New SEPP – Questions
L1: New SEPP – QuestionsHi, I am looking at starting a new SEPP later this year (June 1st). My DOB is 7/29/63. Here is a little background on my situation. I was laid off in November 2016 and immediately thereafter, I sold all my company stock and rolled over my entire 401(k) balance into a traditional IRA with Schwab in Nov 2016. I then decided to go the self directed IRA route in order to purchase rental property. So I transferred my funds to a self directed IRA account with IRA Services Trust Company in Jan 2017, created an LLC, and “bought” shares of the LLC with the funds in my IRA Services account.
So my question is, do I have to use the account balance as of 12/31/2016, or can I use the account balance at any date prior to June 1st (such as May 1st).
Thanks in advance.
Al2017-02-08 22:06, By: BOAR, IP: [188.8.131.52]
L2: New SEPP – QuestionsYou can use an account balance on any day from 12/31 to the day before you take your first distribution. You must use a date that is after any non SEPP distribution. For example, if you take a distribution in April before starting your plan, you cannot use an account balance pre dating that distribution.
Be aware that a self directed IRA invested in real estate must maintain enough cash to fund your SEPP distributions as well as funding the expenses of the real estate, such as insurance, repairs, property taxes, legal fees etc. The real estate expenses are not taxable distributions, but to pay them your IRA must include a significant cash position. This can be a dangerous investment for a SEPP account. Suppose your tenant cannot pay the rent and you have to evict. Without consistent rental income you might not have the liquidity to pay the expenses or fund the SEPP distributions.2017-02-09 00:23, By: Alan S, IP: [184.108.40.206]
L3: New SEPP – QuestionsI believe that self-directed IRA investments in real estate is a terrible idea. None of your expenses are deductible whereas they would be in a non-IRA situation. You get no tax savings for depreciation. You would normally make invests in real estate in the hope or expectation that it would increase in value. If the real estate were owned outside of the IRA, the gain would be taxed at favorable capital gains tax rates of 15%. However, any increase in value of any investment in an IRA will be taxed at ordinary tax rates, which would usually be between 25% to 39.6%. Furthermore, you are not allowed to have any involvement in any aspect of the rental operations. You are not allowed to collect rents. You cannot do any repairs. You cannot pay any of the bills. If you do any of these things, 100% of your IRA will become immediately taxable, all in 1 year. Finally, most banks will not give anyone a mortgage for a self-directed IRA investment in real estate.
As Alan warned you, the real estate may not be liquid, and any vacancy or big expense could result in the lack of adequate cash to make your required SEPP distribution, which would mean that you will bust the plan, which will make all of your distributions subject to a 10% penalty retroactively to the beginning. And, if there is a cash shortage, you are not allowed to contribute any more money to pay the bills, or to make the distribution.
There are many articles that you can get on the internet by googling “ROBS”.2017-02-09 01:11, By: dlzallestaxes, IP: [220.127.116.11]
L3: New SEPP – QuestionsAlan,
Thanks for the quick reply and for the warnings regarding using a self directed IRA for a SEPP plan. I have thought about what you warn against. I will end up with about 10-11 units within my LLC so I am spreading the risk should one or two units be vacant for a month or two. Also, I am keeping some cash in reserve just in case of unexpected expenses or cash flow issues. Finally, I will only be taking out about 70% of the net income (after all expenses and reserves/contingencies) in order to continue to build up the cash reserve in the account.
Al2017-02-09 14:43, By: BOAR, IP: [18.104.22.168]
L4: New SEPP – QuestionsIf you are involved in any of the daily operations of these rental units you should read the IRS Audit Manual and numerous articles about “ROBS”. If so, you may have already violated the IRA regulations, and your IRA is already terminated, subject to the 10% penalty, as well as all of your IRA being already fully taxable. As a result, you probably no longer have a SEPP. As a result, I suggest that you meet with an qualified experienced tax professional. (See my posting above.)
There is an excellent forum posting about “REAL ESTATE IN SELF-DIRECTED IRA” at :
https://72t.net/Forum/Post/Details?R=5a44bb4c-42f9-46d1-aeda-08fc53a0fa122017-02-09 18:27, By: dlzallestaxes, IP: [22.214.171.124]