Dec 11

IRA Financial Group Releases Cryptocurrency E-Info Kit for Solo 401(K) Plan Investors

New Bitcoin E-Kit will help investors understand how to purchase cryptocurrencies with 401(k) funds

IRA Financial Group, the leading provider of self-directed IRA LLC and Solo 401(k) Plans, announces the launch of a new Cryptocurrency E-Info Kit. The free cryptocurrency information kit will help retirement account holders looking to purchase cryptocurrencies, such as Bitcoins, with their retirement accounts to better understand what is involved in the process. “The IRA Financial Group Crypto E-Info Kit will help guide retirement account holders looking to use a Solo 401(k) plan to buy cryptocurrencies, such as bitcoins,” stated Adam Bergman, a partner with the IRA Financial Group.

IRA Financial Group’s Crypto 401(k) platform with checkbook control will allow retirement account holders to buy, sell, or hold Bitcoins and other cryptocurrency assets and generate tax-deferred or tax-free gains, in the case of a Roth Solo 401(k). The primary advantage of using a Solo 401(k) to make Bitcoin investments is that all income and gains associated with the 401(k) investment grow tax-deferred.IRA Financial Group Releases Cryptocurrency E-Info Kit for Solo 401(K) Plan Investors

IRA Financial Group is the market’s leading provider of self-directed retirement plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent. The IRA Financial Trust Company, a self-directed IRA custodian, was founded by Adam Bergman, a partner with the IRA Financial Group.

IRA Financial Group is the market’s leading provider of self-directed retirement plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

Adam Bergman, IRA Financial Group partner, has written six books the topic of self-directed retirement plans, including, “The Checkbook IRA”, “Going Solo,” Turning Retirement Funds into Start-Up Dreams, Solo 401(k) Plan in a Nutshell, Self-Directed IRA in a Nutshell, and in God We Trust in Roth We Prosper.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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Nov 21

How To Use Your Self-Directed Solo 401k to Invest in Tax Liens

It’s a little-known fact that tax liens can be purchased with retirement account funds. By Self-Directing your Solo 401(k) Plan investments into tax liens, your profits are tax-deferred back into your retirement account. More importantly, if you have full checkbook control over your Solo 401(k), the purchases can be made on the spot as fast as you can write a check. Tax Liens have been a lesser known and underappreciated money-maker, however learning how they can magnify your earnings in a tax-deferred 401(k) will make them one of the soundest investments in your retirement account.

The purchase of tax lien certificates is a surprisingly safe investment. The transaction is fast and its characteristics make tax liens a perfect investment for the individual with full checkbook control of an IRA Financial Group Solo 401(k) Plan.

How To Use Your Self-Directed Solo 401k to Invest in Tax LiensThe Solo 401(k) Plan offers a highly attractive loan feature allowing for the purchase of tax liens. Under the Solo 401(k) Plan, a participant can borrow up to either $50,000 or 50% of their account value – whichever is less. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) to finance your tax lien purchase.

These unique IRS approved structures are created by IRA Financial Group’s in-house tax and ERISA professionals who personally customize your account structure to suit your needs. Only a handful of institutions are skilled in these specialized account structures and IRA Financial Group is the “gold standard” for Compliance, Leadership, Customer Service, and Technological Innovation.

Facts & Opportunities Surrounding Tax Liens

Real estate has long been considered one of the best (and safest) investment opportunities for both the large and small capitalist. Savvy investors know that the trick to making money in a downward spiraling market is to purchase properties for a fraction of their value. The question is…How? Many are finding the perfect answer in the high-profit possibilities of investing in Tax Lien Sales.

When a property owner falls behind on their taxes, failing to pay for one or more years, the local taxing authority has the legal right to place a lien or repossess the property and sell it at auction to recoup the lost tax revenue. How long local authorities wait to seize individual properties, and how much they allow to be owed on it before one of these events is up to the lien laws in their particular area. In many cases properties may be acquired for a few thousand dollars, regardless of how much it’s actually worth! Similarly, paying off the lien on others may cost more than the house or land is worth. A savvy investor takes the time to research each property carefully prior to sale day.

Tax Lien Sales

Tax lien sales usually happen at public auctions once or twice a year, depending on the area in which it is located, and how many properties the government may seize annually for back taxes. Larger urban areas may hold monthly auctions, while smaller rural ones might only have one a year.

Types of Tax Liens

There are two types of tax lien sales through auction: the tax lien certificate; and the tax lien deed. Both can be a safe yet profitable opportunity for investors with check book control.

Tax Lien Certificate sales offer the delinquent homeowner one last chance to retain ownership of their property, by using third-party investment money to pay off the taxes and give them a bit more time to collect the money needed to pay their debt without the risk of losing their home. When an investor bids on a tax lien certificate, he is in essence agreeing to loan the homeowner the money needed to pay all taxes due. The homeowner, in turn, agrees to pay back the tax lien certificate holder – with interest – by a specified date. If the homeowner fails to pay the debt on time, the deed to the property is transferred to the investor for the amount paid on the taxes. Either way the investor makes a profit: either on the interest he earns on the loan; or by obtaining the property for a fraction of its value through the tax lien sale, and then reselling it.

Tax Lien Deed sales are handled a bit differently, since the investor is actually bidding (or buying), the complete property at the time of auction, with no responsibility to give the homeowner more time to pay his/her tax debt. Once the selling price is approved, the deed is automatically transferred to its new owner, giving the investor full reign as to what to do with the property next: renovate it; sell it as-is; or raze the existing house and build anew.

Investors usually pay more for properties in this type of tax lien sale, which may lower their profit margins compared to the acquisition of tax lien certificate properties. But, many investors prefer outright purchases to eliminate problems with current homeowners. Either way, investing in tax liens is a profitable and easy way to enter the real estate market in virtually any area.

How Much Money Can I Make and How?

1. Double Your Money Quickly. A Solo 401(k) plan can be supercharged when you buy tax lien certificates. Example: A tax lien certificate can earn up to 16% annually in your Solo 401(k). When you buy tax lien investments you generally receive the amount invested plus interest within 12 months. If you continue to reinvest in tax liens year after year at 16%, you can double your money in about 4.4 years.

2. Your Money Grows Tax-Free. By buying tax liens in an IRA Financial Group Solo 401(k), you can avoid all taxes until the money invested is withdrawn from the 401(k), which is usually around age 59 1/2. The money can be invested once, twice or a thousand times and continue to grow tax-free, so long as it is not withdrawn for personal use. If you use a Self-Directed Roth Solo 401(k), your investment will grow tax-free and you can withdraw the funds tax-free once you reach the age of 59 1/2.

3. The Flexibility to Buy Time Sensitive Investments. IRA Financial Group’s Solo 401(k) Plan allows the participant to serve in the trustee role. This means that all assets of the 401(k) trust are under your sole authority (“checkbook control”). This gives you incredible freedom to fund the investment at a moment’s notice. In this arrangement, you can buy tax liens with the stroke of the pen, without a custodian or other bureaucrat saying no or otherwise trying to slow down the process.

Tax liens are backed and leveraged by real estate and guaranteed by the governmental taxing authority. In most states, they are a first lien on real estate, and when foreclosed, they wipe out all junior liens, including mortgages. This allows you to potentially receive a valuable piece of real estate for pennies on the dollar!

Time to Act

Real property has been the cornerstone of wealth for thousands of years. While ill-informed speculators have fled real estate because of the housing bust, intelligent real estate investors are enjoying immense profits by expanding their geographic scope and investing for predictable income.

Why are we significantly less than everyone else and “The best in the business”?

Establish a Solo 401(k) with IRA Financial Group and have immediate “checkbook control” to make tax lien investments.

Our in-house tax and ERISA professionals will take care of setting up your Solo 401(k) Plan. Our tax and ERISA professionals are onsite greatly reducing the setup time and cost. You will find that our fee for this service is significantly less than other companies that perform the same or similar services.

Please contact one of our 401(k) Experts at 800-472-0646 for more information.

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Oct 10

Self-Directing Your Solo 401(k) is Easy!

A Solo 401K Plan, also called a Self-Directed 401K, offers a self employed business owner the ability to use their retirement funds to make almost any type of investment tax-free, including real estate, on their own without requiring custodian consent. Additionally, a Self-Directed 401K Plan will allow you to make high contributions to the Plan (up to $54,000 for plan participants under the age of 50 and $60,000 for plan participants over the age of 50) as well as borrow up to $50,000 for any purpose.

Advantages of Using a Self-Directed 401K

The Self-Directed Solo 401K Plan is such a popular retirement solution for small business owners because the IRS designed it specifically for them. Unlike other 401(k) Plans, which restrict plan investments to just stocks and mutual funds, IRA Financial Group’s Self-Directed 401K Plan is designed specifically to allow plan participants to diversify their retirement portfolio by making traditional as well as non-traditional investments such as real estate and precious metals. The Individual 401K Plan can be adopted by a sole proprietorship, LLC, Partnership, or Corporation.

There are a number of features that make the Self-Directed 401K Plan so appealing and popular among self -employed business owners.

High Contribution Limits: Under the 2017 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $54,000.

For plan participants over the age of 50, an individual can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre-tax or after-tax (Roth). On the profit sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including the employee deferral, of $60,000.

Calculate Your Solo 401k Plan Maximum Contribution Limit Please click here to calculate your Solo 401(k) Plan Maximum Contribution Limit.

Tax-Free Loan:   With a Self-Directed 401K Plan, a plan participant is eligible to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose, including paying personal expenses such as credit card bills, mortgage payments, personal or business investments, a car, vacation, or anything else. The loan has to be paid back over a five-year period at least quarterly at a minimum prime interest rate (you have the option of selecting a higher interest rate). There is no pre-payment penalty.

Checkbook Control”: One of the most popular aspects of the Self-Directed 401K Plan is that it does not require the participant to hire a bank or trust company to serve as trustee. Unlike, an IRA which requires a financial institution to serve as trustee and custodian of the IRA, in the case of a Self-Directed 401K Plan, the plan account can be opened at any local bank or credit union and the plan participant can serve as trustee of the Self-Directed 401K. This flexibility allows the plan participant (you) to gain “checkbook control” over your retirement funds. In essence, all assets of the Self-Directed 401K Plan will be under the sole authority of the 401k participant.  A Self-Directed 401K plan allows you to eliminate the expense and delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself. With a Self-Directed 401K Plan, making a 401K Plan investment is as simple as writing a check.

A World of Investment Opportunity: With a Self-Directed 401K, you will be able to invest in almost any type of investment opportunity that you discover, including: Real Estate (rentals, foreclosures, raw land, tax liens etc.), Private Businesses, Precious Metals, Hard Money & Peer to Peer Lending as well as stock and mutual funds; you’re only limit is your imagination. The income and gains from these investments will flow back into your Self-Directed 401K Plan tax-free!

Self-Directed 401KUse Leverage Tax-Free:   When an IRA buys real estate that is leveraged with nonrecourse mortgage financing, it creates Unrelated Debt Financed Income (a type of Unrelated Business Taxable Income) on which taxes must be paid pursuant to Internal Revenue Code Section 514. A Self-Directed 401K plan is generally exempt from UDFI. What this means is that unlike an IRA, Internal Revenue Code Section 514(c)(9), allows a Self-Directed 401K plan to use nonrecourse leverage to make a real estate acquisition without tax or penalty.

Roth Contributions: The Self-Directed 401K Plan contains a built in Roth sub-account which can be contributed to without any income restrictions. A Self-Directed 401K Plan will allow you to make pre-tax and/or after-tax (Roth) employee deferral contributions to your Plan.

Easy Administration:  The Self-Directed 401K Plan is easy to operate and effortless to administer. There is generally no annual filing requirement unless the assets in your Self-Directed 401K Plan exceeds $250,000, in which case you will need to file a short information return with the IRS (Form 5500-EZ).

Roth Conversion: The Self-Directed 401K Plans allows for the conversion of pre-tax 401K funds to an after-tax Roth sub-account. However, the 401K Plan participant must pay income tax on the amount converted.

Offset the Cost of Your Plan with a Tax Deduction: By paying for your Solo 401(k) with business funds, you would be eligible to claim a deduction for the cost of the plan, including annual maintenance fees. The deduction for the cost associated with the Solo 401(k) Plan and ongoing maintenance will help reduce your business’s income tax liability, which will in-turn offset the cost of adopting a self-directed Solo 401(k) Plan. The retirement tax professionals at the IRA Financial Group will help you take advantage of the available business tax deduction for adopting a Solo 401(k) Plan.

Asset & Creditor Protection: In the case of a bankruptcy, the general exemption found in section 522 of the Bankruptcy Code, 11 U.S.C. §522, provides an unlimited exemption for retirement assets exempt from taxation for Section 401(a) (tax qualified retirement plans—pensions, profit-sharing and section 401(k) plans). Thus, ERISA qualified plans as well as Self-Directed 401K plans are afforded full bankruptcy exemption. Outside of bankruptcy, state law will govern whether Self-Directed Solo 401K Plan assets are protected from creditors. Most states will provide protection for Self-Directed Solo 401K Plan assets from creditors outside of the bankruptcy context.

IRA Financial Group will take care of setting up your entire Self-Directed 401K Plan. The whole process can be handled by phone, email, fax, or mail and typically takes between 2-10 days to complete, the timing largely depending on the time it takes your current retirement asset custodian to move the funds to the new Self-Directed 401K Plan account. Our tax and ERISA professionals are on-site greatly reducing the set-up time and cost. Most importantly, each client of the IRA Financial Group is assigned a retirement tax professional to help with the establishment of the Self-Directed 401K Plan.

For additional information on the Self-Directed 401(k) Plan, please contact us at 800-472-0646.

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Sep 27

IRA Financial Group Introduces New Solo 401(k) Plan Bitcoin Solution For Retirement Account Investors

Solo 401(k) Plan option offers retirement account holders the ability to trade or hold Bitcoins and other cryptocurrency without tax

IRA Financial Group, the leading provider of Solo 401(k) Plan solutions, is proud to announce the introduction of the Bitcoin Solo 401(k) Plan option to all retirement account holders. IRA Financial Group’s Bitcoin Solo 401(k) Plan solution will allow retirement account holders to buy, sell, or hold Bitcoins and other cryptocurrency assets and generate tax-deferred or tax-free gains, in the case of a Roth Solo 401(k) Plan. “Bitcoins have become a popular investment diversification option for many of our Solo 401(k) Plan investors in 2017, who are interested in using a tax-efficient manner to buy and sell Bitcoins,” stated Adam Bergman, a partner with the IRA Financial Group.

IRA Financial Group Introduces New Solo 401(k) Plan Bitcoin Solution For Retirement Account InvestorsAccording to Mr. Bergman, IRA Financial Group’s Solo 401(k) Plan Bitcoin solution is so attractive to Bitcoin investors because it gives them the control to buy, hold, or sell Bitcoins themselves. The primary advantage of using a Solo 401(k) Plan to make Bitcoin investments is that all income and gains associated with the Solo 401(k) investment grow tax-deferred or tax-free, in the case of a Roth Solo 401(k).

IRA Financial Group’s Bitcoin Solo 401(k) Plan for cryptocurrency investors is an IRS approved structure that allows one to use their retirement funds to make Bitcoin and other investments tax-free and without custodian consent.

IRA Financial Group is the market’s leading provider of self-directed retirement plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate, without custodian consent.

Adam Bergman, IRA Financial Group partner, has written six books on the topic of self-directed retirement plans, including, “The Checkbook IRA”, “Going Solo”, “Turning Retirement Funds into Start-Up Dreams”, “Solo 401(k) Plan in a Nutshell”, “Self-Directed IRA in a Nutshell”, and “In God We Trust in Roth We Prosper”. Mr. Bergman is also the founder of The IRA Financial Trust Company, a Self-Directed IRA custodian.

To learn more about the IRA Financial Group, please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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Sep 18

Investing in Real Estate with a Self-Directed Solo 401k Plan

Most people mistakenly believe that their 401(k) must be invested in bank CDs, the stock market, or mutual funds. Few Investors realize that the IRS has always permitted real estate to be held inside 401(k) retirement accounts. Investments in real estate with a Solo 401(k) are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA). IRS rules permit you to engage in almost any type of real estate investment, aside generally from any investment involving a disqualified person.

Advantages of Using a Solo 401(k) to Purchase Real Estate

Income or gains generated by a 401(k) Plan generate tax-deferred/tax-free profits. Using a Solo 401(k) Plan to purchase real estate allows 401(k) for Real Estatethe 401(k) to earn tax-free income/gains and pay taxes at a future date, rather than in the year the investment produces income.

With a Solo 401K, you can invest tax-free and not have to pay taxes right away – or in most cases for many years allowing your retirement funds to grow tax-free! All the income or gains from your real estate deals flow though to your 401(k) account tax-free!

Types of Real Estate Investments

Below is a partial list of domestic or foreign real estate-related investments that you can make with a Solo 401(k):

  • Raw land
  • Residential homes
  • Commercial property
  • Apartments
  • Duplexes
  • Condos/townhomes
  • Mobile homes
  • Real estate notes
  • Real estate purchase options
  • Tax liens certificates
  • Tax deeds

Investing in Real Estate with a Solo 401(k) is Quick & Easy!

Purchasing real estate with a Solo 401(k) Plan is essentially the same as purchasing real estate personally.

  • Set-up a Solo 401(k) Plan with the IRA Financial Group.
  • Identify the investment property.
  • Purchase the investment property with the Solo 401(k) Plan – no need to seek the consent of the custodian with a Solo 401(k) Plan since you serve as Trustee and Plan Administrator.
  • Title to the investment property and all transaction documents should be in the name of the Solo 401(k) Plan. Documents pertaining to the property investment must be signed by you as Trustee.
  • All expenses paid from the investment property go through the Solo 401(k) Plan. Likewise, all rental income checks must be deposited directly in to the Solo 401(k) Plan bank account. No 401(k) related investment checks should be deposited into your personal accounts.
  • All income or gains from the investment flow through to your 401(k) tax-free!

Solo 401K Solution

Structuring the Purchase of Real Estate with a Solo 401(k) Plan

When using a Solo 401(k) to make a real estate investment there are a number of ways you can structure the transaction:

1. Use your Solo 401(k) funds to make 100% of the investment

If you have enough funds in your Solo 401(k) to cover the entire real estate purchase, including closing costs, taxes, fees, insurance, you may make the purchase outright using your Solo 401(k). All ongoing expenses relating to the real estate investment must be paid out of your Solo 401(k) bank account. In addition, all income or gains relating to your real estate investment must be returned to your Solo 401(k) bank account.

2. Partner with Family, Friends, Colleagues

If you don’t have sufficient funds in your Solo 401(k) to make a real estate purchase outright, your Solo 401(k) can purchase an interest in the property along with a family member (non-disqualified person), friend, or colleague. The investment would not be made into an entity owned by the 401(k) owner, but instead would be invested directly into the property.

For example, your Solo 401(k) Plan could partner with a family member, friend, or colleague to purchase a piece of property for $150,000. Your Solo 401(k) Plan could purchase an interest in the property (i.e. 50% for $75,000) and your family member, friend, or colleague could purchase the remaining interest (i.e. 50% for $75,000).

All income or gain from the property would be allocated to the parties in relation to their percentage of ownership in the property. Likewise, all property expenses must be paid in relation to the parties’ percentage of ownership in the property. Based on the above example, for a $2,000 property tax bill, the Solo 401(k) would be responsible for 50% of the bill ($1000) and the family member, friend, or colleague would be responsible for the remaining $1000 (50%).

Isn’t Partnering with a family member in a Real Estate Transaction a Prohibited Transaction?

Likely not if the transaction is structured correctly. Investing in an investment entity with a family member and investing in an investment property directly are two different transaction structures that impact whether the transaction will be prohibited under Code Section 4975. The different tax treatment is based on who currently owns the investment. Using a Solo 401(k) Plan to invest in an entity that is owned by a family member who is a disqualified person will likely be treated as a prohibited transaction. However, partnering with a family member that is a non-disqualified person directly into an investment property would likely not be a prohibited transaction. Note: If you, a family member, or other disqualified person already owns a property, then investing in that property with your Solo 401(k) would be prohibited.

3. Borrow Money for your Solo 401(k)

You may obtain financing through a loan or mortgage to finance a real estate purchase using a Solo 401(k). Solo 401(k) participants can also borrow up to either $50,000 or 50% of their account value – whichever is less to help finance a real estate investment.

If using financing through a third-party loan to purchase real estate (other than a loan from the 401(k) Plan), one important point must be considered when selecting this option:

  • Loan must be non-recourse – A “prohibited transaction” is a transaction that, directly or indirectly involves the loan of money or other extension of credit between a plan and a disqualified person. Normally, when an individual purchases real estate with a mortgage, the traditional loan provides for recourse against the borrower (i.e., personal liability for the mortgage). However, if the 401(k) Plan purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse; otherwise there will be a prohibited transaction. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the 401(k) Plan itself.

Note: Unlike a Self-Directed IRA LLC, pursuant to Internal Revenue Code Section 514(c)(9), in the case of a Solo 401(k) Plan, the Unrelated Business Income Tax (UBTI) does not apply when using nonrecourse leverage as part of a real estate transaction (unrelated debt-financed income – UDFI). Therefore, unlike a Self-Directed IRA LLC, using a Solo 401K to finance a real estate investment will not trigger UBTI – which imposes a tax in the range of 40% for 2017 on all income/gains relating to the debt financed portion of the investment.

To learn more about using a Solo 401(k) Plan to invest in real estate, please contact one of our Solo 401(k) Plan Experts at 800-472-0646 for more information.

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Aug 24

What Can You Invest in With a Self-Directed Solo 401(k)?

A Solo 401(k) Plan offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The following are some examples of types of investments that can be made with your Solo 401(k) Plan:

  • Residential or commercial real estate
  • Domestic of foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

Solo 401(k) Flow Chart

Real Estate

The IRS permits using a Solo 401(k) to purchase real estate or raw land. Since you are the trustee of the 401(k) Plan, making a real estate investment is as simple as writing a check from your 401(k) Plan bank account. The advantage of purchasing real estate with your Solo 401(k) Plan is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

Solo 401(k) Investments For example, if you purchased a piece of property with your Solo 401(k) Plan for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a Solo 401(k) Plan. By using a Solo 401(k) Plan to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

More importantly, with a Solo 401(k) Plan, you, as trustee of the 401(k) Plan, will have “checkbook control” over your retirement funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Loans & Notes

The IRS permits using 401(k) funds to make loans or purchase notes from third parties. By using a Solo 401(k) Plan to make loans or purchase notes from third-parties, all interest payments received would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

For example, if you used a Solo 401(k) to loan money to a friend, all interest received would flow back into your 401(k) Plan tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Private Businesses

With a Solo 401(k) you are permitted to purchase an interest in a privately held business. The business can be established as any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using 401(k) funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512. The retirement tax professionals at the IRA Financial Group will work with you to develop the most tax-efficient structure for using your Solo 401(k) Plan to invest in a private business.

Precious Metals & Coins

Our Solo 401(k) Plan documents allow for investments into IRS approved precious metals and coins (bullion), as defined in Internal Revenue Code Section 4975. The advantage of using a Solo 401(k) Plan to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the IRS approved precious metals and/or coin (bullion) should be held at an approved depository or U.S. Bank, as defined under Internal Revenue Code Section 408(a).

Foreign Currencies

The IRS does not prevent the use of 401(k) funds to purchase foreign currencies, including Iraqi Dinars. In fact, our Solo 401(k) Plan documents permit the purchase of foreign currencies. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

By using a Solo 401(k) to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Solo 401(k) may purchase stock, bonds, mutual funds, and CDs. The advantage of using a Solo 401(k) Plan with “Checkbook Control” is that you are not limited to just making these types of investments. With a Solo 401(k) Plan with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless!

For additional information on the advantages of using a Solo 401K Plan to make investments, please contact one of our 401(k) Experts at 800-472-0646.

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Aug 17

Tips and Tricks for Solo 401(k) Alternate Investments

A Solo 401(k) Plan offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The foundation of the prohibited transaction rules are based on the premise that investments involving a Solo 401(k) Plan and related parties are handled in a way that benefits the retirement account and not the plan participant. The rules prohibit transactions between the plan participant and certain individuals known as “disqualified persons”. The outline for these rules can be found in Internal Revenue Code Section 4975. In general, the definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the Solo 401(k) Plan participant, any ancestors or lineal descendants of the plan participant, and entities in which the plan participant holds a controlling equity or management interest.

Types of Solo 401(k) Alternate Investments:

  • Residential or commercial real estate
  • Domestic of foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

Real Estate

The IRS permits using a Solo 401(k) to purchase real estate or raw land. Since you are the trustee of the 401(k) Plan, making a real estate investment is as simple as writing a check from your 401(k) Plan bank account. The advantage of purchasing real estate with your Solo 401(k) Plan is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the plan participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

Solo 401(k) Alternate Investments For example, if you purchased a piece of property with your Solo 401(k) Plan for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

Helpful Tips :

  • The deposit and purchase price for the real estate property should be paid using Solo 401(k) Plan funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • All expenses, repairs, taxes incurred in connection with the Solo 401(k) Plan real estate investment should be paid using retirement funds – no personal funds should be used
  • If additional funds are required for improvements or other matters involving the real estate investments, all funds should come from the Solo 401(k) Plan or from a non “disqualified person”
  • If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed and whereby the lender’s only recourse is against the property and not against the borrower.
  • With a Solo 401(k) Plan the use of a nonrecourse loan would not be subject to any tax pursuant to Internal Revenue Code Section 514, which is not the case with an IRA. This provides a very exciting investment opportunity.
  • No services should be performed by the Solo 401(k) Plan participant or “disqualified person” in connection with the real estate investment. In general, other then typical trustee type of services (necessary and required tasks in connection with the maintenance of the plan), no active services should be performed by the plan participant or a “disqualified person” with respect to the real estate transaction.
  • Title of the real estate purchased should be in the name of the trustee for the benefit of the plan. For example, if Joe Smith is the trustee of ABC 401K Trust, title to real estate purchased by Joe’s plan would be as follows: Joe Smith as Trustee of the ABC 401K Trust
  • Keep good records of income and expenses generated by the real estate investment
  • All income, gains or losses from a Solo 401(k) Plan real estate investment should be allocated to the Solo 401(K) Plan
  • Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in
  • Make sure you will not be engaging in any self-dealing real estate transaction which would involve buying or selling real estate that will personally benefit you or a “disqualified person”

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a Solo 401(k) Plan. By using a Solo 401(k) Plan to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

More importantly, with a Solo 401(k) Plan, you, as trustee of the 401(k) Plan, will have “checkbook control” over your retirement funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Helpful Tips :

  • The deposit and purchase price for the tax lien should be paid using Solo 401(k) Plan funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • A check from the Solo 401(k) Plan account should be taking to auction or used for the tax lien purchase – no personal check or cash should be used
  • No credit card should be applied for in the name of the Solo 401(k) Plan as that would violate the IRS prohibited transaction rules. A pure debit card is allowable
  • All income, gains or losses from tax lien investments should be allocated to the Solo 401(K) Plan

Loans & Notes

The IRS permits using 401(k) funds to make loans or purchase notes from third parties. By using a Solo 401(k) Plan to make loans or purchase notes from third-parties, all interest payments received would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

For example, if you used a Solo 401(k) to loan money to a friend, all interest received would flow back into your 401(k) Plan tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Helpful Tips :

  • The loan or note amount should be paid using Solo 401(k) Plan funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used in the loan transaction
  • The loan or note should not involve a “disqualified person” directly or indirectly
  • The loan or note should have a stated interest rate of at least Prime as per the Wall Street Journal (4.25% as of 6/23/17)
  • All interest and principal associated with the loan or note should be allocated to the Solo 401(K) Plan
  • It is good practice to have the loan terms documented in a promissory note or loan agreement
  • If you will be acting as the lender, consider securing the loan with an interest or lien in an asset owned by the borrower
  • Make sure you will not be engaging in any self-dealing loan transaction which would involve a loan or note that will personally benefit you or a “disqualified person”

Private Businesses

With a Solo 401(k) you are permitted to purchase an interest in a privately held business. The business to be purchased can be any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using 401(k) funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512.

Helpful Tips :

  • The deposit and purchase price for the business should be paid using Solo 401(k) Plan funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used to purchase the business
  • The purchase of the stock or assets of the business should not directly or indirectly benefit the plan participant personally or any “disqualified person”
  • The purchase of a business operated via an LLC or partnership will potentially trigger the Unrelated Business Taxable Income rules under IRC 512 and a corresponding tax of approximately 40% for 2017 would be applied
  • Stock of an S Corporation should not be purchased with retirement funds as the S corporation rules only allow individuals to be S Corporation shareholders
  • The purchase of stock of a C Corporation would not trigger the application of the Unrelated Business Taxable Income rules under IRC 512
  • All income, gains or losses from the purchased business should be allocated to the Solo 401(K) Plan
  • The plan participant or any “disqualified person” should not have any ownership in the business being purchased and should not directly or indirectly personally benefit from the acquisition
  • Make sure to perform adequate diligence on the business you will be purchasing or investing in especially if you will be buying the stock/interests and not the assets
  • Make sure you will not be engaging in any business acquisition transaction which would involve buying or selling a business that will personally benefit you or a “disqualified person”

Precious Metals & Coins

Our Solo 401(k) Plan documents allow for investments into precious metals and certain coins. The advantage of using a Solo 401(k) Plan to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, IRS approved metals or coins, as defined under Internal Revenue Code Section 408(m) should be held an an approved depository or U.S. Bank.

Helpful Tips:

  • Only IRS approved metals or coins (bullion) may be purchases as per Internal Revenue Code Section 408(m)
  • The IRS approved precious metals or coins being purchased by the plan should be paid using Solo 401(k) plan funds or funds from a non-disqualified third-party
  • With respect to IRS approved precious metals or coins (bullion), the metals or coins should not be held in the personal possession of any individual
  • With respect to the IRS approved precious metals or coins outlined in Internal Revenue Code Section 408(m), the bullion must be held in the “physical possession” of a U.S. depository or at a U.S. bank
  • An affidavit signed by the trustee of the plan confirming that the IRS approved precious metals or coins are being purchased and being held in the sole interest of the retirement account is good practice
  • All income, gains or losses from the purchased precious metals or coins should be allocated to the Solo 401(k) Plan
  • IRS approved precious metals or coins should not be held at a bank outside the United States
  • Perform adequate diligence on the dealer with which you will be transacting with for the purchase of IRS approved metals or coins

Foreign Currencies

The IRS does not prevent the use of 401(k) funds to purchase foreign currencies, including Iraqi Dinars. In fact, our Solo 401(k) Plan documents permit the purchase of foreign currencies. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

By using a Solo 401(k) to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Solo 401(k) Plan, all gains are tax-free.

Helpful Tips :

  • Make sure you have a solid background in trading currencies – high volatile and significant risk
  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade foreign currencies and all his/her securities licenses are in good standing.
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • All income, gains or losses from the foreign currency transactions should be allocated to the Solo 401(K) Plan

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Solo 401(k) may purchase stock, bonds, mutual funds, and CDs. The advantage of using a self-directed Solo 401(k) Plan is that you are not limited to just making these types of investments. With a Solo 401(k) Plan with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless! When purchasing stocks or securities with a Solo 401(k) Plan, all income and gains, including dividends, would flow back to the plan without tax. With a Roth Solo 401(k) Plan, all gains are tax-free. Whereas, if you purchased stocks with personal funds, all income and gains would be subject to federal and in most cases state income tax.

Helpful Tips :

  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade stocks or securities and all his/her securities licenses are in good standing.
  • Beware of promoters who are promising high returns and that do not work at reputable financial institutions – high likelihood of fraud
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • Open up a brokerage account in the name of the Solo 401(k) Plan – not a personal account
  • All income, gains or losses from the stock investments should be allocated to the Solo 401(K) Plan

If you have any questions about whether your specific Solo 401(k) Plan transaction would potentially be in violation of IRS rules, please contact a tax professional at the IRA Financial Group at 800-472-0646.

Aug 10

How to Use ROBS to Start a Business with 401k Funds

The Business Acquisition & Compliance Solution Structure (BACSS), also known as the “Rollover Business Start-Up” (ROBS) Solution, is an IRS and ERISA approved structure that allows an individual to use retirement funds, such as an IRA or 401(k), to purchase a new or existing business or franchise tax-free and penalty-free.

The ROBS arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsored, and then investing the rollover funds in the stock of the new C Corporation.

What is the Difference between using a Self-Directed IRA Vs. ROBS structure to buy a business?

At first glance, using a Self-Directed IRA LLC to purchase stock in a corporation would seem to share many similarities with the ROBS structure.

How to Use ROBS to Start a Business with 401k FundsWith IRA Financial Group’s ROBS transactions, the structure typically involves the following sequential steps: (i) an entrepreneur or existing business owner establishes a new C Corporation; (ii) the C Corporation adopts a prototype 401(k) plan that specifically permits plan participants to direct the investment of their plan accounts into a selection of investment options, including employer stock, also known as “qualifying employer securities.”; (iii) the entrepreneur elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover or trustee-to-trustee transfer of retirement funds from another qualified retirement plan into the newly adopted 401(k) plan; (iv) the entrepreneur then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that the entrepreneur wishes to invest in the new business); and finally (v) the C Corporation utilizes the proceeds from the sale of stock to purchase an existing business or to begin a new venture.

With IRA Financial group’s ROBS strategy, the newly formed business will also be able to borrow from third parties, pay salaries to employees (including shareholders/plan participants), and engage in other routine business transactions with disqualified persons. Commonly, a corporate officer or shareholder will make or guarantee loans to the business.

With a Self-Directed IRA LLC, an entrepreneur could use retirement funds to purchase business assets like with the ROBS strategy. However, that individual would not be able to be actively involved in the business, earn a salary, or even personally guarantee a business loan.

The recent U.S. Tax Court case Ellis v. Comm’r of Internal Revenue, No. 14-1310 (8th Cir. 2015) highlights the risk and limitations involved when using a Self-Directed IRA to purchase business assets. In the Ellis case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. Because Mr. Ellis used an IRA and not a 401(k) Plan to purchase the C Corporation stock, Mr. Ellis was not able to earn a salary or personally guarantee a business loan, which ultimately was the cause of the IRS prohibited transaction rule violation.

If Mr. Ellis had used IRA Financial Group’s ROBS strategy, he would have been able to purchase business assets with retirement funds, earn a salary from the business, as well as personally guarantee the business loan without triggering the IRS prohibited transaction rules.

Legal Foundation for the ROBS Solution

An individual retirement account investor is able to use retirement funds to invest in an active trade or business with tax or penalty because the ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules. The exemption to the prohibited transaction rules under IRC 4975(d) is centered around ERISA Section 408(e). It is IRC Section 4975(d) and ERISA Section 408(e) which shields employers from scrutiny of routine (non-abusive) corporate transactions by the plan sponsor and other “disqualified persons,” which might otherwise constitute technical violations of the prohibited transaction rules (due to the employer-sponsored retirement plan’s ownership of employer securities). If the plan sponsor and other fiduciaries’ routine corporate transactions did not fall within the purview of ERISA Section 408(e), the prohibited transaction rules would needlessly prohibit a myriad of legitimate business transactions and would ultimately nullify the exemption that Congress intended to provide. To accomplish its intended effect, ERISA Section 408(e) must be read to exempt the natural and necessary commercial consequences of owning corporate stock, rather than just the stock purchase or divestiture.

Important tax and economic policy considerations also compel a different result for 401(k) plans than IRAs. Congress specifically intended to encourage 401(k) plans to invest in employer securities, within certain limits. The opportunity to invest in employer securities through retirement plans benefits employers and employees alike by aligning their economic interests.

Outside the context of ROBS arrangements, many 401(k) plans permit participants to invest in employer stock. A number of large 401(k) plans, including plans sponsored by Apple and Pepsi, include substantial allocations of employer stock.

To learn more about the benefits of the ROBS (Rollover Business Startup) strategy, please contact a retirement tax expert at 800-472-0646.

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Aug 01

Using a Solo 401(k) to Invest in Bitcoin

Bitcoin is usually described as virtual currency. That’s useful shorthand, but is it really money? And should it be taxed as if it is? Or is it a capital asset? How about a commodity? Or what about a collectible? Most commentators have viewed bitcoins either as a virtual type of currency or capital asset. However, the potential still exists that the IRS could argue that bitcoins do not satisfy the main functions of money and acts more like a stamp or other collectible than a currency.

Using a Btcoin 401k to Invest in virtual currency.In Notice 2014-21, the IRS stated that it would tax digital money such as bitcoin like property, not currency. On March 25, 2014, the IRS issued Notice 2014-21, which for the first time set forth the IRS position on the taxation of bitcoins. According to the IRS, “Virtual currency is treated as property for U.S. federal tax purposes,” the notice said. “General tax principles that apply to property transactions apply to transactions using virtual currency.” By treating bitcoins as property and not currency, the IRS is providing a potential boost to investors but it is also imposing extensive record-keeping rules—and significant taxes—on its use. In a notice, the IRS said that it generally would treat bitcoin held by investors much like stock or other intangible property. If the virtual currency is held for investment, any gains would be treated as capital gains, meaning they could be subject to lower tax rates. The top long-term capital gains tax rate is 20%, while the top ordinary income-tax rate is 39.6%, although add-on taxes often make both rates somewhat higher. But as capital investments, loss deductions from bitcoin often would be limited, whereas currency losses can be easier to deduct up front.

The IRS guidance in Notice 2014-21 targets a new crop of digital currencies used by a small number of merchants, consumers and investors. Bitcoin, the best-known of the group, is created using a computer process and can be exchanged for dollars online.

Although IRS Notice 2014-21 did not address whether bitcoins would be considered an approved investment for retirement purposes, the fact that the Notice is treating bitcoins as property, like stock, and not as a collectible, it should be clear bitcoin is an approved investment for IRAs and 401(k) plans and would not violate IRC 408(m).

For many retirement investors, the investment in bitcoins via a Solo 401(k) plan could prove a very tax efficient manner for transacting with bicoins as use of bitcoin in a retail transaction typically would be a taxable “event” for many buyers, requiring them to figure out the gain they had made on the virtual currency—and eventually pay tax on it, whereas, the gains would likely not be subject to tax with retirement funds. However, the IRS stated in the Notice that bitcoin “miners”—including people who use computers to validate bitcoin transactions or maintain transaction ledgers—also would be subject to tax on payments received in bitcoin and that “mining” that constitutes a trade or business would be subject to self-employment taxes. Accordingly, dealers in bitcoin—much like dealers in other types of property—would be subject to different tax principles than individual investors, and their gains generally would be taxed as ordinary income.

Notice 2014-21 is important because it sets forth some clarity by the IRS about the tax treatment of virtual currencies, but it also raised new questions, such as what government body would be in charge of regulation.

With IRA Financial Group’s self-directed retirement plans, retirement account investors have the ability to make traditional as well as alternative asset investments, such as real estate and bitcoins, in a tax-deferred or tax-free basis.

Why Work With the IRA Financial Group?

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP. Over the years, we have helped thousands of clients establish IRS compliant Self-Directed retirement solutions. With our work experience at some of the largest law firms in the country, our retirement tax professionals’ tax and IRA knowledge in this area is unmatched.

To learn more about using a “Checkbook Control” Solo 401(k) to make bitcoin and other investments without tax, please contact one of our 401(k) Experts at 800-472-0646 for more information.

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Jul 31

What The Law Says About UBTI In Non-Real Estate Investments

This article, written by Adam Bergman, about the UBTI rules when making non-real estate investments, first appeared on Forbes.com

For many retirement account investors, understanding how the Unrelated Business Taxable Income Rules work, also known as UBTI, UBIT, or debt-financed income rules, and how they may potentially apply to one’s retirement account investment has been a challenge.  The main reason is that the majority of IRA or 401(k) plan investors invest in traditional types of investments, such as equities, mutual funds, and ETFs, which do not trigger the application of the UBTI tax rules since most passive investments that a retirement account might invest in are exempt from the UBTI rules, such as interest, dividends, and capital gains.

Understanding the potential impact of the UBTI rules is crucial for retirement account investors Understanding the potential impact of the UBTI rules is crucial for retirement account investors seeking to make non-real estate alternative investments in their retirement accounts, including options, stock short sales, and commodity futures contracts.  In general, the UBTI tax rules are triggered in three instances: (i) use of margin to buy stock, (ii) use of a nonrecourse loan to buy real estate, and (iii) investment in a business operated through a flow-through entity, such as an LLC or partnership.  The tax imposed by triggering the UBTI rules is quite steep and can go as high as 40 percent.

When it comes to non-real estate transactions, such as securities and other financial products involving retirement funds, understanding the application of the UBTI or debt-financed income rules have been somewhat difficult. Neither the Code nor the Treasury regulations define “indebtedness” for purposes of the debt-financed income rules. Generally, when a retirement account borrows funds and has a clear obligation to repay the funds, the debt-financed income rules are applicable. However, many financial product type investments that involve “leverage” but not a direct borrowing are not considered debt-financed property and are not subject to UBIT.

Below is a summary of how the UBTI/debt-financed income rules apply to some of the more common type of financial product investments involving retirement funds:

Purchase of Stock or Securities on Margin:  It is well established that the purchase of securities on margin gives rise to unrelated debt-financed income (Elliott Knitwear Profit Sharing Plan v. Commissioner, 614 F.2d 347 (3d Cir. 1980).

Repurchase Agreements:  In a repurchase agreement, one party (usually a bank) purchases securities from another party (the bank’s customer) and agrees to sell the securities back to the customer at an agreed price. Such transactions are treated as a loan of money secured by the securities and give rise to unrelated debt financed income (Rev. Rul. 74-27, 1974-1)

Securities Lending Transactions: IRC Section 514(c)(8) provides that payments with respect to securities loans are deemed to be derived from the securities loaned, not from collateral security or the investment of collateral security from such loans.

Short Sales of Stock: The IRS has ruled that neither the gain attributable to the decline in the price of the stock sold short nor the income earned on the proceeds of the short sale held as collateral by the broker constituted debt-financed income (Rev. Rul. 95-8, 1995-1)

Options: IRC Section 512(b)(5) excludes from UBTI all gains or losses recognized, in connection with an organization’s investment activities, from the lapse or termination of options to buy or sell securities.

Commodities Futures Transactions: The IRS has concluded that gains and losses from commodity futures contracts are excluded from UBTI under Code section 512(b)(5). The IRS has rules that the purchase of a long futures contract entailed no borrowing of money in the traditional sense.  Likewise, the IRS found a short contract was merely an executory contract because there was no property held by the short seller that produced income and thus there could be no acquisition indebtedness.

Notional Principal Contracts: The IRS has issued regulations providing that all income and gain from notional principal contracts is excluded from UBTI. (Treas. Reg. § 1.512(b)-1(a)(1).)

The Internal Revenue Code permits retirement account investors to make a wide range of financial product investments using retirement funds. While the majority of financial product type investments would not trigger the UBTI or debt-financed income rules, (including mutual funds and options) transactions involving margin, however, would likely trigger the tax.  The burden falls on the retirement account holder to make the determination of whether the financial product type transaction triggered the UBTI rules and, if so, file the IRS Form 990-T. Therefore, it is important to work with a tax professional who can help one evaluate the financial product transaction to determine whether the transaction will trigger the UBTI or debt-financed income rules tax.

For more information, please contact the IRA Financial Group @ 800.472.0646!

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