Self Directed IRA or 401(k)

Has your IRA and 401(k) investment results left you wanting more?

Such as more returns, more safety, and more financial security? Are you looking for investment alternatives? You are not alone!

In fact the S&P 500 Index from September 1999 to September 2009 has lost 18% . How can you ever afford to retire? Is now the time to let the traditional portfolio and mutual fund managers control your financial destiny? (click here to download Genesis Financial Advisors' portfolios performance)

We at Genesis Financial and Real Estate Services would ask you to consider this: A Self-directed IRA or 401(k) can let you be in control of your retirement investment choices.

A Self-directed IRA (or 401k) allows you to invest in "non-traditional" investments, such as real estate, mortgages/deeds of trust, private placements, tax liens, limited partnerships, and much, much more!

Genesis offers a comprehensive package that gives you the structure necessary to remain compliant with the IRS regulations, and our team provides support to ensure that your investment decisions do not “bend” the rules and put your retirement dollars at risk of taxes and penalties.

Our Investment Advisory team at Genesis Financial Advisors can assist you with investment ideas that are designed to provide consistent performance with greater stability. These are truly outside the box of the traditional investing most people have been counting on for their financial future.

Genesis Financial and Real Estate Services can help you establish your own SELF-DIRECTED IRA or 401(k) and show how to take control of your retirement in ways you may have never imagined.

For more information or to receive your Self Directed IRA or 401(k) kit please contact us at:

888-902-9191 or email us at info@genfinre.com

IRS Non-Excluded Investments: This is what you can invest in with your Self-Directed IRA:

Commercial Real Estate - Residential Real Estate - International Real Estate - Tenants in Common Property (TIC’S) - Tax Liens, Tax Deeds, Tax Certificates - Mortgages, Loans, Notes - Real Estate Options - Franchises - Private Stock, and Publicly Listed Stock - Limited Liability Companies - Limited Partnerships - Raw Land - Receivables - Mutual Funds , Exchange Traded Funds (ETFs) - Annuities - Options - Commercial Paper

Real Estate

The first thing to remember when your IRA purchases real estate is that the property is for investment purposes only. Your IRA must take title to the property. For example: Custodian Name FBO (for the benefit of) John Smith IRA. Your IRA may purchase property from an unrelated party (anyone who is not disqualified). Any income from the property such as rent goes back into the IRA. Likewise, any expenses, such as property management fees, maintenance, etc. are paid from your IRA. It is advisable to use a property management company to avoid any prohibited transactions. When the property is sold funds also go back into the IRA and remain tax-deferred or tax-free if using a Roth IRA.

There are various ways to purchase real estate. You may form an LLC and pool different funds together to purchase. For instance, you may use your IRA funds together with personal funds, a non-recourse loan, or with other investors. These different entities all own a part of the LLC, percentages being based on the amount of money invested.

Below are just some of the types of real estate you can invest in with your IRA:

Residential homes, condominiums, duplexes, four-plexes
Commercial retail, apartment complexes, office condominiums, homes
Industrial manufacturing, warehouses
Land

A non-recourse loan may also be secured to purchase investment real estate with your IRA. Typically the down payment for these loans is 30% to 40%. Guidelines for these loans do not normally use credit scores or income for loan qualifications.

Mortgage Notes and First Deeds of Trust

Types of Mortgage Instruments

Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.

The Mortgage

In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt.

The Deed of Trust

The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee. It is also possible to foreclose them through a judicial proceeding.

Tax Liens

Payment of a tax lien may occur through various methods:

Payment may be made directly by the property owner or, in many cases, indirectly by the mortgage holder using an escrow account. Notice is given both to the property owner and mortgage holder when a property tax is delinquent; thus, even if the property owner does not have an escrow account on the mortgage, the mortgage company will receive notice of the delinquency and may pay the tax. The mortgage companies will then demand repayment from the owner/borrower and/or create an escrow account to recoup the proceeds, since the mortgage company might lose some of the value of its mortgage lien if the property were sold by the taxing agency to satisfy unpaid taxes foreclosure.
If a property is sold by the owner prior to tax foreclosure by the government body, the tax lien (which is generally discovered as part of a title search) is usually paid as part of closing costs from the sale proceeds.
Procedures vary from State to State. Generally, in the event a tax lien on personal property is not paid within a specified time (and after several notices are generally given), the property may be seized and sold at foreclosure sale. On real property, one of two methods may be used: either the property may be seized and sold (a tax deed sale), or in some States the tax lien may be offered to investors (in the form of a tax lien certificate) with an accompanying right for the investor, after a specified period of time, to institute foreclosure proceedings (a tax lien sale).

Private Placements

A private placement is a direct private offering of securities to a limited number of sophisticated investors. It is the opposite of a public offering. Securities issued as private placements include debt, equity, and hybrid securities.

An "equity" offering is where the company sells partial ownership in the company (via the sale of stock or a membership unit) to raise capital. Equity offerings are preferred by early stage companies because there is no set repayment schedule or debt service payments - the investors profit when the company profits.

A "debt" offering is where the company raises debt financing by selling a note instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full. A debt offering functions much like a business loan except instead of a bank providing the financing it is a group of investors lending funds to the company.

IRAs can own stock or membership interests in a company. It is important to note in these situations that compliance will scrutinize the investment for any violations of prohibited transactions (i.e. self-dealing, related-party transactions, etc.)

As with any investment, you should consult an attorney, tax professional or your financial adviser to determine if investing in any of these items is right for you.

Our knowledge and expertise provides an avenue for you to use this innovative way of investing. You may avoid capital gains taxes and defer (or optimally eliminate) paying taxes on your self-directed retirement funds.

Through years of expertise, combined with our professional affiliates, Genesis Financial Advisors, LLC can personally guide you through a successful process of diversifying and redirecting your retirement funds into real estate and non-traditional investments in a tax-sheltered environment.

With a vast array of various types of investments, it is difficult to know the proper method to complete each one. There are instances that an LLC may not be necessary. Each investment scenario brings with it a diverse need. With our expertise, we will help you navigate through the maze and make your experience smooth and uncomplicated.

FAQ’s

How can I use a self-directed IRA?
A self-directed IRA allows you to diversify from traditional investments (stock, bonds and mutual funds) to “non-traditional investments.” This can be real estate, deeds of trust, notes, tax liens and other private placements. You can use your investment knowledge and proficiency to help you prepare for your retirement. Genesis Financial Advisors, LLC will help guide you through this exciting process.

Can I get a mortgage to invest in a self-directed IRA?
Yes, you may, but only with a non-recourse loan. Typically you must put down 30 percent to 35 percent.

What is a non-recourse loan*?
With a non-recourse loan, the note can only be secured by the property itself. It cannot be personally secured. The lender can only use the property as collateral to secure the note. If your IRA fails to make the loan payments, the only collateral the lending institution can come after is the property itself, and not the IRA. Please consult your tax adviser about any Unrelated Business Taxable Income (“UBTI”), and any taxes that may be due. Non-recourse loans with your self-directed IRA are a great way to help you to be able to diversify. Please contact us for more information about a non-recourse loan.

*Non-recourse loan is a loan that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable.

What can I invest in if I have a Self-Directed IRA?

The investments that you make outside your IRA can now be made within it. You the investor have tremendous flexibility to make the investments of your dreams.

What types of retirement accounts can be moved into Self-Directed accounts?

Traditional IRAs
SEP IRAs
Roth IRAs
401(k)s
403(b)s
Coverdell Education Savings (ESA)
Qualified Annuities
Profit Sharing Plans
Money Purchase Plans
Government Eligible Deferred Compensation Plans (457)
Keoghs

Is this new?

No. There are two TRILLION dollars held in retirement accounts; however, only about 3% of retirement accounts are self-directed and only about 2% are invested in Real Estate. But what most people don’t know is that the stock market isn’t your only investment choice for your IRA. You have been able to invest in Real Estate since the day IRAs were created. That was about 30 years ago!

Are there downsides?

You must be aware of the prohibited transactions / restrictions (no self-dealing). See Resources below for IRS publications and other pertinent information. Additionally, you may have some additional forms to file, and some additional bookkeeping. This is a small tradeoff for giving you the potential for higher returns with greater security.

What are the differences between IRA's and Individual 401(k)'s?

Here is a brief overview of the main differences between these two types of plans.

Features

SDIRA

Individual 401(k)

Contribution Limit (2009, thereafter adjusted for inflation in $500 increments, or as otherwise stipulated by the IRS)

$5,000 to age 49, $6,000 age 50 and above

$16,500 ($22,000 age 50 and above) pre-tax contribution and a total of $49,000 ($54,500 age 50 and above) allowed between employee election and company contributions and/or profit share

Employer Matching Contributions

Not Allowed

Your business can match 100% of employee deferrals

Profit Sharing Allowed

Not Allowed

Your business can profit share in addition to, or in place, of matching contributions

Roth Provisions

A separate Roth account must be established and will have its own additional custodian costs

A separate Roth account must be established and will have its own additional bookkeeping requirements

Roth Contributions

Contributions can be very limited - $5,000 in 2008 but not allowed when AGI is above $116,000 single or $169,000 joint

Up to $16,500 after tax, with no income caps: employer contributions and profit share must be pre-tax however

Roth Rollovers

rollovers allowed from one plan or custodian to another

Rollovers generally not allowed, however, at retirement, 401(k) will allow rollover to individual Roth IRA

Roth Conversion

Conversions from traditional IRA to Roth IRA are allowed

Not allowed

TAXATION - UBIT/UDFI (Unrelated Business Income Tax/ Unrelated Debt Financed Income Tax)

UDFI applies to leveraged transactions

UBIT applies but with certain exemptions. UDFI is currently exempted on leveraged real estate

Purchase Shares in a "S" Corp

Not Allowed

Allowed

Government Reporting Requirements

Recommended

Yes, more specifically form 5500-EZ is an annual requirement, other reporting may be required depending on investment choices

Loan Provisions

Not Allowed

Allowed, with certain pay back requirements and specific limits on amounts available

Tax Credits for low-income individuals

Not Allowed

Allowed, up to 50% of first $2,000 with certain income limits (see IRC § 25B)

Lease-back property purchased by plan

Not Allowed

Allowed, but with certain occupancy limits

Purchase of business

Allowed, but no "s" corps

Allowed, UBIT will apply outside of any exemptions

How are custodians different from each other?

The government allows certain institutions to handle the accounting and reporting of IRAs. Under the law, all custodians can allow you to invest your IRA in the same types of investments (stocks, bonds, real estate, notes, tax liens, etc.). However, the majority of custodians have made the decision to restrict the types of investments you can make. This is not based upon law, but it is based upon what the custodian wants to offer. However, there are a handful of custodians who allow non-traditional investments. Please contact us for a special report on self-directed custodians.

Do I get complete control?

Having a self-directed IRA is one step toward obtaining complete control. To obtain a truly self-directed retirement account you need the Retirement Plan’s LLC. This is the structure that gives you total control. When you simply establish an account with a self-directed custodian, you are still required to get permission from the custodian before making each investment. This can be time consuming, cumbersome, and more expensive than it needs to be. With the Retirement Plan’s LLC you are then able to make investments the minute you decide to without getting permission from anyone. You have the control. You are in command of your retirement money. We firmly believe that you are the best steward for your money. Nobody cares as much about your retirement as you do.

How do I know that this is legal?

This is a question that is frequently asked by investors who have never heard that they could invest in anything other than stocks and bonds. They have no idea that they can invest in Real Estate and many other investments. However, Real Estate has been an allowed investment since the day IRAs were created almost thirty years ago.

See the Resources link below for Publication 590 for further information.

Can I transfer funds from a 401K, IRA, Sep IRA, Roth IRA, or 403b and direct investments myself?

Yes. You can self direct all of these types of accounts. They can all be invested into the Retirement Plan’s LLC for truly self-directed investing.

What does the IRS think of investing your IRA in Real Estate?

The IRS makes the following statement on their website “…..because of administrative burdens, many IRA trustees do not allow IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

Can my IRA purchase Real Estate I already own?

No. This would be considered a prohibited transaction (see IRC 4975). You many not purchase property which is currently owned by you or any other disqualified person (see below). You would need to find another piece of Real Estate that you don’t already own to purchase.

Why does my current broker say I can’t buy Real Estate in my IRA?

Likely because your current broker won’t let you invest in real estate through their custodian. Just because that isn’t something they offer doesn’t mean that you can’t do it; It just means that you can’t do it through them. It is a limitation that your broker is placing on your IRA NOT one that the IRS is placing on your IRA.

What is the easiest way to buy Real Estate using my IRA?

The Retirement Plan’s LLC is the way to get total control over your IRA. A self-directed IRA account isn’t enough. You will still need to get permission and have someone else sign off on all investments you want to make. If you are ready to be in control of your IRA, you need the Retirement Plan’s LLC.

If I buy an income producing rental property, what happens to the rent income?

The income goes back into the Retirement Plan’s LLC, and you retain the tax deferred or tax free status of the investment.

I don’t have enough money in my IRA to purchase a piece of property outright. Can my Retirement Plan’s LLC get a loan and use my IRA money as the down payment?

Yes you can use your IRA money as the down payment and then have your Retirement Plan’s LLC get a loan for the balance. However, you will not be able to personally guarantee the loan. It must be a non-recourse type of loan which means that if your IRA fails to make payments, the only recourse the lender has is against the property itself. Further, there will be tax ramifications to doing so; UDFI (unrelated debt financed income) tax applies when a loan is obtained so you would want to confer with your tax professional about what forms would be necessary.

My IRA is small. Can I personally co-invest with my IRA?

It is not a prohibited transaction for you to co-invest with your IRA. However, there are certain formalities that need to be adhered to, and there are some situations where it isn’t advised.

Can my IRA co-invest with friends?

Yes. IRAs may purchase an undivided (and proportionate) interest in Real Estate.

Can I be the property manager of the Real Estate?

That depends. With just a self-directed IRA the answer is no. But with the Retirement Plan’s LLC you have the ability to manage the property, collect the rent and pay the bills. Unlike just having a self-directed IRA which put restrictions on what you can do, the Retirement Plan’s LLC structure allows you to perform maintenance on the property, advertise for renters, collect and deposit the rent checks, pay the real estate bills, etc. This saves your IRA a lot of money and helps provide a more comfortable and prosperous retirement for you.

May I use my IRA funds to make improvements or renovations?

Yes. In fact, you must use IRA funds to make the improvements and pay all expenses associated with the property. All expenses of the property are paid with IRA funds, and all profits made on the property are returned to the IRA. This makes sense because it is an investment of the IRA.

Can I buy vacation property?

Yes. Doing so would not constitute a prohibited transaction. However, you cannot vacation there.

Can I buy my dream retirement home with my IRA and then live in it when I reach the age of retirement?

Yes. Your IRA would be the original owner. You would use your IRA money to make the purchase and maintain the property. Any rents generated would be returned to the IRA. However, upon reaching retirement age, the property could be distributed out to you. Of course, you would have to pay taxes at that point but without penalty.

What are the advantages to using a Retirement Plan’s LLC when investing my IRA in Real Estate?

You can only receive true checkbook control with the Retirement Plan’s LLC. With a self-directed custodian, you get more control than you get with a traditional custodian, but you still have to get permission from the custodian for every transaction you make. This is problematic and can be expensive. Further, with any time sensitive investment it puts you at a huge disadvantage.

With the Retirement Plan’s LLC you have the checkbook, authority to write the checks and can make an investment without time delays. This ensures that your IRA is able to make the best investments at the best prices.

With the Retirement Plan’s LLC your IRA will be subject to fewer and lower fees from the custodian. Thus, there is more money for your retirement, which is the whole goal of an IRA.

Can my Retirement Plan’s LLC get a mortgage on a piece of property?

Yes. The mortgage would need to be a non-recourse type of loan, meaning that if your IRA fails to make the payments, the only recourse the lending institution has is the property itself. Also, be aware that if your IRA obtains a loan, unrelated debt financing income tax will apply.

Can my Retirement Plan’s LLC make loans to other individuals who want to buy Real Estate?

Absolutely. And this is done frequently, and it is a great investment for your IRA because the loan can be secured by the property.

Can my Retirement Plan’s LLC make loans to a Real Estate developer?

Yes. Your IRA can loan money to a Real Estate developer to finance the purchase of property or the development of property. Developers often look for private financing so it is a great way to get your IRA involved in Real Estate development. And because developers often pay an above market interest rate, the loan can be a great investment for your IRA.

Can my Retirement Plan’s LLC make loans to businesses or companies?

Sure. Your IRA can make a loan to any type of business. However, be aware that there are some restrictions on loaning money to any business that you or any other disqualified person has an ownership interest in.

Do taxes and penalties apply when I take money out to buy Real Estate?

No. You DO NOT take money out to purchase Real Estate or anything else you want to buy. It is just a purchase of your IRA LLC. There are no taxes or penalties. Instead of buying 1000 shares of Microsoft or any other typical stock, your IRA is just making a different type of investment. The method of doing so is different but the tax ramifications are the same.

Are the gains that my Retirement Plan’s LLC makes taxable?

Not in most cases. If an IRA buys a piece of property and then sells it at a profit, the gains stay within the IRA. If you have a traditional IRA, the gains are tax-deferred. If you have a Roth IRA, the gains are tax free. Note: you alter that result if you use leverage.

Are there any special taxes that apply when I use leverage?

Typically unrelated debt financing income tax (UDFI) would apply. Each plan type has its own specific rules that will determine the effects of UDFI on a leveraged acquisition.

Does it still make sense to use leverage?

It certainly can. Because of your increased buying power when you use leverage, the profits you make from the ability to use leverage can greatly outweigh the tax associated. Keep in mind that leverage can increase the risk of loss as well as the potential for profit, so proper use of leverage for your specific risk tolerance, and goals, needs, and resources is critical.

Can I invest outside of my state or outside the country?

Yes! Just as you have International Investments available in the form of Mutual Funds or Exchange Traded Funds, your IRA can invest outside of the U.S. States. There are many great investment opportunities in other countries.

What are Prohibited Transactions?

Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your IRA. The IRS defines a prohibited transaction as follows:

“Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members or your family (spouse, ancestor, linear descendant, and any spouse of linear descendant).” IRS Publication 590

IRC 4975 is the section that lays out the rules on prohibited transactions. Prohibited transactions generally involve one of the following: (1) doing business with a disqualified person; (2) benefiting someone other than the IRA; (3) loaning money to a disqualified person; or (4) investing in a prohibited investment.

In plain English, prohibited transactions are those transactions that violate the basic intent of the IRA. Your IRA must benefit rather than benefiting you personally. In other words, there can be no “self dealing” transactions. However, there are many ways in which you can invest your IRA and not be in violation of the prohibited transaction law. And when your IRA benefits, you benefit because it is for your retirement.

What are Prohibited Investments?

The Internal Revenue Code does not specifically authorize investments within an IRA; rather, the code outlines what types of investments are not allowed. The Prohibited Investments include:

Artwork
Rugs
Antiques
Metals
Gems
Stamps
Coins
Beverages
Stock in a S-Corporation
And certain other tangible personal property

Who is a disqualified person?

the IRA holder and his or her spouse;
the IRA holders ancestors, lineal descendants and their spouses;
investment advisors and managers any corporation, partnership, trust or estate in which the IRA holder has a 50% or greater interest;
and anyone providing services to the IRA such as a trustee or custodian.

How am I a disqualified person? It doesn’t seem to make sense.

There is a clear distinction between your IRA and you individually. You and your IRA are not the same. Your IRA is a separate Trust for your benefit when you retire.

What would be classified as Self Dealing?

Self dealing is using your IRA in transactions that in some way benefit you (or other disqualified persons) individually. The purpose of your IRA is to provide for your retirement. It is not intended to benefit you prior to retirement and distribution of the funds.

What are some types and examples of Prohibited Transactions and / or Self-Dealing Transactions?

Self dealing with a family member (having your IRA purchase a home from you father)
Self dealing with yourself (having your IRA purchase a home from yourself)
Personal use of IRA property (buying a rental vacation home with IRA money and then staying in the home when on vacation)
Receiving personal benefit from your IRA (paying yourself for work that you do on the property such as repairing the roof)

What are Exemptions?

Exemptions are permission to invest in something or in some way that is technically a prohibited transaction. For example, it is a prohibited transaction to rent property owned by your IRA to your child. An exemption would allow you to do so.

Can I buy a business with my Retirement Plan’s LLC?

Yes you can buy a business with your Retirment money via the Retirement Plan’s LLC.

Can I invest in an existing business?

Yes. This can be done as the purchase of stock as a loan to the business.

What about S-Corporations?

S-Corporations do not allow IRAs as investors; they only allow individuals as investors. Therefore, it isn’t so much that IRAs are prohibited from investing in S-Corporations rather that S-Corporations don’t permit having an IRA as a shareholder. It is likely that the investment of the IRA would revoke the sub-s status of the corporation.

Can I buy Stocks, CDs, Bonds, Options, etc.?

Yes. You can invest in any IRS permitted investment. That includes publicly traded stocks, CDs, mutual funds, annuities, bonds, stock options, futures, etc. In fact, if you are an active swing trader or day trader, you will be able to trade your IRA in a manner that your current broker does not allow you to trade using the Retirement Plan’s LLC. For example, you probably have asked your broker if you can buy or sell Options (Calls and Puts). Or maybe you would like to write Covered Calls or do Spreads and have been told no. The Retirement Plan’s LLC allows you to trade your way.

I have a 401K with an old employer. Can I move it into the Retirement Plan’s LLC?

Yes. You can move these 401K funds into the Retirement Plan’s LLC. You can start controlling this money yourself rather than letting your old employer control your future.

I have a 401K with my current employer. Can I move it into the Retirement Plan’s LLC?

The 401K plan documents will specify what you can do. Contact you Human Resources department to see if your plan allows for diversification outside of your current plan.

I have several IRAs and old 401Ks. Can I combine them?

Yes. The can all be combined and then invested into your Retirement Plan’s LLC so that your buying power is maximized. The only restriction is on 401(k)s; is that you generally must no longer work for the employer. You can usually combine multiple retirement accounts into one account. Or in the event that they can’t be combined, such as the case of a traditional IRA and a Roth IRA, they can still be invested into the same Retirement Plan’s LLC so that you still have maximum buying power.

How can I get more information?

Email at info@genfinre.com

Resources

Ø IRS Publication 590 - Individual Retirement Arrangements

Ø IRS Publication 598 - Tax on Unrelated Business Income of Exempt Organizations

Ø IRS Publication 554 - Tax Guide for Seniors

Ø IRS Publication 571 - Tax Sheltered Annuity Plans 403(b)

Ø IRS Publication 575 - Pension and Annuity Income

Ø IRS Publication 3125 - An Important Message for Taxpayers with IRAs: The IRS Does NOT Approve IRA Investments

Ø IRS Publication 4118 - Lots of Benefits - Retirement Plans Life Cycle

Ø IRS Publication 4405 - Have you had your Check-up this year? for SIMPLE IRAs, SEPs, and Similar Retirement Plans

Ø IRS Publication 4406 - 403(b) and 457 Retirement Plans (with plan feature comparison chart)