Affordable Checkbook Control of your IRA

Asset Protection of an LLC

The LLC give tremendous asset protection to those assets held inside the LLC. You, your IRA and the

LLC are all viewed as separate entities under the law. Under most state laws, if someone were to sue

the owner of an LLC, and the individual suing won, they could not take away the assets inside the LLC

from the LLC owner, which in this case is your IRA. What they could receive is a “charging order”

against the LLC.

California IRA Statute

The state of California basically states that it will decide how much of your IRA you get to keep in the

event you lose a lawsuit and your creditor is allowed access to your IRA assets.

“an IRA is exempt only to the extent necessary to provide for the support of the judgment debtor and

his dependents when the judgment debtor retires, taking into account all resources that are likely to be

available at the time of retirement.“

Charging Order

A charging order can be put in place if the owner of an LLC loses a lawsuit. The order doesn’t give the

winner of the suit full rights over the LLC, actually their rights are very limited. You, the IRA owner

would still maintain full management of the LLC and all of it’s investments. The most they would have

rights to would be any distributions made. As the manager it’s solely your decision whether to make

any distributions. What if the LLC made $50,000 in profits that year? You could keep it all in the LLC

and reinvest. However the individual holding the charging order would owe the IRS the tax on that profit

since LLC are “flow through” entities. The fact that no funds were distributed makes no difference to

the IRS. This wasn’t a problem for the owner of the LLC because it’s your IRA, which is a tax free

entity. But the person holding the charging order is now liable for the taxes each year. Who would

want to pay taxes on the profits that may not be distributed for years? Ask any attorney and they will

tell you it is almost never worth it to sue an LLC.

Check Book IRA

It is a step further towards putting you in full control of your IRA. You don't have to go to your custodian

to get approval of the investment and get a check written. You truly have a self-directed IRA because

you have checkbook control as the manager of your IRA owned special LLC. It also provides superb

asset protection.

Disqualified Company

Any company, corporation, partnership, trust , estate or LLC that is 50% or greater owned by a

disqualified person. However, if the disqualified person(s) ownership is 49.5% or less your Check Book

IRA could have dealings with that entity. For example if you had a real estate partnership with your

brother (he’s not related in the eyes of the Code) and you owned 49.5% then that partnership could

sell an option to buy to your Check Book IRA! This is a fantastic way to build up a TAX FREE Roth IRA

with very little seed money.

Disqualified person

According to IRS Code (IRC 4975) 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 a “disqualified person” has 50% or greater interest; and anyone

providing services to the IRA such as a trustee or custodian.

NOTICE: The IRS left out: brothers, sisters, step children, step parents, cousins, uncles and aunts.

None of these are “disqualified persons” and your IRA could deal directly with them.

Exemptions

Granted by the Department of Labor allowing you to participate in what would otherwise be a

prohibited transaction. The exemption 96-62 states if there have been two substantially similar

transactions in the past five years yours will be probably approved in about 78 days.

Flow Through Tax Entity - LLC

The income of the LLC is treated as income of the owner, NOT the LLC. It’s just as though the owner

made the profit. Whether any of the profits were actually sent from the LLC to the owner is irrelevant

to the IRS. Whether you keep it in the LLC or distribute it to the owner(s) it’s still taxed. With the

Check Book IRA the owner, the IRA , is a non taxed entity so the funds can be kept in the LLC

accounts and name but the tax liability “flows through” to the IRA. Unless you use leverage there are

no taxes due on the profits. This flow through is also what makes the asset protection work because if

sued only a charging order could be placed. (see Charging Order)

IRA Custodian (Traditional)

Approved by the IRS to act as custodian or trustee for your retirement funds. Normally they only allow

you to invest in the investment vehicles that they offer. If it’s a bank then usually only CD’s or Bonds

are available. If it is a Brokerage Firm then stocks are offered. Even then not all stock markets are

allowed. For example they will not allow investment in OTC or pink sheet companies. No investments in

futures or options are allowed. (See Self-Directed Custodian)

Prohibited Investments

You probably aren’t investing in them anyway. 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:

Collectibles including:

Artwork Rugs

Antiques Metals

Gems Stamps

Coins Alcoholic Beverages

Life Insurance Contracts

Stock in a S-Corporation and c

ertain other tangible personal property

Prohibited Transaction

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.

Roth - IRA

With a Roth IRA the contributions you make are NOT tax deductible HOWEVER all contributions and

profits are tax free upon retirement. Also tax free savings can be passed on to your heirs if they chose

the “life expectancy” rule. This means if the oldest heir were, say 50 years old then their life

expectancy according to the rules is 83. That means over the next 33 years they only have to take

1/33 per year out. The profits could continue to build up TAX - FREE. A great way to build up a Roth is

through real estate options. Ask for our article entitled “Super Charge Your Roth IRA”

Self Directed Custodian

A self-directed IRA custodian is approved by the IRS but you are allowed to direct the investments of

the IRA. Many custodians claim that they allow you to self-direct your IRA investments but then only let

you invest in to what they offer. A truly self-directed IRA allows you to make the decisions without

restriction.

Swanson vs. The Commissioner

This landmark case was ruled in favor of Swanson stating it was not a “prohibited transaction” for the

IRA holder (Swanson) to have the IRA form and own a company, transfer assets from the IRA into the

company and afterward be the manager of the same company. The tax court also ruled since the IRS

case was so weak and lacking in merit that the IRS had to pay all of Swanson’s legal fees. CAUTION:

One important point of the case was the wording of the LLC and that entire transaction must follow the

rules EXACTLY. We can help.

Unrelated Debt Financed Income (UDFI)

This tax applies if you use leverage within your IRA. For example if you finance 1/3 of a property then

1/3 of the profits are taxed. The balance is not taxed and since it all ends up in your IRA many still use

leverage.