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hi,
i am interested in setting up a solo 401k account, i presently have a 401k from my old employer at fidelity that i would want to roll over. and take out a loan to fund my business. please send me some info on your services and fees associated with setting up account & loan. thanks
-maria
Maria,
Thanks for your interest. We’ve found that there are a few avoidable mistakes in the way most investors use or plan to use a self directed account. In an effort to avoid these common mistakes, doing business with us starts with completing a simple, brief telephone questionnaire. To start the process, please call us at 877-SOLO-401K (877.765.401). We look forward to assisting you.
Hi Jeff
I love your blog. I hope you can answer this question. A friend is setting up a Self Directed IRA (to be held by a custodian- a local bank) and transferring $30,000 (that he will loan to his condo association- he lives there and is on the board- to pay for a new driveway for the Association) from his IRA account to local bank. He is in the process of filling out the forms to do this. The loan to the Association would be in the form of promissory note
Is this a prohibited transaction under IRC Section 4975 (would he be a disqualified person or not under this scenario and so forth), if a loan to the Home Owners Association from a Self Directed IRA has any tax problems-Please advise.
AnnieO,
A response based on a quick read of your question: I don’t think the condo association is technically a disqualified person. Usually POAs/HOAs are nonprofit corporations, so it’s impossible for your friend to own 50% or more if it – nobody owns it. What about voting and control? Does he have less than 50% of the voting power?
The next question is Regardless of whether the HOA is technically a disqualified person, does your friend benefit from directing his IRA to make this loan? I think the answer would be that he benefits somewhat, but not substantially. However, if he receives compensation for serving on the board of directors, then I think, yes, he does benefit… and he should avoid making the loan.
In this scenario there is probably not a definitive answer. I’ve written a comprehensive prohibited transaction guidebook that will be available next week that may prove helpful. At that point, I’ll add a link to it here.
Jeff- Tanks for your prompt and intelligent and, of course, knowledgeable response!
Any benefit my friend would recive would be use of a driveway at the condo complex he lives at.
I will check if he receives compensation to serve on the board- but I don’t think so.
If his position is volunteer on the board and voting is as 1 member of the board and he will share with many others the benefit of a new drive way, would the answer be that he and r the HOA are not disqaulified persons and he can loan the money to the HOA to get the new driveway from his newly established self directed IRA?
Complex stuff!
Thanks.
AnnieO,
Unfortunately I don’t think there’s a clear answer. If money is to be loaned to the HOA from somebody’s IRA, it would be better for it to be from a person who doesn’t live there and who doesn’t serve on the board.
Jeff
Jeff – we spoke a few weeks back. One of your representatives sent me some links which I’ve reviewed. I have a few questions in advance of working with you. As an business owner with a Subchapter S Corp and sole owner I am interested in taking my 401k plan over from a previous emplooyer. My goal is to take out a substantial loan (50%) and pay down some expensive debts. Should I take the loan out what tax implications might there be, if any? Am I taxed on the loan as income?
Loan proceeds are generally not treated as income, as is the case with a Solo 401k participant loan as long as it is actually paid back in accordance with the promissory note.
I am interested learning how to set up a Solo 401k Trust. I currently have a Solo 401 k for my business LLC and will be adding to it again this year. My objective is to reduce fees and own gold without custodian fees unless I can do it directly with a Swiss custodian that insures the gold.
One question I have is how would you protect it from possible government confiscation if it is in a Solo 401k trust or IRA LLC with yourself or a third party swiss custodian?
Please send any info for me to understand setting up a Solo 401k trust or your free Prohibited Transactions – Guide Book if still available.
Bob,
To request the free PT Guide Book, please follow the instructions in that post.
Our setup of a Solo 401k is a package deal. I don’t know of anyone who will setup a trust for an existing Solo 401k without restating all of the plan documents. It would be much more work (and more cost for you) to have the existing plan documents examined and specially edited and have a special trust agreement drafted.
How do you protect metals from government confiscation if it is in a Solo 401k trust? Well you would have physical possession of the precious metal coins as trustee of the trust. Protection from confiscation of Solo 401k trust owned metals would be no different than protection from confiscation of any other precious metals in your possession.
Hi Jeff. I just finished school and starting earning a steady income. As a young investor with few assets, where would you suggest placing my money? Right now I put any extra money I have into a money market account. I am interested in investing in a relatively stable country such as canada but i am not sure what the best way to go about doing that is. Any suggestions on that? Thanks
JJ,
Firstly, I would suggest you save money in a currency that is more stable than the U.S. Dollar. Not only is our dollar losing value at double digit rates right now, we just saw one of the only instances of money market funds becoming worth less than par.
Canada may be a good bet as I think they have budget and export surpluses (while we have deficits), but you’ll need to physically go to Canada to open an account.
Because of the current financial services meltdown, we (Nabers Group) may soon offer assistance in opening bank accounts (without traveling) in foreign countries who use more sound monetary policies which result in more financial stability than here in the U.S. If and when we offer such services, I’ll announce it on this blog – so feel free to subscribe by clicking “Feeds FULL” on the right column of this page.
Hi Jeff. You have provided great counsel to many people. We have also been investigating the usefullness of an IRA-LLC strategy. I have researched the subject and need to make a decision this month on whether to move forward with a group such as yours to establish a self-directed IRA. I would be interested in your opinion of our plans. I am currently the owner of 15 acres of farm land. I bought the property as a cash sale three years ago. In the next 3 to 5 years we are going to build our future retirement home on the property, and begin a small vineyard operation. Our principle residence is Chicago; we will not officially change residency to the vineyard location for another 5 years. In the interim I will contract out for grape production services. Once we decide to move, I may decide to officially retire and become a grape producer full time. An adjoining 10 acre tract has recently been offered to me as a private sale by the neighboring farmer. My husband and I would like to acquire the land and hold it as an investment. We would like to do this through an IRA-LLC. It would be funded from my current SEP rolled into a self-directed IRA. This would represent about 25% of my retirement portfolio (although the value is dropping everyday recently!) We would leave the land fallow- that is only using it for hay (its current function). After I turn 59’1/2 in 7 years we would distribute the land from the IRA-LLC to me at present market value and at that time have the option of developing the land into an additional home site or propogating it with more grape vines based on success on our current land. I understand that we could not physically touch the land ourselves during the holding period. Would this align with the IRS rules? I believe it would not represent a prohibited transaction or self-dealing because the appreciation in land value would benefit the IRA-LLC in the future, not me personally in the present. Is that a supportable position? Thanks for your counsel.
Hi, Mary.
Thanks for your interest. I’m teaching a class tomorrow. I’ll take a closer look at your message over the weekend. You can also start the process of hiring our assistance by calling my office at 877-903-2220.
Jeff
Mary,
As far as prohibited transaction compliance is concerned, it seems you have an accurate understanding.
I will say that in terms of wealth growth and tax minimization you may want to reconsider your approach.
Jeff
AnnieO,
The prohibited transactions guide book is available now at https://www.iraaa.org/store/
For a trading business, leverage is often greater than 10:1, so it seems that UDFI would be a big potential concern here. In the case of a properly formed LLC that is owned by a self-directed Roth IRA, where the LLC is a professional trading business that trades in leveraged instruments such as futures or spot currency, is UDFI or UBIT going to be triggered? Can your firm offer advice about the best structure a small, individually run and operated trading business?
Karl,
I’ve responded to your question at this link here.
Our company 401k is also one of the owners of our sub s bank. It also owns an interest in another sub s bank. Would the earnings be subject to the tax on unrelated business income?.Would the municipal income also be subject to tax? Based on instructions it would be. Does it make any difference that this investment is not debt financed property? By forming an Esop would we avoid tax?
no bank will open a self directed 401K plan..bank of america said that he stopped doing it 11/2008…help:?
About 2 years ago, a friend and I bought a business. We each own 50% of the business. Recently my partner expressed interest in selling his 50% interest to me.
Can I buy his 50% with my IRA LLC?
@ Mike Mudd,
It sounds like the income from ownership of the bank is coming from a business rather than a passive asset, so yes it sounds like UBIT would be due.
@NLO,
We have clients open bank accounts for their Solo 401ks every single week. In fact, Bank of America is a common bank of choice. Large banking corporations sometimes have no idea how to deal with uncommon requests. We’ve even had a case of a client being told by a Bank of America branch manager, “We do not open trust accounts and we cannot open an account for your 401k trust.” This customer then drove 3 miles down the road to another Bank of America branch and opened the checking account for the 401k trust in under 20 minutes.
If you have your Solo 401k setup with us, we offer guidance documents for opening bank and brokerage accounts that include written instructions for the bank/broker. We also provide unlimited support to our customers in matters such as this. Give us a call to leave the frustration behind 877-903-2220.
@Tom,
Great question. I’ve written a post about coinvesting with your plan that addresses this topic.
I have a roth IRA invested with the Madoff firm. The Ira custodian is refusing to file the SIPC claim form. Do they owe me a duty to do so. They sent me a letter authorizing me as the beneficial owner to submit the claim. It doesn’t seem right. Am I opening myself up to problems by submitting the SIPC form personally.
Hi, Peter. I’m sorry to hear that your custodian is being difficult. Submitting the SIPC form for your IRA shouldn’t create the risk of a prohibited transaction unless you do it in a way that benefits you or any other disqualified person. For instance, if SIPC issues money or securities to you personally (rather than to your IRA) as a result of your instructions on the SIPC form then you will have a prohibited transaction or taxable distribution.
See http://jeffnabers.com/2008/04/24/prohibited-transaction-basics/
I agree that it’s not right – in the sense that the custodian isn’t doing their job. But in the sense of risk of noncompliance, they seem to be taking the risk if you document your communication with them. I’d recommend writing them a letter asking them to take care of the form. And beyond giving you an authorization letter, get their refusal to follow your directions in writing as well. File these letters away, and also make sure that SIPC issues claim payment to your IRA.
hi, i have a self directed ira and used it to fund an llc to “FLIP”
real estate. can my llc take out bank laons like a normal co. ?
Russell,
You cannot guarantee the loan like you would a normal loan. The lender can’t have recourse against the LLC or the IRA.
See:
http://jeffnabers.com/2008/04/15/solo-401k-nonrecourse-loans-now-available/
Hi Jeff,
I have a 401k and pension from a previous employer that I want to roll over into some investment vehicle to buy property. I am not self employed right now, so is it possible to create an S Corp or one of the other types of investment vehicles to do this?
Thanks
Hi Jeff,
I just started working as an independent contractor (1099) and would like to open either a SEP or solo 401k. I am not sure how long will I be working on 1099 at this point. Does it make sense for me to open either of those?….My primarily goal is to save money on taxes.
Your advise would be greatly appreciated.
thanks,
Robert
@Michelle – You don’t have to create an S Corp to have a self directed retirement account. This can be confusing at first, but we’re happy to clear it all up for you. Call my office at 877-903-2220.
@Robert – I think we’ll need more information to be of assistance. Call my office at 877-903-2220, and we’ll be happy to walk through your situation.
Jeff
Jeff,
I have 2 questions for you. 1) do you have or can refer to where I might obtain sample templates for an operating agreement for a SDIRA. Do the agreements need to be state based? My LLC will be Nevada.
2) I am planning on transferring two separate IRA’s to a custodial for purposes of a SDIRA and i want the new IRA to be a Roth. I understand that I will have to pay taxes on the existing IRA’s since their are not Roth. Is my tax basis the current value vs. the initial investment or is it just a simple tax on the current value that is transferred? Also, the guidelines that allow me 2 years to pay this tax gain starts in 2010 but can I do it now in 2009 and spread it out over 2 years?
Thanks
Mitch,
1) I don’t. Most companies that sell a special-purpose operating agreement or IRA LLC formation services are selling a basic operating agreement (like what you can buy on legalzoom.com) with the main text of Internal Revenue Code Section 4975 inserted into it. For practical purposes, I don’t believe this type of operating agreement has any advantages over the basic one from legalzoom.com. I also believe that forming your own LLC without additional protection (from the IRS) measures is not worth the risk.
My company, Nabers Group, is the only firm in existence that establishes a special purpose IRA LLC with substantial documentation designed to effectively protect you from the IRS in the event of an audit. This documentation goes far beyond the operating agreement itself. We used to sell kits and let people create their IRA LLC themselves, and almost all cases involved the customer getting frustrated or making mistakes and undoing the whole thing and then asking us for the turn-key setup. In the interest of our clients (and based on feedback from clients) in 2007 we terminated all IRA LLC related services except for our turn-key service. To learn more, call 877-903-2220.
2) I recommend talking to your CPA about calculating basis and taxes for a Roth conversion. I also generally recommend not doing a Roth conversion at all. See http://jeffnabers.com/2008/05/15/the-roth-assumption/. In addition the the argument in that link, inflation strengthens the case for staying with non-Roth funds. This topic is covered in detail in my book which can be ordered at http://www.unlimitedinvesting.com.
Jeff
Jeff,
I am interested in the IRA LLC. Will the transfer of funds go directly from my present IRA brokerage account to my checkbook controlled account or does it have to go through another account? If it has to go through another account, how can I be assured of the legitamacy of the transfer?
I am interested in the LLC purchasing some raw land and would like to consider developing it into a residential subdivision at some later date. What are my options to do this? What role can I take in the management of it without being a PT. Is there an age when I could begin to distribute it to myself as the developement proceeds such as building a home for myself on one of the lots?
Joe,
Those are good questions. The easiest way to get a full answer is to call my office at 877-903-2220 and dial option 1 to learn more about the IRA LLC.
Jeff
Here’s a strange one (or maybe not) for you Jeff. I am the sole shareholder of a “C” corp. A client of my C corp is an S-corp who owes my C corp $50k in receivables. This is an unsecured debt and I am afraid that the owner will close the business and I’ll be out the $50k. My idea is to have my Self-Directed IRA invest in a $50k second mortgage on the owner’s personal residence (thus making the $50k secured), he will then take the cash received from the second mortgage and make a $50k capital contribution into his S corp so that his S corp can pay my C corp it’s receivables. What do you think?
Ken,
That appears to clearly break at least one of the following prohibited transaction code rules:
4975(c)(1)(D)
4975(c)(1)(E)
4975(c)(1)(F)
Any arrangement where your decision to enter your IRA into a transaction involves a substantial benefit to you is off limits.
If it’s a good investment for the IRA (apart from helping you out), then you should offer it to someone else you know who isn’t related to you.
I hope this helps :-)
– Jeff
I don’t read your messages as much as I would like because I cannot remember my password when I don’t use it frequently so then more time passes and I really don’t use it because I can’t remember it. I figure if I got the e-mail, I should be able to read it without a lot of effort. Too complicated for me and takes too much time to figure out. If you simplify, I will read every one. Sorry.
Jeff,
Great information on your blog.
Say, what is the source of information on iraaa.org that $2 trillion will move to self directed retirement accounts in the next two years?
Also,how much is in the self directed retirement accounts at this time?
Many Thanks
Lee
Ken, this may be a long shot, but here it is anyway.
You may be able to structure an arrangement where your SDIRA invests $50K in the second mortgage. The money is then invested in certain assets, such as, tax deeds or distressed real estate, etc.
Your borrower makes some money and pays handsomely to your SDIRA. You don’t get anything directly, but your SDIRA gets richer.
We have a solo 401k that took assets from the plan to purchase stock in a company (bank). The solo 401k owner is also employed by the same company (bank) as one of its Vice-Presidents. The solo 401k owner does not have any stock ownership in the bank, only the stock owned by his 401k plan. DOES THIS CONSTITUTE A PROHIBITED TRANSACTION?
Thanks.
Hi, Kathy.
Based on my annual meetings over the past several years with the government agents who write and interpret the rules about prohibited transactions, here’s how I think they would view it:
Yes, overall that would most often be a prohibited transaction. The bank isn’t a disqualified person, so it doesn’t violate IRC 4975(c)(1)(A), (B), or (C), which are the 3 PT rules that most people in our industry understand. The potential violation is with IRC 4975(c)(1)(D) or (E) — basically the rules that say the plan owner can’t deal with the assets in his own interest or benefit (aside from his benefit of receiving future distributions [taxable] from his plan).
Here are the things that would likely become key factors…
Was he/she employed by the bank when the decision was made to invest in bank stock?
Under what conditions was the stock offering made? Was it seed capital? Was it to avoid insolvency? Was it just to offer some equity to key employees?
Did the bank stock offering sell out quickly and easily and with an investor waiting list or did it need the investors who invested because there were no other interested investors?
The answers to these questions would create a fact pattern that would indicate whether the investment was made with the intention and expectation of benefiting the disqualified person (even if indirectly or implicitly) or with the sole aim to benefit the plan.
I hope this helps ;-)
Jeff