Tag Archives: IRS

Can you provide input on IRA Owned LLCs?

Question: Quincy can you give us input on whether we need to set up an IRA LLC or is there a better entity for self directed IRA’s? Is selling interest in a LLC the best way to pool IRA money?

Answer: The question of whether to set up an LLC for a particular transaction or series of transactions depends on a lot of factors.  For example, are you going to use the LLC for transactions on a regular basis, or is the LLC set up for a single transaction?  What is the cost of setting up the LLC in the state where you are located?  Are there any income or annual fees to maintain the LLC?  How much will the LLC cost to set up and maintain?  As I always say, “every port of refuge has its price.”  You simply have to analyze the costs and decide whether or not it is worth forming an LLC for your anticipated investments.  I have seen many people use trusts as a viable and less expensive alternative to LLCs, but once again there may be state law issues which affect your decision.

Another question is who will manage the LLC?  Personally, I believe it is not a great idea for an IRA owner to manage an LLC which the IRA owns, for a lot of reasons.  I understand that guidelines on IRA owned entities have been written by the Department of Labor and are under review by the IRS prior to being released sometime later this year.  These guidelines will hopefully shed light on a lot of the issues facing IRA owned entities.

Another factor to be considered is whether or not the operation of the LLC will subject the IRA to Unrelated Business Income Tax (UBIT).  If an IRA operates a business, either directly or through a non-taxable entity such as an LLC, the owing IRA will be subject to taxation and will need to file a Form 990T each year (unless that LLC elects to be treated as a C corporation for tax purposes).  This may impact the return and complicate matters somewhat, but does not at all mean the project shouldn’t be considered (I have investments in my retirement plan that require me to file a 990T each year).  It is conceivable or perhaps even probable that the continuous purchase and sale of notes in the LLC would cause the owning IRAs to owe UBIT, if that is your intent.  You should note that no disqualified person (including, but not limited to, the IRA owners and their immediate familymembers) may receive any current benefit from the transactions engaged in by the LLC.  For example, no commissions may be earned by any disqualified person for purchasing notes within the LLC.

The answer to your second question has significant Securities and Exchange Commission issues, so if you form an LLC and sell its shares you will want to be careful not to make it a “public” offering, or at the very least you should consult with a securities attorney prior to raising capital.  A full discussion of the securities law implications is beyond the scope of a quick email, and is subject to who the members of the LLC are and how they acquire the membership interests.  I have used both trusts and LLCs to accumulate funds for investments, but I have always dealt with immediate family members and close associates, not the “public.”  I am not an expert on securities laws, I just know enough to be dangerous.

Of course you should also realize that any particular asset may be held directly by an IRA as opposed to owning the asset through an LLC.  Depending on the complexity of the transaction and the volume of activity, direct ownership by the IRA or IRAs may be sufficient to meet your needs.

I apologize for the delay in answering your questions. If I can do anything for you, please let me know.  Have a great day!

Has my Self-Directed IRA been “invalidated”?


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.


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

Prohibited Transaction 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. 

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


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?


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.

The Saver’s Tax Credit – How to get up to $2,000 FREE from the U.S. Government

By H. Quincy Long

            Tax time is coming, and many of you are considering whether or not to make a 2007 contribution to your Traditional or Roth IRA.  I have good news!  If you are at least 18 years old, you are not a full-time student, you are not claimed as a dependent on another person’s tax return and you meet the income requirements listed below, you are entitled to a tax credit of up to 50% of your contribution to almost any type of retirement plan, including a Roth IRA!  If you then take your refund from the government and put it back into your IRA, your retirement savings will increase by as much as 50%!

            Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code as part of the Pension Protection Act of 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation.  To qualify for the Saver’s Tax Credit, you must have Modified Adjusted Gross Income (MAGI) within the following limits for 2007:

            Credit              Income for Married     Income for Head of    Income for

            Rate                 Filing Jointly               Household                   Others

            50%                 up to $31,000              up to $23,250              up to $15,500

            20%                 $31,001 to $34,000     $23,251 to $25,500     $15,501 to $17,000

            10%                 $34,001 to $52,000     $25,501 to $39,000     $17,001 to $26,000

            The maximum tax credit allowed for 2007 is $1,000 (with a $2,000 contribution), or up to $2,000 if married filing jointly and each spouse makes a contribution.  Simply attach Form 8880, Credit for Qualified Retirement Savings Contributions, to your income tax return, and you will receive up to a $2,000 tax credit.  A tax credit is a dollar for dollar reduction in your tax bill, as opposed to a tax deduction, which only reduces the amount of money on which you pay income taxes.  You may get more information on this credit from IRS Publication 590.

            To prevent abuse, the IRS has rules which will reduce the amount of contribution which qualifies for the saver’s tax credit if the IRA owner has taken distributions from any eligible employer plan or IRA during a specified testing period.  The testing period includes the two taxable years prior to the year the credit is claimed, plus the taxable year the credit is claimed and the following year up until the tax filing deadline for the year the credit is taken, including extensions.   For example, if Josh contributes $2,000 to his Roth IRA for 2007 but had previously removed $500 from his IRA in 2006 and removes an additional $500 in 2008 before October 15, only $1,000 of his $2,000 Roth IRA contribution for 2007 may be used toward the saver’s tax credit on his 2007 tax return.

            Let me give you an example.  Lucky Larry, a married man, was downsized from his job in the corporate world in December, 2006.  Larry decided that he wanted to be a real estate investor instead of looking for another j-o-b.  Things went fine in 2007, but Larry’s modified adjusted gross income after all of his expenses will be $30,000 due to his various write-offs, and his taxable income after the standard deduction and 2 exemptions will be $13,500.  Therefore his taxes before the tax credit will be $1,353 (see instructions for Form 1040, page 65).  He and his wife contribute $1,353 each to a self-directed Roth IRA at Quest IRA, Inc. which they can use to purchase real estate options, debt-leveraged real estate, and many other things.  Larry and his wife will receive a tax credit of $1,353 (50% of each of their contributions). 

            Although the maximum contribution for purposes of the tax credit is $2,000 each, the tax credit is non-refundable.  This means that the maximum tax credit Larry and his wife can receive is equal to the taxes they would otherwise pay.  With the tax credit, Larry’s income tax for 2007 is ZERO!  Larry and his wife wisely decide to contribute the tax refund back into their Quest IRA, Inc. self-directed Roth IRAs.  Each Roth IRA grows by 50% to $2,029.50 absolutely FREE, courtesy of the United States government!

Preparing for 2010: Converting your Traditional IRA Assets to a Roth

Preparing for 2010:
Converting your Traditional IRA Assets to a Roth
by Hubert Bromma, CEO of Entrust
As we face an ailing U.S. economy bombarded by the subprime crisis, the rising cost of oil and the products that depend on it, and an expensive, ill-advised war, there is the opportunity for investors to profit from long-term gains at the expense of current economic problems. However, in the context of these current economic conditions, IRA holders can look toward the future and can take advantage of a change to the tax law that takes affect in 2010.

In 2010, regardless of your income, you can convert your traditional IRA assets to Roth IRA assets. Under the current law, you cannot convert a traditional IRA to a Roth if your adjusted gross income (AGI) exceeds $100,000. If any of your assets are currently undervalued, 2010 could be a great opportunity to convert your funds. The  assets will be taxed based on their fair market value as of December 31, 2010, and you also have the option of paying your tax bill over two years. You can pay the tax with cash outside of the IRA, which preserves your IRA assets. After the tax is paid, your earnings will never be taxed again.

Roth IRAs offer the added benefit that there are no required distributions. Unlike a traditional IRA, which requires that you begin taking minimum distributions starting at age 70½, with a Roth, you can let your assets sit and continue to grow. In a time when people work longer, you can amass wealth in a non-taxed environment for as long as you want.

Because you can convert as much or as little of your IRA as you want, you can choose to convert only the assets that have a current low value but that you anticipate having more value in the future. For example, if your self-directed IRA has real property that has been decreasing in value in today’s market but you expect a turnaround, that asset may be ideal to convert at the current fair market value.

Fair Market Value
Neither the Internal Revenue Code nor IRS regulations provide a general definition of fair market value for income tax purposes. The IRS regulations, however, use the following definition in connection with specific income tax issues as well as for estate and gift taxes:“The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”

This is the definition adopted for purposes of valuing charitable contributions of property,pension plan assets,and real property interests disposed of by nonresident aliens and foreign corporations.The courts have also followed this definition when addressing tax issues.

You must determine the fair market value before converting your traditional, pre-taxed assets to Roth, post-taxed assets. This value is used to compute the federal tax, and possibly state tax, that you owe. The best way to establish the fair market value is through a qualified appraiser. The appraiser must have an arms-length relationship with the taxpayer and the asset. The IRS might also accept a recent bona fide offer from a third party who is not considered disqualified under IRS regulations involving IRAs and qualified retirement plans.

Debt-financed assets, such as real estate, must be valued at net asset value. This means that the fair market value subtracts the amount of debt remaining after the date of the appraisal or valuation. Private placements should be assessed by persons or firms qualified to make such appraisals. Cash, stocks and bonds, and publicly traded assets use the established values on the date required for valuation.

Plan Ahead to Minimize Tax and Maximize Gain

The object is to pay as little tax as is legally required and to pay the tax with non-IRA funds, thus preserving the funds that are never be taxed again. If you can, convert as much as possible, concentrating on assets that have the highest potential of future appreciation or income within your time horizon.Tax planning with a professional is always a good idea, but especially so in 2010 if you want to take full advantage of the new law. The amount you convert is added to your income for 2010, and your tax is calculated on your total adjusted gross income. So in 2010, it behooves you to have as little income as possible and plenty of losses. You can also spread the tax burden and pay part in 2011 and 2012.

After you have converted the asset, you can withdraw all or part of it at any time without paying federal taxes if you are at least 59½ years old. However, you may owe state tax. States differ on how assets in IRAs are taxed, and you should make sure that your have adhered to your state’s tax requirements.

The biggest question you have to think about is how well is your crystal ball working; how well can you and your tax advisors foretell your economic and tax-paying future?
Clearly, the more flexibility that you have and the more time that you have will give you more opportunity for appreciation and improve the possibility of the conversion paying for itself. But if past history and inflationary pressures are any indication, if , for example, your real estate investment is valued at 35% less than when your IRA purchased it, the increase in value over time should not only make up the 35% but even more. So converting now at its lowest fair market value may be a wise investment.

Doing The Numbers

It can be daunting to figure out the tax implications when taking inflation and cost of living indicators into account. If your property is in a traditional IRA, when you take distributions, which remember are required, you pay tax on that property at your ordinary income tax rate. Some pundits suggest that your tax rate will be lower when you are older and retire. This may be, but tax rates have hardly decreased over time.Just to take a simple case, let’s say your property has a fair market value of $100,000 today. If the property appreciates as a result of inflation by 2.5% annually over 20 years, the fair market value will be $163,000. You will be paying tax on an asset valued at least 63% higher just due to inflation. Paying tax in 20 years at 35% leaves you with a property worth about $106,000, without taking into consideration any gain as a result of appreciation.

Your cost of living may also increase at a nominal annual rate of 3.5%, based on current rates. That means you have to make up the difference between the fair market value of the property and what your real cost of living is on the amount that you need to live on, or $199,000. In this scenario, you need the property to appreciate to at least $306,000. Tax on $306,000 is $107,000, leaving you with the $199,000 that you need to just break even with the original fair market value. So in this case, you hope for either better appreciation or lower taxes.

The income on the property also plays a big role over time. Let’s say that your property has a 7% net operating income annually. Over 20 years, that equals about $314,000. You also invest the income in money markets that make 4%, adding another $15,000. So when you add your $329,000 in income over 20 years to the fair market value of $306,000, you end up with an IRA worth $635,000! Tax on a distribution of $635,000 at the rate of 35% is about $222,000, leaving you with $413,000, a little more than twice as much than the IRA had in real dollar terms.

If you had paid the tax with money outside the IRA in 2010, you would pay $35,000 (35%) on the $100,000 fair market value. Taking into account how much you could have made on the tax you paid in 2010 over 20 years-we’re using 14.8% compounded annually, which totals about $553,000-and adding that to the $413,000 in the above scenario, your IRA is valued at nearly $628,000 ($996,000 taxed at 35%) rather than $635,000. But that money does not get taxed on distribution. You end up with $628,000 and not $413,000.

Is It Worth It?

In summary, if you pay tax in 2010 on a low cost basis, the outcome in the long term can be substantially better if your assets earn a good return and they appreciate in value. If you expect very high appreciation and income, converting to a Roth IRA in 2010 could be profitable. Most importantly, do the numbers with the advice and input of competent accounting and tax professionals. And you also need to think about paying taxes 20 years from now. In our example, the tax bite is $338,000 in 20 years, not $35,000 in 2010. Keep in mind that you can spread the tax over two years. If you plan now, you can possibly minimize your tax burden by managing your income and losses. But who knows, the value of dollar may be relatively the same and render the question moot.

How Do I Invest Thee? Let Me Count the Ways!

Many people find it very easy to see the benefits of self-directing their Roth and Traditional IRAs, SEP IRAs, SIMPLE IRAs, Individual 401(k)s, Coverdell Education Savings Accounts (ESAs) and Health Savings Accounts (HSAs) into something other than the same old boring stocks, bonds, annuities and mutual funds.  The central idea of a self-directed IRA is that it gives you total control of your retirement assets.  With a self-directed account you can invest your IRA funds in whatever you know best.

When I spoke recently at John Schaub’s Real Estate All Stars conference in Las Vegas, Nevada, I outlined some of the top strategies our clients have actually used to build their retirement wealth.  A brief description of these strategies is included in this article.  This shows the tremendous flexibility of investing through a self-directed account.

Strategy #1 – Purchasing Rental Real Estate for Cash.  Even the IRS acknowledges on its website that real estate is an acceptable investment for an IRA.  In answering the question “Are there any restrictions on the things I can invest my IRA in?” the IRS includes in its response that “IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”  One of our clients purchased a 10 unit apartment complex for $330,000 cash.  In April, 2008 his total rent collection was $5,235.  Even after payment of taxes and insurance, his cash on cash return is excellent, and the client believes that the value of the property will increase significantly over time.  A discussion of the relative benefits and disadvantages of owning real estate directly in an IRA is beyond the scope of this article, but for those who know how to successfully invest in real estate it is great to know that real estate is an option for your self-directed account.

Strategy #2 – Purchase, Rehab and Resale of Real Estate.  In this case study, our client decided not to hold onto the real estate purchased with his IRA.  The client received a phone call one evening from an elderly gentleman who said he needed to sell his home quickly because he wanted to move to Dallas with his son.  After a quick phone conversation, it was clear that the price the seller wanted was a bargain even considering the needed repairs.  Our client dropped what he was doing and immediately headed over to the seller’s house with a contract.  The buyer on the contract was our client’s IRA, and of course the earnest money came from the IRA after the client read and approved the contract and submitted it with a buy direction letter to Quest IRA, Inc.  They agreed on a sales price of $101,000.  Approximately $30,000 was spent rehabbing the property with all funds coming from the IRA.  The property was sold 6 months later for $239,000, with a net profit after sales and holding expenses of $94,000!

Strategy #3 – Purchase and Immediate Resale of Real Estate (Flipping).  The previous two examples show the tremendous power of buying real estate for cash with a self-directed IRA.  However, both of these strategies require a significant amount of cash in your account.  How else can you invest in real estate if you have little cash?  One of our clients was able to put a commercial piece of vacant land under contract in his Roth IRA.  The sales price was $503,553.60 after acreage adjustments.  Using his knowledge of what was attractive for a building site, our client was able to negotiate a sales price to a major home improvement store chain for $650,000.  On the day of closing Quest, IRA Inc. received two sets of documents, one for the purchase of the property for $503,553.60 and the other for the sale of the same property for $650,000.  After sales expenses, the IRA netted $146,281.40 from the sale with only the earnest money coming from the account!  A word of caution in this case is that if property is flipped inside of an IRA the IRS may consider this to be Unrelated Business Taxable Income (UBTI), causing the IRA (not the IRA owner) to owe some taxes on the gain.  Even if taxes had to be paid, it is hard to argue that this transaction was not beneficial to the IRA and ultimately the client!  It should also be noted that in this situation everyone involved in the transaction was aware of what everyone else was doing, so there was no “under the table” dealings.

Strategy #4 – Assignments and Options – Getting Paid NOT to Buy!  Another favorite strategy for building tremendous wealth without a significant amount of cash is the use of options and assignments.  One of our clients put a property under contract in his daughter’s Coverdell Education Savings Account for $100.  The sales price was a total of $5,500 because the house had burned down.  The seller was just getting rid of the property for its lot value since he had already received a settlement from the insurance company and had purchased another house.  Our client then used his contacts to find a person who specialized in rehabbing burned out houses.  The new buyer was willing to purchase the property for $14,000 cash.  At closing one month after the contract was signed, the seller received his $5,500 and the Coverdell ESA received an assignment fee of $8,500 right on the settlement statement.  That is an astounding 8,400% return on the $100 investment in only 30 days!  Even better, our client was then able to take a TAX FREE distribution from the account of $3,300 to pay for his 10 year old daughter’s private school tuition.  In a similar transaction, another client’s Roth IRA recently received an assignment fee of $21,000 plus reimbursement of earnest money for a contract.

Strategy #5 – Using the Power of Debt Leveraging.  One of my favorite true stories of building wealth in a Roth IRA involves purchasing property subject to a debt.  If an IRA owns debt-financed property either directly or indirectly through a non-taxed entity such as a partnership or LLC taxed as a partnership, profits from that investment are taxable to the same extent there is debt on the property.  One of our clients used her knowledge of real estate investing and what she learned from a free Quest IRA, Inc. educational seminar to tremendously boost her retirement savings.  After noticing a large house in downtown Houston which was in bad shape but in a great location, our client tracked down the owner in California who was being sued for approximately $97,000 in delinquent taxes on the property.  She negotiated a deal with the seller for her Roth IRA to purchase the property for $75 cash subject to the delinquent taxes.  With closing costs her Roth IRA’s total cash in the transaction was only around $3,000.  Within 4 months she was able to sell the property for a profit to her Roth IRA of $43,500!  Because the property had debt on it and because her Roth IRA sold the property for a short term capital gain, the taxes on the profit were approximately $13,500.  Still, using the power of debt leveraging her Roth IRA was able to achieve a 1,000% return in less than 4 months even after paying Uncle Sam his share of the profits!

Strategy #6 – Hard Money Lending.  Another excellent strategy for building your retirement wealth is through lending.  Loans from IRAs can be made secured by real estate, mobile homes or anything else.  Some people even choose to loan money from their IRAs on an unsecured basis.  As long as the borrower is not a disqualified person to the lending IRA, almost any terms agreed to by the parties are acceptable.  In many states there are limits to the amount of interest that can be charged, and loans must be properly documented, but IRA law does not impose any limits other than the prohibited transaction rules.  For those wanting to avoid the direct ownership of real estate within their IRA, a loan with an equity participation agreement is often used.  Several of my own self-directed accounts combined together recently to make a $25,000, 7 1/2 year, 12% first lien loan against real estate with 6% in points up front.  True, this is not exactly setting the world on fire as far as return on investment goes, but I was very pleased with a safe return on a relatively small amount of cash.  If I get to foreclose on the collateral my accounts should be able to make a substantial profit, since the land securing the loan was appraised at $45,000.  At my office we routinely see hard money loans secured by first liens against real estate with interest at 12%-18% for terms ranging from 3 months to 3 years.

Strategy #7 – Private Placements.  Many of the best opportunities for passive growth of IRAs include the purchase of private limited partnership shares, LLC membership units and private stock which does not trade on the stock market.  Let me give you two examples from my own retirement account investments.  In one case my 401(k) plan invested in a limited partnership which purchased a shopping center in northern Louisiana.  The initial investment was $50,000, and in a little over 2 years the partnership has returned $59,321.  The plan’s remaining equity is estimated as of 12/31/2007 at $31,598 and the return on investment will be around 82%.  Even though the property is debt-financed the taxes on the profit have been almost nothing since the plan has taken advantage of depreciation and all of the normal deductions.  Once your IRA or other plan owes taxes due to debt financing, it gets to deduct a pro rata share of all normal expenses.  Another of my 401(k) plan investments is bank stock of a community bank in Houston, Texas.  The initial shares were sold at $10 per share in February, 2007.  The book value after less than 1 year of operations was $11 per share, and shares have recently been selling to other private investors for as much as $14.25 per share!  That is a great return for a completely passive investment, and when the bank finally sells the shares are expected to sell for well above these amounts.

Strategy #8 – Owning a Business in Your IRA.  One of the most innovative strategies we have seen is the ownership of a business by an IRA.  Although neither you nor any other disqualified person may provide services to or get paid for working at a business owned by your IRA or other self-directed account, this does not mean that your IRA cannot own a business.  Some companies do market the ability for you to start a C corporation, adopt a 401(k) plan, roll your IRA into the plan, and purchase “qualifying employer securities,” but this is different than an IRA owning a business directly.  For example, my Health Savings Account invested $500 for 100% of the shares of a corporation which arranges for hard money loans to investors.  The company is fully licensed as a Texas mortgage broker.  The structure of the company is a C corporation.  Since being a mortgage broker is a business operation, profits from the venture would have been taxable to my HSA if the entity formed to own the business was not taxable itself, and the tax rates for trusts such as IRAs and HSAs are much higher than for corporations.  While normally dividends from C corporations are taxable a second time to the shareholder, dividends paid to an IRA or HSA are tax free as investment income.  The corporation is run by non-disqualified persons who handle the due diligence on the loans and the legal work, as well as by a licensed Texas mortgage broker who sponsors the corporation’s mortgage broker license.

Strategy #9 – Using OPI (Other People’s IRAs) to Make Money Now.  Even if you have not found the investment strategy of your dreams among the strategies discussed in this article, or if you have no IRA or if you are more focused on making money now to live on, your time spent reading this article can still be of great use to you.  For each of the above strategies I have focused on the possibility that your IRA could be the investor.  But what if you are the recipient of the IRA’s investment money?  Are you a real estate investor having a hard time finding funding for your transactions?  If you know people with self-directed IRAs or people who would move their money to a self-directed account, you can borrow their IRA money and virtually create your own private bank!  You can also partner with OPI where the IRA puts up the money and you share in the equity for finding the deal and managing the project.  Simply by explaining to people that they can own real estate in their IRAs you may be able to sell more property, either as a real estate broker or as the seller.  You can even provide financing for your sales by having OPI make loans to your buyers.  Finally, OPI can be a great way to raise capital for your business venture, although you must be aware of and comply with all securities laws.  One bank I know of told me that 42% of their initial capital came from retirement accounts!  Although you cannot use your own retirement account to benefit yourself at present unless you are over age 59 1/2, these are just some of the ways you can use OPI to make money for yourself right now.  A good network is the key to your success.

What I have discussed in this article have been some of the more common investment strategies actually used by our clients.  The only restrictions contained in the Internal Revenue Code are that IRAs cannot invest in life insurance contracts or collectibles.  Almost any other investment that can be documented can be held in a self-directed IRA.  As long as you follow the rules and do not invest in prohibited investments, your only real limitation is your imagination!