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13122 NE 20th Street Suite 100

Bellevue, WA 98005

tel 888.472.4455

fax 888.418.0374

web www.guidantfinancial.com

Self-Directed IRA LLC FAQ Q. Why haven’t I heard about this? Once ERISA was passed, the securities markets were responsible for bringing the IRA and 401(k) to the mass market. The banks and brokerage houses created a misconception that buying stocks, bonds and mutual funds was all that was allowed through retirement products such as an IRA. This is 100% false! Banks and brokerage houses have a vested interest in having you invest in stocks, bonds and mutual funds − not real estate, businesses and other non-traditional investments. Do not let the interests, or lack of knowledge of your financial advisor limit your ability to maximize the investment potential of your retirement accounts. There are many great brokers who understand that true diversification happens when your funds are invested in a variety of different markets. Guidant would be more than happy to introduce you to a professional who will be able to help truly diversify your IRA.

Q. What kind of retirement funds am I able to use? It is possible to use funds from most types of retirement accounts:

• Traditional IRA • Roth IRA • SEP IRA • Keogh

• 401(k) • 403(b) • And many more!

It must be noted that most employer sponsored plans such as a 401(k) will not let you roll your account into a new vehicle while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.

Q. How many people have self-directed IRA accounts? This is a difficult number to determine. However, the self-directed industry is growing at a rapid pace and is expected to see upwards of $2 trillion enter the market during the next two years. Some of the latest numbers show more than 45 million IRA holders in the U.S. and less than 4% of those funds are held in non-traditional assets. This number is expected to increase significantly during the next five years as more and more individuals and their financial advisors attain a greater awareness of self-directed IRAs.

Self-Directed IRA LLC Freqently Asked Questions


13122 NE 20th Street Suite 100

Bellevue, WA 98005

tel 888.472.4455

fax 888.418.0374

web www.guidantfinancial.com

Q. Are there limits to the investments I can make? Yes. As discussed previously, you cannot invest in Collectibles or Life Insurance Contracts. In addition, there are certain transactions in which you cannot participate when using IRA funds. These are referred to as “prohibited transactions”. Prohibited transactions are defined in IRC § 4975(c) (1) and IRS Publication 590. They were established to maintain that everything the IRA engages in is for the exclusive benefit of the retirement plan. Professionals often refer to these as “self-dealing” transactions. Self-dealing occurs when an IRA owner uses their individual retirement funds for their personal benefit rather than to benefit the IRA. As an IRA owner, if you violate these rules, your entire IRA could lose its tax-deferred or tax-free status. It is very important that you work with a competent Retirement Account Facilitator to help avoid violating these rules.

Q. Specifically, what are prohibited transactions? IRC § 4975(c) (1), identifies prohibited transactions to include any direct or indirect:

• Selling, exchanging, or leasing any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.

• Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.

• Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.

• Transferring or using, by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intend to use.

• Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.

• Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.

If you participate in a transaction which does not fit SPECIFICALLY within these guidelines, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to decide whether you have engaged in a prohibited transaction. A Retirement Account Facilitator can help educate you regarding how these may apply to investments you are considering.

Self-Directed IRA LLC Freqently Asked Questions

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13122 NE 20th Street Suite 100

Bellevue, WA 98005

tel 888.472.4455

fax 888.418.0374

web www.guidantfinancial.com

Q. Who are disqualified parties? Many of the prohibited transactions are the result of a very simple equation:

• Plan (or plan asset) + Disqualified person = Prohibited Transaction

A plan is defined to include tax-qualified plans, IRAs and other tax favored arrangements. For the complete definition you can reference IRC § 4975(e) (1). A disqualified person (IRC §4975(e) (2)) is defined as:

• The IRA owner • The IRA owner’s spouse • Ancestors (parents, grandparents) • Lineal Descendents (daughters, sons, grandchildren) • Spouses of Lineal Descendents (son or daughter-n-law) • Investment advisors • Fiduciaries – those providing services to the plan • Any business entity i.e., LLC, Corp, Trust or Partnership in which any of the disqualified persons mentioned above has a 50% or greater interest.

Q. Why are the rules considered to be complex? These rules exist to ensure that your IRA does not engage in any investment activity other than for the exclusive benefit of the IRA. There are many types of investments which violate this law. For example, buying a house and then letting your mother rent it would potentially create a conflict of interest. If your mother, who was making rent payments, all of a sudden could not - you would be conflicted from evicting her and finding a more reliable tenant. You would then have a conflict of interest between your relationship with your mother and what is in the best interest of your IRA. These rules were put in place to help avoid these sorts of scenarios. See IRC § 408.

Q. What is the consequence of a prohibited transaction? If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.

Self-Directed IRA LLC Freqently Asked Questions

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13122 NE 20th Street Suite 100

Bellevue, WA 98005

tel 888.472.4455

fax 888.418.0374

web www.guidantfinancial.com

Q. How do I make sure that I am following the rules? As mentioned previously, the IRS does not identify what investments or transactions you can make in your IRA. They instead state which investments are prohibited and what makes certain transactions prohibited. Identifying, interpreting and following these rules can be complicated, but not impossible. As a Retirement Account Facilitator, Guidant Financial Group can help you follow IRS guidelines and steer clear of prohibited transactions.

Q. My CPA and Financial Advisors say this is illegal. Why? It may be that they are influenced by self interest or they are simply uninformed. Often times an individual will ask their CPA, attorney or financial planner for advice and in turn are told: “That’s illegal,” “You can’t do that,” or “It is very risky.” Attorneys stick to their core competencies and rarely deviate from them. Tax preparers are taught to do just that: prepare taxes. Your financial advisor’s company or agency may either be disinterested in this type of business or have not been educated regarding this type of investing format. A stock broker makes money when they sell stocks, bonds and mutual funds-not real estate. Guidant’s Professional Network understands and embraces the self-directed industry. Use this area of our Web site to find professionals available to you in the self-directed industry.

Q. What is a self-directed IRA custodian? The custodian is a bank or savings and loan institution, as defined in IRC § 408(n), or any other entity that has the approval of the IRS to act as custodian. In order to have a self-directed IRA, it needs to be held with a custodian who will allow investments into non-traditional investments. There are very few of these types of custodians.

Q. Why are there not more of these custodians across the country? There are very few non-traditional IRA custodians simply because the business is not as profitable as it is for the brokerage houses. It requires many more hours to complete a real estate transaction than to purchase stocks over an electronic system. Traditional banks do not compete because it does not fit within their business objectives. They make money by leveraging the dollars you have sitting in their accounts.

Self-Directed IRA LLC Freqently Asked Questions

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13122 NE 20th Street Suite 100

Bellevue, WA 98005

tel 888.472.4455

fax 888.418.0374

web www.guidantfinancial.com

Q. Is my money safe? In order to work with Guidant, a custodian must be a registered Trust Company. For one to register as a Trust Company, the institution must meet stringent state requirements and have adequate reserves. Your money is kept in a separate account for your benefit and not subject to creditors of the custodian. Further, under Guidant’s programs, the custodian never has control of your money-you do! You are ALWAYS in control.

Q. How does a custodian make money? You are charged a fee for simply having an account with a custodian each year. A custodian generates revenue in a variety of ways:

• Asset based fees. • Transactional fees

• Holding fees • Special fees

Asset fees are typically based on a percentage of the value of your self-directed IRA. As your IRA continues to increase in value, they are able to charge you more – even if you never purchase an asset. Larger accounts are penalized under this system. Transactional fees apply when your IRA purchases an asset. In regards to real estate, there can be fees assessed for wiring an escrow deposit; fees for reviewing a purchase and/or sale; fees for recording each document; and fees for the final wire of funds to complete the purchase. The process repeats itself when you sell that asset. This can add up quickly for active investors. Holding fees are also assessed for assets that are held with a custodian. If your IRA purchased a piece of real estate, the custodian could assess a quarterly fee for just holding the deed on behalf of your IRA. Special fees include things like expediting service, express mail, wiring funds and so on. Special fees can add up quickly, especially when trying to close transactions quickly.

Q. Is Guidant Financial Group an IRA Custodian? No. Guidant Financial Group is the largest Retirement Account Facilitator in the nation. As a Retirement Account Facilitator, we ensure that our clients are compliant with the rules and regulations set forth by the IRS and Department of Labor. In this way, their retirement funds are safe from penalties and tax consequences.

Self-Directed IRA LLC Freqently Asked Questions

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13122 NE 20th Street Suite 100

tel 888.472.4455

Bellevue, WA 98005

fax 888.418.0374

web www.guidantfinancial.com

A Retirement Account Facilitator makes investing through self-directed IRAs simple and cost effective for its clients. Additionally, Guidant Financial Group is not bound to offer just one product or service, so we are able to consult with you to help determine which self-directed structure or account is best for your investment objectives. Guidant’s clients do not pay asset fees, holding fees or transactional fees. They simply pay one small fee to a custodian each year – regardless of the size of their account. Because of the volume of people using Guidant to facilitate their self-directed structures, we have been able to secure the lowest rate available for all self-directed participants. Other benefits may include, but are not limited to, having checkbook control to make timely investments, further insulation for asset protection purposes and access to one of the nation’s largest self-directed Professional Networks.

Q. How do I open a self-directed IRA account? As a Retirement Account Facilitator we need to make sure you understand all of your options. Click here to see how you can get started with self-directed investing.

Q. As a Guidant client, am I limited in which types of investments I can make? Guidant continues to deal with a wide variety, and different types of investments. Some of the more common include:

• Residential Real Estate • Commercial Real Estate • International Real Estate • Sub-Leasing • Real Estate Options • Loans • Mortgages • Tax Deeds

• Tax Liens • Businesses • Franchises • Limited Partnerships • Limited Liability Companies • Private Stock • Public Stock • Mutual Funds • And much more!

Self-Directed IRA LLC Freqently Asked Questions

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13122 NE 20th Street Suite 100

Bellevue, WA 98005

tel 888.472.4455

fax 888.418.0374

web www.guidantfinancial.com

Q. How long does it take to make an investment with a self-directed IRA? That depends. Working with a traditional self-directed IRA custodian makes investments like tax liens, foreclosure homes and real estate difficult. With a traditional self-directed IRA custodian, the client cannot have any personal interaction with the IRA funds. They have to petition the IRA custodian to make an investment on their behalf. Banks move at a pace much slower pace than the investment community, and it can take weeks to complete a transaction. On the other hand, Guidant Financial Group’s clients benefit from having complete “check-book” control and immediate access to their retirement funds, so they CAN participate in such transactions quickly and efficiently!

Q. If I have a 401(k) with my current employer, will I be able to use these funds to purchase non-standard assets? Perhaps. If your company has a self-directed 401(k) like the ones Guidant establishes then yes. Most employers do not have a self-directed 401(k) so there is a high probability that it will not be possible. The only way to be sure is to contact your current 401(k) administrator.

Q. Can I use a self-directed IRA to buy a business? Yes you can. Guidant Financial Group is a Retirement Account Facilitator. Because of this, we are able to offer many more options than a self-directed IRA custodian. Our business is to make this process simple to establish, easy to understand and effortless to maintain. However, we do not suggest you use a self-directed IRA to purchase a business. Plans such as IRAs and 401(k) which engage in business activity generate Unrelated Business Taxable Income (UBTI). To alleviate this situation, Guidant uses the 401(k) Small Business Financing™ vehicle when a retirement account is going to purchase a business because this structure does not generate UBTI.

Q. What is UBTI and how is it different from UBIT? UBTI is an acronym for Unrelated Business Taxable Income. UBTI generally occurs when a plan generates income from operating a business, acquiring or improving property through debt financing, or certain partnerships from which the plan owns an interest.

Self-Directed IRA LLC Freqently Asked Questions

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13122 NE 20th Street Suite 100

Bellevue, WA 98005

tel 888.472.4455

fax 888.418.0374

web www.guidantfinancial.com

UBTI is income generated by a trust when engaging in business activity that is unrelated to its general purpose. Self-directed IRAs were created for long-term investing, and when it purchases an asset that produces income unrelated to the intent of the “plan,” then that income is subject to taxation – which means your IRA will be paying taxes on profits generated from your business purchase. UBTI is subject to Unrelated Business Income Tax, or UBIT. UBIT is a very steep and complicated form of taxation. Much like Federal Income Taxes, UBIT is set to a laddered schedule. However it is compressed on much tighter levels. In 2005, UBIT is taxed at the following rates:

• $0 - $2,000 = 15% • $2,000 -$4,700 = 25% • $4,700 - $7,150 = 28% • $7,150 - $9,750 = 33% • Over $9,759 = 35%

UBIT was implemented to keep the playing field even between plans that open businesses and the typical small business owners. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT mitigates that risk for the typical business owner. UBIT is one of the most complicated areas of taxation in the Internal Revenue Code. It is imperative that you seek professional help to make sure you do not incur any severe tax penalties.

Q. What is UDFI? UDFI stands for Unrelated Debt Financed Income. UDFI is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is similarly as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1). For example: Your self-directed IRA purchased a piece of raw land in 1999 for $100,000 using a non-recourse loan with 50% down. In 2004, you sold that same piece of property to a developer for $200,000. Your IRA had secured a 50% loan to value (LTV) on the property, and let’s assume that you never paid down any principle because it was an interest only note. Fifty percent of the profit would be subject to UBIT because it was generated by money that was not related to the self-directed IRA. As a side note – UDFI does not apply if the debt is paid off 12 months prior to the sale of the property. If the self-directed IRA can pay off its loan early, it may not have to pay UBIT at all! If you are intending to purchase assets inside a self-directed IRA using debt-financing, please consult with a competent tax advisor.

Self-Directed IRA LLC Freqently Asked Questions

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