WHAT EVERY SELF DIRECTED IRA INVESTOR SHOULD KNOW ABOUT PRECIOUS METALS

by | Sep 30, 2014 | News

what-sdira-investors-should-know-about-metalsPrecious metals have been a popular investment for retirement plans since the financial market collapse in 2008. Most standard IRAs with financial institution custodians will typically only offer precious metals through funds or other complex structures whereby the IRA does not directly own the precious metals. A self directed IRA can hold actual precious metals as long as those metals are not considered collectibles under law and as long as they are properly stored.

Only precious metals which meet the requirements of IRC § 408(m)(3) may be owned by an IRA. All other metals or coins are considered collectible items and cannot be held by an IRA. IRC § 408(m)(2)(C), and (D).

There are two categories of approved precious metals. The first category are specifically approved coins, such as American Gold or Silver eagles. The second category is bullion (e.g bars, or coin form bullion) that is gold, silver, platinum, or palladium, AND that meets certain purity requirements. The purity requirements are outlined below.

  • Gold, meeting minimum fineness requirements of 99.5%.
  • Silver, meeting minimum fineness requirements of 99.9%.
  • Platinum, meeting minimum fineness requirements of 99.95%.
  • Palladium, meeting minimum fineness requirements of 99.95%

Precious metals must be stored with a licensed financial institution or trust company. Personal storage of precious metals owned by an IRA is not allowed. A broker-dealer, third-party administrator, or any company not licensed as a bank, credit union, or trust company may not store precious metals owned by an IRA. IRS Private Letter Ruling 200217059.

If an IRA purchases precious metals that do not meet the specific requirements of IRC § 408(m)(3), then the precious metals are deemed  collectible items. As a result, they are considered distributed from the IRA at the time of purchase. IRC § 408(m)(1). Similarly, if the storage requirement is violated, then the precious metals are also deemed distributed as of the date of the storage violation. IRS Private Letter Ruling 20021705. The consequence of distribution is that the value of the amount involved is deemed distributed and is subject to the applicable taxes and penalty.

By: Mat Sorensen, Attorney & Author of The Self Directed IRA Handbook

This article is an excerpt from Chapter 12: Precious Metals of The Self Directed IRA Handbook by Mat Sorensen

The Roth IRA to Roth 401(k) Rollover Roadblock

by | Aug 26, 2014 | News

A Roth IRA cannot be transferred or rolled over to a Roth 401(k). That comes as a surprise to many Roth IRA owners who later establish or participate in a Roth 401(k) as Traditional IRAs can be rolled over to Traditional 401(k) accounts. However, because of some unfortunate quirks in the tax code, a Roth IRA can only be transferred or rolled over to another Roth IRA. The Department of Treasury issued regulations and clarifying questions on the issue in Treas. Reg. 1.408A-10, Q&5, where they stated the following.

Can amounts distributed from a Roth IRA be rolled over to a designated Roth account as defined in A-1 of §1.402A-1?

A-5. No. Amounts distributed from a Roth IRA may be rolled over or transferred only to another Roth IRA and are not permitted to be rolled over to a designated Roth account under a section 401(a) or section 403(b) plan.

The same rule applies even if all the amounts in the Roth IRA are attributable to a rollover distribution from a designated Roth account in a plan.

So, if your funds are in a Roth IRA they can only be transferred or rolled over to another Roth IRA. On the other hand, if you have funds in a Roth 401(k), those funds can be rolled or transferred out to a Roth IRA but once they are in a Roth IRA they cannot go back to a Roth 401(k). In short, just remember, that once funds are in a Roth IRA they are stuck as a Roth IRA and cannot be rolled over and transferred into any other account. While I believe the rule restricting Roth IRA to Roth 401(k) transfers/rollovers will change over time I don’t see it happening any time soon. In fact, at a recent conference in Washington, D.C., I asked a top ranking treasury official about the issue and he stated that they wanted it fixed and that they were working on it. In other words, we have more important stuff to do right now (or to not do, however you view the workings in D.C.).

By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook

Tax Court Rules Against Self-Directed IRA Owner Who Failed to Properly Make a Real Estate Investment

by | Jul 29, 2014 | News

In a recent U.S. Tax Court case, the Court ruled against an IRA owner and deemed his IRA distributed and taxable as the IRA owner failed to properly execute his intended self-directed IRA real estate investment. Dabney v. Commissioner, T.C. Memo 2014-108.

The IRA owner had an IRA at Charles Schwab and intended to use the IRA to acquire real estate in Brian Head, UT. Upon conducting research Mr. Dabney learned that an IRA could own real estate. However, instead of rolling or transferring his IRA funds to a self directed IRA custodian who would allow his IRA to own real estate, Mr. Dabney took a distribution of the IRA and directed Schwab to wire the funds to closing for the purchase of the property. Additionally, he instructed title and eventually received a deed in the name of his Schwab IRA.

The problem was that rather than invest his IRA into real estate he instead distributed his IRA and use the distributed fund to buy real estate outside of his IRA. Charles Schwab issued Mr. Dabney a 1099-R for that distribution and Mr. Dabney contested the 1099-R and the taxes owed as a result arguing that the funds were used to buy a property owned by his Schwab IRA. Mr. Dabney argued that Charles Schwab made a mistake. However, the Court ruled against him because his funds were distributed out of his Charles Schwab IRA and because his IRA funds and the real estate were not held by a self-directed IRA custodian that allowed for IRAs to own real estate. The Court stated that an IRA can certainly hold real estate but that Charles Schwab’s policies did not allow for Mr. Dabney’s IRA to own real estate and since his custodian would not hold the real estate as an asset of his IRA that it was deemed distributed.

The lesson to be learned from the Dabney case is that in order to properly execute a self-directed IRA investment into an asset such as real estate, the IRA owner needs to roll over or transfer their IRA funds first to a self-directed IRA custodian who allows the IRA to own real estate and then that self-directed IRA will actually take title and ownership to the IRA asset directly. While these rules seem simple, I’d estimate that I speak to at least one or two IRA owners a year who took a distribution from an IRA and used those funds to buy real estate (or some other alternative asset) thinking that the real estate would still be owned by their IRA and that the funds would not be distributed and subject to tax. The confusion usually arises with the non-self directed custodian who misunderstands what the the account owner is trying to do (invest the IRA, not distribute it). Keep in mind, that in order to own real estate with a self-directed IRA, you must have a self-directed IRA custodian.

Maximize Roth 401(k) Dollars: What Can You Roll-Over or Convert to Roth in Your Solo 401(k)?

by | Jul 22, 2014 | News

Many savvy investors have come to find Roth retirement accounts as a great tool to building long-term tax-free wealth. Roth IRAs were first introduced in 1997. Roth 401(k)s came around in 2006 but had many restrictions and were not widely offered. Under current 401(k) rules, you can contribute $17,500 a year to your Roth 401(k) account as an employee contribution. You can contribute up to an additional $34,500 to your 401(k) for the year, depending on your income, up to a total amount of $52,000 but the $34,500 would be employer contributions and must be Traditional dollars. So, if you’re self-employed and have a solo 401(k) and want to max-out your 401(k) contributions you could contribute $17,500 as Roth 401(k) dollars and $34,500 of Traditional 401(k) dollars. But what if you want all of the funds to be Roth 401(k) dollars? Well, have no fear; all you have to do is convert the Traditional 401(k) dollars to Roth. Also, what if you want to roll-over existing retirement accounts to your Roth 401(k)? This is also possible, you just have to roll the funds over and convert. This article outlines the brief history and details on how you can maximize your Roth 401(k) account.

The American Tax Payer Relief Act of 2012 (“ATRA”) totally changed the game for Roth 401(k)s. Following ATRA, Roth 401(k)s became significantly more beneficial to investors for one simple reason: you could more easily put your existing retirement plan dollars into it. Since 2012, any 401(k) account owner, whose plan offers a Roth 401(k) account (and most now do), is eligible to convert any and all of their existing Traditional 401(k) dollars to Roth 401(k) dollars. This includes Traditional IRA rollovers to the 401(k), 401(k) employee contributions, and vested 401(k) employer contributions. Keep in mind that when you convert any Traditional retirement plan dollars to Roth 401(k) dollars that you will be taxed on the amount converted. That’s what Roth retirement account dollars are. They are post-tax retirement plan funds (you’ve paid taxes on them already) that grow tax-free and are withdrawn at retirement tax-free (age 59 ½).

Transfer and Rollover Rules

Additionally, funds in prior employer Roth 401(k)’s may be rolled into your existing Roth 401(k). Unfortunately, one source of funds that cannot be rolled, transferred, or converted into a Roth 401(k) are Roth IRAs. Here’s a quick chart breaking down the rules.

Existing Retirement Plan Dollars Can These Retirement Plan Dollars Go Into My Roth 401(k)?
Transfer/Rollover from a Traditional IRA or Prior Employer Traditional 401(k). Yes, but tax will be due at the time of conversion on the amount converted to Roth.
Traditional Employee Contribution Made to Your Traditional 401(k) Account. Yes, but tax will be due at the time of conversion on the amount converted to Roth.
Employer Contribution Made to Your 401(k). These Are Always Contributed as Traditional Dollars. Yes, but tax will be due at the time of conversion on the amount converted.
Prior Employer Roth 401(k). Yes, these are rolled from the old Roth 401(k) plan to the existing Roth 401(k).
Roth IRA No, right now you cannot roll Roth IRA dollars into a Roth 401(k). We expect this law to change over time but not anytime soon.

In addition to the chart above, here’s a link to IRS Notice 2013-74 which discusses Roth 401(k) conversions and rollovers.

Keep in mind that conversions to Roth dollars are only permitted if your 401(k) plan allows it.  Most Solo or Owner Only 401(k) plans allow for Roth contributions and conversions.  Also, only vested amounts are available for conversion, which in a Solo 401(k) plan, all amounts contributed are usually immediately vested.  Finally, keep in mind that any amounts converted are still subject to tax based on your personal tax rate liability.  However, once converted, all subsequent distributions will be tax-free, so long as any converted funds remain in the Roth account for five years prior to distribution.

In summary, Roth 401(k) sums can be accumulated from many different sources. They can be accumulated from conversions of traditional IRAs, old employer Traditional 401(k)s, and from existing Traditional 401(k) contributions (employee or employer). You aren’t just limited to putting in your annual $17,500 of Roth 401(k) dollars each year. So, if you want to maximize your Roth 401(k) account, all you need to do is rollover and/or convert your existing dollars to Roth.

ROTH IRA’S INHERITED THROUGH A TRUST: SPOUSAL ROLLOVER PERMITTED WHERE SURVIVING SPOUSE HAS CONTROL

by | Jul 15, 2014 | News

In a recent Private Letter Ruling (PLR 201423043), the IRS stated that a deceased person’s Roth IRA may be inherited by the Roth IRA owner’s surviving spouse through their Trust when the surviving spouse was the sole beneficiary and had sole control of the Trust upon the passing of her husband.

As many retirement account owners already know, listing your Revocable Living Trust as the beneficiary of your retirement account can be tricky as the Trust needs to meet certain requirements in order to receive rolled-over funds from the surviving spouse.

For example, Under Reg. § 1.408-8, Q&A 5, a surviving spouse of an IRA owner may elect to treat the spouse’s entire interest as a beneficiary in an individual’s IRA as the spouse’s own IRA, but only if the spouse is the sole beneficiary of the IRA and has an unlimited right to withdraw amounts from the IRA.

The IRS has stated that, “If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust.” Under the PLR though, the IRS stated that when the surviving spouse is the sole trustee of a trust and has the sole authority and discretion under the trust to pay the IRA proceeds to herself/himself, then the spouse may rollover the deceased spouses Roth IRA to the surviving spouses Roth IRA as long as the rollover occurs within 60 days of the distribution from the deceased person’s IRA.

The rules regarding spousal rollovers can be tricky and you should consult with your attorney before listing your trust as the beneficiary of your IRA. As a result, I have the following three tips to follow when listing beneficiaries on your retirement accounts.

  1. When In Doubt, List Your Spouse Directly, Don’t List Your Trust – If you aren’t sure about whether your Trust qualifies as a beneficiary for your retirement account, then list your spouse directly as the beneficiary.
  2. If You List Your Trust  Instead of Your Spouse, Make Sure Your Trust Qualifies- Have an attorney review your Trust to make sure that it meets the requirements above (that your spouse will have sole control and authority under the trust to distribute the IRA to himself/herself) so that your spouse can rollover the retirement account in the most tax advantageous manner possible. For example, a spouse can rollover their deceased spouse’s account into their own account as was shown in the PLR above. That’s a great tax benefit as you can keep the funds in a retirement account and outside of taxation longer. However, if the Trust doesn’t meet the proper requirements then the trust receives the retirement account and it cannot be directly rolled into the retirement account of the surviving spouse and must instead be distributed.
  3. Consider a Separate IRA Trust for IRA’s Over $1M- If you have an IRA over $1M, you may benefit by having a special IRA trust as the beneficiary of your IRA. It depends on your goals and tax planning, but is worth considering.

Bottom line, the rules here are very tricky so consult with your estate planning attorney on the best way to list your heirs as beneficiaries on your retirement accounts.

By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook