Author Topic: stuffing an IRA  (Read 6243 times)

sol

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stuffing an IRA
« on: October 18, 2012, 03:24:17 PM »
Watching the election coverage has taught me that the $5000 limit on Roth IRA contributions applies to the nominal value of the investments you put into it, not to the amount of money you contribute.

Has anybody here used this little loopholes to put income-producing real estate or a business interest into their IRA?

For example, if you bought an undeveloped piece of land for $10,000 through a private holding company (cheap to create) and then transferred half ownership of the company into your IRA each year, your IRA would contain a $10,000 piece of property exempt from income taxes.  If you then built a $100,000 house on that property and rented it out, the rental income would also be tax free.  This seems like a way of adding value to your IRA (by building the 100k house) without bumping up against the $5k limit.

It seems private equity men do the same thing routinely with businesses; they buy a business and load it up with debt to reduce it's book value, transfer a fraction of ownership of the company into their personal accounts as part of their compensation, then have the company either work off or pay off the debt to reinflate the price of their holdings.  Voila, million dollar Roth IRA and tax free income.

Has anybody here tried this plan personally?  Are there hiccups I would need to worry about?  Right now, this looks like it might pencil out for some landlords who specialize in renovating housing in depressed markets, or anybody who owns a private business and could control the book value through creative accounting.

JohnGalt

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Re: stuffing an IRA
« Reply #1 on: October 18, 2012, 03:49:45 PM »
I'm pretty sure this would violate the IRS regulations on IRA money / personal money interaction - invalidating the entire account and potentially subjecting it to taxes and penalties.

You can't sell property that you own to an IRA.
You can't mingle personal money (the $100k house) with IRA money (the $10k land).
I haven't been able to figure out if there is a way to use a self directed IRA to start/buy a business that you manage personally - but at the very least, if you did, I think you would have to keep very detailed records to show that you have not mingled it with your personal funds in any way. 

arebelspy

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Re: stuffing an IRA
« Reply #2 on: October 18, 2012, 05:09:01 PM »
Yeah there's arms length stuff with real estate and IRAs that make it a pain.

For example, if you have a rental purchased by your IRA and the toilet breaks, you legally CANNOT fix it.  You must pay someone to do it, even if you know how.

The best way to invest in real estate in an IRA, IMO, is to loan it out as private money, secured by the property.. Your IRA takes the property if they default, otherwise you lend out at a good rate.
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sol

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Re: stuffing an IRA
« Reply #3 on: October 18, 2012, 07:33:56 PM »
I'm pretty sure this would violate the IRS regulations on IRA money / personal money interaction - invalidating the entire account and potentially subjecting it to taxes and penalties.

Somehow I doubt that it's outright illegal, if a Presidential candidate is doing it.  Morally questionable maybe.  Necessitating a good accountant, certainly.  But not just illegal.

The best way to invest in real estate in an IRA, IMO, is to loan it out as private money, secured by the property.. Your IRA takes the property if they default, otherwise you lend out at a good rate.

Also seems like a good option.  Can you "invest" your IRA in a private loan to your neighbors?  How would you generate the receipts on that little transaction for the IRS?

arebelspy

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Re: stuffing an IRA
« Reply #4 on: October 18, 2012, 08:39:22 PM »
Also seems like a good option.  Can you "invest" your IRA in a private loan to your neighbors?  How would you generate the receipts on that little transaction for the IRS?

Yes. Cannot be a parent or child.

Self directed IRA, promissory note.
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JohnGalt

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Re: stuffing an IRA
« Reply #5 on: October 19, 2012, 08:42:10 AM »
I'm pretty sure this would violate the IRS regulations on IRA money / personal money interaction - invalidating the entire account and potentially subjecting it to taxes and penalties.

Somehow I doubt that it's outright illegal, if a Presidential candidate is doing it.  Morally questionable maybe.  Necessitating a good accountant, certainly.  But not just illegal.


I definitely don't think it's morally questionable and I'm sure a good accountant could figure out whether or not it will work at all - but what makes you think Romney is doing what you're proposing?

I'm pretty sure Romney ended up with so much in his IRA because he invested his 401k contributions in company stock which did incredibly and then rolled that stock into an IRA. 

Undecided

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Re: stuffing an IRA
« Reply #6 on: October 19, 2012, 01:02:46 PM »
I'm pretty sure this would violate the IRS regulations on IRA money / personal money interaction - invalidating the entire account and potentially subjecting it to taxes and penalties.

Somehow I doubt that it's outright illegal, if a Presidential candidate is doing it.  Morally questionable maybe.  Necessitating a good accountant, certainly.  But not just illegal.

I'm not sure what "it" you're talking about, but in your original example, how does the $100,000 house get built?  The IRA doesn't have the money to build it.  The IRA could get a third-party loan, but it must be able to pay the loan entirely on its own (you can't pay the loan from outside money).  You can leverage the assets in an IRA (e.g., there are lenders who will write no-recourse loans for IRAs to buy property with significant equity and solid expense coverage ratios), but you can't put more of your own money into the IRA than the annual contribution.  You can't loan money to (or borrow money from) your IRA (nor can your family members or companies controlled by you or your family members).  You can't sell property to your IRA (so you can't sell a $100,000 house to the IRA for $5,000 to shield all the rental income from the house from future taxation).

You might be interested in this article, though:  http://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/

salmp01

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Re: stuffing an IRA
« Reply #7 on: October 19, 2012, 02:14:19 PM »

Quote
You might be interested in this article, though:  http://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/

Interesting article.

I own three rental properties in a self directed IRA.  As stated above I am not able to do physical work on the propertis.  For these specfic properties I typically tell my tenants that I expect them to do minor repairs.  If something a little more major comes up I will hire the appropriate person.  I am allowed to act a the property manager and so Iím able to do quite a bit of work (leasing, general contracting, etc).  I set up my self directed IRA nearly 2 years ago and so far itís working out well.   If I had more money in my account Iíd purchase another property.  When I leave my job and have access to my 401k I plan on purchasing additional properties if the deals are still out there.