SELF-DIRECTED IRA INVESTMENT OPPORTUNITIES

Self Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS only describes the type of investments that are prohibited, which are very few.

The following are some examples of types of investments that can be made with your Self Directed IRA LLC:

Real Estate

The IRS has always permitted an IRA to purchase or hold real estate or raw land. Making a real estate investment is as simple as writing a check. Since you are the manager of your Self-Directed IRA LLC, you have the authority to make investment decisions on behalf of your IRA. One major advantage of purchasing real estate with a Self-Directed IRA is that all gains are tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all gains are tax-free.

For example, if you purchased a piece of property with your Self-Directed IRA for $100,000 and later sold the property for $200,000, the $100,000 of gain would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and in most cases state income tax.

Using Leverage to Purchase Real Estate with an IRA

Pursuant to Internal Revenue Code Section 514, if an IRA uses debt to acquire real estate, the debt-financed portion of the property is treated as unrelated business taxable income ("UBTI" or "UBIT"). The UBTI tax rates mirror the Trust tax rates which is approximately 37%.

Under Internal Revenue Code Section 514, if an IRA owns "debt-financed property", some portion of each item of gross income from the property, and a like portion of all related deductions, are included in unrelated business taxable income, whether the income is in the form of rent, interest, gain on disposition of the property, or some other character. Property is debt-financed if it is held for the production of income, its use is not substantially related to the organization's exempt purposes, and there is acquisition indebtedness with respect to the property. The term "acquisition indebtedness" generally includes any liability incurred before, contemporaneously with, or after the acquisition or improvement of the property if it arose because of the acquisition or improvement or if the need for the indebtedness was foreseeable at the time of the acquisition or improvement.

Under Internal Revenue Code Section 514(b)(1) , property is "debt-financed property" if it is held to produce income and "acquisition indebtedness" with respect to the property exists at any time during the taxable year (or, in the case of a disposition, at any time during the preceding 12 months). The application of Internal Revenue Code Section 514 has a wide application. For example, it has been held that securities purchased on margin can be debt-financed property.

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a self-Directed IRA LLC. By using a Self-Directed IRA LLC to purchase tax-liens or tax deeds, all income and profits are tax-deferred back into your retirement account until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all income and gains received would be tax-free.

More importantly, with a Self-Directed IRA LLC, you, as the manager of the IRA LLC, will have "checkbook control" over your IRA funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Loans & Notes

The IRS permits the use of IRA funds to make loans or purchase notes from third parties. By using a Self-Directed IRA LLC to make loans or purchase notes from third parties, all interest payments received would be tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all interest received would be tax-free.

For example, if you used a Self-Directed IRA LLC to loan money to a friend, all interest received would flow back into your IRA tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Private Businesses

With a Self-Directed IRA LLC you are permitted to purchase an interest in a privately held business. The business can be established as any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using IRA funds, it is important to keep in mind the "Disqualified Person" and "Prohibited Transaction" rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512.

Investing in an Active Business - The Unrelated Business Taxable Income Rules

If a Self-Directed IRA LLC invests in any business regularly carried on or by a partnership or LLC of which it is a member, all income or gains allocated to the IRA will likely be treated as an unrelated business and subject to the Unrelated Business Taxable Income ("UBTI" or "UBIT") rules pursuant to Section 512 of the Internal Revenue Code. For example, an IRA investment into an LLC or partnership that is engaged in an active trade or business such a shoe factory, gas station, retail store or restaurant would likely be treated as an unrelated business and subject to UBTI.

The UBTI rules were enacted by Congress in the 1950s t o prevent tax-exempt entities, such as charities, from competing unfairly with taxable entities. Since an IRA is treated as a tax-exempt entity pursuant to Internal Revenue Code Section 514, the UBTI rules apply to IRA investments.

Most IRA investments are not subject to the UBTI rules because of the many exceptions available. For example, dividends, interest, annuities, royalties, capital gains, most rentals from real estate, and gains/losses from the sale of real estate are all excluded from the application of the UBTI tax. However, rental income generated from real estate that is "debt financed" loses the exclusion, and that portion of the income becomes subject to UBTI.

A self Directed IRA LLC subject to UBTI is taxed at the trust tax rate because an IRA is considered a trust. For 2011, a Self Directed IRA LLC subject to UBTI is taxed at the following rates:

Precious Metals & Coins

Internal Revenue Code Section 408(m) lists the type of precious metals and coins that are permitted investments using IRA funds:

The Technical and Miscellaneous Revenue Act of 1998 allowed IRA owners to invest their IRA assets in certain platinum coins as well as certain gold, silver, platinum, or palladium bullion provided the coins are held in a financial organization.

The advantages of using a Self-Directed IRA LLC with "checkbook control" to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, the metals and/or coins can be held in the name of the LLC at a financial organization (at any local bank) safety deposit box eliminating depository fees.

Foreign Currencies

The IRS does not prevent the use of IRA funds to purchase foreign currencies, including Iraqi Dinars. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

Purchasing foreign currency, such as the Iraqi Dinar, with a Self-Directed IRA LLC is as easy as writing a check. As manager of the IRA LLC, you will have "checkbook control" over your IRA funds, providing you with the ability to make investments without requiring custodian consent. In addition, the foreign currency notes, including Iraqi Dinars, can be held in the name of the LLC at a financial organization (any local bank) safety deposit box eliminating depository fees.

By using a Self-Directed IRA LLC to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all foreign currency gains would be tax-free.

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a self-directed IRA LLC may purchase stock, bonds, mutual funds, and CDs. The advantage of using a Self-Directed IRA LLC with "checkbook control" is that you are not limited to just making these types of investments. With a Self-Directed IRA LLC with "checkbook control" you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless!

Note: The use of margin to purchase stock with an IRA will be treated as debt-financed property pursuant to Internal Revenue Code Section 514.

What Types of Investments are Not Permitted Using a Self-Directed IRA LLC?

The Internal Revenue Code does not describe what an IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain type of transactions. The purpose of these rules is to encourage the use of IRAs for accumulation of retirement savings and to prohibit those in control of IRAs from taking advantage of the tax benefits for their personal account.

Who is a "Disqualified Person"?

The IRS has restricted certain transactions between the IRA and a "disqualified person". The rationale behind these rules was a congressional assumption that certain transactions between certain parties are inherently suspicious and should be disallowed.

The definition of a Disqualified Person (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest. In essence, under Code Section 4975, a "Disqualified Person" means:

Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as "Disqualified Persons".

Life Insurance and Certain Collectibles

In general, a Self-Directed IRA cannot Invest in life insurance contracts or collectibles defined below:

Types of Collectibles That may be Purchased Using IRA Funds

Prohibited Transactions

IRA prohibited transactions are listed in Code Section 4975; prohibited transactions are any direct or indirect:

Examples of Prohibited Transactions

The following are a number of common IRA related transactions that are prohibited pursuant to Internal Revenue Code Section 4975:

For additional information on the advantages of using a Self-Directed IRA LLC with "checkbook control" to make investments, please contact one of our IRA Experts at 800-472-0646.