MAREI Newsletter, November 2020 - special Self Directed Issue

2 0 2 0 N O V E M B E R

Self-Directed MID-AMERICA ASSOCIATION OF REAL ESTATE INVESTORS' SPECIAL GUIDE TO SELF DIRECTING

NETWORKING OFFERING A WEALTH OF OPPORTUNITY TO CONNECT

EDUCATION FROM MEETINGS & WORKSHOPS TO ONLINE RESOURCES

DISCOUNTS FROM LOCAL AND NATIONAL VENDORS TO SAVE YOU MONEY

MAREI Staff Chapter

Executive Director

Kim Tucker: Kim@MAREI.org - 913-815-0111

Newsletter

Staff: Newsletter@MAREI.org - 913-815-0111

PartnerCast Legal

John Wires: JohnWires@gmail.com Julie Anderson-Clark: Julie@MOKSLaw.com Rick Davis: RDavis@LevyCraig.com

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A L T E R N A T I V E

I N V E S T M E N T S

An Introduction to

Self-Directing BEYOND STOCKS, BONDS AND MUTUAL FUNDS

Available to the public since

A self-directed IRA or SDIRA is

You can also self-direct your IRA to

individual retirement accounts

administered through a custodian

invest in stocks, bonds, securities

were created in 1975, self-directed

or a trustee and directly managed

and mutual funds.

IRA plans continue to offer a broad

by you the account holder. This

range of diversified investment

allows you to use your own

There are a variety of types of Self

opportunities. However, the

expertise in non-traditional assets

Directed IRAs including a

average investor is only made

such as.

Traditional, Roth, SIMPLE, and SEP

aware of the stocks, bonds, and

IRAs. They can be in the original tax

mutual funds offered by their

Real Estate

deferred form. Or you they can earn

brokerage firm.

Mortgage Notes

profits tax free through a ROTH.

Tax Liens Why?

Gold & Silver

There are also options to Self-

Private Placements

Direct: 401(k) plans, Health

Simple: because stocks, bonds

Commodities & Futures

Savings Accounts and Coverdell

and mutual funds are very

Livestock

Education Savings Accounts.

profitable and easy to manage by a

Hedge Funds

brokerage firm. When you take

Foreign Currencies &

This guide is to provide you with

over the management of your

Investments

information and resources for self

investment, the brokerage firm

U.S. Treasury Bills

directing. However, we advise you

does not profit.

Oil, Gas, Mineral & Lumber

to seek out professional and legal

Rights

advice before making any investment.

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W H A T

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Prohibited Transactions PROVIDED BY QUEST TRUST COMPANY Investment Restrictions – What Your

to the extent of the investment.

IRA Cannot Invest In

prohibited. If your IRA enters into a prohibited transaction, there are

Everything else can be purchased in

severe consequences (see below),

The Internal Revenue Code does not

an IRA, provided that the custodian is

both for you as the IRA owner and for

say anywhere what investments are

willing to hold the asset. According

disqualified persons who participate,

acceptable for an IRA. The only

to the Internal Revenue Service, “IRA

so it is important to understand what

guidance in the Code is what

trustees are permitted to impose

constitutes a prohibited transaction.

investments are not acceptable – life

additional restrictions on

insurance contracts and

investments. For example, because of

The general rule is that a “prohibited

“collectibles”. “Collectibles” are

administrative burdens, many IRA

transaction” means any direct or

defined as any work of art, any rug or

trustees do not permit IRA owners to

indirect–

antique, any metal or gem, any stamp

invest IRA funds in real estate. IRA law

or coin, any alcoholic beverage, and

does not prohibit investing in real

Sale or exchange, or leasing, of

any other tangible personal property

estate but trustees are not required to

any property between a plan and

specified by the Secretary. An

offer real estate as an option.”

a disqualified person

for certain U.S. minted gold, silver

Transaction Restrictions – What

Lending of money or other

and platinum coins, coins issued

Your IRA Cannot Do Legally

extension of credit between a

exception to these restrictions exists

under the laws of any state, and gold,

plan and a disqualified person;

silver, platinum or palladium bullion.

Although the Internal Revenue Code

If you direct your IRA to invest in any

lists very few investment restrictions,

Furnishing of goods, services, or

prohibited collectible, your IRA will

certain transactions (as opposed to

facilities between a plan and a

be deemed to be distributed to you

investments) are considered to be

disqualified person;

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W H A T

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Transfer to, or use by or for the

discretionary control respecting

An employer any of whose

benefit of, a disqualified person of

management of such plan or

employees are covered by the plan.

the income or assets of the plan;

exercises any authority or control respecting management or

An employee organization any of

Act by a disqualified person who is

disposition of its assets; renders

whose members are covered by the

a fiduciary whereby he deals with

investment advice for a fee or other

plan.

the income or assets of a plan in his

compensation, direct or indirect,

own interest or for his own

with respect to any moneys or other

An owner, direct or indirect, of 50

account; or

property of such plan, or has any

percent or more of the voting

authority or responsibility to do so;

power of stock in a corporation, the

has any discretionary authority or

profits or capital interest in a

own personal account by any

discretionary responsibility in the

partnership, or the beneficial

disqualified person who is a

administration of such plan.

interest in a trust or other

Receipt of any consideration for his

fiduciary from any party dealing

unincorporated enterprise which is

with the plan in connection with a

A person providing services to the

an employer or employee

transaction involving the income or

plan. This can include attorneys,

organization described above.

assets of the plan.

CPA’s and your third party administrator.

Disqualified persons

A member of the family of any of the above individuals, which is defined to include only a spouse, ancestor,

There are nine different classes of

lineal descendant and any spouse

disqualified person:

of a lineal descendant.

A fiduciary, which is defined to

Caution: Although other members of

include any person who – exercises

the family are not disqualified persons

any discretionary authority or

(for example, brothers, sisters, aunts,

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W H A T

T O

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For Other Disqualified Persons.

uncles, step-children), dealing with

employee organization, or a

close family members may still be a

corporation, partnership, trust, or

prohibited transaction because of the

estate which is itself a disqualified

Initially, an excise tax of 15% of the

indirect rule. For example, in the IRS

person.

amount involved for each year (or part

Audit Manual it states: “Included

of a year) is paid by any disqualified

within the concept of indirect benefit to

Crime and Punishment – What

person who participated in the

a fiduciary is a benefit to someone in

Happens to Your IRA if You Make a

prohibited transaction. An additional

whom the fiduciary has an interest that

Mistake

tax equal to 100% of the amount

would affect his/her fiduciary judgement (sic). An example would be

involved is also imposed on a For the IRA Owner.

the retention by the fiduciary of his/her

disqualified person who participates in the prohibited transaction if the

son to provide administrative services

If the IRA owner enters into a prohibited

transaction is not corrected within the

to the plan for a fee.” This is true even

transaction during the year, the IRA

taxable period.

though the son’s provision of services

ceases to be an IRA as of the first day of

to the plan may be exempt under the

that taxable year. The value of the

Every investor should know about IRA

“reasonable compensation” exception

entire IRA is treated as a distribution for

prohibited transactions. Quest Trust

that year, and if the IRA owner is not yet

Company provides a series of articles,

A corporation, partnership, trust, or

59 1/2, there could be premature

videos, and training classes on their

estate owned 50% or more, directly

distribution penalties also. Since the

website to help you make the right

or indirectly, by the first 5 types of

IRS often does not catch the prohibited

decisions. Visit

disqualified persons described

transaction for several years, additional

www.QuestTrustCompany.com

above. Note that indirect

penalties can accrue for underreporting

ownership may include ownership

income from transactions in years after

by certain related parties such as

the prohibited transaction took place.

spouses.

An officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person who is an employer or employee organization, the owner of 50% or more of an employer or employee organization, or a corporation, partnership, trust, or estate which is itself a disqualified person.

A 10 percent or more (in capital or profits) partner or joint venturer of a person who is an employer or employee organization, the owner of 50% or more of an employer or

Discount Code MAREI30

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C A M A P L A N

I N V E S T M E N T S

Investing in Real Estate with a Self-Directed IRA

Real Estate IRA PROVIDED BY CAMAPLAN Investing in real estate is one of the most popular ways to build wealth in a selfdirected IRA. Real estate investing is an excellent option for people who want to use their personal knowledge to diversify their retirement savings accounts.

Diversification is one of the keys to protecting retirement assets, and property can be a particularly lucrative self-directed IRA business investment over the long run.

So Why Invest in Real Estate?

Real estate is one of the time-tested ways to growth wealth over the long term. Like any other segment of the financial market, property may be a hot investment market at some times and cooler at others, but when viewed as a long term investment, real estate remains one of the most stable types of assets. It is an important class of asset to consider including in a well-diversified retirement portfolio. Self-directed real estate investors have also found that it can be

one of the best ways to save tax-free money for retirement. These are some of the advantages of self-directed real estate IRAs: When the real estate investment is made with a Roth IRA, all of the proceeds from rental income or the profits from the sale of the property go back into the account tax-free. This represents a tremendous advantage over buying investment property with funds from outside a Roth IRA. In addition, the power of compound interest is multiplied in taxadvantaged accounts such as IRAs. Leverage your knowledge base: if you have ever bought a house or obtained a mortgage, you are already a real estate investor. Putting your experience to work for you is one of the most proven methods to convert your areas of expertise to high-yield returns.

You can invest in a wide range of properties, including residential, commercial, industrial, co-ops, condominiums, and unimproved land. It is up to the account owner to determine what strategy to take; you can buy low and rehabilitate a property to turn it over for quick sale, buy a home or retail space to lease out, or purchase a property to hold for decades while it appreciates. You have the control.

Self-directed IRAs and assets owned by an account are protected by statute from seizure by most creditors.

Rest easily knowing that you have secured your family’s financial future with estate planning that leaves valuable IRA assets to loved ones without the burden of taxes.

Types of Investment Options

Investing in real estate is not a “one size

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fits all” plan. There are actually a variety of different ways that you can use your selfdirected IRA to directly or indirectly put money into the real estate market.

Options for real estate investments include: Buying physical residential or commercial property. Many investors like owning a tangible asset like a piece of real estate. The potential downfalls to purchasing property is that it may take longer to liquidate and there are upkeep costs such as property taxes, insurance, and maintenance.

Purchasing real estate like apartment buildings or retail space to hold and rent. Look for properties which already have long term tenants in place whenever possible. For commercial property, it is ideal to find sites with current tenants who have NNN leases in which the tenant pays or splits the insurance, property tax, and maintenance expenses. Keep in mind that you will either have to pay a property management company or handle all of the tenant issues yourself in a rental situation.

Investing in a real estate investment trust (REIT), which is a security that invests in either property or mortgages. The advantage of REITs is that they are traded on a market and are therefore much more liquid than real estate itself. However, the flip side is that REITs are also subject to more volatile fluctuations of the market, just like stocks.

Buying mortgages or secured notes backed by real estate.

Private lending – use your IRA funds like a mini-bank to make private loans to individuals, real estate businesses, or an investment group. The account

owner can choose their borrower, decide on terms such as the length of the loan term, the interest rate, the size of the down payment, or even whether to accept a no money down offer. Private lending can be very lucrative, but it is also more risky than buying real estate, so it is essential to be thorough in performing due diligence.

Purchase tax liens from state or local governments. Because these investments often sell quickly, investors will typically form a selfdirected IRA LLC with checkbook control so they have ready access to funds.

Investors may wish to consider using their real estate IRA to invest in a variety of these options to further diversify their retirement plans.

Disallowed Transactions

There is a common misconception that an IRA can only be used to buy stocks, bonds, and mutual funds. This myth has been perpetuated by the large brokerage firms that benefit directly from selling those types of financial products; however, it has never been true. Since the inception of the individual retirement account plan, both state and federal regulations have permitted retirement account funds to be used for a wide range of alternative assets with very few exceptions. IRS real estate investment rules prohibit self-dealing and transactions that benefit the account owner, their business (or subsidiaries thereof), or other certain disqualified persons. For instance, you cannot buy a house to rent to your children of any age, or purchase commercial property to use as the office for your small business.

General rules about Traditional or Roth IRA real estate investment properties

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I N V E S T M E N T S

include: Transactions with any disqualified persons (including yourself, your spouse, lineal descendants, fiduciaries, and business partners) are prohibited. This means that your selfdirected IRA cannot be used to purchase property from, or sell or rent property to any disqualified person.

To do so can cause the account to lose its tax exempt status.

Property expenses including taxes, insurance, and repairs must be paid by funds from the IRA or income generated by the property. That is one reason why a rental strategy can be a great way to use your retirement account to invest in real estate, as it generates a stream of cash that can be used to cover those costs.

Using personal labor (aka “sweat equity”) to improve the property is not permitted. All repairs must be performed by a non-disqualified individual and paid for by the IRA. It is permissible – although considerably more complicated – to combine IRA funds with those obtained from a non-recourse loan or in partnership with others (including disqualified persons). However, earnings on the part of the property that is not financed by the IRA will be subject to taxes.

For more information on how selfdirected IRA real estate rules apply to your particular situation, please consult your personal financial adviser or tax professional. Also visit our website for more informational articles, videos and training events at www.CamaPlan.com.

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Using Self-Directed IRA's for Private Funding

Tapping into Trillions PROVIDED BY QUEST TRUST COMPANY

Whether you’re a first time home buyer,

that much money available for use in

option like private financing is almost

an experienced fix and flipper, or an

IRAs, it’s nearly impossible not to be

necessary.

expert in rentals, one aspect will be

curious about how to use those funds

present for almost everyone: funding.

for private funding.

Investors will always need money for

With a Self-Directed IRA, investors can choose to loan out their retirement

deals and sometimes the traditional

For lenders and borrowers alike, private

funds on their terms, as decided and

bank loans aren’t possible for

loans with self-directed IRAs have

agreed upon with the person

everyone. Others just prefer the

provided opportunities for successful

borrowing those funds. These

flexibility of being able to work out a

deals and have given investors the

agreements are usually more

deal on their own terms.

ability to have options. Whether you’re

customizable than regulated bank

looking to borrow private funding or

loans, and typically the interest works

There’s plenty of options available, but

loan out your own, here is everything

out in favor for the investor, making it a

private lending by using self-directed

you need to consider when getting

great investment for a self-directed IRA.

IRAs has proven time and time again to

involved in a private loan!

be an option many investors seek out when it comes to their real estate or

Private loans also give the investors the Why Private Lending?

other alternative investments.

ability to collaborate when doing the loan. Maybe one investor doesn’t have

As mentioned, sometimes a normal loan

the ability to loan out the full amount of

According to a recent study from the

from a bank or hard money lender just

funds a borrower is needing, but the

Investment Company Institute, $28

doesn’t work for unique situations.

flexibility of a private agreement makes

trillion dollars were in retirement assets,

Especially in a market like real estate

it possible for two or multiple people to

and of that, $9.2 trillion dollars was

where investors are seeking to get

come together to supply the total

reported to be in IRAs alone. With

creative with their strategies, having an

amount to loan out. This flexibility also

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C O M P A N Y

comes into play with timing, too.

Private loans are ideal when needing to purchase property in a short period of time, whereas it sometimes can take a while when applying for a traditional

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Top 10 Things to Know When Your IRA Lends

loan.

Considerations When Private Lending

Just as banks have a certain set of criteria when vetting someone for a loan, private lenders typically do, as well, although the requirements are usually different and much fewer.

Things that a private lender may consider when deciding to lend are the borrower’s credit scores, the investment loan to value ratios, the amount of time the investment may last, and if in the event the money was not paid back, is that investment something the investor would want to own. These are just a few

You may end up owning this piece of real estate if your borrower defaults.

Never loan on something you wouldn’t want your IRA to own.

Do not advance IRA money for home repairs until the repairs are finished; then have the repairs inspected before advancing the money.

Do not loan money to someone you would feel uncomfortable foreclosing on.

If the loan goes into default, take action immediately.

Collect interest monthly so you will know if the borrower is getting into trouble.

If you are unsure about how to evaluate the loan, hire a professional to help you.

considerations a lender may have.

Get title insurance for the loan.

As a borrower, it is wise to have a

Verify that hazard and, if necessary, flood insurance is in place, naming your IRA as an additional insured.

success book (if applicable) and be able to properly present your investment. Usually, when seeking a private loan versus a traditional loan, there is a higher approval rate for borrowers.

Borrowing from a bank can be time consuming and stressful, but private lending doesn’t have to be. Whether you’re a borrower looking for capital, or an investor with money looking for a good deal, private loans with a SelfDirected IRA have proven to be great investments that are flexible enough to work for everyone.

Insist that the borrower provides you with evidence of payment when property taxes and homeowners association fees become due.

Get a personal guarantee if lending to an entity or to an individual with some weakness.

Other Considerations: Your lien position - is it the first, second or further down the list?

State usury laws that might apply to the loan.

At least a general idea of what a foreclosure process is in your state, in case the loan goes into default.

Always get good legal counsel to assist you with loan documentation.

Because the borrower traditionally pays for all expenses, including legal fees, there is no reason not to have an attorney draw up loan documents.

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A C C O U N T S

20 Ways Your IRA Can Fund a Real Estate Investment (or other Self Directed Account)

Funding a Deal PROVIDED BY CAMAPLAN

Co-invest with Your Non-IRA Money

deferred accounts. You can also co-

spouse so they may contribute to an IRA,

Though the IRA owner is typically

invest your IRA with your Health Savings

even without earned income. As long as

considered a disqualified person to the

Account (HSA) or small business account

one individual meets the eligibility

IRA, it is still possible to co-invest your

(SEP IRA, SIMPLE IRA, Solo 401(k), etc.).

requirements, are married, and file a joint

IRA with your personal money. This allows you to supplement your IRA funds with your personal savings and income so your IRA can still, at least partially, benefit from the investment returns. For Example- If a piece of real estate was $100,000 but your IRA only has $75,000 you could structure the deal so the IRA owns 75% and you could pay for the other 25% with your personal funds. 75% of all proceeds would go to your IRA and 25% would go to you.

Co-invest with Your Other Retirement Accounts You have the ability to co-invest multiple retirement accounts on one investment.

For example, you may choose to coinvest both your Traditional IRA and your Roth IRA so you can split the profits between the tax-free and tax-

tax return, you and your spouse are Co-invest with Your Children or Grandchildren’s Coverdell Education Savings Accounts

eligible to open an IRA.

CESAs allow investors to save and invest

Grandparents retirement accounts

money, tax-free, for a child’s or grandchild’s qualified educational expenses. CESA investors face a limited amount of available funds due to the $2,000 annual contribution limits. One potential way to grow CESA funds is to co-invest your IRA with CESAs for your children or grandchildren.

Co-invest with Your Spouse’s IRA

If you find an investment, it is possible to co-invest your IRA and your spouse’s IRA to grow your family’s retirement savings.

Many investors do not realize a Spousal IRA may be opened for a nonworking

Co-invest with Your Parents or

If you find an investment, it is possible to co-invest your IRA and your parents and/or grand-parents IRA, HSA, and/or 401K to grow your family’s retirement savings. In addition, it might be a good time for your parents and grand-parents to consider converting to a Roth based on their tax bracket and deductions and to alleviate RMDs. Co-invest with Other People’s IRAs, HSAs, or Small Business Retirement Accounts

There is an estimated $7 trillion in IRAs

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across the country and approximately $24 trillion in total retirement assets.

These funds can be used to invest in a variety of alternative assets. Often the first step is to make others aware of the possibilities for their own retirement plans – the ability to co-invest multiple accounts into one investment.

Co-invest with Another Investor’s Non-IRA Money

Another possible source of funding is another investor’s money, but it does not have to come from their retirement accounts. It is possible to co-invest your IRA with non-IRA money from another investor.

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S M A L L

work out terms for a nonrecourse loan with another investor for an agreed upon interest rate or rate of return and length of time.

Secure a Loan from Someone’s Business (must be a non-recourse loan) Similar to the non-recourse loans from financial institutions or individuals, it may be possible to work out terms with another business. If you have business owners who are interested in your plan investment strategies, your plan may be able to receive nonrecourse financing from their business.

Secures a Loan from Someone’s IRA

Co-invest with Someone’s Business

If you know someone who owns a business, it may be possible to co-invest your IRA with financing from their business.

Secure a Loan from a Financial Institution

(must be a non-recourse loan) One of the ways investors can finance investments without having the full amount in their IRA is with debt financing. It is possible for your IRA to receive a loan, but the loan must be non-recourse. Self-directed IRAs require non-recourse loans because your IRA (or you personally) cannot serve as collateral for the loan or be the personal guarantor. The only recourse is the investment/asset that is being financed with the loan.

Secure a Loan from an Individual

(must be a non-recourse loan) Nonrecourse loans do not have to originate from a financial institution. Any loan made to a selfdirected IRA must be nonrecourse, but the lender can also be a private investor. You may be able to

Similar to the non-recourse loans from financial institutions or individuals, it may be possible to work out terms with someone’s qualified plan. If you have other people with qualified plans such as an IRA who are interested in your plan investment strategies, their plan may be able to provide nonrecourse financing for your IRA investment.

Secures a Loan from a Hard Money Lender

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A C C O U N T S

iloan can be promissory notes, mortgages, deeds of trust, UCC forms etc.

Makes a Loan to Someone’s Business

Your Account (IRA, HSA, ESA, 401K, etc) acts as the bank for a business. The business may want to buy another building, land to develop, equipment (bull dozer, trucks, office equipment, furniture, forklift, etc.) to expand. The Account is the bank negotiating the terms of the loan. The documents securing the loan can be promissory notes, mortgages, deeds of trust, UCC forms etc.

Makes a loan to Someone’s Retirement Plan

Your Account (IRA, HSA, ESA, 401K, etc) acts as the bank for another retirement plan. Someone’s retirement plan may want to buy another building, or buy appliances, or make improvements to a retirement plan owned building, etc.

The documents securing the loan can be promissory notes, mortgages, deeds of trust, UCC forms etc.

Similar to the non-recourse loans from financial institutions, individuals, or someone’s IRA it may be possible to work out terms with hard money lenders that provide loans based on value and are may be non-recourse.

Hard money lenders are generally ishort term loans with high interest rates and points.

Makes a Loan to Someone’s CESA and/or HSA

Your Account (IRA, HSA, ESA, 401K, etc) acts as the bank for another CESA or HSA. Someone’s retirement plan may want to buy another building, or buy appliances, or make improvements to a

Makes a Loan to Another Investor Your Account (IRA, HSA, ESA, 401K, etc) acts as bank for another investor.

The account negotiates the terms of the loan, then send fund to the borrower. Real estate flippers often need money to improve properties, buy and hold investors may also need a loan until they can refinance with a bank. The documents securing the

plan owned building, etc. The plan is the bank negotiating the terms of the loan. The documents securing the loan can be promissory notes, mortgages, deeds of trust, UCC forms etc.

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A C C O U N T S

Wholesales a contract

Your Account (IRA, HAS, ESA, 401K, etc) may want to wholesale a contract for half the ownership in the property for 95% of the cost. This is a strategy many people use to build their tax deferred and tax free accounts.

Joins an entity

such as an LLC, trust, partnership, etc.

Your Account(IRA, HAS, ESA, 401K, etc) may want to purchase an interest in an entity that buys apartment buildings, shopping centers, veteran housing, student rentals, industrial buildings, office and retail space, etc. This allows your plan to own real estate without the management headaches and depending on the entity may limit your

CamaPlan.com/Event

exposure and any losses. Your plan can then buy as little or as much as you want. This may also provide more liquidity.

Invests in a Fund that Buys Real Estate Private REIT Your Account (IRA, HAS, ESA, 401K, etc) may want to purchase an interest in a Real Estate Investment Trust, private or public, that buys apartment buildings, shopping centers, veteran housing, student rentals, industrial buildings, office and retail space, etc.

This allows your account to own real estate without the management headaches and depending on the entity may limit your exposure and any losses. Your plan can then buy as little or as much as you want. This may also provide more liquidity.

Please visit our website for more ideas through our articles, blog posts and virtual training events.

A Brief Word on Check Book LLCs Quick Synopsis: An engineer from Phoenix made a living doing “Phase I” and similar types of environmental impact reports for purchasers of commercial properties. When the crash came, his services business declined. He started flipping properties and did quite well with it.

Pursuant to the “advice” of a Check Book LLC promotor, the promotor set up an IRAowned LLC for the Engineer. The “advice” and “customization” were typical, or, in a word, somewhere between “awful” to “non-existent”. The operating agreement was almost certainly a template with no customization to meet the client’s specific needs.

The Engineer was the sole manager of the LLC. Worse yet, Engineer received no effective advice on how to use the LLC without destroying his IRA. Consequently, he entered into deals between himself and his IRA that were clearly prohibited. As a result, his $230,000 IRA was destroyed, the funds distributed, and heavy taxes & penalties levied as a result.

Avoid Checkbook LLC promotors. If you think an LLC for your IRA or 401k might make sense, talk to a qualified tax attorney, such as John Hyre who wrote this synopsis.

When consulting with counsel, be sure to accomplish three tasks: 1. Determine whether you really need an IRA-owned LLC. 2. Customize the LLC to your particular circumstance and strategy. Don't Cheap Out! 3. Learn the rules that apply to self-directing an IRA, especially the Prohibited Transaction Rules. Make sure to analyze those rules in the context of the specific types of transactions you intend to complete with your IRA or IRA-owned LLC.

Q U E S T

T R U S T

C O M P A N Y

1 7 |

S O L O 4 0 1 K

Solo 401k PROVIDED BY QUEST TRUST COMPANY Since the creation of the Solo 401(k) in 2002, self-employed individuals and small business owners have been able to utilize these accounts to grow their retirement wealth exponentially.

check writing authority by the trustee.

Using a 401(k) is a great way to obtain checkbook control, without the dangers of the IRA LLC Checkbook Control model that has come under fire recently.

The Solo 401(k) is one of the most powerful IRA accounts to self-direct and has many financial benefits. These advantages include exemptions from certain Unrelated Business Income Tax (UBIT) and the ability to have checkbook control.

Larger Contribution Limits: The business owner wears two hats in a Solo 401(k) plan: employer and employee.

Contributions can be made to the plan in both capacities, allowing up to $57,000 in contributions for 2020.

While the Solo 401(k) may be very beneficial to some, it is critical that you understand all of the qualifications and maintenance required by a 401(k) before deciding to open the account at a financial custodian.

Loans to yourself: Unlike with your IRA, you can borrow money from your

To establish a Solo 401(k), certain qualifications must be met. An individual must be either self-employed, a company owner that receives W-2 wages, or an individual with no commonlaw employees. Once these requirements have been met, you can start to take a look at whether a solo 401(k) is the best option for you.

Checkbook Control: Maintaining this type of checking account allows for

newly established 401(k), the employer or employee must make a contribution for the tax year in which the account was established. See IRS Publication 560 for minimum funding requirements.

Reporting requirements: The account

holder has sole responsibility when it comes to tax reporting requirements. A 1099-R must be filed if any distributions are taken from the 401(k) and a 5500 or 5500EZ must be filed once the account value reaches $250,000+.

Individual 401(k). You are able to loan yourself the lesser of 50% of your account balance or a maximum of $50,000. Loans are based on a 5-year amortization at market rates.

Dangerous responsibility: Your transactions are not overseen by your custodian, allowing more room for potential trouble or prohibited transactions.

Exemption from UDFI: One of the major benefits of real estate investing through your Individual 401(k) is the exemption from Unrelated Debt-Financed Income (UDFI) taxation.

Record keeping: Careful record keeping must be kept for the multiple accounts held in the 401(k). Often time this bookkeeping is tedious, so it’s important to make sure good records are kept.

Disadvantages of a Solo 401(K)

IIn summary, the Solo 401(k) is one of the most powerful retirement accounts you can have, and understanding how they work is the first step in deciding if it’s the right investment strategy for you. For all of your further Solo 401 (k) questions, please feel to contact QuestTrustCompany.com

Benefits of a Solo 401(K) Solo 401(k)s are powerful investments and wealth-building vehicles. Some of their advantages include:

Legitimizing: In order to legitimize a

Conversely, there are some serious potential disadvantages that come along with maintaining a Solo 401(k). Some key dangers to be aware of while evaluating your need for a 401(k) include:

1 8

M A R E I

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T E A M

Build Your Team with MAREI's Business Directory M A R E I . O R G / B U S I N E S S - D I R E C T O R Y Accounting

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1 9

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