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Written by: API Manage

Category: Uncategorised

Published: 23 March 2024

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IRA's: Alternative Investments, Illiquid Assets and Limited Liability Companies

I have been assisting clients take their IRA's and Retirement Plans offshore for well over 25 years. A significant number of articles written by me have been published by various newsletters and can still be found online.

Many of these articles were focused on what you can accomplish with a truly self-directed custodian. I've had numerous conversations regarding what investment, or action, triggers a prohibited transaction. Unfortunately, the public domain contains more bad information on this topic than accurate. No doubt, one of the primary causes of confusion is a lack of information provided by the IRS. Basically, the Internal Revenue Code, (IRC), tells you what's prohibited, not what is allowed. In essence, you cannot invest in certain collectibles, (wine, rugs, art, etc.), and you can't deal with yourself or other disqualified individuals. (No self-dealing.) You want to avoid engaging in or triggering a prohibited transaction at all possible cost. (Want more on the topic? Send me an email request.) Absent these restrictions, everything else is allowed!

The other prevalent cause of confusion oftentimes comes from dealing with a custodian who imposes artificial restrictions on IRA participants. (Custodians have the right to limit customer investment selections, as they see fit, regardless of what is allowed.) Occasionally these restrictions are driven by a lack of knowledge, but more often than not the custodian is simply concerned about their own profit margin, limiting you to investments for which they receive compensation. For example, ask your local broker if you can hold real estate in an IRA. If lucky, your advisor will know it's compliant for an IRA to invest in real estate, but must inform you their firm doesn't allow it. If unlucky, your advisor will tell you it's not allowed, which is absolutely incorrect!

The question is, beyond traditional stocks, bonds, and mutual funds ,what types of investments can you make?

Alternative Investments-

Examples of Alternative Investments.

1. Real estate
2. Loans/Privately held notes (You loan money to a friend for a car, business, home purchase etc.)
3. Privately held mortgages
4. Pre-IPO stock
5. Stock in a privately held company that is not publicly traded
6. Oil and Gas
7. Limited Partnerships
8. Hedge Funds
9. Business Franchise
10. Ownership of a privately run business

*Participants must adhere to all rules, avoid self-dealing and any actions that might trigger a prohibited transaction.

For a moment let's focus on Limited Liability Companies, also known as an LLC or IBC.

LLC's- Investment Flexibility and Asset Protection

Most clients choose to use an LLC for a number of very valid reasons.

• They are concerned about the need for asset protection.
• They are seeking a much more private way to hold their investments.
• They have concerns about the unwarranted seizure of their assets.
• They understand the need to keep some of their assets outside of the U.S. for safety and diversification.
• They understand our government has greatly increased the reporting requirements surrounding non-US accounts and they know an IRA may be the best way to do so. (The newly released FBAR Form {Foreign Bank Account Reporting} contains the following Noteworthy language- "IRA Owners and Beneficiaries. An owner or beneficiary of an IRA is not required to report a foreign financial account held in the IRA.")
• The U.S. government understood and intended one of the main results of the new reporting requirements would be that less and less Foreign Financial Providers, like banks, brokerage firms and insurance companies, would be willing to open accounts for US citizens. Without question this has come to pass. The list of providers accepting US clients grows dramatically smaller each year.

An LLC can be a valuable tool for clients who are looking to invest their IRA into illiquid investments. The courts have already ruled on the legality of an IRA investing in an LLC. (Copy available upon request.) LLC's have become a very popular way to structure alternative investments. A participants decision on whether to use either a domestic or foreign LLC, will ultimately depend upon where the underlying investments are located.

Much has been written about asset protection and the use of a foreign LLC. If you would like to learn more about the protection afforded by a foreign LLC, please let me know and I will be happy to provide a number of resources. For the sake of brevity, I will exclude such a discussion in this article.

LLC's have numerous advantages. A single member LLC, owned by your IRA, will be treated as a disregarded entity for tax purposes, (unless you specifically chose otherwise). Most taxable events flow through to the underlying owner, which in this case is your IRA or Retirement Plan and are sheltered.

An LLC has membership units instead of shares of stock. Effectively membership units work the same, which would allow participants to take advantage of an in-kind distribution which provides a number of benefits and tremendous flexibility.

IRA participants, who invest in alternative or illiquid investments, should always keep in mind proper planning is required to be able to meet future distributions. In my practice, I have found participants are often under the impression they must liquidate their investments and take a cash withdrawal. This is incorrect. Participants always have the option of taking an in-kind distribution. They are still responsible to pay the tax due upon distribution. The amount of tax due would be based upon the value of distributed investments. This necessitates a participant having liquid funds available from other sources to pay the taxes due.

Here is a simple example of an in-kind distribution.

Participant owns 1,000 shares of a privately held stock. The company has notified the participant current valuation of their stock is $10 per share. The participant’s CPA^® has notified him or her their required mandatory distribution, (RMD), for the year is $1,000. $1,000/$10=100 shares. The participant instructs the IRA Custodian to re-register 100 shares of stock out of their IRA and into their personal name. The Custodian reports a $1,000 distribution to the IRS and participant is responsible for the tax.

In-kind distributions can be incredibly useful. Many of my clients have purchased real estate all over the world with no intention of ever selling it. For some, it will eventually become the beachfront vacation home they have always dreamed of owning. An in-kind distribution affords them the possibility of keeping their real estate investment intact. It provides them flexibility to reduce the effective tax rate a one-time total distribution would normally trigger. It does so by spreading out the ownership/distribution over a number of years.

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Written by: API Manage

Category: Uncategorised

Published: 23 March 2024

Hits: 6448

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Written by: API Manage

Category: Uncategorised

Published: 23 March 2024

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Buy Bullion & Coins

SIPS clients can self-direct their accounts into a wide variety of bullion products, including allocated lots of gold, silver, platinum, or palladium - single coins to multi-ounce bars - with worldwide storage options, low prices, complete liquidity, total security, limited reporting requirements, and access to a 24-hour buying and selling platform online.

Store Precious Metals Globally

Store your precious metals with total security in fully audited and insured independent vaults in New York (Brinks), Salt Lake City (Brinks), Zurich (Loomis), London (Loomis), Singapore (Malca Amit) or Melbourne (Brinks) - the same vaults used by central banks and governments throughout the world.
FAQ's

1. Minimum requirement- $5,000 for U.S. Vaults, $10,000 for non-U.S.
2. Pricing- Competitive pricing with at least 4 suppliers. instantaneous
3. Platform- Buying and selling is accomplished online from your own computer simply and efficiently.
4. Storage- Storage of precious metals outside of the U.S. requires the use of an LLC.

More information on metals offered, pricing, technology, delivery etc. is available upon the establishment of an IRA or other type of Retirement Plan with SIPS, or contact us now.

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Written by: API Manage

Category: Uncategorised

Published: 23 March 2024

Hits: 4914

Own Domestic and International Real Estate With Your IRA/401(k)

Larry C. Grossman is the Managing Director of Sovereign International Pension Services, Inc.  Larry was one of the first financial advisors in the country to develop a compliant method for assisting clients to move IRA's and pension plans offshore.  He has more than 25 years experience and is the author of The Ultimate Retirement Protection Plan: A Step-by-Step Program for Taking Your IRA, 401(k), or Pension Plan Offshore, available on Amazon.com.  

You can own real estate in your IRA contrary to what you may have been told by your advisor.  The IRS permits a great deal of flexibility when it comes to investing the assets of your retirement account, including both foreign and domestic real estate. 

Making these types of investments can be quite challenging if you don't have a "self directed" IRA.  Many IRA custodians impose investment restrictions.  Most of these restrictions have nothing to do with the IRS code governing retirement accounts but are instead designed to make life easier for the custodian or worse yet, they are there to steer clients into investments the custodian is compensated for.

What’s allowed—the real skinny

The truth is the rules are straightforward.  You can own virtually any kind of real estate in your IRA or other retirement account including:

• Raw land

• Condos

• Office buildings

• Single-family homes

• Multi-family homes

• Apartment buildings

Prohibited transactions and self-dealing

The IRS has some important rules that must be followed.  They also define what you cannot do.  There is a simple rule of thumb.  Your retirement plan is meant to benefit you at your retirement and not before.  Therefore, you may not deal with yourself or another disqualified person.

What does this mean? You can't sell a piece of property you personally own to your IRA or vice versa. In short, you cannot lend money, extend credit, or furnish goods, services, or facilities to yourself or another disqualified individual. You can invest in any type of real estate you want as long as it is not for your own personal use while inside of your IRA.  

Let’s say you've found the retirement home of your dreams or a piece of property you would like to build on.  Domestic or foreign real estate is permitted.  When you retire you can take possession of the property or sell it.  Taking possession of the property allows you to take it as a distribution from your IRA  or retirement plan without selling it.  Now that you own the property personally it's yours to use as you see fit.  It's important to note you do not have to sell the property but you would still be responsible for the taxes due.

You can sell the property outright at any time. If you keep the property and take it as a distribution you will be taxed on the value of the property.

Other requirements:

• You may not purchase the property from yourself.

• You may not purchase the property from family members, except for siblings.

• Neither you, your business, nor members of your family may lease or live in any investment property owned by your plan.

• Fractional ownership is allowed.  (Partnering your IRA with other investors or IRA participants is permissible)

Who is “disqualified”?

The IRC code disallows dealing with yourself or another “disqualified person.”

Definition-

This is a simplified version of the definition of a disqualified person.

1) An owner, direct or indirect, of 50% or greater of: (the IRA Participant is an owner)

• The capital interest of a partnership.

• The total value of all shares of stock of a corporation including all classes.

• The combined voting power of all classes eligible to vote.

2) A member of the family, excepting siblings.

How To Own Real Estate In Your IRA

There are many ways to own real estate in your IRA. You can own the real estate fully or fractionally with other entities or investors. You can purchase an option on the real estate or you can buy it outright using a land trust, LLC, or similar entity.

You also have the flexibility of paying for the property in full using your retirement assets or you can finance it. You must take special care to structure the purchase correctly if the property is financed to avoid adverse tax consequences.

The down payment and an equivalent amount of the ongoing payments and expenses must come from the plan if the property is fractionally owned.

Taking on debt

If you wish to use your retirement plan to invest in real estate but do not have sufficient funds in your IRA, your IRA can incur debt. This debt/mortgage must be in the form of a non-recourse loan where the only recourse for default of the loan is the underlying real estate/property.

How do I do this?

The good news is you can find the property of your dreams anywhere in the world, purchase all or part of it with your retirement assets, and eventually take ownership of it—all completely legal.

For additional information, please contact the office at: