About
Seven years ago one of my real estate investment partners decided to tap into his IRA funds tax-free so we could expand our real estate portfolio. As the “Self-Directed IRA Custodian” experience just made him confused and frustrated, I decided to roll up my sleeves and help him get things done. So I dove into the world of Self-Directed IRA & 401(k) Investing… I was fascinated.
For nearly two years I flew all over the country seeking knowledge from tax, legal, and investment experts who specialized in Self-Directed IRA and 401(k) plans. Then one day, one of these experts called me for advice! I thought it was a fluke, but then it happened again with several of the other experts. Before long, the word got out that I knew this field inside and out.
As it turned out, there were a lot of people looking to get straight answers and powerful Self-Directed IRA/401(k) strategies. I couldn’t stop the phone calls from pouring in, so I started charging consulting fees.
What started as a consulting practice has flourished into Nabers Group, the leading provider of direct control investing with an unlimited platform. Not only do we have the only exclusive license to the IRA LLC from the attorney who created it, we also pioneered the non-custodian, self-trustee Solo 401(k) in 2006.
Compliance
I annually visit with the IRS and U.S. Department of Labor in Washington, D.C., and I’m the founding member of the nonprofit professional trade & education association, IRA Association of America.
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Comments»
Hi Jeff,
Nice work on the website. Lot’s of good information that will surely help all investors at any level from novice to seasoned.
Keep up the good work.
Sincerely,
Jeff Williams
yo Jeff, hope all is well in Denver
Hi Jeff,
Thanks for the comments on my site regarding retirement accounts.
Healthy discussion is good and it looks like you’ve got some great experience to back it up. Thanks!
Brian Armstrong
Hi Jeff – which do you recommend more. A self-directed Roth IRA, self directed 401(k), or SEP-IRA. Thanks.
Also, how much do you charge to setup these self-directed accounts along with yearly fees.
and can you recommend any other companies that setup self-directed retirement accounts? Thanks.
@Chris – Anyone who can qualify for a Solo 401(k) will experience many unique benefits above and beyond an IRA. I just recorded some video of a sit down chat with Eric Wikstrom (CPA, CFP, & CEO of Integrated Wealth Strategies) in which we discussed this. The bottom line is that, when eligible, it’s generally advantageous to use a Solo 401(k).
As for Roth or non-Roth… keep your eye on my blog… I’ll post a comparison within the next week.
Also, my company (Nabers Group) is the world’s only full service retirement account provider… we’ve developed our services to fill a gap in the marketplace that we believe others have left… so my primary (although biased) recommendation would be to call us at 877-903-2220.
MY QUESTION IS WHAT IS THE NEW RULEING THAT THE IRS HAVE PUT ON THE 401K AND IS THEIR A DEAD LINE FOR SINGLE PEOPLE THAT HAVE ONE AND ALSO EMPLOYERS ALSO RE SPONDABLE FOR THEIR EMPLOYEE. EMAIL ME AT TOPCAT@ACNINC.NET THANK YOU.
My question is as follows: I am the only participant in a 401k and will be the only one employed and consequently the plan fiduciary. I formed an LLC with 2 other members(parents and brother) to invest in a captive insurance company of which we are minority shareholders. Am I subject to the prohibited transaction rule if I allocate money to the LLC in order to purchase shares in the captive? I am a 33% member in the LLC and our investment is in a minority shareholder position. Your thoughts and to what extent can your organization provide administration services if it is custodialized at Fidelity or should I be prepared to move the account?
Michael,
If you and your parents collectively own 50% or more of the LLC, then the LLC is a disqualified person which means your 401k buying the LLC’s membership units would be a prohibited transaction.
If you and your parents collectively own less than 50% of the LLC, then you have a gray area which can still likely be a prohibited transaction if your 401k buys membership units in the LLC.
If the captive is a separate entity, and the LLC only owns a very small portion of it, you may be able to safely invest your 401k directly into the captive.
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.
i am a real estate land flipper..thought of opening self directed IRA LLC w/ entrust but they said about the UBIT…so someone suggested self directed SOLO 401 (open a trust) and the 401K own the trust so i can direct 401K
1) So does the 401K have to pay UBIT…i asked around and they said no b/c it is qualifed plan
VI,
There are two types of UBIT that a retirement account can be required to pay:
1. General UBIT resulting from ownership of a business / operating company. This is the full trust tax rate applied to the taxable income. Taxable income over $10,000 is taxed at 35%; trust tax rates ramp up much more quickly than personal or corporate tax schedules.
2. UDFI (debt-related UBIT) results from owning real property leveraged by mortgage debt. This applies the trust tax to the portion of the taxable income that is attributable to the leveraged amount. Because of this “discount’ the effective tax rate is often around 12% or lower.
A Solo 401k is exempt from #2 (UDFI). Your first statement was that you are a flipper. That means the UBIT concern is about #1 above because if you flip properties in a certain way can make the endeavor more like a business rather than passive investment holding.
Solo 401k plans are exempt from #2 above, but NOT #1 above. So the issue here is whether your flipping appears to be more like a passive investment or more like a business. Here are some key factors:
How long do you hold each property? The shorter, the more it seems like product inventory of a business.
How many properties do you flip per year? If it’s a lot, you have to spend a lot of time doing it. A lot of time isn’t passive investment.
Do you advertise? Generally advertising is a business activity.
Another issue if you are deemed to be running a business is prohibited transactions. You can manage an LLC that your plan invests into as long as you don’t go beyond administrative duties (paperwork and decisions). You are a disqualified person for your plan to transact with, so if it turns out that you are running a business by going beyond administrative/ministerial duties, then you have done a prohibited transaction. In an IRA it results in a fully taxable distribution of the account in its entirety; in a qualified plan it results in a 100% tax on the amount involved in not corrected within a year.
This can get kind of tricky. My business works like this:
I can help you through these types of understandings for no consulting cost if you establish your plan with my company.
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/
Jeff,
I’m very interested in your business and the services you provide. I’m a Real Estate Investor and I’m working to develop a network of IRA holders as Private Lenders. I also provide some basic education on the subject of Self-Directed IRAs.
I am just starting in the education area and was wondering from your standpoint what kind of licensing I would need to provide it.
In addition, I’m curious as to your educational background and licenses, if you wouldn’t mind sharing.
Thank you.
Paul,
My background is in mortgage lending and personal real estate investment. My mortgage license expired after I sold my mortgage business, and I continue to hold my real estate license which I have used only for my personal buying and selling.
We develop educational programs to license to others through our affiliate program. Our affiliate program is a simple arrangement where a person or company can generate leads to refer to us for IRA LLC or Solo 401k establishment services and receive a referral fee/commission.
Feel free to give us a call to find out more about the affiliate program. Thanks for your interest.
Hi Jeff,
Thanks for your post about Socially Responsible Investing! I just wanted to point out a way everyone can use their money to support green efforts without sacrificing profit: choose a socially and environmentally responsible bank! I’m working with a green bank called ShoreBank, to promote their Online High-Yield Savings Account. Please contact me directly if you would like to know more about ShoreBank’s efforts to protect the environment. Thanks!
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,
Do you mind to talk a little bit about your educational background and work experience?
Susan,
I dropped out of college at age 19 to be mentored by a 30 year-old millionaire. Initially my goals were mostly financial and materialistic (which would later evolve), and I worked in direct marketing. After becoming the top producer in the marketing company, I was burnt out, and my mentor came out of retirement to start a mortgage company. I jumped on board with him and came to the realization that anyone who can make it in direct marketing can make it bigger and easier in a more traditional type business model. As a newbie in the mortgage business I read a lot about real estate investing, and started doing some of my own.
After a year as a loan officer, I opened my own mortgage lending company, hired and trained a staff, and got it somewhat on auto-pilot. I focused mostly on real estate investing and came across the concept of self-directed IRAs. It seemed simple enough, so I sent my investment partners to custodian corporations to get self-directed IRAs setup. There were many shortcomings, and my partners were upset with me. I rolled up my sleeves and set out to address their concerns and solve their problems related to self-directed IRAs and related obstacles. I thought it would take a couple weeks. I usually finish what I start; in this case my initial research ended up taking almost two years full time. From that point, I saw a need for consulting in the field and started a consulting firm.
With my consulting firm I solved the problems and provided the assistance to self-directed IRA investors that nobody else would provide. I eventually learned that most of the problems would have been proactively avoided if the individual would have started the account setup and due diligence process with a more useful and service-oriented company in the first place. Nothing like “that company” existed so I converted my consulting firm to a self-directed retirement plan provider. To this day, we are the only company that provides quality ongoing support after the account is opened.
Jeff
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
Jeff,
I am receiving so much conflicting advice on the subject of financing a franchisee business from a self directed 401K attached to a C corporation that I would be the sole owner of – it is unbelievable. I was very interested in your series of articles – culminating in your 3rd article with the interpretation that the so called ROBS strategy is illegal and under such a strategy I would be fully liable for taxes and penalties on the 401K funds used toward the business.
Another advisor is telling me that your interpretation is clearly missing the fact that 401k rules allow an exception to the prohibited transactions rules for participant investment in employer stock and further does not reflect the fact that the strategy has been used by 1000’s of small business owners for more than 10 years. He says there has yet to be a single action brought forth against any employer or service provider.
Color me confused. Can you please address this other advisor’s rebuttal to your interpretation.
Thanks,
Jeff
Jeff,
Sure. It sounds like there are 2 rebuttals.
1) MISSING THE EXEMPTION – If you read my 3 part post carefully, I am not missing the exemption at all. In fact it is clearly addressed in Part 1. The exemption is for “qualifying employer securities” and this exempts the acquisition of the stock as an isolated transaction. It does not exempt the entire scheme from ERISA or IRC 4975 (prohibited transactions). Check out the DOL Advisory Opinion 2006-1A. This set the precedent that 4975(c)(1)(D) and (E) are always applicable to retirement plan strategies regardless of exemptions and staying within certain % ownership amounts in an attempt to create loopholes.
2) THE STRATEGY HAS BEEN USED THOUSANDS OF TIMES – Unfortunately, whether something has been done a lot has absolutely no effect on whether it is illegal. It all comes down to the written law and how the government applies it. The reason there has yet to be a single action is because nobody has asked DOL to give an official opinion on it. They don’t ask because they are afraid of an unfavorable answer. The important thing to note is that the ball is in THEIR (the government’s) court. If they have not gone after thousands of people who have broken the law, it doesn’t mean that the law wasn’t broken. And they can choose to go after these entrepreneurs whenever they want, resulting in 115%+ taxation.
Jeff
p.s. to Jeff… The “this has been used thousands of times” argument is possibly a bad thing. If a tax law has been abused and broken through a certain strategy, the more the strategy is used the closer it comes to reaching a point where it is “worth it” for the IRS to allocate resources to cracking down on it.
If ROBS was used 100 times and the IRS could only collect a couple million dollars in tax revenue, they couldn’t really afford to assemble an effort to do so. On the other hand if ROBS was used 5,000 or 10,000 times, there are hundreds of millions of dollars (possibly over $1 billion) in tax revenue for the IRS to collect by creating a program that goes after the scheme.
Furthermore, the more ROBS setups a particular firm has done in the past, the more likely they will be a primary target of the eventual enforcement efforts.
It’s a weird situation. The DOL makes the rules (or at least interprets them) and the IRS enforces them. Lack of agency intercommunication is part of the reason that ROBS hasn’t been totally shut down, but this zero enforcement phenomenon isn’t likely to last.
If I’m a Realtor and I have an IRA LLC that purchases rental properties, if I act as the agent in purchases or sales of those rental properties my commissions would be a prohibited transaction. Correct?
Is there any way to deal with this problem such as signing over commissions to the IRA LLC? Or having the broker directly pay the IRA LLC? Or do I really have to use another agent to aid in the purchase or sale of properties for my own IRA LLC?
Dave,
The short answer is “yes, receiving a commission that results from directing your retirement account is a prohibited transaction.”
But that’s not the whole answer. Give our office a call at 877-903-2220 and we can fill you in a more thorough response.
Jeff
I am looking to start a self-directed IRA. I have a tenant who is looking to buy a mobile home from my single-member LLC. Would it be a prohibited transaction for my IRA to invest in the mortgage/trust deed used to fund this purchase. I would be loaning money at 8% interest.
My wife and I have our self directed IRAs invested in a condo, tenancy-in-common. Rents are good were we live. The home we share is on a large lot which would legally accommodate an 800 sq ft “granny unit” with ample common space, which would rent for as much or more than our investment condo without the HOA dues and less property taxes. We could easily see ourselves living in something like this when we retire. We have a mortgage on this home and still owe about 70% of its value. Is there any way we could use our self directed IRA funds to build a “granny unit” on our property so that we could increase our rental income as compared to the condo? I will soon be 58 and my wife is 55.
William,
I recommend you contact my office for further assistance. 877-903-2220.
Jeff
Jim,
I’d recommend you contact my office for further assistance. 877-903-2220.
Jeff
Can I take my Super Simplified 401K Plan and/or ROTH convert to cash and then intest in mortgages on my investment property? I would still hold the deed to the house but my retirement account would hold the note and deed of trust. I would then eliminate or greatly reduce my management services costs, invest in a product I totally understand plus pay myself a return. Is this a Prohibited Transaction?
Many Thanks! Jack
Jack,
What you described would be prohibited, but I encourage you to contact my office for further assistance in moving toward a compliant strategy to accomplish your objectives.
877-903-2220.
Jeff
Hi,
We are trying to determine if we are eligible to open a Solo/Individual Roth 410(k).
My wife and I are married, file jointly, 1099 self-employed Realtors with no W-2 wages. All our income is commission income derived from commissions paid to us by our broker.
I think for tax purposes we are considered to be a sole proprietorship, but we have no official “sole properietorship” document that says so.
Are we eligible to open an Individual/Solo Roth 401(k) plan?
Kind regards, Mike and Vivian
I am looking to start a self-directed IRA. My wife and I are holding a seller financed mortgage for some real estate that we sold 3 years ago. The mortgage balloons in 2 more years and we could really use the cash now since I was laid off a year ago. Is there any way to structure a loan from the IRA LLC to the couple who bought the property so that we can access the cash now and let the IRA LLC hold the mortgage on the property until it balloons? Or is all hopeless because it would be a prohibited transaction?
Robert,
The only way to get your hands on your retirement funds for personal use to to do a taxable distribution or to setup a Solo 401k and take a participant loan (which must be repaid over a period of 5 years).
Jeff
Mike,
A “sole proprietorship” is something that occurs when a person decides to sell a product or service himself or herself. No special papers from any governments or masters are required!
It’s incredible that the government has us so conditioned to jump through the hoops of their bureaucracy that we feel like every decision, transaction, and activity could require a government form.
You’re not alone; most Americans today expect some sort of government filing to accompany any major decision. It’s sad.
The good news is it sounds like you do have a sole proprietorship and you can setup a Solo 401k! Give us a call at 877-903-2220.
Jeff
Hi Jeff,
My husband has an IRA LLC that we formed last year and used it to purchase a duplex which we are now going to sell. We have a second LLC that is NOT an IRA LLC that we are each 50% members in and it owns 4 other duplexes. My question is this… when we sell the duplex that is in the IRA LLC can the IRA LLC then purchase a duplex directly from the NON-IRA LLC or is likely to be a prohibited transaction? Would it still be likely to be a prohibited transaction if the NON-IRA LLC first sold one of its 4 duplexes to our friend and then the IRA LLC bought it from that friend? Any input is greatly appreciated!
Hi, Pamela.
Both of your proposed deals would be a prohibited transaction. To stay in the clear, you’ll have to do deals in which you are only involved in one way (in the interest of the retirement plan OR in the interest of yourself directly, but not both).
Thanks for stopping by
Jeff
p.s. To elaborate on your second idea, putting a friend sandwiched in between the two real parties transacting doesn’t change the rules regarding the two real parties.
Jeff,
Can I personally hold precious metals in an IRA LLC?
Jeff,
Is it necessary to have a solo 401k in conjunction with an IRA LLC to personally hold precious metals? Or do I just need to setup only an IRA LLC?
Would it be possible to transfer my self-directed 401K into a Solo 401K self-trustee? Thanks. Bill
Hi, Bill.
Yes, this is possible. Sign up for my report on the right and you’ll get on my mailing list and we’re about to offer a very special deal on Solo 401k setup.
Jeff
Jeff, I currently have no business but was wondering if I would be able to start a business from my existing passive rental income?
How would I go about it and what are the costs? Would I then qualify for a solok by converting some of the passive income to earned income and only take a very small amount so as to not pay much tax but still get the benefit of the solok.
Rod,
You should talk to your CPA, but if you setup an entity and hired your entity to be the property manager, that may convert it into some earned income.
Also, there is no minimum amount of income required to be an entrepreneur. In fact, choosing to start a new business qualifies you to start a Solo 401k. You may want to check this out:
http://nabers.com/docs/solo401k_4dcm.html
http://nabers.com/docs/gt_inside_info.html
Jeff
Jeff,
Would buying a ford vehicle when I have ford stock invested in an institutional IRA be considered a prohibited transaction?
Related (I think) to Bill’s question: if we have a self-directed IRA set up that has invested in a the 100% ownership of rental property, can that be rolled over/transfered into a new Solo 401k?
Jeff
Thank you for such an informative blog–you should get more ad$ based on the quality of your info alone !
Quick question-Can I set up an LLC with 4 members (a CESA, my Roth, my operating INC, and a Living Trust-all in equal %) and invest in qualified transactions?
If so, the Operating agreement would have to identify the 4 founding members and their %, correct?
Thanks much.
What are the steps to set up a sole proprietor business to qualify for a solok in California?
@Jeff- Buying a ford vehicle when you have ford stock held in your IRA is not a prohibited transaction because publicly traded securities are exempt from those rules. As it often is, this is a case of laws and regulations that introduce road blocks to anyone who doesn’t do business with the Wall Street insiders who write the laws. The bottom line is that the rules don’t apply to the stock market, but they do apply when using smarter investment strategies.
@Rod – Step 1… Say “I am now starting a business.” Then you’re a Sole Proprietor. You can’t stop there. You have to actually start making or selling a product or service and intending to make a profit, but the act of “deciding to” literally brings your Sole Proprietorship into existence.
– Jeff
@John – Yes! Just setup the Solo 401k, then contact your IRA custodian to instruct them to do an “in kind” transfer.
@Alex – Check out this post —> http://www.jeffnabers.com/2008/07/24/coinvesting-with-your-plan-partnering-with-disqualified-persons/
Jeff
Jeff
I contacted the Swiss Annuities company, they are saying the min investment for a variable is 250K, not 100K as on your webinar. Please advise.
thanks Sy
Hi, Sy… that is actually correct. My mistake.
50k min for the fixed annuity.
250k min for the variable annuity.
– Jeff
Hello Jeff,
I am considering an angel investment in a very early-stage company using the revenue share approach. I saw your post about this. Do you know of any examples of this arrangement?
I would have to decide when the revenue sharing would start, and the time or money cap — which could get tricky. If you have any guidance on this, I would appreciate hearing it.
Kelsey Libner
Brooklyn, NY
Hi Jeff – I noticed you are no longer accepting new clients for IRA LLC’s? How come? I’m shopping around for one, for a vacation investment property and I am trying to compare my options against Guidant’s model. Thanks, Dave
@Kelsey – This is a topic that could help A LOT of entrepreneurs and investors. I plan on making an information product about it to help people facilitate this type of arrangement. No date nailed down yet, but make sure you get on my email list to be kept in the loop
@Dave – As education about the Solo 401k has grown, Solo 401k setups have become over 90% of our business. We’ve recently made a large investment into our Solo 401k delivery system and we’ll be doing the same with our IRA LLC system soon. Until then, setting a Solo 401k, which is more powerful and less expensive than an IRA LLC, is the best option.
– Jeff
Hey Jeff!
On post #79, you refer to a special on solo 401k setup. Has that come and gone? Still available? No longer applies? Just wondering.
- gregH
Greg, I don’t see where my posts are numbered so I don’t know what “post #79″ is.
Hey Jeff!
Here are the postings from May 2010:
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
78. Bill – May 8, 2010
Would it be possible to transfer my self-directed 401K into a Solo 401K self-trustee? Thanks. Bill
79. Jeff Nabers – May 8, 2010
Hi, Bill.
Yes, this is possible. Sign up for my report on the right and you’ll get on my mailing list and we’re about to offer a very special deal on Solo 401k setup.
Jeff
~~~~~~~~~ End of quoted postings ~~~~~~~~~~~~~~~~~
I was curious if the “very special deal on Solo 401k setup” has come & gone? Still available? No longer applies?
- gregH
Greg, yes that offer came and went within a week. We do promotions occasionally. They usually involve a limited number of spots, and they usually get reserved within a few days, but sometimes within a few hours.
Jeff
Your site is a good resource for information. i set up a special purpose LLC with my bank and they issued a 1099 (not 1099-R) because they treat my LLC the same as any LLC . My accountant is having a lot of difficulty on how to report/manage this even with a Form 5498. Any suggestions ?
Hello-
Excellent site- My question- Is there a way to make a 401K ( with 10 employees) self directed to purchase real estate? If so, does the UDFI apply to the taxable income after depreciation or prior to? Does the UDFI also apply to the ultimate sale?
What is the best way to purchase a property that will require a mortgage? There is one I would like to purchase that would qualify for a CTL 99% loan- however, that seems like it’s not the right thing to do and would make 99% of all the income taxable. Is this correct thinking? thank you-
Please send me your copy of the Wealth Control program that contains all of my best Self-Directed IRA & Solo 401(k) investing strategies that have positively impacted my clients by more than an estimated $100 million dollars- Thank you