The IRS Does Not Approve IRA Investments – “IRA Approved” or “IRS Approved” Terms Are False

Photo of the exterior of the IRS building in Washington, DC.There has been a significant increase in the amount of marketing directed towards IRA owners for non-publicly traded investments. Many of these investment sponsors and promoters are using marketing slogans like “IRS Approved” or “IRA Approved”. Don’t be fooled though, as the IRS does not review or approve investments, nor do they comment or issue statements on investments in an IRA. In fact, the IRS recently revised and updated IRS Publication 3125 titled, “The IRS Does Not Approve IRA Investments,” in an effort to inform IRA investors.

 

IRAs Can Invest into Non-Publicly Traded Investments (Real Estate, LLCs and Precious Metals)

Yes, it’s true that a self-directed IRA can invest into real estate, LLCs, LPs, private stock, venture or hedge funds, start-ups and qualifying precious metals, among other things. However, just because you can invest in all of these assets doesn’t mean that you should. Make sure you’re investing your IRA into assets you are familiar with, and with persons and companies with whom you have thoroughly vetted. Non-publicly traded investments can be easier to understand and vet than a mutual fund prospectus, but you need to be careful when investing your funds with another person or when buying investments from third-parties who regularly sell to IRA owners using comforting, yet totally false, representations like “IRA Approved” or “IRS Approved.”

“IRA Approved” or “IRS Approved” Representations are False

In Publication 3125, “The IRS Does Not Approve IRA Investments,” the IRS provided some guidelines for IRA owners to evaluate and protect their account from “IRA Approved Schemes.”

  1. Avoid any investment touted as “IRA Approved” or otherwise endorsed by the IRS.
  2. Don’t buy an investment on the basis of a television “infomercial” or radio advertisement.
  3. Beware of promises or no-risk, sky-high returns on exotic investments from your retirement account.
  4. Never transfer or rollover your IRA or other retirement funds directly to an investment promoter.
  5. Proceed with caution when you are encouraged to invest in a “general partnership” or “limited liability company”.
  6. Don’t be swayed by the fact that a bank or trust department is serving as an IRA custodian.
  7. Always check out an investment and promoter before you turn over your money.
  8. Educate yourself about IRAs and retirement planning.
  9. Exercise extra caution during tax season when it comes to making IRA investments.

As a self-directed IRA investor, you are solely responsible for investment decisions, and as a result you must make certain that you understand the investments you are selecting and the associated risks. Beware of slogans and terms like “IRA Approved” or “IRS Approved,” as such slogans are just false. In addition to the consideration from the IRS above, I’ve previously written my own “Self Directed IRA Investment Due Diligence Top Ten List” which includes additional tips and questions to ask when investing your hard-earned retirement plan dollars with others.

Take the IRS guidelines and my Top Ten List into consideration when investing your IRA, but in the end, don’t be scared about investing into non-publicly traded investments. Rather, keep the risk and opportunities in perspective, and realize that you may need to get out of your comfort zone by asking pointed questions, demanding additional documentation, or simply saying “no.” Remember: You are the best person to protect your retirement.

Self-Directed Beneficiary IRAs: RMD and Investing Tips

Photo of a man hugging his mother in the kitchen.If you’ve inherited an IRA from a parent or other loved one, it is likely that you have a beneficiary IRA. These can be powerful accounts, but you need to understand the required minimum distribution (“RMD”) rules for your beneficiary IRA to properly utilize it. The inherited IRA may be a traditional or Roth IRA and there are three different distribution options you may elect when you inherit the IRA.

Distribution Options

You will have three distribution options upon the death of your loved one to receive the funds from their IRA. In general, the best option is the “Life Expectancy Method” as it allows you to delay the withdrawal of funds from the IRA, and allows the money invested to grow tax-deferred (traditional) or tax-free (Roth). The three options are outlined fully below:

1. Lump Sum

The first option is to simply take a lump-sum and be taxed on the full distribution. There is no 10% early withdrawal penalty (regardless of your age or their deceased owner), but you are taxed on the amount distributed if it is a traditional IRA. You’re also giving up the tax-deferred (traditional) or tax-free (Roth) benefits of the account. Don’t take this option. It’s the worst tax and financial option you have.

2. Life Expectancy Method

The Life Expectancy Method is the best option. Under this option, you take distributions from the inherited IRA over your life-time based on the value of the account. These distributions are required for traditional IRAs and even for inherited Roth IRAs. For example, if you inherited a $100,000 IRA at age 50, you would have to take about $3,000 a year as a required minimum distribution each year. The RMD amount changes each year as you age and as the account value grows or decreases. There is no 10% early withdrawal penalty. Traditional beneficiary IRA distributions are taxable to the beneficiary, and Roth IRA distributions are tax-free. And yes, beneficiary Roth IRAs are subject to RMD even though there is no RMD for regular Roth IRAs.

3. 5-Year Method

This option is available to all inherited Roth accounts, but is only available to inherited traditional IRAs where the deceased account owner was under age 70 1/2 at the date of their death. Under this option, the beneficiary IRA is not subject to RMD. However, it must be fully distributed by December 31st of the fifth year following the year of the account owner’s death. There is no 10% early withdrawal penalty, and distributions are subject to tax. Again, this option is only available to traditional accounts.

Investing with a Self-Directed Beneficiary IRA

Yes, you can self-direct your beneficiary IRA. Before you do, make sure you understand the amount of funds you’ll need to take as an RMD, and that you will have available cash in the account to cover the those RMDs. As I described above, assume you are 50 and inherited a beneficiary IRA for $100,000. You will need to take annual distributions of around $3,000. So, if you invest all of the $100,000 into an illiquid asset, then you will be unable to take RMDs and force the IRA account to pay stiff penalties. Consequently, when making a self-directed investment from a beneficiary IRA, you must take into account the amount of the investment, the total value of the account, and the time-line of the investment (when will it generate cash back to the IRA). If you inherited the $100,000 account above, you may decide to only invest $70,000 of the beneficiary IRA into an illiquid investment (e.g. real estate or private company), while leaving the other $30,000 to be invested into liquid investments like publicly-traded stocks, CDs, cash or mutual funds. This will leave funds available for RMD until such time as the illiquid investment generates income or is sold for profit.

Stretching out the benefits of an inherited IRA can be powerful, but make sure you plan for RMDs before you make any self-directed investment from your beneficiary IRA.

Can Your SDIRA Own Bitcoin and Other Cryptocurrencies?

 

Yes, your IRA can invest in and own bitcoin and other cryptocurrencies. Bitcoin is a form of virtual currency using blockchain technology, and can be exchanged between parties for goods and services, or for dollars. From 2011 to July 2017, the value of Bitcoin has risen from $0.30 per Bitcoin to $2,550 per Bitcoin. As a result, we’ve seen a significant increase in the number of questions from investors whether their retirement account can invest in and own actual Bitcoin or other forms of cryptocurrency.

Can Your IRA Own Bitcoin?

Well, the short answer is: “Yes, your IRA can own Bitcoin and other forms of cryptocurrencies, such as Ethereum and Litecoin.” The only items an IRA cannot invest in is life insurance, S-Corp stock, and collectibles as mentioned in IRC 408(m), which refers to tangible personal property such as “art, rugs, coins, etc.” and “any other tangible personal property the Secretary determines.” Bitcoin is certainly an intangible item by all accounts and would not be considered tangible. As a result, an IRA can own Bitcoin or other cryptocurrency since such investments are not restricted.

How Are Bitcoin Gains Taxed?

The IRS issued IRS Notice 2014-21 addressing the taxation of Bitcoin and cryptocurrency, and stated that Bitcoin and other forms of virtual currency are property. The sale of property by an IRA is generally treated as capital gain, so the buying and selling of cryptocurrency for investment purposes wouldn’t trigger unrelated business income tax (UBIT) or other adverse tax consequences that can occasionally arise in an IRA.

How Do I Own Bitcoin with My SDIRA?

There are three steps to own Bitcoin or other cryptocurrency with your IRA:

1. First, you will need a self-directed IRA with a custodian who allows for alternative assets, such as LLCs.

2. Second, you will invest funds from the IRA into the LLC. Your IRA will own an LLC 100%, and that LLC will have a business checking account. For more details on IRA/LLCs, please check out my prior video here.

3. And third, the IRA/LLC will use its LLC business checking account to establish a wallet to invest and own Bitcoin through the wallet. The most widely used Bitcoin wallet is through a company called Coinbase, and you can use your wallet on Coinbase to buy, sell and digitally store your cryptocurrency.

There are already certain publicly-traded funds and other avenues (e.g. Bitcoin Investments Trust) where you can own shares of a fund that in turn owns Bitcoin. But, if you want to own Bitcoin directly with your IRA, you’d need to follow the steps outlined above. Keep in mind, Bitcoin and other forms of cryptocurrency have significant potential in the digital age. However, as with any new market investment, make sure you proceed with caution, and don’t “bet the farm” or “go all in” on just one investment or deal.

What is a Joint Venture Agreement and When Should You Use It?

Three people sitting at a desk with two of them shaking hands over a joint venture agreement and text reading "What is a Joint Venture Agreement and When Should You Use It?"A Joint Venture Agreement (aka, “JV Agreement”) is a document many business owners and investors should become familiar with. In short, a JV Agreement is a contract between two or more parties where the parties outline the venture, who is providing what (money, services, credit, etc.), what the parties responsibility and authority are, how decisions will be made, how profits/losses are to be shared, and other venture specific terms.

A joint venture agreement is typically used by two parties (companies or individuals) who are entering into a “one-off” project, investment, or business opportunity. In many instances, the two parties will form a new company such as an LLC to conduct operations or to own the investment and this is usually the recommended path if the parties intend to operate together over the long term. However, if the opportunity between the parties is a “one-off” venture where the parties intend to cease working together once the agreement or deal is completed, a joint venture agreement may be an excellent option.

For example, consider a common JV Agreement scenario used by real estate investors. A real estate investor purchases a property in their LLC or s-corporation and intends to rehab and then sell the property for a profit. The real estate investors finds a contractor to conduct the rehab and the arrangement with the contractor is that the contractor will be reimbursed their expenses and costs and is then paid a share of the profits from the sale of the property following the rehab. In this scenario, the JV Agreement works well as the parties can outline the responsibilities and how profits/losses will be shared following the sale of the property. It is possible to have the contractor added to the real estate investors s-corporation or LLC in order to share in profits, but that typically wouldn’t be advisable as that contractor would permanently be an owner of the real estate investor’s company and the real estate investor will likely use that company for other properties and investments where the contractor is not involved. As a result, a JV Agreement  between the real estate investors company that owns the property and the contractors construction company that will complete the construction work is preferred as each party keeps control and ownership of their own company and they divide profits and responsibility on the project being completed together.

While a new company is not required when entering into a JV Agreement, many JV Agreements benefit from having a joint venture specific LLC that is created just for the purpose of the JV Agreement. This venture specific LLC is advisable in a couple of situations. First, where the parties do not have an entity under which to conduct business and which will provide liability protection. In this instance, a new company should be formed anyways for liability purposes and depending on the parties future intentions a new LLC between the parties may work well. Second, where the arrangement carries significant liability, capital, or other resources. The more money, time, and liability involved in the venture will give more reason to having a separate new LLC to own the new venture and to isolate liability, capital, and other resources. A $1M deal or venture could be done with a JV Agreement alone, however, the parties would be well advised to establish a new entity as part of the JV Agreement. On the other hand, if the venture is only a matter of tens of thousands of dollars, the costs of a new entity may outweigh the benefits of a separate LLC for the venture.

There are numerous scenarios where JV Agreements are used in real estate investments, business start-ups, and in other business situations. Careful consideration should be made when entering into a JV Agreement and each Agreement is always unique and requires some special tailoring.