9 Wealth Building Tips
Using Self Directed IRAs
Presented by Matthew A. Tillack
Disclaimer
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related to the use of the information within this presentation or webinar including but not limited to direct or indirect
incidental or consequential loss or damages, compensatory damages, loss of profits, tax statue, or your individual
retirement account arrangement(s).
IRA Origins
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Traditional IRA started in 1974
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ERISA (Employee Retirement Income Security Act)
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Created so citizens could save for retirement independent of employer sponsored
plans
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Federal rules require that a qualified bank, credit union, or a “non-bank” custodian
such as a regulated-trust company hold the IRA.
Key Points
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A Self-Directed IRA gives the account owner full control over account management
and investment selection.
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A self-directed IRA can move beyond stocks, bonds and mutual funds allowing you to
invest into "alternative" or hard assets like real estate, precious metals, private equity,
notes, etc.
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You can diversify your portfolio to protect against market volatility and high interest
rates while investing in what you know and understand.
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Investment gains are tax-deferred or tax-free.
In the News
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Mitt Romney, former CEO of Bain Capital, and former Presidential Candidate, who
invested his self-directed IRA into early stage or turn-around private businesses that
was not publically traded. His IRA value was reported at between $20.7 million and
$101.6 Million. “Bain Gave Staff a Way to Swell IRAs by Investing in Deals” -Mark
Maremont, The Wall Street Journal (March 22, 2012).
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Paypal founder and CEO, Peter Thiel, reportedly bought shares in his self-directed
Roth IRA for $510,000 and received $31.5M for them when the company sold to
eBay. “Why—And—How Congress Should Curb Roth IRAs” -Deborah L. Jacobs,
Forbes (March 26, 2012).
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Yelp founder and Chairman, Max Levchin, whose self-directed Roth IRA acquired
shares in the early stages of Yelp (at excellent value) and was worth $95M in 2012,
when numbers were reported.
30
IRA Assets
25
1.9
1.9
2
2
5
5.2
5.2
5.2
4.9
2.9
2.9
3
3
3
6.2
6.5
6.6
6.8
6.8
6.5
5.9
7
7.3
7.4
7.6
7.6
7.3
2012
2013
2014:
Q3
2014:
Q4
2015:
Q1
2015:
Q2
2015:
Q3
1.9
20
1.7
Annuity Reserves
Government DB Plans
1.5
15
4.3
1.2
0.9
3
2.6
3.5
2
4.6
Private-Sector DB Plans
DC Plans
IRA's
10
5
0
2
2.6
5
2.8
2.7
5.3
3.6
3
2000
eData
4.3
1.9
4.7
3.7
2007
2008
are estimated.
Note: For definitions of plan categories, see Table 1 in “The U.S. Retirement Market, Third Quarter 2015.” Components may not add to the total because of rounding.
Sources: Investment Company Institute, Federal Reserve Board, Department of Labor, National Association of Government Defined Contribution Administrators, American Council of Life Insurers,
Internal Revenue Service Statistics of Income Division, and Government Accountability Office
Assets in individual retirement accounts (IRAs) totaled $7.3 trillion at the end of the third quarter of 2015, a decrease of 4.8 percent from the end of the second quarter. Defined contribution (DC) plan
assets fell 4.1 percent in the third quarter to $6.5 trillion. Government defined benefit (DB) plans—including federal, state, and local government plans—held $5.0 trillion in assets as of the end of
September, a 3.9 percent decrease from the end of June. Private-sector DB plans held $2.8 trillion in assets at the end of the third quarter of 2015, and annuity reserves outside of retirement accounts
accounted for another $1.9 trillion.
Self-Directed IRA vs. Regular IRA
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A self-directed IRA is technically not any different than other IRAs (or 401ks) as selfdirected IRAs follow the same rules as any other IRA. They also receive the same tax
benefits as all other IRAs.
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"Self-directed" is a descriptive term, not a legal or IRS distinction.
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The IRS does not approve or endorse investments. According to IRS Publication
3125 –
The IRS does not review or approve investments. The IRS
does not advise people on how to invest in their IRAs.
What Does “Financially Secure” Mean?
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The U.S. Social Security Administration
Defines Financial Security as:
–
•
$3,000
per month at the age of 65
ONLY
APPROXIMATELY
5%
OF
AMERICANS ACHIEVE THIS, AND ARE
ABLE TO TRULY RETIRE.
Tip 1: Benefits of a Self-Directed IRA
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Tax Advantages - Profits are tax-free or tax- deferred
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Compounding wealth - (due to tax-sheltered status)
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Asset Protection
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Wealth for future generations
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Investment Diversification
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Invest in what you know
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Seven different self-directed accounts
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Almost anyone can have a self-directed account
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Even small balance accounts can invest
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Millions of dollars are available to finance your deals
Tip 2: The Importance of Building Your Team
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Financial Planner – for overall success
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Accountant/CPA
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Attorney
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Real Estate Agent
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Title Company
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Custodian/Administrator
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Non-Recourse Lender (if applicable)
Six Non Traditional Asset Classes/Options/Types
1. Real Estate
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Residential rental property
Multi family rental property
Commercial property
Real estate development
Undeveloped land
Developed land
Foreclosures
Real Estate options
Mobile homes
Rehabs and flips
Storage units
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Farm Land
Foreign Real Estate
Joint Ventures and Partnering
Crowdfunding Investments
Six Non Traditional Asset Classes/Options/Types Cont.
2. Tax Liens / Tax Deeds
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Tax Lien
Tax Deed
3. Promissory Notes
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Secured notes
Unsecured notes
Mortgage/deeds of trust
Business loans, secured by assets of company
Automobile notes
Six Non Traditional Asset Classes/Options/Types Cont.
4. Entities & Non-Publicly Traded Companies
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Private stock offerings
Private placements
Limited liability companies
Limited partnerships
C corps
Joint ventures
Hedge funds
REITS
Crowdfunding Investments
Foreign entities
Startup companies
Six Non Traditional Asset Classes/Options/Types Cont.
5. Traditional Assets
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Stocks
Bonds
Mutual funds
ETFs
CDs
Treasuries
Six Non Traditional Asset Classes/Options/Types Cont.
6. Other Options
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Structured settlements
Accounts receivable
U.S. Treasury gold and silver coins
Gold bullion, silver bullion, platinum and palladium
Foreign currency exchange
Commodities
Futures
Factoring
Oil & gas ventures
Mineral rights
Water rights
Equipment leasing
Six Non Traditional Asset Classes/Options/Types Cont.
Other Options
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Judgments
Websites
Certain Intellectual Property
The list goes on…
Tip 3: Three Major Prohibited Transactions
Some transactions violate the basic intent of your IRA. Your retirement plan is intended to
benefit you when you retire and not before. Any transactions providing immediate
financial or other gain to the account holder or other disqualified persons are not allowed.
Prohibited transactions have to do with intent; as in those transactions that run afoul of
what the account is intended for, your future retirement. Any action or transaction that can
be construed as providing you with direct use or benefit is not allowed.
ERISA and the IRS code prohibit a number of transactions between a plan and a “Party
in Interest” / “Disqualified Person”.
Three Major Prohibited Transactions
IRC 4975 – Outlines three main categories of prohibited transactions.
1. Direct Prohibited Transaction:
Any transaction between your IRA and yourself or other “Disqualified Person.”
2. Extension of Credit Prohibited Transaction:
Any transaction where there is an extension of credit between an IRA and a
disqualified person or vice versa.
3. Self-Dealing Prohibited Transaction:
Any transaction where a disqualified person (e.g., IRA owner) receives a
current benefit from the IRAs investments.
Direct Prohibited Transaction
A direct prohibited transaction occurs when an IRA engages in a “transaction”
with a “disqualified person”. IRC §4975 (c)
A “Transaction” includes a purchase, sale, lease, exchange, loan,
extension of credit, services, goods, etc.
A “Disqualified Person” includes the IRA owner (as fiduciary),
spouse, children, and parents (ancestors and lineal descendants
and their spouses). Also, partnerships and companies you or other
disqualified persons own 50% or more of.
Disqualified Persons
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The IRA owner
The IRA owner’s spouse;
Ancestors (parents, grandparents, great-grandchildren and their spouses)
Lineal Descendants (children, grandchildren, great-grandchildren and their spouses)
Fiduciaries (advisors, brokers, accountants, attorneys)
Those providing services to the plan (including a trustee),
An employer whose employees are covered by the plan
Any corporation, partnership, trust, or estate where a disqualified person has a 50% or
greater interest
A 10% or more owner, partner, officer, director, or highly compensated
individual referenced in the prior bullet point
Disqualified Persons
Who May My IRA Transact Business With?
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Brothers and sisters
Aunts, uncles, cousins
Nieces and nephews
Spouse’s brothers and sisters
Spouse’s parents (in-laws)
Spouse’s grandparents (in-laws)
Step-mother and Step father (if
un-adopted)
Step children (if un-adopted)
Spouses step-children
Step-brother and step-children
Your grandparent’s spouse, if not
your natural grandparent
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Other third party investors or
acquaintances
Companies the IRA owner or
other disqualified persons own
and control less than 50%
(beware of self dealing)
Everyone else not disqualified in
IRC§4975 (e)(2)
Extension of Credit Prohibited Transaction
IRC §4975 (c)(1)(B) Occurs when there is a “lending of money or other
extension of credit between a plan [IRA] and a disqualified person.”
1. If an IRA obtains a loan the loan must be “non-recourse” (e.g., the lender’s
sole recourse is against the asset). The IRA owner cannot personally
guarantee the loan.
2. UDFI Tax will be due on net income from debt. Profits attributable to
retirement plan cash or other non-debt investment is not subject to UDFI
tax.
Self Dealing Prohibited Transaction
A self dealing prohibited transaction occurs when the IRA owner or other
disqualified person benefits from the IRA’s investments. IRC §4975
(c)(1)(D),(E), and (F).
1. No personal use of IRA assets. For example, IRA owned rental
property
cannot be used by a disqualified person to the IRA (e.g. IRA owner, spouse,
etc…).
2. No compensation or commissions paid to a disqualified person as a result
of an IRA’s investment. (e.g. avoid commissions, salary, etc.).
3. Bottom line, Don’t use IRA assets. Use of IRA assets without
payment results in a benefit to a disqualified person and is self dealing
while use and payment by a disqualified person is a transaction with a
disqualified person and is a direct prohibited transaction.
Prohibited Transactions Examples
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Buying the property of a disqualified person in your IRA
Borrowing money from your IRA to pay off a personal mortgage
Taking personal payment directly from an income producing property
Hiring a disqualified person to provide services for a property held in your IRA (i.e.,
using your spouse as the property manager)
Using real estate owned by your IRA as collateral for a personal loan
Any use of a property owned by your IRA that brings personal benefit to you, rather
than the account
Using property owned by your IRA as your vacation home
Allowing a disqualified person to live in an IRA-owned property
Allowing fiduciaries to obtain or use the plan’s income or assets for their own interest
Using the account as security for a loan
Six Prohibited Transactions – IRC Section 4975
1.
4975(c)(1)(A): The direct or indirect Sale, exchange, or leasing of property between an IRA and a “disqualified
person”
2.
4975(c)(1)(B): The direct or indirect lending of money or other extension of credit between an IRA and a
“disqualified person”
3.
4975(c)(1)(C): The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified
person”
4.
4975(c)(1)(D): The direct or indirect transfer to a “disqualified person” of income or assets of an IRA
5.
4975(c)(1)(E): The direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with
income or assets of the IRA in his/her own interest or for his/her own account
6.
4975(c)(i)(F): Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account
from any party dealing with the IRA in connection with a transaction involving income or assets of the IRA
Tip 4: Items Not To Hold Inside Your IRA
Prohibited Holdings – IRS Publication 408
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Life insurance contracts, IRC § 408(a)(3);
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Collectibles IRC § 408(m);
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Works of art
Rugs
Antiques
Metals (other than gold, silver, platinum, or palladium bullion)
Gems
Stamps
Coins (except certain U.S. minted coins)
Alcoholic beverages
and certain other tangible personal property
Prohibited Investments
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S-corporation stock, IRS Letter Ruling 199929029, April 27, 1999, IRC §1361
(b)(1)(B); and
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In addition to these restrictions, you may not borrow from an Individual Retirement
Annuity contract [IRC 408(e)(3)]
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or use your IRA as security for a loan [IRC 408(e)(4)]
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Any investment that constitutes a prohibited transaction pursuant to IRC § 4975
(e.g., using your IRA funds to purchase any investment from a disqualified person
such as a spouse, parent, child, etc…). Prohibited transactions are covered at length
in a future module
Prohibited Transaction Penalties
If an IRA owner engages in a prohibited transaction with his or her own IRA,
the consequence is that the entire IRA is disqualified and distribution of.
Disqualification results in distribution of the entire account, based on the fair
market value of all assets in the account, based on the fair market value of all
assets in the account as of January 1 of the year in which the prohibited
transaction occurred. IRC §4975 (c)(3), IRC §408 (e)(2)(A). Distribution of
an IRA results in possible taxes on amounts distributed, early withdrawal
penalties, and revocation of tax-preferential treatment on the IRA’s
investments that occurred after the prohibited transaction.
If a prohibited transaction occurs between an IRA and a disqualified person
other than the IRA owner, then the consequence is an excise tax of 15% on
the amount involved to the disqualified person who was a party to the
transaction and a potential additional 100% penalty if the prohibited
transaction is not corrected
Investment Purchase Steps
Self-Directed Investing
Expenses Related
To Investment
Payments/Profits
from Investment
Tip 5: How To Title Asset Documentation
Self-Directed IRA Titling
Remember you and your IRA are two separate entities, and as such, any investment
needs to be titled in the name of the IRA.
Titling is the name, or “title”, that is used to reference your IRA. It is important to reflect
your IRA as purchaser on investment documents, rather than your personal name.
“iPlanGroup Agent for Custodian FBO Client Name IRA”
or
“ABC Trust Company Custodian FBO Client Name IRA”
Seven Investment Purchase Steps
① Establish & Fund Your Account
② Investment Selection & Document Preparation
③ Investment Authorization
④ Investment Review
⑤ Signing of Documents
⑥ Investment Funding
⑦ Maintaining the Investment
Tip 6: Maintaining Your Investment
Expenses:
Any expenses associated with the investment (maintenance, improvements, property
taxes, condo association, general bills, capital calls etc.) must come from the IRA.
Cash Flow/Profits:
All profits must return to the IRA, meaning all income (rent, note payments, dividends)
and profits (selling of property, return of capital investment, note principal pay off) are
deposited back into your IRA.
Tip 7: Account Options
Tax-Deferred
Tax-Free
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Traditional IRA
SEP IRA
SIMPLE IRA
Individual/Solo 401(k)
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Roth
Coverdell Education Savings
Account (ESA)
Health Savings Account (HSA)
Roth Individual/Solo 401(k)
Five Steps for Establishing an Account
Step 1:
Locate and choose a company to hold your plan
Step 2:
Complete your new account application
Step 3:
Fund your account
Step 4:
Provide a copy of your photo ID
Step 5:
Submit your new account kit
Seven Different Funding Options
① Trustee to Trustee Transfer
② Direct Rollover
③ Distribution Rollover (60 Day Rollover)
④ Contribution (earned income – W2, 1099)
⑤ Roth Conversion
⑥ QDRO (Qualified Domestic Relations Order)
⑦ Inherited IRA
Potential Account Type Funding Options
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IRAs (Roth and Traditional)
Simple IRA
SEP IRA
Inherited IRA
401(k)
Section 457 plans
403(b)
Keogh
Pensions
Profit sharing plan
Cash balance plan
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Money purchase pension plan
Defined benefits plan
Defined contribution plans
Solo/individual 401(k)
Roth 401(k)
Qualified annuities
Stock bonus plan
Combination plans (combined
profit sharing and money
purchase plan)
Thrift savings plan
Employee stock ownership plan
Tip 8: Fees & Expenses
①
②
③
④
⑤
⑥
⑦
⑧
Are the fees all inclusive?
Are there transaction fees?
Investment purchase or sale fees
Per check fees
Quarterly fees
Keep a buffer in the account for expenses, wires, overnight checks, etc.
Generally an all inclusive fee schedule is the way to go
The least expensive isn’t always the best
Fee Schedule Example
Tip 9: Tax Issues for IRA Investments: UBIT & UDFI Tax
There are multiple situations where taxable transactions could happen inside your IRA
How it Works
Online Access
Fund Your
Investment
Find Your
Investment
Fund Your
Account
Open Account
• Complete the New
Account Application
•Transfer
•Direct Rollover
•60 Day Rollover
•Roth Conversion
•Real Estate
•Note(s)
•Private Companies
•Land
•Precious Metals
•Ect.
•Investment
Authorization Form
•Supporting
Documentation
Enjoy Tax-Free or Tax-Deferred Profits!
•View your Account
Online
Castle House
Purchase Price:
$235,000
Expenses:
$25,000
Sold For:
$370,00
Total Profit:
$110,000
6 Month Hold Time
1 Month on the
Market
1 Offer Received
After Pictures
Castle House
Construction Pictures
3691 Sutherland
Purchase Price:
$71,000
Repairs:
Sold For:
Net Profit:
$65,000
$235,000
$74,394
5 Month Hold Time
1 Month on the Market
4 Offers Received
Before Pictures
17454 Shaw
Purchase Price:
$87,100
Repairs:
Sold For:
Rents Received:
$70,000
Still Owned
$31,500/Year
Income Earning Rental Property
After Picture
3691 Sutherland
After Pictures
LaBelle Mobile Home Park
$136,000
Purchase Price:
Expenses:
Sold For:
Rents Received:
5 Yr. Mineral Lease:
$0
Still Owned
$77,000/Year
$115,000
Incoming Earning Mobile Home Park
Royalties (20% of Production)
After Picture
Before Picture