Other Investments

Pitbull Conference to Spur IRA Private Money Lending

February 26, 2014

Investing in real estate through a self-directed IRA might not be for everyone. For many, being a landlord is daunting – hassling with tenants, upkeep on maintenance, and all the other elements of owning rental property. Although IRA holders have the ability to hire third-party property managers, some do not prefer all the moving parts associated with owning investment real estate.

However, there are other investments that take advantage of the reemerging real estate market that don’t require the day-to-day involvement of property management. Last week in Ft. Lauderdale, we had the opportunity to address a packed room of eighty private money lenders at the Pitbull Conference, and from all reports, that business is booming.

The need for private money is significant, so much so that real estate-backed lending is one of the fastest growing self-directed choices in IRAs. The lenders, representing funds from $1-60 million, were eager to learn how IRAs could be put to use for financing buying, fixing up and flipping, and renting investment property. It just so happens that the time for their business couldn’t be better.

According to BankRate, current 5-year CD rates garner approximately 2%. At that rate, it would take about 36 years for an investment to double in value. It’s no wonder that people are looking for alternative ways to make their retirement funds work at a more efficient rate. Is the stock market better? It certainly has done well over the past two years, but how much higher can it go? And what type of gains can you make while you still hold the investment, or must you sell out to earn your gains?

When lending private money out of your IRA, the rate you charge is based on the outcome of your negotiation with the borrower. It can be a conventional 30-year mortgage, or a six-month loan to a rehabber. At NuView, IRA lending has had anywhere from 5 – 18% interest, depending on the client’s loan terms and collateral.

To seriously misquote Shakespeare’s Hamlet, “Either borrower or lender be.” An IRA can do both. Look through our site or give us a call to learn more. We will help you unlock your IRA and let you make all the decisions.

New Case Answers Important Questions About IRA LLCs

February 13, 2014

Guest article by Mat Sorensen:

Can my IRA own substantially all of the ownership of an LLC? Can my IRA/LLC pay a salary to me for serving as the manager of the IRA/LLC? The U.S. Tax Court issued an opinion in the case of Ellis v. Commissioner, T.C. Memo 2013-245 and answered both of these questions.

In Ellis, the Tax Court resolved two questions posed by the IRS. First, did Mr. Ellis engage in a prohibited transaction when his IRA acquired 98% of the membership interest in CST, LLC? And second, did Mr. Ellis engage in a prohibited transaction when CST, LLC (owned 98% by his IRA) paid him compensation for serving as the manager?

As to the first question, the Tax Court held that Mr. Ellis’ IRA did NOT engage in a prohibited transaction when it acquired 98% of the ownership of a newly established LLC. The other 2% was owned by an unrelated person who was not part of the case and whose ownership did not have an impact on the decision. The IRS contended that a prohibited transaction occurred when the IRA bought ownership of CST, LLC. The Court disagreed, however, and held that the IRA’s purchase of the initial membership interest of the LLC was NOT a prohibited transaction. The Court stated that the IRA’s purchase of membership interest in a new LLC is analogous to prior holdings of the Court whereby the Court held that an IRA does not engage in a prohibited transaction when it acquires the initial shares of a new corporation. Similarly, the court held that a new LLC is not a disqualified person to an IRA under the prohibited transaction rules and as a result an IRA may invest and own the ownership of the LLC. IRC § 4975(e)(2)(G), Swanson V. Commissioner, 106 T.C. 76, 88 (1996). Consequently, the Court’s ruling means that it is NOT a prohibited transaction for an IRA to acquire substantially all or all of the ownership of a new LLC.

As to the second question, the Tax Court held that it was a prohibited transaction for the LLC owned substantially by Mr. Ellis’ IRA to pay compensation to Mr. Ellis personally. The court reasoned that, “In causing CST [the IRA/LLC] to pay him [IRA owner] compensation, Mr. Ellis engaged in the transfer of plan income or assets for his own benefit in violation of section 4975 (c)(1)(d).” This type of prohibited transaction is often times referred to as a self dealing prohibited transaction and occurs when the IRA owner personally benefits from his IRA’s investments. The Court looked to the operating agreement of the LLC which authorized payment to Mr. Ellis for serving as the general manager and also the actual records of the LLC which showed the payments to Mr. Ellis. When using an IRA/LLC, one of the many important clauses in the operating agreement is one which restricts compensation to the IRA owner or any other disqualified person (e.g. IRA owner’s spouse or kids). Also, the actual payment and transaction records of the IRA/LLC will be analyzed so it is important that both the LLC documents and the actual payment records do not allow for or result in payment from the IRA/LLC to disqualified person (e.g. IRA owner).

It is also important to note that the Tax Court rejected Mr. Ellis’ argument that the payments were exempt from the prohibited transaction rules under section 4975 (d)(10). Section (d)(10) provides an exemption to the prohibited transaction rules for payments from an IRA to a disqualified person [e.g. IRA owner] for services rendered to manage the IRA. The Tax Court rejected this argument stating that the payments from the IRA/LLC were not for management of the IRA but for management of the IRA/LLC and its business activities. In this case, the IRA owner was actively involved as the general manager of the IRA/LLC which LLC bought and sold cars. As a result, the Court held that the payments were not exempt and constituted a prohibited transaction.

I was happy to read this case and find the Court’s conclusions because it matches the same opinion and advice we have been giving clients regarding IRA/LLCs for nearly ten years: that a newly established LLC owned by an IRA does not constitute a prohibited transaction but the IRA/LLC cannot pay the IRA owner (or any other disqualified person) compensation for managing the IRA/LLC.

Mat Sorensen is a lawyer and the author of The Self Directed IRA Handbook: An Authoritative Guide for Self Directed IRA Investors and Their Advisors. He is a partner with KKOS Lawyers in its Phoenix office and assists clients nationwide on self directed IRA matters. He can be reached at mat@kkoslawyers.com or by phone at 602-761-9798. His website is www.sdirahandbook.com

A Difference of Opinions – JOBS Act Updates

August 7, 2013

In this edition of A Difference of Opinions, two attorneys sound off about the SEC adoption of a mandate in the JOBS Act of 2012 that permits general solicitation in private securities offerings. We reached out to two attorneys with different backgrounds just to get a better idea of what this update might hold for the future of promotional activities among investors and those wishing to raise money.

And You Thought Law Firm Advertising Was Bad?
By: Wayne Patton, Esq, an asset protection, business, finance and estate planning attorney. Wayne’s firm is based in Miami, Florida, and he can be contacted through his website.

In March of 2012 the Jumpstart Our Business Startups Act (the “JOBS Act”) became law. The purpose of the legislation simplifies the process of business fundraising. The law specifically touches investment firms like hedge funds and private equity funds, which have traditionally struggled to “get the word out” under the previous stifling rules that prohibit “general solicitation” under the Securities Act of 1933.

Though it took more than a year for the SEC to approve rules implementing the JOBS Act, we now officially have a framework on which to rely. There are a few things you should know before you start urging clients to advertise openly.

First, while general advertising and solicitation is permitted under the new rules, the “accredited investor” rules regarding unregistered security offerings are still in place.

Also, with the permission to generally solicit comes more responsibility. Specifically, the burden of proving “accredited investor” status has shifted. Under the new rules, investment firms need to ensure that investors are actually accredited.

The next logical question is “Just how inundated will we be with fund advertising?” You thought lawyers were bad. Just wait…

Adoption of New Rule 506(c): General Solicitation in Regulation D Offerings
By: Sara Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field.

On July 10 the SEC complied with a mandate in the JOBS Act of 2012 to permit “general solicitation” in private securities offerings. In doing so, the SEC created an entirely new type of securities offering not required to be registered under the Securities Act of 1933.

The SEC adopted amendments to Regulation D under the Securities Act to add new Rule 506(c). Rule 506(c) offerings are technically private placements, made only to “accredited” (rich) investors. In the past this has meant not just that accredited investors only could buy the securities, but also that the issuer could offer them to accredited investors only.

Under the new rule, small companies and private investment funds and their intermediaries will be able to use “general solicitation” to reach accredited investors, which means they may advertise or publicize an offering on television, in newspapers, and most importantly over the internet. They may talk about the offering on talk shows and webinars, and they may promote the offering on social media.

This is a big change. But companies planning to take advantage of the ability to make public solicitations (and their advisers) should bear in mind that something that hasn’t changed is the application of the securities anti-fraud laws to all statements made in connection with the sale of securities. And for that reason, this new type of offering might not be as game-changing as some think.

Proponents of the new rule believe that it will increase transparency, make it easier for small companies to raise capital and decrease companies’ administrative costs. Opponents worry that, in the words of SEC Commissioner Aguilar, removal of the prohibition on general solicitation would be “a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net, and making securities law enforcement much more difficult.”

Awareness of fraudulent promotional activities means that prospective issuers and their advisers will have to be very careful about the accuracy and completeness of any statements they make. Will the rule change mean that we see hedge funds advertising on late-night TV or Twitter campaigns for investments in startups? The impact of the new rule is likely to be more limited in that respect than some have predicted. Public registered mutual funds do advertise, but those advertisements tend to be staid and contain lots of “fine print” disclaimers prescribed by law; private funds will likely be just as constrained. Broker-dealers putting together Regulation D deals are already subject to FINRA rules with respect to their advertising and social media use, and these requirements have not changed. The anti-fraud laws discussed above should have a tempering effect on any overly-exuberant publicity attempts in either paid or social media.

And the SEC will be watching. The SEC has established a “Rule 506(c) Work Plan” involving staff from all across the SEC, who will monitor the new Rule 506(c) market for fraud and compliance and to coordinate with state regulators.

The effective date for the new rule is September 23, 2013. Rule 506(c) offerings will only be legal after that effective date.

Weighing Long-Term Capital Gains Against Ordinary Income

August 6, 2013

Article by Glen Mather:

Why would anyone want to trade a 15% capital gain tax rate for a 22% marginal income tax rate?

During a recent presentation to a group of CPAs, I was asked this rather obvious question. We were in the process of discussing the relative merits of investing an IRA into rental housing.

For the investor that purchases with after tax money outside an IRA, certain tax advantages accrue largely based on the income and tax situation of the individual. If passive losses are able to offset ordinary income, an additional benefit can arise. However, the assumed disadvantage of the IRA investment in a similar real estate asset may not be accurate, based on the individual facts of the case.

Important variables to consider:

The age of the investor
The anticipated number of years until the investment will start to be distributed
Estimated cash flow of earnings, if any
Estimated profits upon sale of the asset
How long each asset will be held
How the proceeds from the sale of the investment will be re-invested
The marginal tax rate of the investor at the time investment revenue is received
The estimated marginal tax rate of the individual when the funds are to be distributed

Unless investments are in a fixed-return instrument, predicting investment results is a difficult task, and certainly forecasting individual tax rates in future periods is next to impossible. For the real estate investor using non-IRA funds, a 1031 exchange process may be a great choice if the timing of the sale and purchase permits. It will ensure that all of the proceeds of a sale can be rolled into the basis of the new property while forestalling capital gains until the sale of the final property.

The capital gain rates for those with federal marginal tax rates of 35% and 39.6% have been raised to 18.8% and 23.8% due to 2013 tax law changes and the affordable health care surcharge. Avoiding or deferring these higher charges for those in the upper brackets are now more necessary than ever for those outside IRAs. Indeed, these new LTCG brackets tilt the advantages more heavily to the benefit of using IRA monies for investments.

With an IRA, as long as the real estate investment is not leveraged, all gains are deferred until distribution, and then it’s taxed as ordinary income. Should tax rates stay constant (which they never do), generally the majority of retirees will enjoy a lower rate due to diminished earnings.

Roth IRAs change the landscape considerably. Roths are attractive for those who believe their investment performance will be able to recoup the tax costs of conversion or contribution, and for those willing to bet that future tax rates will be equal or higher in retirement than their current rates.

Glen Mather is President of NuView IRA, Inc., a leading self-directed IRA administrator in Orlando, Florida. He can be contacted at 407-367-3472 or gmather@nuviewira.com.

Do You Enjoy DIY Projects? Try a Self-Directed IRA

May 2, 2013

People are always looking for the gratification of successfully completing a do-it-yourself (DIY) project. Even if it’s something as simple as painting an old bookshelf to look new, building something on your own often creates a satisfying feeling. If you’re on Pinterest, one of the most popular ideas among users of this inspirational social media platform is do-it-yourself projects. Users pin DIY project ideas ranging from how to modernize your kitchen to designing your own flower arrangements at your wedding.

According to an article in Psychology Today, building something yourself also increases the item’s value. “The act of building something, putting your own blood and sweat into a physical object, seems to imbue it with additional value above and beyond its inherent quality,” said Travis J. Carter, Ph. D., author of the article. In fact, this is rumored to be one of the reasons why IKEA requires customers to assemble their purchased furniture.

So, how does this relate to IRAs and retirement planning? Banks, brokerages, and mutual fund companies are able to open an IRA for you and act as custodian of your retirement funds, helping you invest in the traditional bank, brokerage, and mutual fund products. However, for those who would like to put their own personal stamp on their IRA and customize their investment choices to ones they are most familiar with, there is a do-it-yourself IRA known as a self-directed IRA.

A self-directed IRA opens up a whole range of investment products that can be purchased inside an IRA beyond the stock market. Since many of us have specialized knowledge that could help us make niche investments in a self-directed IRA, this type of IRA becomes very appealing to the DIY investor. The benefits that accrue may be far more than just psychological.

Give our Florida self-directed IRA administrators a call today at 407-367-3472 to learn more about your IRA options including self-directed IRAs and real estate IRAs! As always, we wish you all the best in your investments!

Is Obama Capping IRAs?

April 12, 2013

It happens to me almost every presentation. Someone from the audience raises their hand during a seminar on self-directed IRAs and asks, “What is the likelihood that the government is going to take away my IRA?” Or, “will my Roth IRA indeed never be taxed again, or will Congress change their mind later when they are desperate for more revenue?”

Until this past week, I dismissed those conjectures as needless concerns from conspiracy theorists. Until the headline “Obama wants to put $3 Million Cap on IRAs” was found on the front page of the local paper. Maybe there is something going on that we need to pay attention to…

Now, of course, the political approach of making such a drastic move is first to reassure everyone that this will only target the rich, not you or I. And there is a slight inference that no one can gather such a large IRA together without some unfair advantage and extreme good fortune. In the article, recently failed GOP Presidential candidate Mitt Romney’s $100M IRA was trumpeted as the perfect example of how a large IRA is created based on insider knowledge and understanding tax law nuances.

Regardless, the rest of us in much lower tax brackets should be a bit uneasy. IRAs were created to help individuals have a shot at creating a retirement for themselves that industry and government had no stomach or ability to provide. Now over 47 million households have them, with almost $5 Trillion saved for retirement. It’s not unexpected that the government is eyeing those accounts with a great deal of interest, impatient for the tax revenues that will only come upon personal distribution of those largely pre-tax assets.

But wait, this won’t affect me – or anyone I’m likely to know. $3M is a huge IRA and not likely to be amassed by an ordinary person. Not true. For example, a person can, through a SEP IRA, contribute up to $51,000 annually. Through consistent savings and wise investing – many choosing a self-directed IRA, it is not impossible or even improbable of achieving a large balance in your IRA. We certainly have clients that would be taxed under this potential plan.

The concept of charging a tax on an IRA account which was created in the first place to provide a tax shelter to encourage savings is flawed policy. A bad idea is equally as bad regardless of whether or not it affects you or I.

Balancing the budget is something that both sides of the political aisle proclaim to be important for the future of our country. Doing it by taking it directly from retirement plans that were pledged never to be taxed is wrong.

Who knows, are Roth IRAs next?

Glen Mather is President of NuView IRA, Inc., a leading self-directed IRA administrator in Orlando, Florida. He can be contacted at 407-367-3472 or gmather@nuviewira.com.

The Delicious Dillema – What Alternative Investments to Buy with a NuView IRA

February 25, 2013

One of the most frustrating elements of a self-directed IRA is the fact that you have to find an alternative investment to make it grow. Unlike typical “off the shelf” investments like mutual funds, you may actually have to be patient and wait for the best opportunity to present itself.

However, to the patient can come choices that are hard to match in the world of publicly traded stocks and bonds.

As most of you know, I make my living as the president and CEO of NuView IRA, a self-directed IRA administrator in Florida. However, I make my retirement investments just like each of my clients – through alternative investments via self-direction. As such, I find myself researching opportunities to see what is best for my retirement account. Last week, I let a few friends know that I had some retirement funds recently come available to see what investment opportunities were out there. Among my personal contacts are Realtors, fellow investors, builders, private lenders and real estate developers. I had recently sold a property owned by my retirement account and wanted to get the proceeds back into action. Additionally, my brother had moved some funds out of his company’s 401k into a NuView IRA and he wanted to partner with my retirement and make some alternative investments together.

Now, after networking with friends and family members, I have been able to narrow it down to four opportunities. First, a private developer of luxury apartments that is offering an 8% return with further profit participation, a property wholesaler in the Orlando area who finds great deals in rental properties with cash flows at 7%, private notes for the purchase of semi-tractors, secured by the “pink-slip” at 9%, and a local Realtor who has a great property to fix up and sell, estimating a 10% return within 6 months.

Each opportunity is attractive for various reasons and rather than choose one of the four investments, I am contemplating on spreading my funds partially amongst all four. Through fractional ownership and the ability to partner with my brother’s IRA and others, I may indeed be able to accomplish my goal and achieve true investment diversity.

I do practice what I preach and like many of you, face the struggles of finding, analyzing and executing on alternative investments for my self-directed IRA. I have learned that with good networking, surrounding myself with investment professionals and understanding the opportunities self-direction affords, I too can achieve my dream of an achievable retirement.

All the best in your investments.

Glen

Keeping Your Financial New Year’s Resolutions

January 30, 2013

According to a study by Fidelity Investments, 62 percent of consumers said they stuck with their financial New Year’s resolutions in the past year, compared with only 40 percent who kept other resolutions. When you think about it, a financial resolution may be easier to keep than others regarding eating better or giving back to the community because for many people, taking control of their finances seems like a more pressing, dire need in their life.

Research shows that when people have a measurable goal, they are more likely to succeed with their resolution. Therefore, if your New Year’s Resolution is to take control of your finances, create a measurable goal for your financial health. If you don’t know where to start, consider these three main areas of financial health: zero consumer debt, adequate emergency reserve funds, and maximization of IRA contributions.

According to The Investment Company Institute (ICI), only 39% of US families even have an IRA. In addition, many people who have IRAs are only contributing up to the level at which their employer matches, which is often 6 percent. However, for most people, 6 percent will not be sufficient in the long term. Chances are, you will probably need to put away 15 percent (or more) of your salary to hit your financial goals.

A self-directed IRA is a great way to unlock your IRA and take control of your retirement plan. Self-direction significantly expands your investment options to a wide variety of investments including real estate, tax liens, stocks, bonds, mortgages, notes, precious metals, and other investments. There is a myth that you have to have a lot of money to get started with self-direction, but we debunked this myth in our blog entitled “How to Take Advantage of a Self-Directed IRA with Just $5,000”.

Consider these ideas as you work to improve your financial health in 2013. As always, NuView IRA is here to provide you with the professional service you deserve. Call our company of experienced self-directed IRA administrators in Florida at 407-367-3472 to discuss your investment choices within a self-directed IRA and to start building momentum toward your financial goals for this year.

As We Roll into the New Year, Seize the Opportunity to Take Control of Your Retirement with Self-Direction!

December 27, 2012

As we head into the New Year, many people will likely be looking at their bank accounts and then making it their New Year’s Resolution to save more money. While this resolution is admirable for anyone, why not take it one step further and have your New Year’s Resolution be to take control of your retirement! Mentioned in an article from Fox Business, George Papadopoulos seized the opportunity to take control of him and his wife’s retirement when his wife’s employer made significant changes to her company’s 401(k) plan.

In addition to offering an extensive list of mutual funds that employees could choose to invest their money in, his wife’s company began offering a self-directed 401(k) option for employees. Papadopoulos, being an experienced investor looking to take control of the couple’s retirement, jumped at the opportunity for self-direction. “Self-directed 401(k) options are great for experienced investors like myself,” Papadopoulos said.

Even though a traditional 401(k) plan and a self-directed 401(k) plan offer the same pre-tax benefits and automated payroll deductions, the true difference between them is the investment choices you have with a self-directed 401(k). Self-direction dramatically expands your investment options from a short list provided by your employer to a variety of investments including real estate, tax liens, stocks, bonds, mortgages, notes, precious metals, and other investments.

The percentage of employers offering self-directed retirement savings plans in 2011 was 29% and this number is growing. Who knows – maybe your employer will be next to offer a self-directed 401(k) option to employees? Give our Florida self-directed IRA administrators a call today at 407-367-3472 to learn more about your self-directed retirement plan options!

Required Minimum Distributions – You Can’t Afford to Miss This Deadline!

December 7, 2012

Don’t let the little issue of RMDs or required minimum distributions get lost in the blur of the holiday season. The IRS makes it painfully clear that they are envious of those of you that are over the age of 70.5 and have an IRA or other retirement plans. Interestingly, the Roth IRA holders are spared the indignity of the government telling them how to manage their finances, but more about that later.

If you hold a non-Roth IRA and had your 70th birthday before July 1 of 2012, you must take a minimum distribution from your plan. In other words, make what was tax deferred, now taxable. How much must you take out? It is based on an IRS provided table that calculates your estimated life expectancy. How much is it? Well, if you turned 70.5 this year, you will be forced to take a distribution of a little over 3.6% of your holding. My mother, age 92, is required to take out 9.8%. For those of you yearning to know more, consult IRS publication 590 for the rules and tables.

All non-Roth IRAs are added together to calculate the RMD, and distributions can be made out of any of the held IRAs to meet the distribution requirements.

IRA holders that are in or near their RMD years should plan for sufficient liquidity in their plans to permit the easy withdrawal of funds as required. This withdrawal can take place anytime during the calendar year – but if not done by December 31st, a penalty of 50% of the undistributed amount will accrue to the IRA holder.

Those that have contributed or converted to a Roth IRA are not forced to take any distribution during their lifetime, as all taxes have already been paid.

So, two end-of year reminders: If you are nearing or over seventy years of age and have pre-tax IRAs, get prepared, and take the distributions as required. If you wish to convert to a Roth this year, you must do so before December 31st. Talk to your tax professional before the end of the year so you make all the best moves.

As always, all the best in your investments,