Everyone is talking about health care. “How could the politicians do this with a strong majority of American in opposition?”

This video provides some insight into the never-ending string of government takeovers, and seeing the whole picture is alarming. One lesson from all of this is that complaining doesn’t work. Neither does disapproving. What does work is being prepared to defeat government takeover attempts.

Discussed in the video is what I believe is one of the most fundamental characteristics for a free society. Enjoy!

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 case studies involved the use of a Solo 401(k) or a self-directed IRA LLC. If you’ve been brainstorming ways to make the most of a self-directed IRA LLC or Solo 401(k), then 5 Steps To Freedom can really pull things together for you in how it brings real success (and failure) stories to you. Knowing what works and what doesn’t can mean the difference between incredible achievements and embarrassing failure when using your self-directed IRA LLC or Solo 401(k).

Perhaps the most powerful information in the book is the simple exercises you can follow to remove the confusing “inflation goggles” and see what’s really happening to your wealth.

Check out the book in Kindle today and feedback is always welcomed!

Search the internet for “Roth IRA Conversion 2010” and you will find pages and pages of advice telling you that the Roth conversion is a sweet deal.

But is it?

Well first, WHAT is it? Here’s a simple overview of what would be involved:

• Fill out some forms for the government
• Send the government a big chunk of your retirement savings
• Rejoice upon the how the government will not tax your Roth distributions in the future!

Pretty swell, huh?

Voice of Devil’s Advocate: Hey isn’t this the same government that could go bankrupt at any minute? Haven’t you seen the film, I.O.U.S.A.?
Voice of Popular Advice: We’re the most powerful country in the world! How could we go bankrupt?
Devil’s Advocate: Hmm… you should just watch the film I.O.U.S.A. In it, the former chief accountant for the government explains how it is on path to go bankrupt in less than 10 years.
Popular Advice: Well I’m sure the government will figure out some way to stay afloat!
Devil’s Advocate: Yes, they will invent new taxes, increase existing taxes, inflate currency, and break promises… such as the promise to not tax your Roth distributions.
Popular Advice: When has the government ever broken a promise to not tax us?
Devil’s Advocate: First, there was the promise to never tax individual income. They broke that. Tax rates have been rising steadily since. Then there was the promise to create a retirement insurance fund, called Social Security, where funds would be waiting for you in retirement and the distributions to you would not be taxed. Then they broke that promise by taxing SS benefits. While they were at it, they never created a fund and operated a Ponzi scheme instead.
Popular Advice: What’s on TV tonight?

[end Jeff's mental theater]

Since when do we respond to a lying thief’s claim that “Send me money now and I’ll never rob you again” by sending him money?

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 grow their retirement account and then make “losing investments” that actually put their retirement funds into their own hands.

For example, imagine you grow your IRA to $1 million and now you’re ready to get that money into your own hands so you can spend it. You could distribute it to yourself and pay ordinary income taxes on the distributions. Or you could invest it into your business that you personally own and operate. The latter could be an “investment” from the IRA. Once the money is in your business you could do whatever you want with it. And maybe your business doesn’t pay anything back to your IRA. Maybe it was a “losing investment” for your IRA. Taxes avoided. Woo hoo!

The only problem with the above scenario is that the real loser isn’t your IRA–it’s the government who didn’t collect distribution taxes because your IRA “lost” all its money. For this reason, the prohibited transaction rules make the above scenario illegal. The government made the PT rules to ensure that you don’t end up “losing” your retirement money. There are six PT rules. Four of the rules are commonly quoted, written about, and understood easily. The remaining two rules seem to elude or mystify most people, so let me bring clarity to the matter.

In order to be legally compliant, every retirement plan transaction must involve a genuine effort to benefit the retirement plan itself without benefiting the plan owner or his relatives. Let’s go ahead and knock out the most common strategies that are wrongly believed to successfully “get around” the rules:

Benefit Swapping

Joe & Frank are friends and each of them setup a self-directed IRA. Joe’s IRA loans $50,000 to Frank and Frank’s IRA loans $50,000 to Joe. This doesn’t break the 4 rules that are most focused on, but it does break the usually-ignored rules. For each loan transaction the borrower is not a “disqualified person” for the IRA to transact with, but the loan is a conflict of interest for the IRA owner because he expects to receive a loan back from the other person’s IRA. Because his decision to extend the loan from his IRA involves the expectation of a chain of events that is designed to benefit him personally, this is a prohibited transaction.

Another example would be if Joe’s IRA and Frank’s IRA each bought a vacation condo, and each IRA let the other person stay in the condo. Real estate is a popular investment for self-directed IRAs, but if an IRA owns real estate its owner (and his relatives) are not allowed to make personal use of the property, regardless of whether fair market rent is paid. If Joe vacationed in property owned by Frank’s IRA and Frank vacationed in property owned by Joe’s IRA, it would be a prohibited transaction. Just like the loan swapping, what makes it prohibited is the fact that when the IRA owner made the decision to enter into the transaction, he expected to receive a personal benefit as a result of the transaction. This applies to direct benefis and indirect benefits that come about as an expected chain of events.

Strawperson

Joe wants to sell his house, but he can’t find a buyer. His IRA has enough money in it to buy the house from Joe, but that would be a prohibited transaction because Joe is a disqualified person. So Joe arranges for his friend Frank to buy the house from him who will later sell the house to Joe’s IRA. Joe thinks he didn’t break any rules because Frank is not related to Joe and thus is not a disqualified person. In this scenario, in the eyes of the law Frank is a “strawperson”… a person who is not involved in the transaction for genuine reasons. Frank doesn’t really want to buy and then own Joe’s house. He is just entering into the transaction to add separation to the real transaction. The law removes the strawperson to examine the real transacting parties. In this case the real parties are Joe and his IRA. Effectively, Joe sold his house to his IRA. That is a prohibited transaction and it remains a prohibited transaction even with Frank the strawperson inserted into the chain of transactions.

The same strawperson strategy fails the test no matter how it is constructed. If Joe’s IRA loaned money to Frank and Frank subsequently loaned money to Joe, it would violate the PT rules.

The lesson

Setting up a self-directed IRA or Solo 401(k) brings your retirement funds to an unlimited investment platform in the sense that you can invest in virtually any type of asset. You will save yourself a lot of time and headache (and possibly tons of money) if you clearly understand the remaining limitation: you must invest solely to grow your retirement account without engaging in conflicts of interest.

Now that’s not so bad is it? The merits of whether the income tax is good for our country in the first place is a topic for another discussion. But within our current system, it’s not so much to ask that you avoid all conflicts of interest. Use your retirement account for its intended purpose–to grow massive wealth. There is a whole world of opportunities out there that don’t involve a potential conflict of interest!