SEPP with self directed IRA (SDI)
L1: SEPP with self directed IRA (SDI)Hello,
DOB 12/06/1960. I recently retired 7/1/16 and moved all company sponsored 401kfunds to a SDI (~560k). Of that money, 350k has been invested in rental income property. I would like to set up a new annual SEPP distribution for the maximum amount on the remaining balance of ~210k. First payment would be as soon as paper is processed. Any light you can shed on this plan?
chris2017-05-04 19:40, By: Retiredchris, IP: [18.104.22.168]
L2: SEPP with self directed IRA (SDI)1. Too late now, but you should have checked on the feasibility of your utilizing the NUA (Net Unrealized Appreciation) provision of the Tax Code, and not rolling over your 401-K into an IRA. It would have probably saved you $ 100,000 in taxes.
2. Too late now, but if the company would have allowed you to keep your funds with them in their 401-K, and would have allowed you to take variable partial distributions until you were 59 1/2, you would not have needed a SEPP 72-T.
3. Please explain your investment in Rental Properties. Are you involved in any way in the management of these properties ?
If so, you probably have MAJOR problems. I am doing a presentation to 100 accountants next week about the problems of Self-Directed IRA’s in ROBS (Retirement Owned Business Start-Ups) and BORSA’s (Business Owner Retirement Start-up Accounts). I know that there are companies that market these plans, but the IRS has an extensive project auditing them. You are allowed to invest in REITS and Real Estate ventures that you have no connection with, but you are not allowed to be involved in renting the property, managing the property, or even repairing the property yourself.
Besides the legal tax issues, there are many financial and tax reasons that these types of Self-Directed IRA’s are not a good idea in general, and even more at your age and older. My presentation includes about a dozen reasons why these are a bad idea.
If these are just investments in partnerships or public companies that you do not have a major or operational control position, then you are probably ok.2017-05-04 19:58, By: dlzallestaxes, IP: [22.214.171.124]
L3: SEPP with self directed IRA (SDI)thank you for the rapid response.
1. Not aware of the rules of NUA. Company did match contributions with company stock.
2. Funds could not remain with the company and I was advised by my accountant to move into something else (we chose SDI based on research and Adam Bergmans publications on SDIs.
3. Vacation rental property is in Mexico. I retired in Costa Rica and rent the property through VRBO online. Property management and all maintenance is performed by an onsite group (not me).
I saw no red flags when setting this up. Is your presentation available via PDF?
So, with that, is SEPP an option with the balance of the SDI funds?
Thank you.2017-05-04 20:28, By: Retiredchris, IP: [126.96.36.199]
L4: SEPP with self directed IRA (SDI)Yes, you can set up a SEPP 72-T with the $ 210,000 remaining in your IRA.
I’ll send you my pdf of the issues, and the numerous related articles, if you send you me your e-mail address. email@example.com
I assume that your accountant and the company explained that you do not get deductions for any expenses or depreciation, and that all appreciation or gain when you sell will be taxed as ordinary income (probably 25% or more), and not at the preferential capital gains rate of 15% (or 20% for high income taxpayers). When you reach 70 1/2, you hopefully will no longer own the property, or will have sufficient cash flow or another IRA that you can tap for the RMD distributions (which will require annual independent appraisals of the property) on ALL IRA investments.
2017-05-04 20:53, By: dlzallestaxes, IP: [188.8.131.52]
L5: SEPP with self directed IRA (SDI)DLZ,
I know little about self directed IRAs, and less about Real Estate in IRAs, but in your comments, you warned Charles of words similar to the following: “..but you are not allowed to be involved in renting the property..” In #3 of his following reply he says he is renting the property using VRBO website. That sounds like less than the desired “arms length” concept of real estate held in an IRA. What do you think?
Also, if this IRA money is all in one account, won’t have have to isolate the $210K into a separate IRA in order to do the SEPP, which may eliminate him taking IRA withdrawals from the income he may be getting from the rental property? I just wasn’t sure it could all be left together in one IRA account, unless he based the SEPP on the total (recent) balance prior to starting the SEPP, and then used a very low interest rate that gets him to what the normal allowed rate would have yielded for a calc on $210K.2017-05-05 03:47, By: Ken, IP: [184.108.40.206]
L6: SEPP with self directed IRA (SDI)I am not familiar with the details of the procedures involving VBRO (Vacation Rentals By Owners). They may be like a management company that collects the rents for the owners, and they probably sign the rental agreements with the renters. If he signs the rental agreements, that could be a problem.
The more usual violation involves the expenses of the property. With the property in Mexico, I doubt that he has to worry about his doing repairs, but he has to make sure that all expenses are paid by VBRO, and that all of the invoices, insurance, etc. are in the name of the IRA, and not in his name.
Because this is in a foreign country, he could have a bigger problem if the bank account ever exceeds $ 10,000 for even 1 day, because then he has “a financial interest in an account in a foreign country”. That requires filing FBAR and possibly FIN CIN forms with the U S government ( IRS or Treasury). The fines for failure to do this are huge.
Also, he is not allowed to take money out of the IRA until he is 59 1/2, unless it is in a SEPP 72-T, and then it might be locked in for the longer 5-year period. That could mean that the balance exceeds $ 10,000 at some point. I hope that his accountant has explained all of the ramifications of the above nuances to him.
It doesn’t sound like VBRO is the typical Self-Directed IRA Real Estate company, but rather just a vacation property rental agency.
It would be unusual that the Rental Property would be in the same IRA account as the rest of his IRA investments. Most Self-Directed IRA Real Estate activities are handled by companies who specialize in just that type of activity, and do not get involved in stocks, bonds, and similar portfolio investment. Conversely, brokerage and mutual funds almost never get involved in Self-Directed IRA Real Estate activities. A recent case involving a Schwab IRA and a Real Estate investment was ruled invalid by the Tax Court.
Another possible problem could be UBTI (Unrelated Business Taxable Income) if it exceeds $ 1,000 in any year. If this venture is profitable/successful, this could actually be a factor. If you got a mortgage in addition to your own funds for the purchase, then it will also be subject to UDFI. You should make sure who will be preparing IRS form 990-T for the IRA UBTI tax.
I think I would definitely suggest that only the non-rental investments be included in the SEPP 72-T to avoid as many of these issues as possible from affecting the SEPP.2017-05-05 04:37, By: dlzallestaxes, IP: [220.127.116.11]