Use in an IRA?

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Question: I am looking for a custodian for a client who wants to make a real estate investment in his IRA.  Quest IRA, Inc. was referred to me by my accountant.  I have a couple questions about the limitations of use of the property by the owner.

Specifically, the accountant mentioned there are some tricky provisions about using the investment for personal use, but it would appear from the articles on the Quest IRA, Inc. site that the property cannot be used at all by the owner, as a vacation home for example.  Is that the bottom line on the issue or are there a few loopholes with the provision?

Answer: Thank you for your inquiry.  Unfortunately, no, there are no loop holes to the restrictions against personal use.  Statutorily, Internal Revenue Code Section 4975 contains the prohibited transaction rules, which prevent, among other things, the direct or indirect:

(c)(1)(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;

(c)(1)(C) furnishing of goods, services, or facilities between a plan and a disqualified person;

(c)(1)(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(c)(1)(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account;

Your client, as the owner of the account, is considered a fiduciary and a disqualified person, and of course the IRA is included within the definition of a plan under the statute.  Your client’s spouse, lineal ancestors (Mom, Dad, etc.) and lineal descendants (children, grandchildren, etc.) and their spouses, plus any corporation, partnership, trust or estate in which any of the above owns or controls 50% or more of are all disqualified persons and cannot enter into a transaction with or benefit from a transaction with your client’s IRA.

The prohibited transaction rules are intended to make sure that all transactions within the IRA are on an arms-length basis and that no disqualified person directly or indirectly benefits from the transaction except, of course the IRA owner when he or she takes a distribution from the IRA.

If we can assist you or your clients, please let me know.  Have a great day!

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?

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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