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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 , 17comments

mystery

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 : Self Directed IRA Solo 401k , add a comment

dc_jefferson_memorial

[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:

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 : Self Directed IRA Solo 401k , add a comment

road_block

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:

  1. Forms a C corporation.
  2. Uses the new C corporation to adopt a 401(k) or profit-sharing plan.
  3. Performs a rollover from existing retirement funds (IRA, 401k, etc) into the new 401(k) plan.
  4. Directs the new 401(k) plan to invest into the new C corporation by purchasing shares of stock.
  5. 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…)

Getting Around Prohibited Transactions August 31, 2009

Posted by Jeff Nabers in : Self Directed IRA Solo 401k, real estate , add a comment

sneaky

Prohibited transactions is a chief topic when exploring self-directed IRA & Solo 401(k) investing. When a person first discovers that his retirement accounts have been chained to Wall Street brokerages without necessity, his mind starts to imagine the possibilities.

Real Estate? Yes.
Private Businesses? Sure.
Precious Metals? Absolutely.
Getting my hands on my retirement money now? Slow down there.

There are two types of limitations on the average retirement account. One is an unnecessary restriction of investment options to securities products. That can be eliminated through restructuring your accounts and funds. The second limitation is legal and cannot be removed.

Setting up a self-directed IRA or 401(k) is about removing limitations. Once you have it setup outside the nearly monopolistic network of securities dealers, you can invest in almost anything… but you must fully understand the legal limitations.

The general premise behind prohibited transaction rules is that the government wants you to grow your retirement account as big as possible because they plan to tax it later on when you distribute the funds to yourself for spending. Without prohibited transactions rules, anyone in their right mind would (more…)

Eliminating securities problems – Part 2 March 19, 2008

Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment

I previously discussed what a security is and who are accredited investors. Non-accredited investors are typically excluded from most syndicated private placements. This is part of the cause of the investor isolation in the self directed IRA/401k marketplace.

The stock market’s growth has been because it’s easy to invest in it because of fractional ownership. You can’t afford to buy Microsoft outright, but you can afford to own a millionth of a percent of it. Self directed accounts have failed to go mainstream because securities laws get in the way of making fractional ownership simple for the non-accredited investor.

Assuming you are not accredited, so far your options in pooling money are:

  1. Ignore securities laws – Very bad idea. Investments are supposed to be profitable. When securities laws are ignored, you could face huge fines and even prison.
  2. Regulation D offerings- You can create or find a “Red D” offering. In this arrangement disclosure requirements must be met, and notices must be filed with the SEC and/or state securities agencies for each state in which there is an investor. It’s recommended that an attorney create the disclosure documents, and this can typically cost $10,000 and up. (Again check www.nfhlaw.com for more free info on Red D offerings)
  3. Form an Investment Club – If every investor actively participates in investment decisions, then there probably isn’t an investment contract or security. (more…)

Eliminating securities problems – Part 1 March 19, 2008

Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment

There’s a case (the Howie case – can somebody provide me a good link that explains it?) that defines a security as an investment contract in which a person invests their money into a pool and expects to receive a profit solely from the efforts of others. So typically, when a person invests in something it is a security.

You may have violated securities laws in the past without even knowing it. If you’ve invested into your son’s company, it was probably a security and you were the investor. If someone has invested in your company, it was probably a security and you were the issuer. I’ve found a great resource for understanding all of this – www.nfhlaw.com – a securities attorney who has published a wealth of information (on her site, check out “Checklists & Legal Info”).

When you are pooling funds together, it makes things easier if all investors are considered accredited investors – having a net worth of at least $1,000,000 or having at least $200,000 in annual income. When all investors involved are considered accredited, (more…)