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Supercharge your IRA
The average American has a little over $30,000 inside their Individual
Retirement Account (IRA). In most cases this is the second largest amount
of wealth people have, after the family home. However, few if any of us
have taken the time to find out exactly what we can or cannot do with those
monies inside our IRA.
Rules Of The Road
There are several rules we need to be aware of when we talk about IRA's
listed below is a summation of some of these rules. Actually the first rule
is one of my own.
When we are talking about our retirement funds, we cannot afford to make a
miss-step. If we do the results could be disastrous. Prior to taking any
action on the ideas presented below you must consult with a tax professional
that is familiar with the subject and has helped individuals in this area
before.
I. Prohibited Investments
There is a lot of misinformation about what you can and cannot do with your
IRA assets. Most of the misinformation is spread by those who have the most
to gain by your lack of knowledge; your investment advisors.
The investment houses spend billions of dollars each year advertising the
investments that they sell, while they never tell you that you can invest
your IRA elsewhere. Another thing many of them do not tell you about is
your ability to trade options in your IRA; in fact most of the brokerage
houses will not allow this to happen. What is the truth about investments
inside your IRA, what is and what isn't allowed? There are only two
limitations upon what type of investments you can make inside your IRA!
The Two Prohibited Investments
1. 1. Life Insurance Contracts
Side Issue:
Could you use it to invest in other types of insurance such as long- term
care or disability insurance? Answer: yes
2. 2. Collectibles
Side Issue:
What are collectibles? The code specifically mentions the following as
collectibles: Gems, fine art, etc...
Let's now turn our attention from investments to transactions.
II. Prohibited Transactions
Just as there are certain investments that you cannot make with your IRA
money, there are certain actions you cannot take with your IRA.
Six Prohibited Transactions
1. 1. A sale or exchange, or leasing of property between a plan and a
party in interest;
2. 2. Lending of money between a plan and a party in interest;
3. 3. Furnishing of goods, services, or facilities between a plan and a
party in interest;
4. 4. Transfer to, or use by, a party in interest of the income or
assets of a plan;
5. 5. Act by a party in interest whereby he deals with the income or
assets of a plan in his own interests or for his own account; or
6. 6. Receipt of any benefit for his own personal account by any party
in interest in connection with a transaction involving the income or assets
of the plan.
This list is pretty detailed and in essence says your IRA cannot have any
dealings with related parties. This list seems designed to discourage the
un-educated, but don't you get discouraged- we're going to educate you.
Who Is a Party in interest?
1. 1. The IRA owner
2. 2. The one who makes decisions for the plan
3. 3. A person providing services to the plan
4. 4. An ancestor, (lineal descendant) spouse, descendant of the IRA
owner, or spouse of any of the above.
5. 5. A corporation, partnership, or trust or estate of which 50% or
more is owned by any of the above.
6. 6. An officer, director, a 10% or more shareholder, or a highly
compensated employee of the above.
7. 7. A partner of any of the above.
What is the Penalty for engaging in a prohibited Transaction?
Under the rules, your IRA will be considered fully distributed at any time
it engages in a prohibited transaction.
Which Agency of the Government is responsible for IRA's?
The Department of Labor is responsible for granting exemptions to the above
rules, and they do-many, many times each year. In fact, the Department
grants hundreds of exemptions each year. Most of your tax advisors will not
be aware of this, but if you go to the DOL's web page you can see the ones
they have granted. You can see a doozy at:
http://www.dol.gov/dol/pwba/public/programs/oed/96-62.htm
A Few of the Exemptions Granted
1. 1. The owner of an IRA was allowed to sell real estate to his IRA.
Remember the prohibited transaction for sales of assets between the IRA and
the IRA owner? This is a direct violation of that and yet was allowed by
the DOL. Since it has been allowed more than twice in the last 5 years, it
meets the requirements.
2. 2. An IRA owner was allowed to sell stock to the IRA.
3. 3. The IRA owner was allowed to purchase real estate from their IRA
and was allowed to have their IRA carry back the mortgage on the property.
This one was even written up in Forbes magazine.
How do I do this?
Knowing that you can do this is only half the battle. The other half is
knowing how to go about doing it. The key is the custodian you have for
your IRA.
Not All IRA Custodians Are Created Equally.
Many custodians have a vested interest in telling you that you cannot do
what you have learned above. If your IRA is with Giant Mutual Fund Co.,
they are inclined to keep your IRA money in their fund, so it is in their
best interest to tell you it cannot be done or not disclose that it can.
The type of custodian you want is a "True Self Directed IRA Custodian".
This is generally a bank or trust company that serves as a custodian, who
will follow your wishes and invest your retirement money in those
investments you want to make, not investments that are going to earn the
custodian commissions.
Using a True Self Directed IRA Custodian is the way you can grow your
retirement funds as you see fit, rather than being at the mercy of some
third party who might not always have your best interests in mind.
There is one drawback to a self directed IRA...every time you want to make
an investment you have to fill out paperwork for your self directed
custodian to issue the money to whatever investment you want to make.
Anytime there is paperwork there is also cost and lost time. Many times
with an investment time is of the essence, so we let's consider how to
overcome this one shortcoming.
Use An LLC As Your IRA's Investment Company
A Limited Liability Company is a relatively new business entity that is a
cross between a corporation and a partnership. The LLC gives you the
liability protection of a corporation and the tax benefits of a partnership.
, As a "flow-through" entity it pays no taxes-the owner pays the taxes for
the entity.
Hmmm...the owner pays the taxes. In this case the IRA is going to be the
owner, and an IRA pays no taxes-what an interesting solution!
Here is how it works, you move your money to a true self directed IRA
custodian and tell him to have the IRA set up and fund an LLC, with you as
the manager of the LLC. You would fund the LLC by opening a brokerage
account (and perhaps a bank account, if the brokerage firm does not offer
checking privileges) with some or all of the money in the IRA. From then on
you can make your own investment decisions without having to involve anyone
else. The end result is that assets of your IRA have now been safely placed
into an LLC account. Now instead of having to call up your IRA custodian
and request permission to make an investment, all you have to do is fill out
the check, sign it, rip it out of the check book and to pay for your
investment. Simple and direct!
EXAMPLES:
1. Real Estate
Then:
You enjoy purchasing a house that you intend to fix up and sell. This is
commonly called "flipping". The problem in the past is that you are taxed
at the highest tax rates on the profits you generate, and couldn't make the
best deals because you didn't have all the liquid cash you needed.
Now:
You have your IRA money in the LLC, you go to the owner of the home and make
the best deal you can, and write the check for the down payment out of the
LLC account. The LLC now owns the house. You fix it up and six months
later sell it for a $50,000 gain.
* · Where does the gain go? To the IRA.
* · Does the IRA pay taxes on it now? No!
* · If it were a ROTH IRA would there ever be taxes to pay? No!
* · Who paid the expenses to fix up the house? The LLC.
2. Starting Your Own Business
One of the biggest stumbling blocks for a start-up company is having access
to enough capital to make sure the new business can hit the ground running.
Yet at the same time many of us have significant wealth locked away inside
our retirement plan. This problem is so prevalent that many new business
owners' cash in their IRA's take a big tax hit, and then put the remaining
funds to work for them.
A better solution would be to properly implement our super-charged IRA
strategy. Have the IRA make a loan to an LLC owned 50.5% by a non-party in
interest and managed by you. You own 49.5% of the company and are in charge
of it.
This is a non-taxable transaction and now the new company operating out of
the LLC has the working capital to make it succeed. The loaned money must
be paid back to the IRA with interest, but the interest will be deductible
to the company and will be non-taxed to the IRA and add to your accumulation
for retirement.
3. Trading Options, or Futures
As we all know, there are many brokers out there who will not allow you to
trade naked puts or calls in your IRA. In fact most of them will not let
you do much other than covered calls and straight buy/sell. Using the
Super-Charged IRA strategy and having your IRA money in the LLC, you open
your brokerage account in the name of the LLC. You are under no obligation
to explain to the broker the source of the money. And remember, all of your
wealth is growing tax deferred in a regular IRA or TAX FREE in a ROTH IRA.
I don't know about you, but I like the idea of tax free, and I also like the
idea of having greater control over my investments for retirement.
I repeat my caution: Do not try this on your own. Make sure that you have
someone who is knowledgeable and experienced-has done it before. Your
retirement money is too precious to play around with, and the penalties are
severe. Be careful, and call us at 800.938-9513 before proceeding.
4. How do I get started?
Give us a call at 800.938-9513 and let's go through your situation together.
It may be this plan, or a Qualified Pension Plan may be the best for you, we
will take the time to get your input and make a recommendation.
-----Original Message-----
From: Jim Johnson [mailto:jejohn@xxxxxxxxxxxxxxxx]
Sent: Wednesday, February 20, 2002 10:16 AM
To: The Funkhousers
Cc: Omega- List
Subject: Re: [Fwd: Re: Scope of Trading in an IRA Acct: Short Selling?]
Hello The Funkhousers,
the Illinois trust company you mention (InTrust) was bought by
Millenium Trust and is still doing futures accounts. The hit to most
recent (post 97) accounts was fairly small and all seems well. I
don't know their policy on shorting stocks but their requirements for
futures are very liberal.
Wednesday, February 20, 2002, 9:29:37 AM, you wrote:
TF> -------- Original Message --------
TF> Subject: Re: Scope of Trading in an IRA Acct: Short Selling?
TF> Date: Tue, 19 Feb 2002 22:07:05 -0500
TF> From: The Funkhousers <funkhouser@xxxxxxxx>
TF> To: TaoOfDow <TaoOfDow@xxxxxxxxxxxxxx>
TF> References: <3C73095E.906DA875@xxxxxxxxxxxxxx>
TF> I have been unable to find a broker who will allow short sales, probably
TF> due
TF> to the fact that a margin account is required in order to be a short
TF> seller.
TF> Part of the problem relates to what is described as "unrelated business
TF> income," a carryover from the tax laws originally established for tax
TF> sheltered retirement income and pension plans.
TF> There was an Illinois based trust operation who permitted these
TF> activities
TF> in accounts where they were the nominal trustees, but they collapsed
TF> when it
TF> was discovered that the principals of the trust company had lent most of
TF> the
TF> trust assets to corporations controlled by them.
TF> You can, however buy mutual funds who have investment objectives
TF> designed to
TF> negatively mirror various stock indexes, some of which are leveraged.
TF> Richard Funkhouser
TF> TaoOfDow wrote:
>> Dear Group,
>>
>> My understanding is that for an IRA Acct, one can trade through the
>> following types of accounts:
>>
>> 1. Stock account: Buy stocks for cash (but not margin);
>> 2. Futures account: Buy or sell futures (through a trusteed account, eg
>> old InTrust); and
>> 3. Stock option account: Buy (or sell?) stock options (at least I've
>> seen ads to do this - no personal experience).
>>
>> Query: Is there any way to short-sell stocks in an IRA, for example even
>> the QQQ stock tracking stock?
>>
>> Sincerely,
>>
>> Richard
--
Best regards,
Jim mailto:jejohn@xxxxxxxxxxxxxxxx
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