Read some of the most frequently asked questions from clients and potential clients. This is a great way to start with your education about self directed accounts and the benefits of using CamaPlan as your administrator. It’s great to learn from your mistakes but it is better and less expensive to learn from other peoples mistakes. If you don’t get your questions answered please set up a complimentary phone call with one of our knowledgeable account executives 866-559-4430.
Disclaimer: These questions should be reviewed with your accountant or other professional tax advisor. More details are needed to accurately the answer questions you posed. The good news is not many IRAs are audited but that also means there are not a lot of precedents set, thus a fair amount of grey area exists.
- Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. This is to minimize money laundering, terrorist funding , and other goals of the government laws such as the Patriot Act.
- When you open an account, we will ask for your name, residence address, social security number, date of birth, occupation, and other information that will allow us to identify you.
- We will ask for copies of your passport, driver’s license, social security card and other identifying documents. Your account name needs to match your social security card otherwise you may be fined (presently $100).
- We are required to compare your identity to lists of persons and organizations maintained by federal agencies designated by the Department of the Treasury and/or Homeland Security(such as OFAC). If your name appears on any of these lists, we must refuse to open your account, close your account if it is already open, notify federal authorities, and follow all federal directives.
- If you attempt to falsify or conceal your identity, we may be required to file documents such as a Suspicious Activity Report.
A Roth IRA can be established in 48 hours and we usually see money transferred in 2-4 weeks from your existing custodian.
Not necessarily on your 1040 but you may have to fill out a tax return for your IRA, Form 990T. I suggest you read the IRS 990T instructions. The IRS gives the IRAs exemption for owning real estate as an investment, but your real estate may instead be classified as inventory in a business because you flip it. Questions like how many houses constitute a business, how to establish intent to own real estate and what time frame for holding property appropriate to avoid having it classified as inventory is best discussed with your professional tax advisors and we would be happy to assist you in any way. If you are at the top of IRS tax bracket these concerns are most likely moot. If you don’t need the additional income to live on then it probably makes sense as a rule of thumb.
Yes, we have many clients that do this type of investing. You can use borrowed money if your Roth IRA is the borrower (not you personally) and your Roth is also the owner of the property purchased. When an IRA borrows money to purchase real estate it most likely will be subject to taxation of a percentage of the borrowed amount –again this would be done through IRS form 990T and called Unrelated Debt Financed Income (UDFI), subject to taxation at trust rates. Many clients structure deals in different ways to minimize taxes, as an example instead of borrowing money in the above example– sell part of the deal and UDFI may not apply.
Conversions are not permitted for an IRA you inherit from a person other than your spouse. When you inherit a Traditional IRA from your spouse, you’re permitted to elect to treat this IRA as your own. If you make this election, you can convert the IRA to a Roth IRA.
Yes — if you choose nonelective contributions. Instead of matching contributions, an employer can choose to make nonelective contributions of 2% of each eligible employee’s compensation. If the employer makes this choice, it must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. An employee’s compensation up to $250,000 (for 2012; $255,000 for 2013) is taken into account to figure the contribution limit.
If the employer chooses this 2% contribution formula, it must notify the employees within a reasonable period before the 60-day election period for the calendar year.
RMD’s are required from all Traditional or tax-deferred accounts. Beneficiary IRA’s will also have RMD’s. Roth IRA’s do not have RMD’s for the primary account holder. Please contact your accountant or financial advisor to help you determine the amount of your RMD.
The IRS code on prohibited transactions precludes such an activity by an owner. This would mean providing a service and receiving a benefit from your plan or account to which you are not entitled, and are specifically prohibited. There are specific rules regarding ownership and what is a party in interest transaction, and who may or may not provide such services.
There are private letter rulings which have been obtained in the past permitting latitude under certain circumstances. Private letter rulings may be obtained by application to the IRS.
There are specific rules regarding taxation of prohibited transactions, which include a 100% tax if a prohibited transaction is not corrected in a taxable period, and a 15% tax on the amount of the prohibited transaction. Additional rules apply to IRAs established by employers, which disqualify the entire IRA. See IRS code section 4975 for more information.
I have a 401(k) where I currently work. I would like to use those funds to invest in real estate on a tax-deferred basis. How do I proceed?
The 401(k) Plan Document or Summary Plan Description will specify whether you have complete self-direction (including real estate and notes). You should ask your plan administrator or Benefits Department at your place of employment about the investment options available. If you have a profit sharing, money purchase or defined benefit plan, the same applies.
Your plan may permit you to roll eligible funds from your 401(k) or other qualified plan account to a self-directed plan that permits complete investment flexibility. Again, your plan administrator or Benefits Department can provide you guidance.
CamaPlan would be glad to talk to your Benefits Department or the CEO to discuss the merits of incorporating true self-direction.
Yes – your IRA gets the rent and is responsible for all expenses. CamaPlan will help you set everything up.
Yes, if they are not considered terrorist or disallowed countries. We have many clients with investments outside of the US, including Mexico, Canada, Europe, the Caribbean, etc.
An Educational Savings Account is a tax-free vehicle used to save for educational purposes. Contributions can be made up until the age of 18 and must be used prior to the beneficiary reaching age 30. ESAs may be transferred to other relatives as circumstances warrant.
What do you think about Health Savings Accounts? Can they be invested in notes, mortgages, real estate, etc?
HSAs are great – there is a tax deduction going in, and the money is tax-free coming out; it doesn’t get much better than that! You can spend that cash on eye glasses, dental procedures, etc. HSAs can be self-directed and can be used at any time. Most of our clients keep their contributions to build wealth more quickly and pay any deductibles from other available funds. You should discuss the merits of an HSA with your professional advisors in the tax and insurance fields.
Both are tax-saving, wealth-building tools. 1031 exchanges have time constraints that are sometimes a problem. They are not mutually exclusive, so you may use them both. 1031 exchanges are used for properties an entity already owns and wants to sell and defer taxes. IRAs are used to defer earnings and build retirement wealth, and are used for ongoing investments.
Income deduction may apply with traditional IRA contributions, but not with Roth contributions. Both have earnings that are tax-deferred. Roth earnings and contributions are tax-free with qualified distributions, whereas Traditional IRA distributions are taxed at the owner’s tax rate as ordinary income. Roth contributions can be withdrawn at any time without penalty or taxation. Traditional IRA’s require mandatory distributions at 70.5 years of age; the Roth IRA does not. A person can contribute after 70.5 years old to a Roth, but not a Traditional.
Income limits apply to the Roth IRA, but not the Roth-like 401(k). Contributions for the Roth IRA are significantly less than for the 401(k). Retirement age for the 401(k) can be 55 years, while the IRA is 59.5 years. UBIT/UDFI may not apply in some cases with a 401(k), but would with respect to a Roth IRA. Also, RMD’s are required with a Roth-like 401(k) but not a Roth IRA for the plan owner.
That is a personal choice. The majority of our clients think that the opposite is true. In fact, you will most likely need more money. You will only need less money when you retire if you are lowering your standard of living. Real estate taxes, income taxes, cars, gas, medical expenses, clothes, food, medicine, and insurance seem to always be increasing. Has anything gone down in price in recent years?
I have a self-directed account with my broker – can I use it to buy real estate or other non-traditional assets?
Most likely not, but you can always ask. Most brokers allow you to “self-direct”, but only in products they sell. You can transfer all or part of your account funds to a CamaPlan account that allows for true self-direction, and then invest.
No – we are a neutral third party. We do not sell any products, nor give investment advice to our clients. We specialize in the use of tax-free and tax-deferred retirement and savings plans, and only provide that service, along with bookkeeping and required IRS reporting.
We take the privacy of our clients seriously, and we will never give away or sell your information to outside sources.
Many clients already know the benefits and risks of investing in real estate, especially income-producing properties. There are a few key benefits for the investor using an IRA or 401(k). The investors are in total control, they dictate the rate of return, they feel they have less risky investments, and have less anxiety as opposed to the “hope is my strategy” approach.
- The investment gains from that property will go directly back into their IRA or 401(k) on a tax-deferred basis. Every year, the gains will compound or grow in a tax-free environment, which leads to tremendous wealth accumulation over time.
- Successful real estate investors can apply the same great returns they’re getting with their cash investments to their retirement savings plans.
- Many new investors can actually get started in this market by tapping into this money they’ve saved over time. In many cases it allows investors to buy properties they weren’t considering before, especially if they partner their IRA or 401(k) funds with more knowledgeable investors.
I’ve heard of people putting more than the annual contribution into their Roth IRAs in a year – how is that possible?
- Most professional advisors, financial planners and/or accountants are not taught this for whatever reasons. In many cases, when CamaPlan conducts education courses for these professionals, it’s the first they’ve heard of it. We provide education credits for attorneys, CPA’s, CFP’s and realtors.
- If an advisor is selling products like mutual funds and life insurance, in many cases they are getting commission on those products. They would not have an incentive to encourage a client to invest in non-traditional assets such as real estate unless they were acting as real estate agents or real estate brokers. Quite simply, there may be a conflict of interest.
- Many realtors are unaware of the benefits for their clients looking for investment properties. Realtors should be telling their clients about this because it could mean buying a higher priced property or multiple properties, which ultimately leads to higher commissions for them.
Traditionally, entities exempt from having to file federal tax returns were also exempt from having to file state and local returns. But some local jurisdictions, including the cities of Philadelphia and Detroit, among others, now require returns as they seek to account for income generated within their borders. This may become more prevalent as city budgets and associated deficits continue to grow. The tax or filing requirement will have different names depending upon jurisdiction similar to the ‘business privilege tax’.
So we recommend contacting municipal authorities where your properties are located for information about requirements, and then consulting your accounting and tax advisors. This is a good time to get a separate Taxpayer Identification Number (TIN) for your account in case you need to file.