Get 5 Steps to Freedom Book on Kindle Now! January 19, 2010
Posted by admin in : Money, Precious Metals, Self Directed IRA Solo 401k, real estate , 1 comment so far
Finally! I’ve received many requests to make the book available in Kindle format. We started working on that about 6 months ago, and as of just a few days ago, it’s available.
Go here to purchase 5 Steps To Freedom on Kindle.
The book is more than financial education… it’s an action plan. And it’s more than only an action plan… it’s a proven action plan backed by over a dozen cases studies. It shows you true stories of friends and clients who have found massive success in their self-directed wealth management.
You’ll find that most (more…)
Tax Return for UBIT – Does your retirement plan own leveraged real estate or an active business? April 15, 2009
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a commentJust a quick, last-minute reminder…
- If your IRA owns mortgage-leveraged real estate, you owe UBIT.
- If your IRA or 401(k) owns an active business structured as a pass through entity (such as an LLC or partnership), you owe UBIT.
- If your 401(k) owns mortgage-leveraged real estate AND the mortgage is a “seller carry”, you owe UBIT.
UBIT, or Unrelated Business Income Tax, applies to tax exempt organizations including retirement plans. To pay UBIT, Form 990-T must be filed with the IRS. If this is all news to you, once you are done scolding yourself, you may want to file for an extension using Form 8868.
Warning: Don't let administrators act as custodian – Part 3 January 15, 2009
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment
*** This is Part 3 of a series about the dangers of letting an administrator act as custodian. Make sure you read Part 1 and Part 2 first to make sense of this post. ***
The illegitimate custodian test
Ask “Who should the check be payable to for the rollover contribution or transfer?”
Ask “If my IRA buys real estate and rents it out, to whom should the tenant make the rent checks payable?”
Ask “If my IRA owns real estate that needs repairs, who issues and signs the check to the repairmen?”
These questions will tell you who is actually serving as custodian. For instance, if you live in TX and unregulated company Dotrust is marketing its self-directed IRA services to you, the answer to one or more of the questions above will probably be something like Dotrust of Texas, Inc. If this is the case, ask to see its bank or trust charter – if it is an illegitimate custodian it won’t have one, and it will insist that another bank is technically the custodian. It not only matters who’s the custodian on the paperwork is; but it also matters who is acting as custodian as uncovered by the answers to the 3 questions above.
Why would somebody operate an illegitimate custodian company?
First of all, if it’s a franchise operation, the franchisee might not even know that he or she is part of an illegitimate IRA custodian scheme. Secondly, there can be a lot of profit to be made in an illegitimate IRA custodian scheme. The company can earn interest off of your IRA funds, and it may pass only some (or even none) of that interest earned on to you. It may also be able to earn higher interest rates when it collectively has custody of hundreds of millions of dollars in funds.
Surprised?
You may be thinking “This sounds like a company I’ve run into. But it promotes and and advertises and has been in the business for decades… it can’t be illegitimate, can it????”
Many high-profile schemes have been shut down. The private annuity trust scheme was promoted for over a decade before the IRS shut it down. Additionally, being in business for decades doesn’t guarantee that business is legitimate. Look at Bernie Madoff.
Madoff may be a harsh comparison. Those involved in an illegitimate IRA custodian scheme may not be knowingly harming anyone. They may even be attorneys or CPAs. They may believe they’ve merely created a loophole for themselves with the “stepped transaction” arrangement. They may be good people. But the bottom line is that there are significant risks you take in using their services, and you will pay the consequences if uncovered by the authorities. In my opinion, it never makes sense to use an illegitimate custodian because there are dozens of regulated/legitimate self-directed IRA custodians out there. There should be a balance between risk and reward. There is significant risk of using an unregulated/illegitimate custodian, and it offers no unique reward that isn’t offered by other self-directed IRA custodians.
Confused? If you have a self-directed IRA or are thinking of opening one at a custodian company, perform the illegitimate custodian test as described above.
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Warning: Don't let administrators act as custodian – Part 2 January 13, 2009
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment
*** This is Part 2 of a series about the dangers of letting an administrator act as custodian. Make sure you read Part 1 first to make sense of this post. ***
Signs that your custodian may not really be a custodian
- They sometimes call themselves an administrator. “Administrator” is an accurate label for any company who provides record keeping services. Being an “administrator” doesn’t require any regulation. These types of companies may expand their services to include asset custody without actually registering as a bank or trust company.
- Their name contains the word “trust” attached to other letters or words. A legitimate custodian usually has the word “bank” or “trust” as a separate word included in its name. In most states, the word “trust” is a restricted word for naming companies – just like the word “bank”. This means that you can’t start a company called “ABC Bank” unless it’s registered as a bank. You also can’t start a company called “XYZ Trust Company” without being a registered trust company. An illegitimate custodian might get around this by calling themselves Trustus rather than Trust Us, Dotrust rather than Do Trust, or Safetrust rather than Safe Trust. You see, if trust is attached to another word instead of used as a separate word, then it sneakily gets around the naming restrictions.
- They have dozens of offices all around the country. Expanding to dozens of cities across the country can (more…)
Warning: Don't let administrators act as custodian January 7, 2009
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment
To have a self-directed IRA, unlike a Solo 401k, you must have a self-directed IRA custodian… and you should stay away from unregulated companies masquerading as a custodian. A self-directed IRA custodian is one that will have less investment restrictions than the more common tradition stocks/bonds/funds brokerage-type custodian, and they usually allow investment into real estate, private companies, and other alternative assets.
An IRA is technically a trust, and a custodian is basically a trustee who performs fewer duties than a trustee usually would. As the name suggests, the sole duty is custody-holding assets and/or property on behalf of the trust.
The Internal Revenue Code says that the IRA custodian role can only be served by:
- A bank
- A trust company (this is the most common type of company to serve as self directed IRA custodian)
- A company specially & specifically approved by the IRS (this is very rare)
So, essentially, in the self directed IRA market, most custodians are chartered as (more…)
Why to self-trustee your Solo 401k plan: An argument for direct possession of your assets December 18, 2008
Posted by Jeff Nabers in : Money, Personal Enjoyment, Personal Productivity, Precious Metals, Self Directed IRA Solo 401k, real estate , add a comment
We have seen some unbelievable things over the past few years… especially the past few months. The only thing certain is that there is a lot of uncertainty ahead. If you haven’t already done so, right now I strongly suggest you watch the 30 minute condensed version of the film I.O.U.S.A. This film features David Walker, the former U.S. Comptroller General… aka the chief accountant of the government. He tried to fix the government’s financial problems, but Dick Cheney and others told him he needed to stop because they didn’t need solving. So he stepped down from his position and decided to prove to the world just how bad of shape our government really is in.
Today some people, including congressmen, are promoting some very extreme ideas. Some of these ideas involve the government “nationalizing” (or “confiscating” for those of us who speak directly) the assets of the people. Some plans even call for confiscation of retirement account assets specifically. In one scheme called the “Guaranteed Retirement Account” all retirement assets would be liquidated and handed over the Social Security Administration for investment management in a program that would provide a guaranteed return of 3% per year. This kind of silliness doesn’t need to be gratified by anything more than a brief response:
- We’ve already seen how well the Social Security Administration manages money. It simply doesn’t. There is no money. There is no account. It just hands its income straight over to the general spending account of the government, and (not surprisingly) it gets spent!
- Liquidating $16 trillion is impossible. It would crash the securities market entirely, and $16 trillion would not be withdrawn. If you started liquidating people’s retirement accounts alphabetically by name, those with names that start with letters n through z would receive little to nothing because of the price free fall created by the first half of the mass sell off.
- The real world cost of living increases do not jive with published CPI figures, and there is often a discrepancy of much more than a few percent. A 3% return on investment would likely be a steady loss of principal when accurately indexing for inflation.
While we may not see that particular scheme enacted into law, it can’t be ignored that this type of solution is being considered. This government theft approach isn’t unheard of. In fact, Argentina just did it! Don’t forget that (more…)
Nabers Group Solo 401k vs. Custodian Solo 401k December 12, 2008
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment
After being asked “What’s the difference between your Solo 401(k) and one offered by a custodian?” for the umpteenth time in the past few months, I figured it’s about time to write a post about it.
Why custodians exist
IRAs are governed by section 408 of the Internal Revenue Code. There they are defined as a retirement savings account trust where the trustee is a bank or a trust company (a trust company is basically a bank that holds assets but doesn’t make loans). This role is often referred to as custodian. Self directed IRAs have been in use for decades, and so self directed IRA custodians have been around for decades as well. For IRAs, there is no choice… you must hire a custodian to serve as trustee to your IRA.
The trustee role of a self directed IRA
The term “custodian” comes about in IRC Section 408 because when a bank or trust company serves the trustee role, they are not being trustee in the traditional sense. Usually the trustee of a trust makes decisions and has discretion over handling the income and assets of that trust. With an IRA, this normally isn’t the case. The bank or trust company is not making decisions or providing any other services other than custody (holding assets as an intermediary), and that’s why they are usually referred to as “custodian” – because they don’t provide any services other than custody.
Solo 401(k) is not required to have a custodian
Internal Revenue Code Section 401, which governs all 401(k) plans, does not issue any restrictions on who can serve as trustee. Not too many people have figured this out yet because the self directed Solo 401k wasn’t available until 2006. The benefits of a Solo 401k (such as higher contribution limits and reduced administrative requirements) come from the fact that you can play multiple roles. You can make higher contributions by serving the roles of employee/participant and employer. But it doesn’t stop there. The participant can also serve as administrator and trustee.
The role of administrator for a Solo 401k
An administrator simply keeps records. For a self directed Solo 401(k), a diligent investor is already keeping the records that an administrator would. These include bank statements, brokerage statements, copies of real estate purchase contracts and leases, and generally whatever paperwork accompanies a transaction of the plan. Since the self directed investor should already keep these records, it isn’t necessary or beneficial to hire another company to also keep the same records. Hiring an administrator for a self directed Solo 401k simply introduces unnecessary, undesirable fees.
The role of trustee for a Solo 401k
The trustee is simply the person or company who handles the transactions of the Solo 401k trust. As an investor, if you were to hire a custodian, (more…)
Video: Self Directed Solo 401k July 31, 2008
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a commentI recently sat down with Eric Wikstrom – CPA, CFP, & Founder of Integrated Wealth Strategies.
In this segment we briefly discuss the Solo 401k and how it differs from a Self Directed IRA.
The following clip observes the benefits of unrestricted investment choices. (more…)
What's so special about the IRA LLC? June 9, 2008
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment
Ahhh… the single most mis-answered question in the self directed IRA world:
Customer: I’ve noticed it costs more to setup an IRA LLC than it does a general purpose LLC. What’s so special about the IRA LLC?
LLC Facilitator: The Operating Agreement has special language. Putting together an IRA LLC without this magical language will result in a prohibited transaction and hefty taxes.
This is untrue. While it’s advisable to include special language in a special purpose LLC (one that is intended to be owned by an IRA and managed by the IRA accountholder), the absence of such language will not create a prohibited transaction in itself. Believe it or not…
Any newly created LLC can be used with an IRA!
…without necessarily creating a prohibited transaction. The sales pitch that you need the special purpose operating agreement is bogus.
That said, it is still advisable to have an IRA LLC established for you by a company experienced and competent in such facilitation. Not because you have to, but because you should want to. Why?
You want things to look good in the event of an IRS audit
This is probably the main reason why you should have an IRA LLC formed for you by a specialist instead of doing it yourself. If you get audited, the IRS is going to have a first impression about your IRA LLC structure. If it looks like you did everything compliantly and your documents pro-actively address most compliance issues, the IRS’s first impression may be friendly. If it looks like you just threw the LLC together with little regard for compliance, this may negatively affect the IRS decision of how long and excruciating the whole ordeal will turn out to be. This is an important issue. Notice I said “looks like”. Regardless of how compliant you are, (more…)
Penalty Free Early Distributions May 23, 2008
Posted by Jeff Nabers in : Money, Personal Enjoyment, Self Directed IRA Solo 401k , add a commentProbably one of the must unknown facets of retirement planning is that you can distribute before age 59 ½ for any reason without paying the extra 10% early distribution tax. How?
Substantially Equal Periodic Payments
- Set a distribution schedule calculated using IRS tables
- The schedule must have regular payments of a certain consistent amount.
- You must make receive these distributions from your retirement account either until you reach age 59 ½ or for a 5 year period… whichever is longer.
Internal Revenue Code Section 72(t) is where the extra 10% tax for “early distributions” (before age 59 ½) is imposed. However, if you read on to IRC 72(t)(2)(A)(iv) it is explained that the 10% tax is not applicable to any distribution that is part of a series of Substantially Equal Periodic Payments – or SEPP for short.
To give you an idea of how this works using calculations from IRS life expectancy tables, let’s examine a fictional case study with round numbers for simplicity:
Jared is considering early retirement at age 45, and over the years he has grown his IRA to an asset value of $2,000,000. He isn’t sure whether he wants to completely retire, work part time, pursue a career change, or start a new business. Let’s take a look at his options… (more…)
