2016 Self-Directed IRA Tax Reporting Requirements

by | Jan 9, 2017 | Uncategorized

Self-Directed IRA investors should be aware of the following IRA tax reporting responsibilities.  Some of these items are completed by your custodian and some of them are the IRA owner’s sole responsibility. Here’s a quick summary of what should be reported to the IRS each year for your self-directed IRA.

IRA Custodian Files

Your IRA Custodian will file the following forms to the IRS annually.

IRS FORM PURPOSE WHAT DOES IT REPORT
Form 5498 Filed to the IRS by your custodian. No taxes are due or paid as a result of Form 5498.  

IRA contributions, Roth conversions, the account’s fair market value as of 12/31/16, and required minimum distributions taken.

 
Form 1099-R Filed to the IRS by your custodian to report any distributions or Roth conversions. The amounts distributed or converted are generally subject to tax and are claimed on your personal tax return. IRA distributions for the year, Roth IRA conversions, and also rollovers that are not direct IRA trustee-to-IRA trustee.


IRA Owner’s Responsibility

Depending on your self-directed IRA investments, you may be required to file the following tax return(s) with the IRS for your IRA’s investments/income.

IRS FORM DOES MY IRA NEED TO FILE THIS? DUE DATE
1065 Partnership Tax Return If your IRA is an owner in an LLC, LP, or other partnership, then the Partnership should file a 1065 Tax Return for the company to the IRS and should issue a K-1 to your IRA for its share of income or loss. Make sure the accountant preparing the company return knows to use your custodian’s tax ID for your IRA’s K-1’s and not your personal SSN (or your IRAs Tax ID if it has one for UBIT 990-T tax return purposes). If your IRA owns an LLC 100%, then it is disregarded for tax purposes (single-member LLC) and the LLC does not need to file a tax return to the IRS. March 15th, 6-month extension available
990-T IRA Tax Return (UBIT) If your IRA incurs Unrelated Business Income Tax (UBIT), then it is required to file a tax return. The IRA files a tax return and any taxes due are paid from the IRA. Most self-directed IRAs don’t need to file a 990-T for their IRA, but you may be required to file for your IRA if your IRA obtained a non-recourse loan to buy a property (UDFI tax), or if your IRA participates in non-passive real estate investments such as: Construction, development, or on-going short-term flips. You may also have UBIT if your IRA has received income from an active trade or business such as a being a partner in an LLC that sells goods and services (C-Corp dividends exempt). Rental real estate income (no debt leverage), interest income, capital gain income, and dividend income are exempt from UBIT tax. April 15th, 3-month extension available

Most Frequently Asked Questions

I’ve answered the most frequently asked questions below as they relate to your IRA’s tax reporting responsibilities.

Q: My IRA is a member in an LLC with other investors. What should I tell the accountant preparing the tax return about reporting profit/loss for my IRA?

A: Let your accountant know that the IRA should receive the K-1 (e.g. ABC Trust Company FBO John Doe IRA) and that they should use the Tax-ID of your custodian and not your personal SSN. Contact your custodian to obtain their Tax ID. Most custodians are familiar with this process, so it should be readily available.

Q: Why do I need to provide an annual valuation to my custodian for the LLC (or other company) my IRA owns?

A: Your IRA custodian must report your IRA’s fair market value as of the end of the year (as of 12/31/16) to the IRS on Form 5498 and in order to do this they must have an accurate record of the value of your IRA’s investments. If your IRA owns an LLC, they need to know the value of that LLC. For example, let’s say you have an IRA that owns an LLC 100% and that this LLC owns a rental property and that it also has a bank account with some cash. If the value of the rental property at the end of the year was $150,000, and if the cash in the LLC bank account is $15,000, then the value of the LLC at the end of the year is $165,000.

Q: I have a property owned by my IRA and I obtained a non-recourse loan to purchase the property. Does my IRA need to file a 990-T tax return?

A: Probably. A 990-T tax return is required if your IRA has income subject to UBIT tax. There is a tax called UDFI tax (Unrelated Debt Financed Income) that is triggered when your IRA uses debt to acquire an asset. Essentially, what the IRS does in this situation is they make you apportion the percent of your investment that is the IRA’s cash (tax favorable treatment) and the portion that is debt (subject to UDFI/UBIT tax) and your IRA ends up paying taxes on the profits that are generated from the debt as this is non-retirement plan money. If you have rental income for the year, then you can use expenses to offset this income. However, if you have $1,000 or more of gross income subject to UBIT, then you should file a 990-T tax return. In addition, if you have losses for the year, you may want to file 990-T to claim those losses as they can carry-forward to be used to offset future gains (e.g. sale of the property).

Q: How do I file a 990-T tax return for my IRA?

A: This is filed by your IRA and is not part of your personal tax return. If tax is due, you will need to send the completed tax form to your IRA Custodian along with an instruction to pay the tax due and your custodian will pay the taxes owed from the IRA to the IRS. Your IRA must obtain its own Tax ID to file Form 990-T. Your IRA custodian does not file this form or report UBIT tax to the IRS for your IRA. This is the IRA owner’s responsibility. Our law firm prepares and files 990-T tax returns for our self-directed IRA and 401(k) clients. Contact us at the law firm if you need assistance.

Sadly, not many professionals are familiar with the rules and tax procedures for self-directed IRAs so it is important to seek out those attorneys, accountants, and CPAs who can help you understand your self-directed IRA tax reporting obligations. Our law firm routinely advises clients and their accountants on the rules and procedures that I have summarized in this article and we can also prepare and file your 990-T tax return.

3 Year-End IRA Tips

by | Dec 28, 2016 | Uncategorized

vgsgn1482893180It’s the end of the year and many IRA investors are stressing about what they need to do by December 31, 2016. Here’s what you need to know for your IRA as it relates to year-end.

1. 2016 Contribution Deadline. First, the good news. You don’t have to make your 2016 contributions by year-end. You have until April 18, 2017 to make your traditional IRA, Roth IRA, or SEP IRA contributions for 2016. Check out the “IRS Year-End Reminders for IRAs” here for more details.

2. Roth Conversions. If you are planning to convert traditional IRA dollars to Roth for 2016, then you must make that conversion by December 31, 2016. If you convert in 2016 (by 12/31/16), then the amount you convert will get reported on your 2016 tax return. For those that have a down year or that simply want to start down the path of moving funds from traditional (tax-deferred funds) to Roth (tax-free), you’ve got to jump on this now. Your IRA custodian will typically have a Roth Conversion form that you complete and return to them. If you are converting cash, then the process is pretty simple as the value of the conversion is the cash amount. If you have a self-directed asset such as real estate or an LLC interest, you will need an appraisal or valuation of that asset in order to convert it to Roth. And lastly, if you’re on the fence about doing a Roth conversion because you’re worried about how much it will cause you in taxes, the IRS allows you to un-do the Roth conversion later in 2017, your funds go back to traditional funds, and you don’t have to pay the tax. This is one of the few things the IRS let’s you un-wind. Check out my prior article on Roth re-characterizations here.

3. The Over 70 1/2 Club. For those over 70 1/2 with traditional IRAs, you are required to take required minimum distributions (“RMD”) from your account each year. The deadline for 2016 RMDs is December 31, 2016. There is a 50% excise tax penalty for failure to take RMDs. In other words, if you don’t distribute the money to yourself from your IRA in time, the IRS will just take half of it to penalize you. Those with Roth IRAs need not worry as Roth IRAs are exempt from RMD. I’ve explained the facts and fiction on RMDs in a prior article you can find here.

So, if you’ve got a Roth conversion or RMD to take for 2016, you better get your “IRA” in gear. If you’re wondering about IRA contributions, don’t worry, you’ve got until April 18, 2017 to make them.

Pitching Your Business or Deal with Kevin Harrington from Shark Tank

by | Dec 14, 2016 | Uncategorized

pitching-your-dealI had the pleasure of interviewing Kevin Harrington on our Refresh Your Wealth podcast last week. Kevin was an original shark on the hit TV Show Shark Tank and appeared on 160 episodes. He is also the founder of the infomercial, a pioneer of As Seen On TV, and a co-founder of Entrepreneur’s Organization (EO). He also took a $500M company public on the NYSE. In short, he’s the perfect person to ask on how to pitch your business, product, or investment. In the podcast you can hear Kevin provide his Top 9 tips for pitching your deal, business, or product. I’ve noted the Top 9 list below and you can check out the podcast here.

  1. Get Their Attention. Start strong and don’t get too far into the details.
  2. Show Problem. Why is your deal, product, or business needed?
  3. Show Solution. What is your solution to the need?
  4. Why are You Unique to Solve. What makes you so special? Why are you the person or company to solve this problem?
  5. Magical Transformation. Show me how this works. Wow me with how cool this is.
  6. Have Testimonials. Have testimonials of people who’ve experienced your company, product or service.
  7. Irresistible Offer. Make an irresistible offer. In the case of courting an investor, make me feel good about getting my money back first. Provide a term that I get paid back my cash investment first before you take any profit. For a product or service, give me a call to action.
  8. Use of Proceeds. If I’m investing money, tell me how the money is going to be used. Is it buying a property, inventory, funding R&D, or paying your salary? That makes big difference.
  9. Create an Invest or Buy Now Incentive. I may be interested but why should I do this now while you have my attention. Close the deal and give me comfort that this will be okay (money back guarantee, warranty, personal guarantee).

I’ve listened to plenty of clients explain their deal and/or business and found this list to be very insightful and practical. Enjoy!

You can find this interview as well as hundreds of other episodes on iTunes under Refresh Your Wealth or at refreshyourwealth.com. Pleas subscribe and tune in weekly for new episodes.

 

RISE Act Bill Update for Self Directed IRA Investors

by | Dec 6, 2016 | Uncategorized

The RISE Act proposed by Senator Ron Wyden of Oregon would significantly impact self-directed IRAs. I previously wrote about the bill here and provided a detailed analysis. In summary, the bill would require that all self-directed IRA investment purchases be valued by a third-party appraiser and reported on the IRA owner’s personal tax return. In addition, the Act would change the disqualified person rule for companies from 50% to 10%. The Act also greatly effects Roth IRAs and would eliminate Roth conversions and would cap Roth IRA accounts at $5M.

Here are few quick updates that are very important to the bill.

  1. Senator Orrin Hatch of Utah (R) has introduced the Retirement Enhancement and Savings Act of 2016. This bill is farther long in the process and addresses retirement account issues but is entirely un-related to Senator Wyden’s proposed RISE Act the impacts self-directed IRAs. I’ve had a few clients worried as they’ve ran across this bill as it is currently working its way through the Senate.
  2. Senator Wyden’s RISE Act is in proposed form and is out for comment until December 7, 2016. You can reply with comments to [email protected]. I will post my Comment in a subsequent blog article.
  3. While the bill is sponsored by Democrat Senator in a Republican controlled Senate, it is still vitally important that the Senate Finance Committee understand the roadblocks and burdens that the bills IRA provisions will cause to hundreds of thousands of Americans who are investing for retirement with their self-directed IRA.
  4. If your Senator is a member of the Senate Finance Committee, I would highly recommend sending focused and professional comments to your Senator regarding provisions that will hinder your ability to save and invest for retirement. The current members of the Senate Finance Committee can be found here.

Additionally, if you have comments or feedback relative to the proposed bill, please feel free to that to me at [email protected].

SEC Notice 5866 and Self Directed IRA Investment Due Diligence

by | Nov 7, 2016 | Tax & Legal Updates and Policy Changes, Uncategorized

SDIRA Due Diligence

In 2012, the SEC and NASAA issued Investor Notice 5866, Self-Directed IRAs and the Risk of Fraud. In the notice, the SEC and NASAA outlined how self directed IRAs can be susceptible to numerous types of fraud and how self directed IRA investors can be bilked. The notice outlined some significant cases where investors with self directed IRAs were involved and where the investors incurred significant losses as a result of fraud and misrepresentations in the companies where the self directed IRAs invested.

The due diligence issues for self directed IRAs are not any different from the due diligence issues for individual investors. The concern, however, is that for many self directed IRA investors, their retirement account is their largest source of funds. Consequently, those accounts can be targeted by crooks. The bottom-line point of the SEC Notice is that self directed IRA owners should carefully conduct due diligence before investing their self directed IRA funds.

I have my own thoughts as to appropriate due diligence, which are in accordance with the SEC Notice, and I have outlined those thoughts in the following due diligence “top ten list”.

DUE DILIGENCE TOP TEN LIST

Before you invest your self directed IRA into a “non-traditional” private business or into a real estate investment, you need to ask some hard questions to the person or business receiving your money. Here are some tips to minimize investment risks with your self directed IRA.

  1. Don’t Understand, Don’t Invest. If you don’t understand how the business or investment makes the returns being promised, then don’t invest.
  2. Demand Documentation of Promises. If you aren’t given adequate documents outlining what has been explained to you verbally or what has been put into a presentation, then don’t invest.
  3. Don’t Accept Commissions for Raising Money if You Aren’t Licensed. If you’re told that you can get a commission for bringing others to invest into the same company and if you don’t have a license to receive such commissions, then don’t invest. If the investment sponsors are willing to violate the law to pay a non-licensed person to raise money from others, then what’s stopping them from misappropriating your IRA investment? It is only the law preventing them, which they’ve proved they will disregard.
  4. Get Security. If your self directed IRA is loaning money for a real estate venture, then demand a recorded deed of trust or mortgage on title to the property, protecting your investment. Also, make sure that you get a copy of the title report or commitment showing what position your loan is being placed into when the deed of trust or mortgage is recorded. Many savvy investors (and what all banks do) create lending instructions to the title company or attorney closing the real estate transaction that instruct the closing agent to only use the funds being loaned when the borrower signs the note/loan documents, when the closing agent verifies the priority of the deed of trust or mortgage you are getting (1stposition, 2nd, etc.), and when all other defects to title have been cleared.
  5. Research Management and Company Status. If you’re investing into a PPM, a private offering, or a crowdfunding offering, you should receive numerous documents outlining the investment, the use of funds, the background of those managing the company, and also documents regarding your rights as an investor (e.g., offering memorandum and LLC operating agreement or LP limited partnership agreement). Also, check to see if the PPM or private offering was properly filed with the SEC by going to SEC.gov and checking the company name in the SEC database. If no filing record exists for the PPM or private offering with the SEC, then the person raising the funds has possibly disregarded the law. As stated earlier, if someone is willing to disregard the law to get your money, what is stopping them from disregarding the law to not pay you back (it’s just the law)?
  6. Investigate Backgrounds of Persons You’re Entrusting Your Money to. Investigate the background of the person(s) with whom you are entrusting your money. When you are investing with others, you need to think like the bank and do what the bank does. What is this person’s credit worthiness? What is their employment or prior business experience? What is their business or investment plan? What are the terms of the investment? Is there a realistic rate of return that fairly recognizes the risk being taken?
  7. Don’t Be Hurried. If you’re pressured that this opportunity will pass if your self directed IRA doesn’t invest now, then let the opportunity pass. Most scams use this technique, and most legitimate investments never have this funding crisis.
  8. Engage a Lawyers to Look Out For Your Interests. Make sure a lawyer representing your interests reviews the documents. If a lawyer drafted the documents, it is still important to have a lawyer look at the documents as they relate to your interests and with an eye towards protecting your self directed IRA. Sometimes, unfortunately, the devil is in the details, and many investments have clauses that can significantly impact your ability to get your money back or that give the company raising the money the ability to pay whatever compensation to themselves that they desire. These are obvious problems that will eat into the bottom line of the profits you may be expecting.
  9. Seek Opinion of Friend or Fellow Investor. Seek the opinion of another investor, business owner, or friend whose opinion you trust. Sometimes, when you explain the investment to someone else, he or she can help you find issues to consider and questions you should be asking.
  10. Get Comfortable Saying No. Be comfortable saying no and only invest what you are willing to lose. Non-traditional investments have made many millionaires over the years, but they have also caused some financial ruin. Just keep the risk in perspective and don’t “bet the farm” in one deal.

Don’t be scared about investing into non-traditional investments. Just remember though that you may need to get out of your comfort zone by asking lots of questions, by demanding additional documentation, or by simply saying no. Remember, you are the best person to protect yourself.  So do it.

This article is a modified except from The Self Directed IRA Handbook. 

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

IRS Warns Against Home Storage for Precious Metals Owned by Self-Directed IRAs

by | Sep 13, 2016 | Uncategorized

The Wall Street Journal recently reported on the radio advertising that promotes an ability to store gold owned by a self-directed IRA at the IRA owner’s own home. Based on the Journal’s reporting and investigation, the IRS issued a statement warning against such storage. I’ve written about this topic on a number of occasions and our firm has always recommended against home storage for precious metals owned your IRA or your IRA/LLC.

The recent statement by the IRS against home storage is an important development and one that all self-directed IRA investors who own precious metals should be aware of. Keep in mind, there are two rules that apply to precious metals owned by an IRA.

Qualifying Metals

First, the precious metals owned by an IRA must qualify under IRC § 408(m)(3). In short, these rules approve certain specifically approved coins (e.g. American Eagles) and gold, silver, platinum, or palladium that meet certain fineness requirements. Check my prior article for more detail as not all precious metals qualify to be owned by an IRA. In addition, Chapter 12 of my book, The Self Directed IRA Handbook covers the subject in detail.

Storage Requirement

And second, qualifying metals must be stored in accordance with IRA rules. Precious metals must be stored with a “bank” (e.g. bank, credit union, 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. Additionally, an IRA owned LLC (aka, IRA/LLC) is subject to the same storage rules and must store metals the LLC owns with a “bank”.

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.

Given the warning against home storage from the IRS, self-directed IRA owners should think twice before storing precious metals owned by their IRA or their IRA/LLC in their home.

For a detailed legal analysis, please refer to our Whitepaper on the topic found at the link below.

white-paper_storage-requirements-of-precious-metals-in-ira-llc_070715.