All Forum Posts by: Loren Whitney

Hey @Robert Taylor 

Investing into an operating business with an IRA is completely alright but as you mention, there are some specific rules that need to be followed.

First and foremost, IRA investments should always be arms length from personal endeavors. This protects you from accidently commiting any prohibited transactions. Others may have a differing opinions but this is the cleanest and safest approach.

That being said, you could be the "money" as long as you or other disqualified persons don't get involved. The concern would be incurring a "self-benefit" like pay, work, etc. If you limit yourself to a passive role as both an investor and as a manager, you can stay well within the boundaries of the IRS guidelines.

One important consideration when investing in an operating business is the additional taxation you'll be subjected to. It's called UBIT or unrelated business income tax. All of the profits that your IRA gains will be subject to UBIT (ranges from 15% to 39.6% tax). These brackets follow the "Trust and Estate" rates published by the IRS. Check out my BP blog for additional UBIT information.

@Robert Blanchard 

Lafayette is probably growing faster now than it was 5 years ago. But I've only been in Colorado for four so... There are many new developments popping up. Even my in-laws are moving from CA to Lafayette. If you're ever in my area, reach out and lets grab lunch.

Joel, we should grab coffee. I live in Louisvile CO too.

Great details Daniel Dietz I don't have much time this evening but I'll chime back in with a detailed response tomorrow. There are certainly pros and cons to this structure. Using this structure really boils down to your risk tolerance with the IRS. The solo(k) is often a client preferred structure if you qualify.

@Leigh Ann Smith 

There's no 20% rule per say. The distribution strategy is up to you in terms of X% over Y-years.

Your last questions is a creative one, nice work! IF you could subdivide the lot into separate legal parcels then yes, you could take an individual parcel from the plan for personal use. That being said, be exetrmely careful to document any and all transactions. You can imagine that owning adjoining lots personally and with your IRA may raise some red flags in the event of an audit.

Just to clarify, the early distribution penalty of 10% ends at age 59.5, not 70.5. I believe Doreen was referring to required minimum distributions (RMDs) that begin at age 70.5. If you don't currently have a Roth IRA, you will pay ordinary income taxes on the fair market property value upon distribution.

Unfortunately, there is no legal way to "swap" assets. If purchasing a rental property in the IRA requires additional capital, it may require the sale of an existing asset.

Just for the record, one common in-kind distribution strategy is to stagger withdrawals into portions. Instead of distributing a property all at once, you could withdraw say, 20% over 5 years and re-register ownership proportions over time. This is simply a distribution tax strategy if you wish to have personal use. Note that the asset must be fully distributed before you can have personal use. As interests become divided, so do income/expenses in proportion. As a disclaimer, other distribution options exist and there is no one way to go about things. Be sure to create a plan that works for your scenario with your own financial/legal counsel.

Best of luck!

I would double check the no taxation that you mentioned. First time home buyers can withdraw funds early without penalty but taxation still applies. Perhaps you've discovered an exception that I've never heard of before. This topic has been discussed many times on BP. I'm sure others will chime in quickly but I'd suggest searching the board for addition discussions on the same topic. Best of luck!

Robert Blanchard Welcome to the BP community. I live just up the road in Louisville. Look forward to networking over time. Loren

Sorry for all the typos. Autocorrect on my iPhone stepped in a few times.

Walt Payne hit the nail on the head. One thing I'll say about spousal participation is the he/she is actually required to be an employee of the company. Just being a spouse is not enough. He/she must actually make a wage. Furthermore, each plan documents will have some specific language about spousal participation and potentially a requirement for "x" hours annually to continue participation. Like Walt stated, only funds that you actively earn can count towards future contributions to the new plan. Sometimes it's necessary to rethink your entity structure in order to maximize your contribution potential. Keep up posted. :)