All Forum Posts by: Bill Humphrey

You would have to find your own consultant. But that could help with the IRS/DOL, if you can show you were relying on an expert to make your screw up!

The fee to death syndrome is something of a misnomer. It is usually fees for services provided. Things such as opening and keeping a checking account, setting up and keeping track of the accounting records, monthly reconciling, filing, bank fees, etc are the things the plan is getting in exchange for the fees. Lots of people that we work with, like the idea of no fees, but don't realize the amount of work involved. And since no one is asking for it from the outside, that is until the auditor shows up, then the temptation is to let it slip.

It is different than just gathering your records at the end of the year and giving them to your CPA. As the trustee, you have a significant responsibility to keep stuff in order, and to show that you didn't screw up. It doesn't have to be a TPA for that stuff, your own accountant, bookkeeper or other business specialist could do it.

The IRS allows the payment of IRA administrative expenses and fees for the IRA itself. But not fees related to assets owned by the plan, such as LLC set up, real estate taxes. Any fees incurred by an LLC or other asset owned by the plan are expenses of that asset and or the owner, the IRA. Not the individual beneficial owner of the IRA.

Both of those duties fall upon the plan trustee so you can't separate them within the plan.

Consulting someone prior to the transactions is probably a great idea. The trustee is responsible even when you do use an outside advisor. You can buy the advise you need ala-carte. Provided you know when you need it.

We see people who do a transaction once every 6 or 12 months. And it is easy to forget the rules and start to apply common sense instead. Seems logical doesn't always apply to the IRS rules though.

Qualified plans and particularly those for company owners without employees are a great tool if you are careful with the rules.

As the trustee of the plan, rather than the manager of a company owned by your plan, you can provide services to the entity. (note an individual can not be the trustee of their own IRA). They do come with checkbook control out of the box, which is handy.

The penalties are not usually based on distributing the assets, but instead start with excise taxes of 15% and up on the trustee themselves.

The use of a 401k or other qualified plans also subjects the plan owner and trustee to DOL oversight in the case of employee issues. For example should you be the owner of another company with employees you have to be careful that the benefits your individual plan offer to you don't have to offered to the other employees. In many cases they must be offered.

It is rare, but not unheard of, for individuals not working with Qualified Plans professionally to have the depth of understanding to keep a plan in good working order.

Also note there are strict requirements for salary deferrals and company contributions to the plan.

I have seen several questions and comments about the advisability of using the Checkbook IRA LLC structure. Although there are a number of firms pushing the idea we always try and point out the potential danger of doing so.

My main worries are four things:

The structure is easy to abuse, which means that people are doing so. That puts the owner of the account in the same boat as those abusers and potentially subject unwelcome IRS attention.

The structure encourages the provision of services to an entity owned by the IRA, which is prohibited. Often noting that the provision of those services saves the IRA money. Those accounting and other services could easily be deemed prohibited and thus disqualify the IRA entirely.

Managers of the entity often don't realize or pay attention to the entity itself. We often see an LLC which has no books or records of any kind, other than bank statements. The LLC is a legal entity and needs to be managed like any other. Perhaps with even more attention since it is IRA money. There are often tax filings that are not prepared and or the owner (the IRA) does not report taxable income that is being passed out of the LLC to the IRA.

Lastly, promoters often refer to the Swanson decision and various IRS memorandums as verification of the validity of the structure. While there are references to setting up an entity and being the manager, the IRS and the courts have never said that you be the accountant manager providing services to an entity. You can always be the decision maker, but that is different than the person sitting down at the computer every month/quarter/year to reconcile quickbooks and prepare statements, tax filings, and other managerial duties.

UBIT - Publication 598 directly links IRAs to UBIT. They are treated exactly like non-profits in many respects you can also refer to the information on the 990-T which is the tax return an IRA files to report the taxes. The instructions refer to IRAs and other plans as well. Including Health Savings Accounts (HSA), which can be self directed as well.

Hi Chris,

Once the loan has been paid to -0- then the UBIT calculation is based on no leverage and thus no tax on the sale.

Note that Roth's and Traditionals follow the same rules for UBIT (and the component Unrelated Debt Financed Income or UDFI).

Also, remember that the UDFI is based only on the net profit from the taxable portion of the investment which is only the portion coming from the assets acquired with financing.

UBIT is one of the more confusing areas in the using Self Directed IRAs.

Bryan, I don't think Fidelity belongs on your list. Although they will allow some select non-security investments, they don't allow real estate and they don't specialize in the rules, nor will they process any payments for things such as taxes, etc.

A warning for people thinking of starting a solo 401k (individual 401k, etc.). One of our clients was audited and the IRS determined that the company set up to have the plan was set up ONLY to have the plan and was not a real business. The rollover to the 401k was invalidated. Moral of the story: Make sure you really have a business before you create a 401k plan for it. See the IRS.gov site for information on businesses, both Schedule C, partnerships, and incorporated entities.

The topic of services to your IRA is a grey one and a topic that comes up often at our classes for the Univ of Denver Law School. One thing for certain, swinging the hammer is a service. Making decisions is not. You can always make any decisions related to your IRA's asset. Who else would?

That leaves a grey area in between, what if you are not swinging a hammer, but just picking up trash in the yard as you walk by? The IRS rules are vague and intentionally so. They don't want you contributing your labor to your plan. We always tell people the rules, and that the more trash they pick up the closer they are coming to providing services. If they do it 40 hours a week, then it is probably service. Once or twice a year when they walk by to check on the property, probably not. The IRS would look at the facts and circumstances. In general, doing less is safer. But never swing the hammer to add a garage to your IRA's unit. The adding value is a good dividing line. If what you are doing is adding value, then you shouldn't do it ever. If it is in the maintaining category, then don't do it or don't do much of it.