Yes, if it is structured correctly. The prohibited transactions code prohibits an individual from using personal or IRA cash to benefit the other. This can be easily violated through “formation issues”. If you are considering using your personal funds to invest in real estate with your IRA either through Tenant-in-Common or a Partnership Entity, consult with Redrock first. Do not be a test case for an inexperienced professional.

If you have a “traditional” self-directed IRA then the answer is no. Using Redrock’s Total Control IRATM, you can manage the property, collect the rent, screen tenants, perform general maintenance, and more. This can save your IRA hundreds of dollars each month and ultimately provide more investment capital for ongoing investments.

Yes! Leverage is a very powerful tool when purchasing real estate. However, there are unique requirements when using a self-directed IRA and leverage. The “prohibited transaction” rules state that you as a disqualified person cannot extend credit to an IRA or IRA asset. This means that if your IRA gets a loan on a piece of real estate – you cannot personally guarantee the loan. This would be viewed as extending credit. Refer to IRC § 4975(c) (1) (B) for more specific information.

An IRA must secure what is called a non-recourse loan. This type of loan is given solely based on the property. A bank who lends money this way is lending money based on the investment rather than lending to a borrower who has a great credit score. Because banks do not have any recourse against the IRA or IRA holder, they typically require a high down payment. In the past we have seen banks require 50% down with marginally high interest rates. Banks are not in the business of foreclosing on homes, so they need to make sure if your self-directed IRA cannot make the payments that it is in a protected position and will not lose its investment.

Theoretically, yes. Your brother is not a disqualified person. However, as in the scenario mentioned above, if he occupied a rental property owned by your IRA and could not make the payments, you could run afoul of the exclusive benefit rule. This could cause your IRA to have participated in a prohibited transaction. It is important that you treat every investment the same, to benefit your IRA and only the IRA.

Without question! The Employee Retirement Income Security Act of 1974 (otherwise known as ERISA) essentially passed the responsibility of retirement saving from the employer to the employee. IRAs were created in 1975 to provide individuals a chance to direct where their retirement funds were invested. Rather than delineating which investments are allowed, the IRS code instead identifies which investments are not permitted under these laws.

UDFI stands for Unrelated Debt Financed Income. UDFI is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is similarly as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1).

For example: Your self-directed IRA purchased a piece of raw land in 1999 for $100,000 using a non-recourse loan with 50% down. In 2004, you sold that same piece of property to a developer for $200,000. Your IRA had secured a 50% loan to value (LTV) on the property, and let’s assume that you never paid down any principle because it was an interest only note. Fifty percent of the profit would be subject to UBIT because it was generated by money that was not related to the self-directed IRA.

As a side note – UDFI does not apply if the debt is paid off 12 months prior to the sale of the property. If the self-directed IRA can pay off its loan early, it may not have to pay UBIT at all! If you are intending to purchase assets inside a self-directed IRA using debt-financing, please consult with a competent tax advisor.

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

UBTI is income generated by a trust when engaging in business activity that is unrelated to its general purpose. Self-directed IRAs were created for long-term investing, and when it purchases an asset that produces income unrelated to the intent of the “plan,” then that income is subject to taxation – which means your IRA will be paying taxes on profits generated from your business purchase.

UBTI is subject to Unrelated Business Income Tax, or UBIT. UBIT is a very steep and complicated form of taxation. Much like Federal Income Taxes, UBIT is set to a laddered schedule. However it is compressed on much tighter levels. In 2005, UBIT is taxed at the following rates:

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

UBIT was implemented to keep the playing field even between plans that open businesses and the typical small business owners. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT mitigates that risk for the typical business owner.

UBIT is one of the most complicated areas of taxation in the Internal Revenue Code. It is imperative that you seek professional help to make sure you do not incur any severe tax penalties.

That depends. Working with a traditional self-directed IRA custodian makes investments like tax liens, foreclosure homes and real estate difficult. With a traditional self-directed IRA custodian, the client cannot have any personal interaction with the IRA funds. They have to petition the IRA custodian to make an investment on their behalf. Banks move at a pace much slower pace than the investment community, and it can take weeks to complete a transaction.

On the other hand, Redrock’s clients benefit from having total “check-book” control and immediate access to their retirement funds, so they CAN participate in such transactions quickly and efficiently!

If I have a 401(k) with my current employer, will I be able to use these funds to purchase non-standard assets?

Perhaps. If your company has a self-directed 401(k) like the ones Redrock establishes then yes. Most employers do not have a self-directed 401(k) so there is a chance that it will not be possible. The only way to be sure is to contact your current 401(k) administrator.

Can I use a self-directed IRA to buy a business?Yes you can. Our business is to make this process simple to establish, easy to understand and effortless to maintain. However, we do not suggest you use a self-directed IRA to purchase a business. Plans such as IRAs and 401(k) which engage in business activity generate Unrelated Business Taxable Income (UBTI). To alleviate this situation, Redrock suggests a Solo 401(k) when a retirement account is going to purchase a business because this structure does not generate UBTI.

In order to offer retirment accounts such as IRAs, a custodian must be a registered Trust Company or bank. For one to register as a Trust Company or bank, the institution must meet stringent state requirements and have adequate reserves. Your money is kept in a separate account for your benefit and not subject to creditors of the custodian. Further, under Redrock’s program, the custodian never has control of your money-you do! You are ALWAYS in total control.

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

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

It is possible to use funds from most types of retirement accounts, including:

• Traditional IRA
• Roth IRA
• SEP IRA
• Keogh
• 401(k)
• 403(b)
• And many more!

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

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

IRC § 4975(c) (1), identifies prohibited transactions to include any direct or indirect:

• Selling, exchanging, or leasing any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
• Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
• Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
• Transferring or using, by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intend to use.
• Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
• Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.

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

Many of the prohibited transactions are the result of a very simple equation:

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

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

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

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

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

As mentioned previously, the IRS does not identify what investments or transactions you can make in your IRA. They instead state which investments are prohibited and what makes certain transactions prohibited. Identifying, interpreting and following these rules can be complicated, but not impossible. Redrock can help you follow IRS guidelines and steer clear of prohibited transactions.