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Self Directed IRA FAQs

Top Self Directed IRA Frequently Asked Questions Now Answered

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Top 5 Questions Answered Prior To Setting Up A Self Directed IRA Account

This Q & A is related to questions we have received through our “Ask The Expert” series. This content is solely offered for educational purposes and should NOT be construed as either financial or investment advice.

Question: I have a small IRA of $5,000 that I wish to cash out. Will I incur penalties, if so, what?

Answer: If this is a Traditional IRA, the distribution will be taxable. You will need to discuss with your tax counsel as to what the taxable amount is. If you have not yet attained age 59½, the taxable portion of the distribution will be assessed an IRS penalty of 10%. If this is a Roth IRA, only the earnings are taxed and could also be penalized.

Question: I have an opportunity to purchase some property but will need to utilize funds in my IRA. Is there a possibility that there might be a way to avoid the early withdrawal penalties if the purchase is classified as an investment property similar to a rollover?

Answer: It sounds like you are asking about taking a distribution from your Roth IRA and use it for a personal investment. There is no way to avoid a reportable distribution for that personal purpose. Rollovers only apply when funds go from one IRA to another AND within 60 days.

However, if this is a Roth IRA, you are allowed to take a distribution of your total, net contributions (basis/principal) without any IRS tax or penalty. Roth IRA contributions were nondeductible, so they are not taxed or penalized when they are removed UNLESS the contributions were an IRA Conversion. Then, the converted amount must stay in the Roth IRA for five tax years or be penalized by the IRS, but not taxed, regardless of age.

If you take a distribution from your Roth IRA in this manner, remember you have only 60 days to roll it back into a Roth IRA. If that is not done within that time frame, the funds are out of the IRA for good.

Also, we are primarily talking thus far about IRS taxes and penalties. Investment penalties are up to the administrator of the investment and State taxes may also apply.

Question: I currently have all of my retirement funds invested through my employer in a 401k and an employer-funded retirement account (both are in a professionally managed account). I would like to learn how to transfer some or all of this to a self directed IRA to allow for more options for investing, etc. with the ideal result being more income options. How do I begin?

Answer: While the result is the same, money from your employer’s 401k can only be “rolled over” or “directly rolled over” to an IRA, NOT “transferred.” It’s just a difference in terminology and procedure. The employer plan usually has specific procedures that must be followed, if it is allowed at all, and most do allow such transactions.

Also, IRA Custodians/Trustees also usually have their internal procedures and documentation to complete.

So, the first place to start is with your employer’s plan administrator to see if or how a (direct) rollover is allowed or possible. Then a discussion with your IRA Custodian/Trustee is the next step. Your IRA Custodian/Trustee should be informed BEFORE any funds are rolled over.

Question: Assuming the IRA owner has reached the age of 59½, can he sell the real estate asset that makes up the IRA portfolio and then roll over the proceeds to a traditional IRA?

Answer: The transaction that you are talking about appears to be simply the IRA selling the IRA asset. All of the proceeds from the sale of the IRA asset must go into the IRA that held that asset. It’s basically like any other investment account. Assets are purchased and sold through the IRA account. All the funds for the purchase must come solely from the IRA, and all funds from the sale must go back into the same IRA account. The IRA is making the purchase and the sale.

Whether it can be rolled over to a Traditional IRA depends on what type of IRA it is. If the real estate was in a traditional IRA, the funds could be rolled over or transferred to another Traditional IRA. If the property was in a Roth IRA, it likely could NOT be rolled over to a traditional IRA. Of course, the purchaser of the IRA asset must not be directly or indirectly related to you, personally or professionally.

The IRA Owner’s age does not affect this. There is no taxable event until the IRA Owner takes a distribution from the IRA. All you are doing here is changing real estate into cash within the IRA.

Question: I have a 401k plan that I want to roll over to a self directed plan. How much can I roll over at one time? If I have $100,000.00 can I roll over only 60,000.00? The purpose is to invest in real estate.

Answer: There are no IRS restrictions on how much can be rolled over to an IRA from a 401k. The 401k participant is free to rollover as much or as little as they want, and are free to have multiple rollovers from a 401k to an IRA.

Question: I want to establish my SEP Roth IRA. Are there any special rules?

Answer: A Roth IRA can NOT be a SEP IRA. ALL SEP contributions must be made directly to a Traditional or SEP IRA. Once those funds are in a Traditional/SEP IRA, they can be converted to a Roth IRA, a taxable event, but then it is a regular Roth IRA. All future SEP contributions must be made to a Traditional/SEP IRA.

If you have made SEP contributions directly to a Roth IRA, you very likely have an excess contribution problem and possible tax consequences. If that is the situation, you should review this with your legal and tax counsel immediately.

Question: I have a self directed Roth IRA. If I direct my IRA Custodian to invest in an LLC, how should the LLC be titled?

Answer: All investments by IRAs, including LLCs, must be titled in the following manner: “(Your IRA Custodian) as custodian for (your name)’s (Traditional, SEP, SIMPLE or Roth IRA).” In this case, the LLC Member is the IRA and must be titled in this manner. The LLC itself can be named in any way.

Question: I am interested in getting rid of my 401(k), through a large company, and investing in the land through my IRA. What are the tax implications? Is it a good idea? What are the risks? Or should I stop investing all together?

Answer: I’m not sure what you mean by “getting rid of” your 401k. If you mean rolling over the 401(k) to an IRA, that is a possibility. If it is rolled over correctly to a Traditional IRA, there are usually no immediate tax implications.

As to what you invest in, or if you should invest, that is your personal decision, and we cannot comment on investment possibilities. Please review those aspects with your personal legal and tax counsel.

Question: I am interested in setting up a self directed IRA. I understand that I can rollover my account only once per 12 months. However, my question has to do with transfers. Can I set up an IRA and transfer monies to it on an “as needed basis” over a period, or do I have to transfer 100% of my existing SEP-IRA at one time?

Answer: IRA-to-IRA transfers are unlimited as to amount and frequency, unlike IRA-to-IRA rollovers, which are limited to one per year. Therefore, transfers to another SEP or Traditional IRA from your SEP IRA could be made on an “as needed basis.”

Question: This is a plan I would like to accomplish.

1. Open a self directed IRA and transfer my funds from an existing IRA.
2. Establish a self directed IRA LLC with an Operating Agreement directed toward buying and flipping foreclosed homes. (I understand that an IRA Operating Agreement is different from a regular LLC agreement.)
3. Open a bank account in the name of my IRA LLC.

My questions are:

1. What are the procedures to purchase the home in the IRA LLC name?
2. Could we pay for part of the acquisition price of the home with funds from another LLC that my husband and I have? (He’s the manager, and I’m a member) If not, could a non-related lender be involved in part ownership of the property; and if so, how does that work? 3. Could I have direct access to funds in my LLC bank account to make renovations on the house?

Answer: IRAs and LLCs are different, separate entities requiring separate agreements. If the IRA-Owned LLC is purchasing property, it must be solely titled in the name of the LLC, like any other owner. If the LLC is doing the purchasing, the IRA is NOT the named owner. The IRA is the owner of the LLC, and the LLC is the owner of the property. The “bank account” would need to be in the name of the LLC, NOT the IRA.

The IRA-Owned LLC must abide by all IRA rules, so you cannot commingle personal funds, other personal IRAs, other LLCs or IRAs, or personal funds of related, disqualified individuals, of which your spouse is one.

I’m not sure what you mean by a “non-related vendor.” However, it is possible for the LLC to borrow funds, but it must abide by IRA rules, meaning no direct OR indirect connection with you or disqualified individuals, including the IRA Custodian/Trustee. This must be without any direct or indirect recourse.

If you set up the LLC account correctly, you would have control over the account for complying renovations, which all must come from/through the IRA-Owned LLC. Personal funds cannot be used. And the LLC funds cannot be used for personal expenses.

Question: My wife and I would like to self direct our IRA money together into real estate. We have all of our IRA’s together in one place right now, BUT they are different types. My wife has contributions from SEP (from her work in a dental office). She receives new contributions annually. She also has Traditional contributions and a small Roth, from past years. I have Traditional, Roth, and money from a tax-deferred annuity, and there may be some money rolled from a 401k.

The Trust Department at our bank is holding all of these in different accounts, under each of our names. This Trust department is not familiar with self directed IRA’s and they have no answers.

My questions are as follows:

How can we or can we at all combine these to be self directed?

What type of annual information does Uncle Sam need if this is done?

Answer: There are a number of issues within your questions. First, spouse’s IRAs/401(k)s cannot be combined. They must remain separate from each other.

Any IRA/401k can allow for self-directing as long as the plan agreements allow it. Some plans will limit what can be invested.

Second, there is no way a Roth IRA can ever be combined into a Traditional IRA unless it was a Traditional IRA that was recently converted and is now being recharacterized, so combining IRAs has only one method…converting a Traditional IRA to a Roth IRA. And that conversion is, of course, a taxable event.

In addition, SEP contributions can only be made to a SEP IRA or a Traditional IRA.  SEP contributions cannot be made into a Roth IRA. So again, that leaves out combining into a Roth IRA, or at least a Traditional/SEP IRA must remain open for the SEP contributions.

Unless the tax-deferred annuity is an IRA Annuity, those funds cannot be rolled over to an IRA or 401(k). If it is an IRA Annuity, the terms and timing of the rollover are dictated by the annuity plan document.

So, “Yes,” certain IRA and 401k funds can be combined via a complying rollover or transfer, but all funds cannot.

Once the funds are combined in a complying manner, the IRA Custodian is responsible for all the required IRA/IRS reporting. IRA Owners have little to report unless they take distributions.

Question: I am interested in opening an IRA with rental property. I want to open a new account and transfer funds from my rollover account. I have a house in mind and a property management company, and they suggested that you could give me step-by-step instructions on what I should do. Can you help?

Answer: Here are some basic suggestions that must be followed. Any property purchased by an IRA must be titled properly in the name of the Custodian for your IRA. All paperwork must be signed by a representative of your IRA Custodian/Trustee. You can NOT sign on behalf of the IRA Custodian. All monies must come from and through the IRA. And, of course, it must be a complying, arms-length transaction. Transactions should be reviewed with your IRA Custodian to make sure you follow all of their requirements.

Question: I need to see if my scenario is eligible for using my Real Estate IRA to do the deal. In my line of work what I typically do is I will contract a parcel of land with nominal funds in escrow (typically 5-10k total). I will handle some degree of entitlement, and then I will sell the entitled “paper” lots to a builder. I will not take title to the property; it will be a contract in which they pay me an amount for my assignment of my original contract. So, in a recent example, I put $5,000 down on a property that I contracted for $855,000. I had a developer pay me $150,000 60 days later for me to assign my contract. Could I have used my IRA to put the $5000 down, with all the proceeds ($150,000) coming back into my IRA with the favorable tax treatment?

Answer: Generally, your IRA cannot directly or indirectly be related to you, your business, or personal investments. And in no case can your IRA and you personally, or through your business, participate in the purchase or financing of an IRA asset. There can be no commingling of personal and IRA funds. So based on the information you have provided, the transaction you discuss is not allowed.

Question: Our tax attorneys are completing the IRA LLC operating agreements, and a question arose for initial IRA funding. This is a single member IRA LLC with the sole purpose of buying real estate.

Question:

1. IRA has 200,000 dollars being held by IRA custodian

2. IRA becomes member of IRA LLC for $105,000

3. IRA LLC purchases real estate for $105,000.

4. Two years from now, a significant, unforeseen maintenance emergency arises that will cost $20,000 which the IRA LLC does not have. Can the IRA add additional funds to the LLC?

Answer: As with many of the questions about IRA/LLCs, there is NOT any Code or Regulation citing this particular situation.

You must rely on your legal counsel as to whether or not the LLC is setup correctly to allow additional capital contributions from the IRA to the LLC, AND that the IRA rules, regulations, and procedures also allow such a transaction. The IRA must do only that which the LLC allows AND the IRA rules allow.

Question: Do the bankruptcy exemption rules for IRAs also apply to Inherited IRAs?

Answer: This is an excellent question. However, you will need to watch this website for future newsletters from JM Consultants because the US Supreme Court has just heard arguments on this issue. It appears they are very close to announcing their decision. So far, the experts on both sides of the issue believe their position will win out.

Question: I am considering converting my current SEP into a self directed IRA. I am a real estate broker and land developer. I would like to use home construction loans secured by real property as an investment vehicle for my IRA. The first loan I would like to make requires $250,000. I currently only have about $60,000 in my SEP IRA which is not enough to fund the entire construction loan. I plan to use my SEP money for part of the construction loan and combine it with money I have available from other sources. The entire note plus interest will be paid back when the home is completed and sold.

(1) Is this type of transaction allowed?

(2) Can I do this as a single construction loan of $250,000 or must I do separate loans? I would prefer to do this as a single construction loan secured by a first lien position on the property. I don’t want to have any part of the note in a junior lien position.

(3) If I do this as a single note, can I just allocate the interest (gain) proportionately between the two sources of funds ($60K IRA and $190 to the other) and roll that gain back into the IRA?

Answer: Internal Revenue Code (IRC) §4975 does NOT allow any commingling of personal funds with IRA funds, directly or indirectly, for any reason, for any investment, in any way. Therefore, none of your options/questions are possible.

Question: My law firm may be asked to assist some retiring individuals from a local company to set up Self Directed IRAs to allow them to roll over their existing 401(k)s from a local employer. May our legal fees for setting up this structure be paid from the proceeds/investments that will be in the SDIRA?

Answer: Your firm’s fees that are directly related to the establishment and administration of the IRAs and IRA-Owned LLCs can be paid with IRA funds after they have been rolled over from the 401(k)s. Of course, the IRA/LLC must be billed directly. The individuals cannot be charged with the IRA/LLC reimbursing them.

Question: My wife and I have an LLC Partnership. I am interested in opening an i401(k) plan for the LLC for the both of us to contribute before-tax and after-tax dollars. My wife and I earn too much from our full-time jobs and cannot contribute to IRAs. The LLC Partnership can generate SE income of $4000/year, and the rest of it is passive income. Can we make just the catch-up contribution (both of us are 51 years old) money to a Roth i401(k) in addition to the $4000/year?

Answer: As long as the LLC Business is completely separate from your other jobs and is a valid business, a 401(k) plan, and contribution is possible. However, the contribution and catchup are based on a percent of income, and the limits are the maximum contribution possible IF you have the income to support it. You can NOT contribute more than the allowable percentage of eligible income. As many think, and are confused, the “catch-up” contribution is misnamed. It is an additional amount added to the statutory limits. It is NOT just an additional amount that can be contributed above the allowed percentage limitations. We recommend you discuss this with your tax advisor.

Question: I have a self directed IRA. Can I withdraw monies and put it back within 60 days and not be penalized?

Answer: The transaction you describe is a Rollover. IRA Owners are allowed one rollover per year, meaning 365/366 days, not calendar year. An IRA Owner may take one distribution from their IRA and return it to the same type of IRA within 60 calendar days. If accomplished correctly and timely there would be no IRS tax or penalty. However, they may only do that once every 365/366 days per IRA.

Question: I have a question about whether or not I will be allowed to purchase a property for my IRA or not. I have a personal LLC with another partner, and we are 50/50 owners of this company. The LLC owns several single-family rental properties. My partner wants to sell some of the LLC’s assets to free up cash, and I am interested in purchasing some of those properties through my IRA. Is my Self Directed IRA allowed to purchase the properties owned by the LLC (where I am a 50% owner)?

Answer: Per the Internal Revenue Code §4975 your IRA is NOT allowed to directly or indirectly (like through an LLC) purchase from or sell to you, your IRA or a related party, regardless of the percent of ownership. The IRS has ruled on this many, many times over the years and has ALWAYS ruled against any such transaction, regardless of how the asset in question is valued or prorated. So, there is no way an IRA or IRA/LLC of yours could purchase the asset in question.

Question: I have $130,000 in my Roth IRA, and all the properties I am interested in are above 160,000. My husband has about another $50,000 in his Roth IRA. Can we use both of these Roth IRAs to buy a property that is less than $180,000, but above $130,000?

Answer: Spouse’s IRAs and personal funds can NOT be commingled, directly or indirectly to purchase IRA investments.

Question: There appears to be some confusion on the taxable entity when opening a brokerage account under a Self Directed IRA LLC. I have an LLC set up in the state of MA, my IRA is the single member, and I am the manager. The brokerage account is being set up in the name of the LLC which is a “disregarded entity.” I believe the taxable entity is the owner of the IRA (my IRA Custodian) and a W9, with the tax ID of my IRA Custodian, is the proper way to define the taxable entity.

Answer: Usually it is set up so that the sole member of the LLC is your IRA, titled Your IRA Custodian as custodian for your IRA. Any investment, like a brokerage account or any other investment within the LLC, is titled in the name of the LLC. If you want to do the managing of the money, it can NOT be titled in the name of the IRA because you can NOT sign on behalf of your IRA Custodian.

Question: My husband and I are looking to buy a condo. The price is $65,000. We currently have $40,000 in a Roth IRA that we would like to use to assist in purchasing the property and the balance from our savings. Are we able to do this as long as we divide the percentages up from the return on the investment based on the monies that were originally used for the purchase?

Answer: IRA funds and personal funds can never be commingled for any IRA investment, regardless of how you try to allocate the monies.

Question: A Can you define what you mean by commingling? Are you indicating a Roth IRA cannot own a percentage of a property and another entity own a percentage of that same investment property?

Answer: It is possible for an IRA to be a part owner of a property, just NOT a part owner of a property you have any personal interest in. Your personal monies and your IRA funds could not invest in the same property. The Internal Revenue Code states your IRA cannot gain from personal funds/investments AND your personal funds/investments cannot gain from your IRA investments, directly or indirectly.

Question: How much can I pay myself for acting as the manager of my IRA LLC?

You canNOT pay yourself anything for managing your IRA LLC. This would be considered a prohibited transaction because you’re not allowed to use your IRA money to benefit yourself.

When using an IRA LLC, you want to keep everything at arm’s length distance from yourself. How hands-on you can be with your IRA LLC is a definite gray area. You could probably speak to five different CPAs and get five different answers on what is acceptable. It’s always best to be very cautious. I recommend using a property manager to handle any properties held in an IRA LLC. This way there is no question that you are not committing a prohibited transaction in your IRA.

Question: I am interested in opening an IRA with rental property. I want to open a new account and transfer funds from my rollover account. I have a house in mind and a property management company, and they suggested that you could give me step-by-step instructions on what I should do. Can you help?

Answer: Here are some basic suggestions that must be followed. Any property purchased by an IRA must be titled properly in the name of the Custodian for your IRA. All paperwork must be signed by a representative of your IRA Custodian/Trustee. You can NOT sign on behalf of the IRA Custodian. All monies must come from and through the IRA. And of course, it must be a complying, arms-length transaction. Transactions should be reviewed with your IRA Custodian to make sure you follow all of their requirements.

Question: I need to see if my scenario is eligible for using my Real Estate IRA to do the deal. In my line of work what I typically do is I will contract a parcel of land with nominal funds in escrow (typically 5-10k total). I will handle some degree of entitlement, and then I will sell the entitled “paper” lots to a builder. I will not take title to the property, and it will be a contract in which they pay me an amount for my assignment of my original contract. So, in a recent example, I put $5,000 down on a property that I contracted for $855,000. I had a developer pay me $150,000 60 days later for me to assign my contract. Could I have used my IRA to put the $5000 down, with all the proceeds ($150,000) coming back into my IRA with the favorable tax treatment?

Answer: Generally, your IRA cannot directly or indirectly be related to you, your business, or personal investments. And in no case can your IRA and you personally, or through your business, participate in the purchase or financing of an IRA asset. There can be no commingling of personal and IRA funds. So based on the information you have provided, the transaction you discuss is not allowed and is prohibited.

Question: Does the IRS still allow opening a Roth IRA with any income level and transferring assets to it from other IRA accounts with the proviso of course of paying the taxes?

Answer: You apparently are describing a Roth Conversion whereby a Traditional IRA is converted to a Roth IRA. There have been no recent changes for making a Roth Conversion, so there currently are no Income Limitations. Income restrictions still do exist for making annual Roth Contributions.

Question: I would like to know if I buy a real estate note, and for some reason, I had to foreclose on the property, would it be a qualified IRA expense if I had to travel to resolve this matter. Would, for instance, airfare be considered an expense if the property were in another state. Could these expenses be paid from my self directed IRA?

Answer: Ordinary, necessary and reasonable expenses to collect an IRA asset must be paid by the IRA, not by the IRA Owner. However, care must be taken to make sure it is NOT an attempt to hide the personal use of IRA assets or personal expenses. The IRS would likely judge the compliance of that in the same manner as deducting travel expenses as business expenses versus personal expenses. The burden of proof would be on you, the IRA Owner, to prove that IRA funds were ONLY used for ordinary, necessary and reasonable IRA expenses. You will need to rely on your tax counsel for that determination. The IRS will take a dim view if IRA funds are misused.

Question: Can you withdraw funds from my Roth IRA before age 59½ and if so what penalties are assessed. Also, I have read that higher education expenses can be paid from a Roth IRA. Is this right?

Answer: All Roth IRA annual contributions are available for distribution at any time, regardless of age or reason. The only Roth IRA distributions that are taxed or penalized are those that come from earnings. The basis is NOT taxed or penalized.

As far as education expenses, Roth IRA funds can be used for any purpose. However, a Qualified distribution is allowed only after five years, AND age 59½ or tax and penalties apply, again to the earnings being distributed.

Question: I have a tax issue with an investment that I used my IRA LLC money. The business that I invested in has gone out of business. My loan to the partners totaled $18,000. This is a loss for my IRA-LLC.

Are there any tax breaks that I can use for this to recoup or “soften” the hit I have taken on this investment?

Answer: First, as our disclaimer states we do not give tax advice. Consequently, you will need to address the loss for/within the LLC with your tax advisor.

However, as your situation pertains to IRAs, losses within IRAs cannot be deducted unless there is a net loss within all of your IRAs AND all of your IRAs are liquidated. Losses within IRAs do reduce the reportable Fair Market Value of that particular IRA.

Question: I’d like to establish a self directed IRA. I have a few questions related to real estate I’d like to place in it.

There is a house I’d like to purchase with my retirement funds. My goal is to roll over into the self directed IRA (target prop – around $375K). I’d like to rent it for one year to another party. Is there a way to do an exchange than at a later date within the IRA vehicle? After a year, I’d like to swap that target prop for the home I’m living in currently, and then rent that house out and move into the target property. What alternatives are there to make something like this happen, or is it impossible?

Answer: There is no type of IRA transaction allowed that can involve any of your personal assets. So a trade, sale, exchange, rental, or purchase, etc. of your personal residence would be a Prohibited Transaction and can NOT be accomplished.

Question: I have a 401k plan that I want to roll over to a self directed IRA plan. How much can I roll over at one time? If I have $100,000 can I roll over only $60,000? The purpose is to invest in real estate.

Answer: There are no IRS restrictions on the number of eligible funds/assets can be rolled over to an IRA from a 401k. The 401k participant is free to roll over as much or as little as they want and is free to have multiple rollovers. So, moving over $60,000 of your $100,000 is allowed.

Question: I have an opportunity to purchase some property, but will need to utilize funds in my IRA. Is there a possibility that there might be a way to avoid the early withdrawal penalties if the purchase is classified as an investment property similar to a rollover?

Answer: It sounds like you are asking about taking a distribution from your Roth IRA and using it for a personal investment. There is no way to avoid a reportable distribution for that personal use purpose. Rollovers only apply when funds go from one IRA to another, or back to the same IRA AND within 60 days. All taxes and penalties would apply in your situation.

Question: Assuming I have reached the appropriate age (59½) can I sell the real estate asset in my IRA and then roll over the proceeds to a traditional IRA?

Answer: The transaction that you are talking about is simply the IRA selling the IRA asset. All of the proceeds from the sale of the IRA asset must go into the IRA that held that asset. It’s basically like any other investment account. In this case, assets are purchased and sold through the IRA account, by and through the IRA Custodian/Trustee. All the funds for the purchase must come solely from the IRA, and all funds from the sale must go back into the same IRA account. The IRA is making the purchase and the sale. Then it is just a matter of completing the rollover.

Question: I have a self directed IRA. Can I withdraw monies and put it back within 60 days and not be penalized?

Answer: The transaction you describe is a Rollover. IRA Owners are allowed one rollover per year, meaning 365/366 days, not calendar year. An IRA Owner may take one distribution from their IRA and return it to the same type of IRA within 60-calendar days. If accomplished correctly and timely there would be no IRS tax or penalty. However, they may only do that once every 365/366 days per IRA.

Question IRA Fair Market Values (FMV) – When Must They Be Reported By The Custodian?

Answer: IRA Consultants and Trustees MUST report the FMV for December 31 for each year for all IRAs on an annual basis. There is no exception! It is their responsibility per the IRS rules, regulations and procedures.

That means an independent valuation must be obtained each year. Appraisal methods include the use of generally accepted market listings like the ones for stocks, bonds, mutual funds, etc. The more complicated valuations include those for real estate, privately held assets like LLCs, partnerships, private stocks, etc. However, the valuations must be obtained for IRS reporting.

Question: I learned I would have the option to roll over my 401k when I am no longer employed by my current company. If I were to leave my current employer, what do I need to do to accomplish this rollover?

Answer: Usually, both the IRA Custodian as well as the 401k Plan Administrator have documentation procedures and requirements that must be followed. Usually, they consist of a formal, written request for the plan administrator and a signed acceptance from the IRA Custodian.

You need to discuss your operational questions directly with them because every plan and IRA Custodian has their separate procedures, and both must be executed correctly. Also, you will want to look into using the Direct Rollover Method and have your 401k plan administrator make the check out directly to the IRA Custodian/Trustee.

Question: I have a small IRA in the amount $5,000 that I wish to cash out. Will I incur penalties, if so, what? Also, what is the process for the withdrawal?

Answer: If this is a Traditional IRA, the distribution will likely be taxable. You will need to discuss with your personal tax counsel as to what the taxable amount is because it is based on your personal income level and whether or not the IRA contributions were deductible. If you have not yet attained age 59½, the taxable portion of the distribution will be assessed an additional IRS penalty of 10%. If this is a Roth IRA, only the earnings may be taxed. Most IRA Custodians/Trustees have required forms to request the distribution. You will need to discuss your operational questions directly with their personnel.

Question: I have a self directed traditional IRA, whose only asset is an LLC whose sole member is the IRA. The LLC simply makes real estate loans and collects interest. I am the Manager of the LLC. The LLC purchased a Convertible Debenture of a publicly traded company about a year ago for $20,000 and had collected monthly interest accordingly.

About a month ago, I processed a partial Roth conversion from my Traditional IRA for $20,000. I would like to transfer the $20K Convertible Debenture into my Roth IRA and have that investment be allocated to the $20,000 partial conversion. Would there be any issues with this transaction?

Answer: You cannot assign a certain asset to your conversion, after-the-fact. You could have designated the conversion of the debenture when the conversion was first accomplished, but not afterward. Then too, any asset converted must be converted at Fair Market Value, not cost. So the amount may or may not have been $20,000 on the day of the conversion. But after-the-fact is not possible.

Question: I am buying a house under my 401k plan. My checking account is set up in the name of the plan. I have written the contract to take title to the house in the name of the plan. The house is a short sale, and the asset manager is requiring that I sign an addendum taking the title in my name. If I take the title in my name and fund the purchase from my 401 checking account, will I have a problem?

Answer: All 401k assets must be properly titled in the name of the 401k with no direct or indirect personal attachments, guarantees or recourse. They cannot be titled in your name directly or indirectly.

Question: I am aware of and have read the prohibited transaction rules. Would the purchase of an investment property in my IRA through a real estate broker be a prohibited transaction, when the listing agent for the seller happens to be my son-in-law? I thought it would not be considered prohibited since the listing agent is working for the seller and will receive their commission from the seller and share with the broker. I am buying the property from the seller through the agent and broker.

Answer: Your logic is understandable, but it does not fly with the IRS. Internal Revenue Code Section 4975 states that a disqualified individual and your son-in-law is so described in the Code, cannot “directly or indirectly” gain from your IRA. In fact, I do not think it would fly if he refused his commission because the sale would still go to his credit. The IRS interprets this section very strictly.

Question: I’d like to establish a self directed IRA. I have a few questions related to real estate I’d like to place in it. There is a house I’d like to purchase with my funds, and I’d roll over into the self directed IRA (target prop – around $375K). I’d like to rent it for one year to another party. Is there a way to do an exchange than at a later date within the IRA vehicle? After a year, I’d like to swap that target prop for the home I’m living in currently, and then rent that house out and move into the target property. What alternatives are there to make something like this happen, or is it impossible?

Answer: There is no type of IRA transaction allowed that can involve any of your personal assets. So a trade, sale, exchange, rental, or purchase, etc. of your personal residence would be a Prohibited Transaction and can NOT be accomplished.

Question: I have a 401k plan that I want to roll over to a self directed IRA plan. How much can I roll over at one time? If I have $100,000 can I roll over only $60,000? The purpose is to invest in real estate.

Answer: There are no IRS restrictions on how much available funds/assets can be rolled over to an IRA from a 401k. The 401k participant is free to roll over as much or as little as they want and is free to have multiple rollovers. So, moving over $60,000 of your $100,000 is allowed.

Question: Can my wife rollover a work 401K to her Self-Directed IRA without penalty or tax after she turns 59½? Are all 401k plans required to allow this?

Answer: Rollovers from complying 401ks are always allowed as part of the IRA rules. If a rollover is accomplished within the complying rules, there are never any tax or penalty on the rolled over funds, regardless of age. Rollovers are NOT age-relevant. As long as the 401k participant has access to the 401k funds, a rollover is possible regardless of their age. Access to the 401k funds can be age-relevant per the plan, however.

Question: My wife and I own several rental properties in your name personally. We have no employees. We operate as sole proprietors and document our rental income via a schedule E. I would like to start holding additional property in a self-directed solo 401k. Is an EIN required to set this up?

Answer: An EIN is required for the 401k plan. However, it takes more than just an obtaining an EIN. The plan must be established using an approved plan document purchased through an organization called a plan sponsor that has an IRS-approved qualified plan. You could establish your own plan, but the legal costs would likely be quite high. You cannot just get an EIN and name it a solo 401k. In addition, you must have qualified earned income, meaning you need to be deemed to be in business and have net earned income. Your tax professional can help you make this determination.

Question: My wife and I would like to self direct our IRA money together into real estate. We have all of our IRA’s together in one place right now, BUT they are different types. My wife has contributions from her employer’s SEP. She receives new contributions annually. She also has Traditional contributions and a small Roth, from past years. I have Traditional, Roth, and money from a tax-deferred annuity, and there may be some money rolled from a 401k.

My questions are:

How can we or can we at all combine these to be self directed?

What type of annual information does Uncle Sam need if this is done?

Answer: There are a number of issues within your questions. First, spouse’s IRAs/401ks cannot be combined. They must remain separate from each other. Second, there is no way a Roth IRA can ever be combined into a Traditional IRA, unless it was a Traditional IRA that was recently converted, so combining IRAs has only one method…converting a Traditional IRA to a Roth IRA. Also, the conversion is a taxable event.

In addition, SEP contributions can only be made to a SEP IRA or a Traditional IRA. So again, that leaves out combining into a Roth IRA, or at least a Traditional/SEP IRA must remain open for the SEP contributions. SEP contributions cannot be made into a Roth IRA.

Unless the tax-deferred annuity is an IRA/401k Annuity, those funds cannot be rolled over to an IRA or 401k.

So, “Yes,” certain IRA and 401k funds can be combined via a complying rollover or transfer, but all funds cannot. Once the funds are combined in a complying manner, the IRA Custodian is responsible for all the required IRA reporting. IRA Owners have little to report unless they take distributions.

Question: I am 72 years old and have both a Traditional IRA and a Roth IRA. What are the restrictions on using the assets of either one or both of these as collateral to buy a rental property?

Answer: Regardless of age or type of IRA, the IRA Assets can NOT ever be used as collateral for a personal loan, per Internal Revenue Code (IRC) §4975.

Question: My issue is that I made small a contribution to my IRA to cover account fees. However, when I did my tax return, I found that because I had no qualified income, as the IRS defines it, it was an excess contribution and I would have to pay a 6% penalty annually on the contribution until it was removed.

I did not report the contribution because, at the time, I did not have the Form 5498 for the original tax year. My intention was to amend my tax return when I had the 5498. I do have that now and would like to move forward on this. When I initiated a discussion of this with my IRA Custodian and read the rules regarding the removal of this excess, I discovered that I had only until October 15th, to correct the excess and file the amended return or pay the penalty.

Other facts of my situation are that I live abroad (maybe I have more time to file the amended return), and that overall the value of my IRA has declined from the time I made the excess contribution until now, so I shouldn’t have to remove earnings or pay taxes or penalties in that regard.

The approach I suggested in order to keep things simple, was not to worry about the difference in IRA value, which would probably allow me to retain a little of the excess within the IRA, but to remove the entire contribution (only $225). I would like to amend my tax return to avoid the penalty (only $14), however, my IRA Custodian informed me that the 1099R for the withdrawal would not be issued until early next year for 2014. How can this be resolved most favorably for me?

Answer: It appears that this is a simple case of an excess contribution that must have been corrected by October 15 or be penalized. This problem could have been avoided if the fees that were covered with the contribution had been billed directly to you and paid personally, NOT through the IRA. But it is too late to change now, but it is something to address for futures fees.

Unfortunately, there is a specific IRS Formula that MUST be used to calculate what earnings must be removed or what prorated loss experienced can be deducted from the excess amount to be removed.

Once that is calculated then you as the IRA Owner must request the distribution from your IRA Custodian correcting the excess. Transactions can NOT be back-dated or changed once they occur. The deadline for this transaction is long past. A 6% penalty is due, payable through your personal tax return, NOT through the IRA.

In addition, the only way to now correct the excess is to remove the excess without any earnings calculation. Excesses corrected after the October 15 deadline are removed without regard to any earnings.

But again, it is a specific formula and procedure required by the IRS. There are no special provisions or exceptions. Consequently, your “suggestions” are not within the IRS procedures and can NOT be followed by the IRA Custodian.

Question: I currently have a Self-Directed IRA. I was wondering if I can use my IRA money to invest in setting up a business for myself, individually.

Answer: IRA assets can NOT be used, directly or indirectly, for a personal business or for personal use of any type. The Internal Revenue Code is very clear on this issue.

Question: I am purchasing a rental property using a self-directed IRA. I am 59 years old and I want to confirm that the monthly rent checks that will be sent directly to the IRA Custodian by the renters will NOT be considered an “IRA contribution by me” but considered the growth of the Self-Directed IRA investment.

Answer: All valid and complying IRA income from IRA owned property must be shown and recorded as income NOT contributions. Income should not be reported as contributions. In fact, all rent checks must be made out to the IRA.

Question: How do you determine the FMV of an oil and gas investment held in a self-directed IRA?
Answer: Since the FMV, not the cost, book value or other valuation, must be reported each year, FMVs must be obtained. If the ownership/partnership, etc., regardless of the type of investment, do not provide it, an expert in the field/industry could be one source. Non-affiliated agents selling/purchasing like-kind investments in the area could also provide a source for valuations. Whatever source used, must be independent and unrelated.