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Coinvesting with your plan / Partnering with disqualified persons

July 24, 2008 By Leave a Comment

What if you could combine your retirement funds with your personal funds and additional monies from other family members? Well, you can… sort of. This question was asked and answered in a Department of Labor Advisory Opinion in July of 2000.

Click that link above to read the opinion in its entirety, but here’s my summary in its most basic form:

Your plan can partner with disqualified persons in certain situations, BUT there are many possibilities for a prohibited transaction in operating the partnership.

A prohibited transaction is when a retirement plan transacts with a disqualified person. The DOL Opinion says [Read more...]

Filed Under: Self Directed IRA Solo 401k Tagged With: 401k, co-invest, coinvest, department of labor, disqualified person, dol, funds, invest, investing, ira, irs, partnering, prohibited transaction, real estate, self directed, Solo 401k

Landlording your IRA LLC's properties – Is it allowed?

May 30, 2008 By 19 Comments

A question I get all the time is “Can I personally mow the lawn, maintain, and/or repair properties owned by my IRA LLC?” My answer is “No” which usually creates the response “But another company said I could.”

First, let’s summarize that the accountholder/participant of a retirement plan generally can’t have a transaction between themselves and their retirement plan. This includes the furnishing of services, sale of property, lending of money, and extension of credit between a plan and disqualified person (such as the accountholder). Next, let’s establish that active landlording means mowing the lawn, repairing, and fixing up properties, while passive landlording means collecting rent, paying mortgages/taxes/insurance, and contracting out the more active tasks to non-disqualified-persons. So is active landlording allowed? No, and I’ll provide two answers – the technical and the layman’s.

The Technical Answer

The argument for why active landlording for your IRA LLC’s property is not a prohibited transaction goes something like this…

As a general rule, the Internal Revenue Code provides [Read more...]

Filed Under: real estate, Self Directed IRA Solo 401k Tagged With: 401k, checkbook control, code, condo, dol, exemption, house, investment, ira, ira llc, irs, landlord, landlording, llc, prohibited transaction, property, real estate, regulation, repair, self directed, tax, taxes, treasury

Grading Promoters – Waterford Financial Group… F

April 30, 2008 By Leave a Comment

As a follow up to “Where to find reliable information”, I want to let you know about another seemingly unscrupulous self directed IRA/401k promoter… Waterford Financial Group (www.thetrueira.com). Again, I’ve never spoken with them or dealt with them in any way, but one visit to their web page is cause for alarm. At the time of this writing, their web site links to various advisory opinions, private letter rulings, and field service advisory letters from the IRS & DOL (the DOL rules on IRA/401k prohibited transactions and exemptions).

The page in question lists summaries of these letters. It is important to first acknowledge that their “About Us” page says:

“Waterford Financial Group is a national marketing and financial services company with a consortium of tax professionals and Tax Attorneys on staff. Our purpose is to educate individuals and other professionals about the many benefits contained in the tax code.”

I always find it odd that companies spotlight all the tax attorneys on their staff without naming those attorneys or substantiating their claim in any way. If you’re browsing my blog posts, I hope I don’t come across too negative, but my pet peeve is predatory practices… and this is not minor issue when it comes to messing with people’s wealth.

Back to the Waterford Financial Group web page: They link to a DOL opinion with the description:

“Here’s a ruling where an IRA owner had his IRA make a loan to a corporation owned 47% by him. Sure beats dealing with a bank.”

The description infers that the proposed loan is acceptable and compliant. So no need to actually read the document since their staff full of tax attorneys probably wrote the description, right? Wrong. If you just scan the actual document you will find [Read more...]

Filed Under: Self Directed IRA Solo 401k Tagged With: 401k, attorney, dol, ira, irs, opinion, self directed, tax, waterford financial

What is the Plan Asset Rule?

April 25, 2008 By 10 Comments

The plan asset rule, among other things, is used to determine whether or not a retirement plan is involved in a prohibited transaction.

A PT happens when a plan enters into a transaction with a disqualified person. In our previous post, we covered how to make a list of disqualified persons for a specific plan. This included determining whether a partnership, LLC, corporation (or other entity) is a DQP itself because of significant ownership by other DQPs.

A prohibited transaction occurs when all three factors are present: a DQP, a plan, and a transaction between the two. So, from the previous post we know how to determine if an entity is considered to be a DQP itself. But how do we know if an entity is considered to be a plan?

Plan asset look-through

…is the term DOL uses (The U.S. Department of Labor, DOL, is the government entity that solely has the authority and responsibility to interpret prohibited transactions code). If a situation does have plan asset look-through it means that you look through an entity to the plan and consider the assets of the entity to be the assets of the plan itself. This also means that when you do have plan asset look-through, that entity is treated as if it is the plan itself for PT purposes. That would mean that that entity could not transact with a disqualified person.

When is there plan asset look-through?

The first hard and fast rule is that when an entity is owned 100% by a plan, there is plan asset look-through. So if your Solo 401(k) was 100% owner of an LLC (or any other type of entity) then that LLC would be seen as if it were the plan itself for purposes of PT determination.

The second rule is that when a plan owns 25% or more of an entity, there is plan asset look-through. I know you have a scrunched up face right now because the second rule seemingly makes the first rule unnecessary. This second rule isn’t hard and fast like the first rule. This rule does not apply if you have an “operating company”.

What is an operating company?

This is where the fun starts.

An operating company is one that primarily makes or sells a product or service other than the investment of money.

A real estate operating company is one where at least 50% of its assets (valued at cost) are invested into managed real estate or real estate development, provided that the entity is directly engaged in the management or development activities.

So, back to plan asset look-through… If you have an operating company, the there is only look through if a plan owns 100% of the operating company. If you don’t have an operating company, there is look through if the plan owns 25% or more of the company.

At first glance you may think “wow, there are some major benefits to investing in an operating company”. I partially disagree. Firstly, your plan is intended [Read more...]

Filed Under: Self Directed IRA Solo 401k Tagged With: 401k, compliance, department of labor, disqualified person, dol, investing, ira, irs, plan asset, plan asset rule, prohibited transactions, self directed
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