IRA Pickle
I have a situation where I am getting conflicting advice. I am aware that an IRA can do a rollover of assets from an IRA to a 401(k) “in-kind”. But, my question goes a bit deeper.
I have an IRA that partially purchased property with funds from the IRA and securing a non-recourse loan for the remaining portion. The IRA purchased the property earlier in 2013. I recently learned that I will be subject to UDFI on the borrowed funds associated with the purchase and I am thinking about establishing a solo 401K and rolling over my assets (cash and property). But, here is the issue:
Someone told me that it is not a problem to rollover the property “in-kind”…bing, bang, no problem.
However, a 401K person told me that based on a 1990-something Supreme Court case, a qualified plan (401k) cannot accept any “encumbered” property…period. They identified encumbered as any property that has a mortgage or lien on it….which my property within the IRA would.
I have read the tax code and what he says certainly makes sense. The court case specifically says that a qualified plan cannot accept encumbered property…if it does, it is a prohibited transaction.
Thoughts? Thanks.
Permalink Submitted by sydney p on Mon, 2013-11-11 14:56
Alan, you seem to be the guru on this site, have you seen this question or might you be able to provide some input? Thanks.
Permalink Submitted by Alan - IRA critic on Mon, 2013-11-11 16:28
I rarely venture into this area, however the attached (if correct) http://www.irafinancialgroup.com/401kpurchaserealestate.php indicates that a loan on property is not a problem as long as it is a non recourse loan. That same restriction would also apply to the IRA being rolled into the solo K.
Permalink Submitted by sydney p on Mon, 2013-11-11 17:58
Alan, first, many thanks. The reason I believe it is an issue is if you look at the 1993 Supreme Court case involving Keystone Consolidated Industries (http://www.law.cornell.edu/supremecourt/text/508/152) it seems to suggest that any property that is encumbered cannot be brought into a qualified plan. They idenfity encumbered as meaning if the property has a mortgage or lien against it….which a property held by an IRA with leveraging would have. Further, they cite Section 4975(f)(3) which states:(3) Sale or exchange; encumbered property A transfer of real or personal property by a disqualified person to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer. I know you don’t provide tax or legal advice but, on the surface, wouldn’t it appear that an IRA could not rollover a property held by the IRA if it had a mortgage or lien on it as the SC said that a qualified plan cannot accept in transfer such a property? I think the possible exception is that everything in the case refers to contribution or “plan obligations”, but it is a good question. I think one could read that a plan, to protect the plan and its participants, cannot accept any such leveraged asset. Your thoughts? And, again, thank you so much.
Permalink Submitted by Jose Morales on Wed, 2013-11-13 01:00
The issue here is transferring via direct rollover of the property from the IRA to the 401k as opposed to using 401K funds to purchase property and obtaining a non-recourse loan. You could always have somone obtain a written determination (PLR) from the IRS just to be sure.
Permalink Submitted by sydney p on Wed, 2013-11-13 02:16
Thanks for the response. Clearly a 401(k) can purchase property if the plan documents permit and not PT are triggered. However, in my opinion this is more of an issue specifically stated in the court case….that a qualified plan cannot accept such a transfer if it has a lien on it. It would also appear that the custodian is a fiduciary and, therefore, a DI….so, one couldn’t say that the DI didn’t apply as because the custodian affected the rollover vs. the account owner. The custodian would be just doing what the account owner requested. This is intriguing, but I haven’t seen anything yet that would allow the rollover/transfer of the property (with lien). I am hoping I am missing somethiing but the Keystone case seems pretty straight forward. Interesting scenario and I believe that a PLR, as you suggested, is the only correct course of action.
Permalink Submitted by Alan - IRA critic on Wed, 2013-11-13 02:51
I would be wary of construing too much from the 1993 case. The case primarily dealt with transferring property to satisfy a funding obligation of a DB plan. A solo K as a DC plan does not have such funding obligations to benefit other employees. Further, there were a variety of opinions before the case was finalized.
Permalink Submitted by sydney p on Wed, 2013-11-13 06:16
Thanks Alan. And, I do agree that the Court was dealing, primarily, with the issue of transferring encumbered or unencumbered property to a qualified plan to meet contribution or funding requirements. There is no doubt about that.However, the code, to my knowledge, does not specifically stipulate that the transfer of encumbered property only is an issue IF it is funding a contribution or funding obligations. It just says that a DI cannot transfer an encumbered property to a qualified plan.So, I think it is logical to possibly conclude (Im not saying I am right of course) that if an IRA account owner/custodian are DI and transfer an encumbered property to the qualfied plan, that a PT has potentially occurred.