Learn the DOs and DON’Ts of using IRAs and other retirement plans

Learn the DOs and DON’Ts of using IRAs and other retirement plans in trading activities and alternative investments
http://www.greencompany.com/blog/index.php?postid=186

Alert! Many traders may be triggering IRS excise-tax penalties for prohibited transactions including self-dealing, and/or UBIT taxes, by using their IRAs and other retirement funds to finance their trading activities and alternative investments in problematic ways. One example of this type of trouble may be the “IRA-Owned LLC” or trust trading account. In many cases, traders also risk losing tax-exempt status on their retirement plans. This content is a serious warning to stay clear of trouble, not just a technical discussion of quirky rules.

Traders are increasingly tapping into their IRA and other retirement funds to finance their trading and investment plans. This trend has been growing since the 2008 financial crisis when many taxable accounts melted down, and proliferating rapidly this year.

The good
For the past several years, GreenTraderTax has offered ways to tap into retirement funds without triggering tax problems. We recap these safe strategies below. But first, let’s tackle the new inappropriate retirement-plan schemes and structures.

The bad
There are many companies marketing these structures, often with educational content. One popular structure is the Self-Directed IRA-Owned LLC, or in a minor variation, the “Custodian IRA-Owned Trust.” Vendors want to put your retirement funds to work and generate commissions with more active trading. Educational firms may realize it’s your only good source of funds for establishing a trading activity, so they recommend these schemes.

While many of these Websites offer good articles about related IRS, DOL and ERISA laws and rulings, take it with a grain of salt. Many vendors make self-serving conclusions, and generally give insufficient consideration to prohibited-transaction and self-dealing rules, which are complex, nuanced and often misunderstood. Attorneys confirm these schemes create substantial risks of tax non-compliance, prohibited-transactions and/or (the wider net of) self-dealing, opening the door to potential trouble from the IRS and DOL.

You should engage your own independent employee-benefits attorney and CPA to help you make the right decisions and to troubleshoot how to handle structural and compliance matters going forward. Unless you are talking about serious money, why bother with all this potential trouble and costs (including legal fees) if it probably won’t work anyway?

And, the ugly
Scheme vendors put too much stock in their 1996 tax court ruling “Swanson v. Commissioner” (Note 1). They utilize the ruling to sell their scheme “Self-Directed IRA-Owned LLC with Checkbook Control.”

How do these schemes work? Working with your IRA administrator or a new intermediary custodian, you arrange for your IRA to own 100% of a newly formed single-member LLC. You then open an LLC trading margin account with the broker of your choice.

You pay trading expenses through an LLC bank account or the LLC trading account with check writing privileges and debit card. That’s LLC “Checkbook Control.” The intermediary custodian has control of the LLC interest itself, but not checkbook control in the LLC.

In a minor variation, the “Custodian IRA-Owned Trust” opens a trust trading margin account rather than an LLC account. The purpose is basically the same. They have checkbook control on the trust level. Both the LLC and trust are disregarded entities.

Many traders abuse that checkbook control by loading up expenses that are otherwise non-deductible on their tax returns. Only investment expenses that directly relate to the IRA’s own trading (Section 212) are payable from the retirement account, not business expenses (Section 162) such as education and home-office expenses which benefit the trader personally.

Read the entire blog
http://www.greencompany.com/blog/index.php?postid=186

 

We had an excellent Webinar today on this content. Download the free recording.

Learn the DOs and DON'Ts of using IRAs and other retirement plans in trading activities and alternative investments

Click here http://www.greencompany.com/EducationCenter/InteractiveSeminars.shtml to download or stream (98 MB, approx time 1:10).

Host Robert A. Green, CPA was joined by prestigious employee-benefit attorneys Richard Matta of Groom Law Group, and Louis Barr of counsel to Green NFH, LLC.

We covered lots of ground not covered in our blog and this is a must-see Webinar for traders using retirement funds. Brokerage firms should also tune in to avoid trouble and do a better job of solving their customers' needs. We boil down the list of do's and don'ts in easy to follow layman's terms.

Few highlights. It may be okay to trade futures and options, and even forex in a retirement account. Forex brokers usually pass for their own compliance reasons, not yours. Middleman intermediaries like trust firms are generally a sign of trouble for IRS self-dealing issues. Don't "blow up" your IRA with a huge penalty. The self-directed IRA-Owned LLC or Trust doesn't work. The statute of limitations may be 6 years or even longer. Prominent brokerage firms try to stay clear of all the trouble and they should not offload the problems to intermediaries.

Please keep your trader friends out of IRS trouble by spreading the blog and Webinar recording in trading chat rooms, social media and media.