Q. What kind of retirement funds am I able to use?
It is possible to use funds from almost any tax deferred or retirement account, including:
– Traditional IRA, – Roth IRA, – SEP, – Keogh, – 401(k), – 403(b), among others.
Note: Many employer sponsored retirement plans (such as a 401(k)s) will not let individuals move plan funds into a new vehicle while still employed with the sponsoring employer. Others will allow employees to move only a portion of their funds. The only way to be sure whether your funds are eligible for a rollover is to contacting your current 401(k) provider, or your employer’s plan administrator.
Q. Are there limits to the investments I can make?
Yes, but not many.
- An IRA may not invest in “Certain Collectibles” or Life Insurance Contracts.
- In addition, there are certain transactions in which you cannot participate when using IRA funds. These are known as “prohibited transactions,” often referred to as “self-dealing” transactions. Self-dealing occurs when an IRA owner uses their individual retirement funds for their personal benefit rather than to benefit the IRA. Any violation of these rules creates an immediate 10% tax penalty, and if the offending transaction is not corrected within the taxable year the penalty is increased to 100%. Therefore, it is vital that you work with a qualified and competent third party, like Reins Financial Group, to structure the plan, and steer clear of prohibited transactions.
Q. Specifically, what are “prohibited transactions”?
- Selling, exchanging, or leasing any property between a plan and a disqualified person.
e.g., your IRA cannot buy property you currently own from you.
- Lending money or other extension of credit between a plan and a disqualified person.
e.g., you cannot personally guarantee a loan for a real estate purchase by your IRA, or vice-versa.
- Furnishing of goods, services, or facilities between a plan and a disqualified person
e.g., you cannot use personal furniture to furnish your IRAs rental property
- Transferring or using, by or for the benefit of, a disqualified person the income or assets of a plan.
e.g., your IRA cannot purchase a vacation property you or your family will use
- Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account.
e.g., you should not loan money to your CPA.
- Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
e.g., you cannot pay yourself income from profits generated from your IRAs rental property.
If you participate in a transaction that does not follow the guidelines provided in the Internal Revenue Code, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to determine whether you have engaged in a prohibited transaction. Reins Financial Group will help to educate you so you can steer clear of prohibited transactions and invest with confidence.
Reins IRA Account holders can access the RFG Prohibited Transaction & Disqualified Person Outline in the shared documents section of their "my account" page, or call us anytime to discuss this issue. (the documents are also available to clients under the "Due Diligence" tab).
Q. Who are “disqualified persons”?
A disqualified person is generally defined as:
- The IRA holder
- The IRA holder’s spouse
- Ancestors (parents, grandparents) of the IRA holder
- Lineal Descendents (daughters, sons, grandchildren) of the IRA holder
- Spouses of Lineal Descendents (son or daughter-n-law) of the IRA holder
- Investment advisors
- Other IRA Fiduciaries – those providing services to the plan
- As well as certain business entities in which one of the aforementioned persons has a controlling interest (usually >50%)
Reins IRA Account holders can access the RFG Prohibited Transaction & Disqualified Person Outline in the shared documents section of their "my account" page, or call us anytime to discuss this issue. (the documents are also available to clients under the "Due Diligence" tab.
Q. What is Unrelated Business Taxable Income, or UBTI?
UBTI is income derived by any organization from any unrelated trade or business regularly carried on by it, IRC section 512. Tax is imposed on such income at the standard corporate tax rate. UBTI is a complicated matter and is applied to all tax exempt or tax free entities, including qualified retirement plans, like IRAs and 401(k)s. Please feel free to call us to discuss the implications of UBTI for your proposed transaction.
Reins IRA Account holders can access the RFG UBTI Outline in the shared documents section of their "my account" page, or call us anytime to discuss this issue. (the documents are also available to clients under the "Due Diligence" tab.
Q. Since my brother is not a disqualified person, may I purchase property with my IRA and rent it to him?
Theoretically, yes. Your brother is not a disqualified person, per se. However, in that scenario, if your brother occupied a rental property owned by your IRA and could not pay the rent you could run afoul of the exclusive benefit rule if you allowed him to remain on the property. This could cause your IRA to have participated in a prohibited transaction. It is very important that every investment benefit your IRA and only the IRA.
Q. What is the consequence of a prohibited transaction?
If an IRA holder is found to have engaged in a prohibited transaction it will result in a distribution of the IRA. The taxes and penalties are severe and may be applicable to all IRA assets as of the first day of the year in which the prohibited transaction occurred.
As noted above, any violation of these rules creates an immediate 10% tax penalty, and if the offending transaction is not corrected within the taxable year the penalty is increased to 100%. Therefore, it is vital that you work with a qualified and competent third party, like Reins Financial Group, to structure the plan, and steer clear of prohibited transactions.
Q. How do I make sure that I am following the rules?
At Reins Financial Group we have the understanding necessary to educate our clients and can help you follow IRS and Department of Labor guidelines. The IRS and Department of Labor do not identify what investments or transactions you may engage in with IRA funds. They do, however, define those investments that are prohibited and what makes certain transactions problematic. Identifying, interpreting and following these rules and regulations can be complicated, but it is not impossible. We are always available to discuss these rules and regulations with you in light of any transaction you may be considering.
Q. My CPA and Financial Advisors say I should avoid these types of transactions. Why?
Generally individuals are told that this structure should be avoided because those they are asking are unfamiliar with the process. While permitted under the Tax Code and Department of Labor regulations, these structures are uncommon, and that can make advisors uncomfortable, as they may not understand the process. Often times, however, this response is motivated by self interest. A stock broker, for instance, makes money when he sells stocks, bonds and mutual funds - not real estate. Furthermore, the IRS have outrightly approved such structures, see IRS FSA 200128011 (April 6, 2001); and likewise by the Tax Courts in Swanson v. Commissioner, 106 TC 76 (1997).
Q. What is a self-directed IRA custodian?
An IRA custodian is a bank or savings and loan institution, as defined in IRC § 408(n), or any other entity that has the approval of the IRS to act as an IRA custodian. A self-directed IRA custodian is one who will allow the IRA holder to direct investment of IRA funds and hold non-traditional assets. There are very few of these custodians.
Q. Why are there not more self-directed IRA custodians across the country?
Simply because the business is not as profitable as it is for the brokerage houses. Most often IRA custodians manage the funds in the IRA and earn money on transactions and other asset based fees. Others, including traditional banks, do not compete because it does not fit within their business objective. They make money by leveraging the dollars you have sitting in their accounts and participate in mutual funds which they control.
Reins Financial Group only works with one approved custodian who keeps annual costs to our clients low. By using the Reins-IRA structure our clients never pay asset based or transactional fees, just a flat maintenance fee of less that $150. Furthermore, our clients maintain a minimum balance of only $300, allowing them to truly direct the investment of their retirement funds.
Q. Is my money safe?
Our custodian is an IRS approved trust company that meets strict state and federal law requirements, including adequate reserves. Funds are held in FDIC insured accounts. It is important to remember that after your funds are invested in your Reins IRA-LLC, the custodian is holding only $300—the full balance resides in a checking or brokerage account (with a bank or firm of your choosing) opened in the name of the IRA-LLC. Most importantly, with a Reins-IRA you always have control of your retirement funds, not the custodian; you are the one holding the reins.
Q. How do IRA custodians make money?
IRA holders are charged an annual fee for having an account with a custodian.
A custodian generates revenue in a variety of ways, including:
• Asset based fees. • Holding fees • Transactional fees • Special fees
Asset based fees are a calculated percentage of the value of your IRA. As your IRA continues to increase in value, the custodian will charge you more – even if you never purchase an asset. Larger accounts are penalized under this system.
Transactional fees apply when your IRA purchases an asset. There are fees assessed for wiring funds; fees for reviewing a purchase and/or sale; and fees for recording each document. The process repeats itself when you sell that asset. These fees can add up quickly especially for active investors.
Holding fees are also assessed for assets that are held with a custodian, quarterly. This means that if your IRA purchased a piece of real estate, the custodian could assess a quarterly fee for just holding the deed on behalf of your IRA.
Special fees include things like expediting service, express mail, transferring funds and so on. Special fees can add up quickly, especially when trying to close transactions quickly.
Reins-IRA holders never pay asset based, transactional, holding or special fees, just a simple annual maintenance cost of less than $150, beginning in year two.
Q. Is Reins Financial Group an IRA custodian?
No, Reins Financial Group is not an IRA custodian. At RFG, we structure vehicles that allow our clients to take true control of their retirement funds while still being compliant with the rules and regulations set forth by the IRS and Department of Labor. In this way, our clients’ retirement funds are safe from penalties and tax consequences. Furthermore, we are not bound to offer only IRA products. This allows RFG to consult with you to help determine the type of structure that is best for your personal needs and investment objectives.
Q. How long does it take to make an investment with a self-directed IRA?
With a regular self-directed IRA, the IRA holder cannot have any personal interaction with IRA funds. Therefore, the IRA holder must petition their custodian to make an investment on behalf of their IRA. Banks often move at a much slower pace than the investment community, and it can take weeks to complete a single transaction.
With a Reins-IRA, the IRA holder benefits from having complete control and immediate access to their retirement funds – with the ease of writing a check. This allows our clients to gain speed and efficiency. By eliminating the custodian gatekeeper, Reins-IRA holders can make time sensitive investments including, taking advantage of foreclosures and tax liens, among others.
Q. Is it legal to purchase non-standard assets, such as real estate, with my IRA?
Absolutely! IRAs were created to provide individuals with the opportunity to direct how retirement funds are invested. Rather than delineating which investments are allowed, the Internal Revenue Code (IRC) instead defines those investments that are prohibited and what makes certain transactions problematic. There are only two asset classes expressly prohibited by the IRC: “Life Insurance Contracts” and “Certain Collectibles” (such as works of art or jewelry).
Q. Who are “disqualified persons”?A disqualified person is generally defined as:The IRA holderThe IRA holder’s spouseAncestors (parents, grandparents) of the IRA holderLineal Descendents (daughters, sons, grandchildren) of the IRA holderSpouses of Lineal Descendents (son or daughter-n-law) of the IRA holderInvestment advisorsOther IRA Fiduciaries – those providing services to the planAs well as certain business entities in which one of the aforementioned persons has a controlling interest (usually >50%)