Self-Directed IRA

[imjulier]

I have a client who is looking at using a self-directed Roth IRA to purchase real estate. He claims it takes a few thousand to set up and then the annual fee is only $40. Since he can't buy a whole property with funds in his Roth, a portion would be held by the Roth and a portion held personally. Whoever is marketing this to him is claiming that as the amount of principle paid goes up, the amount held in the Roth would also go up so that if the property is held until the mortgage is paid off, the property would be 100% in the Roth so no capital gains would be recognized.

I would think that the portion in the Roth and the portion not in the Roth would need to stay consistent so there would be the non-Roth portion that has to recognize part of the capital gains at the same percentage that the property was purchased by the individual, not the Roth.

I know this is gibberish....just the way clients relay it to me. Has anyone heard of this and is it a scam? Any insight is helpful as I'm just trying to wrap my head around it.

Thanks,

Julie

[Guest Taxed]

I believe there are rules against self dealing that applies to IRA and 401(k) type plans. Your client can not personally use that real estate. Also the IRA owner can not have liability under the mortgage. So something does not add up in the example you gave.

I believe if the roth has sufficient funds it can invest in a real estate asset but it still has to follow the self dealing regulations.

[jainen]

>>I know this is gibberish.<<

Yes, but I doubt that's what the promoter is actually saying, technically. The investor hears what he likes to hear. He might not hear what he doesn't like, so make it as simple as possible.

Start with the mortgage. See Page 50 of Pub 590 for Prohibited Transactions, including using the property as security for a loan. Then see page 15 of Pub 598, Debt-Financed Property, which means the IRA custodian will have to file a tax return. They simply are not going to do that for $40 a year.

[Jack from Ohio]

Tell him... "Run Forrest, RUN!!"

[Guest Taxed]

I hope the taxpayer got all that in writing from the IRA promoter/custodian?

There is another scheme that promotes funding your business operations with cash from IRA and 401k without paying the penalty tax??

Remember those tax shelters in the 90s that were so good that they made you sign a non disclosure agreement! All of them were fraud and taxpayers were hit with huge penalties and tax bills!

[imjulier]

Interesting information and opinions. I agree that what I am hearing from the client is not what the sales person is actually saying after having read what jainen suggested. I also can't imagine that you get to pick and choose what expenses the IRA pays for (principle) vs. what the individual pays for (interest of course so the deduction doesn't get lost). I also can't seem to find any information addressing this exact scenario which lets me know it is the sales person who is doing their job, selling. I'll let you know if I find out any other information about this.

[JohnH]

I've had three clients over the years who asked me about Self-Directed IRA plans. After I investigated it the first time, I told that client he would need to find another accountant if he went through with the plan. I also responded the same way to the other two clients without even bothering to look into it more. If one were to call me today, I'd tell them exactly the same thing.

[imjulier]

John-

Can you share more? Is it that they are unscrupulous (sp?), high risk for individual investors who may not be that savvy, putting all the eggs in one basket, no time to manage the investments available, easy to screw up and wind up with a distribution, something else? What was your take that made you react this way? I'm still just gathering information and appreciate any expanding you might do that helped you form your opinion.

[kcjenkins]

My opinion agrees with John's, and basically for all those reasons, but mostly because they are subject to so many restrictions, yet these salespeople sell them as a simple solution that lets the client use his own money while still sheltering it. That is, IMHO, dishonest and totally misleading. We know that the IRA laws are written around the opposite idea, that the client is to keep his hands totally off that retirement money So Self-directed IRAs are hedged around with lots of restrictions and controls, and not at all the place for an amateur to play with.

[JohnH]

In addition to what KC said, all the sales material I read was full of dodges, weaves, and every type of financial doublespeak you can imagine. And it all ended with "consult your tax advisor". So in the final analysis, they were building in enough land mines to sink anyone who agrees with the tax implications of what they recommend, should something go awry. There are so many ways a self-directed IRA can go wrong that all I saw was trouble ahead.

Here's some good reading material:

http://www.producersesource.com/featured-middle-right/7-self-directed-ira-issues-advisors-should-review-with-clients-before-they-take-the-plunge/

You can also google "Self-Directed IRA Problems" or a similar set of words. You'll get enough hits to keep you up all night reading them. Or you can just read one or two of them and let it keep you up all night wondering how you're going to tell the client you don't want anything to do with the mess they're about to get into.

[Guest Taxed]

Friends the phrase "Consult your tax advisor" is a loaded phrase with a double meaning! I got into an argument with a sales person at a brokerage house because they were confusing my client, refusing to put anything in writing and always ended up putting that phrase. Basically what that means is that they will say what they want you to hear and it i s up to you to hear it right and call your tax advisor and get it right. If something goes wrong, don't look at us, we told you consult your tax advisor.

[Lion EA]

You have to have enough money in the IRA to pay the expenses, mortgage, whatever, of the real estate. You can't go adding more than your qualified contribution each year. And, no self-dealing, personal or business use, etc. What happens when you retire and need a distribution? Your IRA has to sell the property to free up cash. Very complex and probably costs more than $40/year, maybe the rest is being pulled from within the IRA.

[ed_accountant]

I agree with John also. I have avoided these clients also. There is too much risk of lawsuit on these.

There are no tax preparation fees on these also. There is no upside for the accountant.

[kcjenkins]

Good point, Ed, although I would have certainly added significant "consulting fees" had I been foolish enough to take this on.

[imjulier]

Yep-

This is pretty much my take as well after researching and hearing opinions on this board. Holding RE that has a mortgage on it should definitely be done outside of an IRA. And I agree, no upside for the accountant.

Julie