Author: Joshua Gearybr
Source: articleage.combr
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If you are looking for total control of your IRA investments and
are tired of having to refer decisions over investment
strategies to unimaginative advisors who tie your hands behind
your back when it comes to making investment choices, or who is
simply limited to his or her companys range of products or
investment policies, and of custodians who over-stringently
interpret IRS investment regulations, then a self directed IRA
is for you.
But if you want a truly
self directed IRA and dont want to be bound into
traditional investment choices or limited in your ability to
invest your money as you see fit when you see fit you need to
take a step further. Then you should be looking at setting up a
self directed IRA LLC. In other words, you become in effect the
director of a limited company responsible for building your own
IRA.
The advantages of this move are immediate and obvious –
Since you effectively become the custodian of the IRA, you will
no longer have to pay transaction costs for every move you make
with your self directed IRA LLC.
Since you control and handle all the transactions, the
custodian for our IRA can be paid a flat annual fee. You can
benefit from the lowest IRA custodian fees in the market. It
does not matter if you have one million dollars in your IRA or
one billion. Your custodial fees are fixed.
You have absolute decision making power – no ifs, no buts, no
maybes; you do not have to ask permission of anyone else, you
are the decision maker. It really is a truly self directed
IRA.
A truly self directed IRA plan can be used as funding for a
down-payment for a real estate purchase.
Because it is set up as a limited liability company (LLC), your
self directed IRA assets are protected from creditors and
litigators. Without the LLC, your retirement funds could be
directly exposed to a frivolous lawsuit.
Investment Variety
You can benefit from massively extended range of investment
choices; of course, you can still choose to invest in the
traditional choices of stocks and mutual funds, but other
choices include real estate, tax liens, tax deeds, options – any
legitimate business investment opportunity that doesnt breach
IRS rules (which is most of them)
Having such a wide range of choices enables you to diversify
your holding; essentially, you reduce your risks by spreading
your investments over several choices (the opposite of putting
all your eggs in one basket)
You can invest in international or foreign real estate in such
places as Costa Rica with your IRA – LLC without asking for your
custodians permission.
Finally, moving to an IRA LLC is an affordable choice for
almost everyone; it is estimated that it is less than a half of
the cost of having an IRA facilitator
In short, your self directed IRA LLC is a truly self directed
IRA because it maximizes your ability to control how your IRA is
invested. You are no longer limited by others choices,
investment options or company policies. It is your IRA, your
way.
But, as with everything in life, there is a downside – at least,
potentially.
I have already hinted that traditional financial advisors are
not best placed to give advice on other kinds of business
investment such as real estate. They will have a good
understanding of stocks and shares. Would you ask your dentist
to do an angioplasty? By the same token, a traditional advisor
will not know how to leverage the best deals in real estate or
in other kinds of business investment.
It is important therefore that you choose an IRA advisor who can
help you structure complex IRA and real estate entities,
evaluate investment opportunities and avoid infringing on the
self directed IRA rules in setting up investments.
Consequences of setting up your IRA-LLC incorrectly: Internal
Revenue Service could step in and simply disqualify the IRA,
resulting in huge tax bills along with additional penalties for
account holders who are younger than age 59ฝ. A lot of people
are going to get themselves in trouble and wind up losing their
IRAs over this, says Ed Slott, an IRA consultant. (Wall Street
Journal, You Did What With Your IRA?, author Kelley Greene,
October 15, 2005).
Investing in a single property is no more difficult than buying
your own home. Where real estate deals become complex is when
you are seeking to fund developments, real estate lots, buying
into apartment communities or other larger scale investments.
This is where extensive knowledge of self directed IRA rules is
paramount. Only someone with a strong background in real estate
can supply these skills.
Rehabilitating residential real estate is a good example of
where things can go wrong – badly. How can you tell a genuine
opportunity from a poor deal? How do you know how much to invest
in rehabilitating a property? Too often, people with little
experience in the area spend over the odds on a property and
fail to realize a return on their investment. Effectively, they
pour money down the drain.
As well as a lack of familiarity with the business, without a
solid knowledge of self directed IRA investment regulations, you
could end up facing stiff penalties (up to 10 % plus taxes) or
even disqualify your retirement altogether. As much as 50% of
your IRA could disappear due to an unintentional violation.
Basically, once you set-up your IRA-LLC correctly, it comes down
to being careful of whom your IRA does business with and who
benefits.
You as the IRA owner cannot live in an investment owned by the
IRA.
You cannot directly or indirectly buy, sell, or lease property
between the IRA and a disqualified party except in cases where
this is exempted.
Your IRA is not allowed to transaction business with your
spouse, lineal descendants or their spouses (i.e. your
grandparents, children, grandchildren, son-in-law,
daughter-in-law, step-children) as they are considered
disqualified persons. However, you can do business with your
brother or sister, their spouses, nieces, nephews, cousins,
aunts or uncles, which are relatives more distantly related to
the IRA account. For example, if your IRA purchased a holiday
home, your brother and his family could stay there for a
holiday, but you could not.
You cannot take real estate property you already own or occupy
and stuff in your IRA, even if you sell the properties to the
IRA at fair market value (FMV). If you have to liquidate a
portion of the IRAs ownership in the property at the time of
required minimum distributions – 70 ฝ in order to remain IRS
compliant – you can do so incrementally. In doing so, the
portion that is sold off can be taken as an IRA
distribution.
You cannot extend personal credit to your IRA. For example, if
wanted to use your IRA as a down payment on an investment
property, then you could not personally acquire a loan in your
name, take title to a property owned by your IRA. However, there
are financing strategies that combine debt financing and your
IRA and there are competent lenders who understand the IRA -
LLC.
Investing in collectibles is a no-no. You cannot invest in
artwork, antiques, rugs or a purchase a 10 carat marquise
diamond ring for your spouse or your fianc้ and pass it of as an
investment.
Real Estate Financing and your IRA
Where you use a non-recourse loan to help purchase your
investment because you do not have enough money in your IRA to
do so, you may also face a tax known as Unrelated Debt
Financing. But this can be mitigated through long term property
holding where your use the property as a rental and the debt
goes down. If you are terribly concerned with UBIT, then
partnering with another IRA holder or a non-disqualified party
who puts up the remaining cash could be the best way to
eliminate UBIT all together. To learn more about pooling IRA
holders together for larger real estate deals visit
http://www.GroupDominion.com.
In order to defer UBIT you can decide to 1031 exchange the UBIT
part of the transaction forward to another investment property
and by doing so reap the benefits of both worlds: receive tax
deferment through the 1031 exchange on the indebted portion and
tax deferred benefits on the gain in the self directed IRA when
you decide to exchange the property.
In addition, because the IRA is already a tax favorable
vehicle, your IRA cannot receive additional tax deductions or
depreciation as you would if it was your own home.
Picking the Right Self Directed IRA Advisor
With the assistance of a competent self directed IRA advisor,
you can petition the IRS successfully and structure your real
estate transactions so that you can make your real estate
purchase outside the IRA. By doing so, prohibited transactions
go away, UBIT goes away; you can receive personal benefit from
the investment property, take title personally to an investment
property without infringing on the rules and without facing
stiff IRS penalties. In short, there are cons as well as pros to
using self directed IRA LLCs, but choosing the right advisor
will help you steer clear of the sandbanks.br
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