The End of Small Business Financing with IRA and 401k Funds? (Part 3) October 21, 2009
Posted by Jeff Nabers in : Self Directed IRA Solo 401k , 28comments
Ok, now it’s time to solve the mystery. (Final Post) [see previous here]
In 1978 Jimmy Carter reorganized the government with this order, and this took the issue of retirement account prohibited transactions away from the domain of the IRS and gave it to the Department of Labor (DOL).
This fact was unknown to (or possibly ignored by) the ROBS promoters who claimed the IRS ROBS letter confirmed the validity of the ROBS strategy. The truth is that the IRS letter did not say whether or not the ROBS strategy creates a prohibited transaction because the IRS didn’t have the authority to say it. It was the authority of DOL. Ah, what fun bureaucracy can be.
Speaking with the Proper Authority
Now, I’ve known about this transfer of authority ever since the creator of the IRA LLC (late attorney Debra Buchanan) told me about it back in 2004. So I’ve been in close contact with DOL employees for several years. Here’s where the bureaucracy gets funny (or scary, depending on how you look at it).
A couple of weeks after the IRS ROBS letter came out, I called my friendly DOL contacts to ask, “What do you (more…)
The End of Small Business Financing with IRA and 401k Funds? (Part 2) October 19, 2009
Posted by Jeff Nabers in : Business Start-Ups, Rollovers As Business Startup, Rollovers As Business Startups, Self Directed IRA Solo 401k, Small Business Lending , add a comment
[This is a continuation of a previous post. You should read that one first so this makes sense.]
The IRS Responds
For the first time ever, the IRS actually addressed the “financing a small business with an IRA or 401(k)” strategy. They called it “ROBS” for “roll over business startup,” and issued a letter on October 1, 2008. This letter basically stated:
- We know about the ROBS strategy
- We are concerned about it for several reasons
Celebrate and Ignore
Most ROBS promoters spun the IRS ROBS letter as a long-awaited government blessing for the strategy. They said that the concerns that the IRS listed were administrative errors, such as (more…)
The End of Small Business Financing with IRA and 401k Funds? (Part 1) October 15, 2009
Posted by Jeff Nabers in : Business Start-Ups, Rollovers As Business Startup, Rollovers As Business Startups, Self Directed IRA Solo 401k, Small Business Lending , 9comments
Guidant calls it Audeo. Benetrends calls it Rainmaker. SDCooper calls it ERSOP. It goes by many names and it’s gotten a lot of attention from the franchise industry and, as of about a year ago, the IRS. The IRS calls it “ROBS” for Roll-Over Business Startup.
What is it?
It’s a strategy where a person with retirement funds:
- Forms a C corporation.
- Uses the new C corporation to adopt a 401(k) or profit-sharing plan.
- Performs a rollover from existing retirement funds (IRA, 401k, etc) into the new 401(k) plan.
- Directs the new 401(k) plan to invest into the new C corporation by purchasing shares of stock.
- Now this person has a C corporation with some or all of their retirement funds in it, and they are told they can use the funds to run the corporation, launch a venture, buy a franchise, and even pay themselves a salary.
Special Powers – For Good or Evil?
This is a tremendously (more…)
Is my home an investment? March 18, 2009
Posted by Jeff Nabers in : real estate, Self Directed IRA Solo 401k , add a comment
Recently I received a question from somebody looking into self-directed IRA/401(k) investment for themselves. They said, “I ran this by my financial planner in New York who said to roll over my IRA to put some of its money into my home is illegal.” This statement is technically correct. Putting IRA money into his primary residence would be a prohibited transaction. The disturbing thing about the situation is that these three people (a person, their realtor, and their financial planner) could all be on the same page about something so fundamentally ridiculous.
The misconception
In the past 10 years, many people think “real estate investing” equals “putting money into my home”. Their home can’t be an investment in the first place because they are paying for it rather than having it paid for by a renter.
When somebody wants to help people rationalize buying the stuff they sell, they often call it an “investment”. Bill Clinton started changing the way people thought about government spending (when he was increasing it) by calling it an investment.
An investment or a consumer product?
Selling a primary residence to a home buyer is selling a consumer product. It’s for their use. They can buy what they really need. Or they could get extravagant and buy the Lexus/Mercedes version of a home and spend more. Either way, it’s a consumer product if they are paying for it and using it themselves.
But realtors followed Clinton’s spin move and started calling home buying an investment. This really caught on once Fannie Mae, Freddie Mac, and the Fed all took actions to artificially inflate home prices in order to defer the recession of 2002. Once you could buy this consumer product (the home) and then have it rapidly increase in value (supposedly) and realize this value by selling it or doing a refinance cash out, then the talk about the home being an investment seemed to make sense.
Today, the bubble is over, and the illusion that your home is an investment should be easy to correct. If it was an investment, then somebody else would be paying the mortgage. If somebody else was paying the mortgage, they’d probably live in it instead of you.
It’s not to say that buying a home is a stupid thing to do. That can only be decided on a case-by-case scenario that depends on the buyer and the home in question. Buying a home can be a financially beneficial thing to do in some cases, but it hardly could be truthfully classified as “real estate investing”.
Back to basics: real estate investing means buying properties that produce income. And, yes, real estate investing can be done inside an IRA or 401(k). 
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