How to Proceed with Self Directed IRA
I planned on working for myself, using my IRA to set up an IRA-LLC and buy rental real estate. I contributed $11,000 ( for 2013 and 2014) to my newly opened IRA at American Pension Services about 2 months before the SEC investigations started. I just lost my job and with APS in receivership I can’t roll over my 401k balance to APS. Obviously after all the allegations I am not sure I would like to use APS, but that depends on the future proceedings and how the case is resolved.
I want to get access to my 401k money to start investing in real estate but not quite sure where to turn at this point. I know there are about a dozen or so other companies out there like APS in which you can have truly self directed IRA accounts but how do I find them and how do I distinguish the questionable practices of APS to other companies to ensure my investments are safe?
Jess
Permalink Submitted by Alan - IRA critic on Tue, 2014-06-03 21:12
Had not heard of APS case, but self directed IRAs include exposure to prohibited transactions, UBIT taxes, lack of liquidity for RMDs etc. You certainly would not want to commit any more assets to APS or anyone like them. I certainly would limit the amount of investments held by self directed custodians, even the good ones. That said, there are a few very large SD IRA custodians like Pensco and Guidant that have the expertise to counsel investors on avoiding prohibited transactions, and have been in business for a considerable time. Fortuneately, you only had 11,000 tied up with APS, and hard to say how much of that can be recovered or how long it will take.
Permalink Submitted by philip berens on Sun, 2019-05-12 21:52
Removed- sorry, found answer.
Permalink Submitted by Jesse Glatz on Wed, 2014-06-04 01:59
I feel pretty comfortable about what the prohibited transactions, prohibited parties are and how to avoid UBTI as I’m only interested in single family real estate as rental income, not necessarily yet commercial property or apartment complexes that would warrant business generated income subject to UBTI. APS has been in business 30 plus years so it was kind of shocking this would come about. But I am seeing that it’s alleged certain transactions were conducted using customers’ cash to invest in certain risky investments Without their knowledge. I have learned to only roll over enough to do a deal. That being said my goal is to have nothing but real property in my self directed IRA vehicle not cash. I understand that the rental income goes back to the IRA as cash but I would immediately reinvest in property or utilize it as a 72T distribution. I guess for now I will look into the other companies and do some research. 2 things I have learned from the APS case or that my funds should be in an individual account, not an account that is pooled with all other customer funds which I was unaware that was how APS operated, and second that my statement is prepared from that financial institution and not the custodian. In overview, SEC claims APS sent out statements to customers adding up to $50 some odd million dollars but the trust bank account APS uses only adds up to $20 some odd million. Another investment professional advised me that if they shut the company down, because I was last in Id be first out and my account had no deals and is easily rectified as opposed to someone who has been with them for years, has many deals and is affected by the case. Those are the customers that would be given back some if any money but in a fair and complex distribution.
Permalink Submitted by M Offen on Sat, 2014-06-21 18:50
How hard is it to spot a “prohibited transactions” or a “prohibited party”? Not very, I think, though perhaps someone will outline a deal that isn’t self-evidently non-kosher and challenge us to say whether it would be OK or not. (I do remember reading about a doctor who bought in his self-directed IRA account an empty lot next to his office building because he thought it likely to appreciate in value over time. But he parked his Corvette on that empty lot and that caused the IRS to come down on him like a ton of bricks because they said the was deriving an impermissible personal benefit from the IRA asset and they made him bust open the IRA, take everything out as a distribution, pay a 10% early distribution penalty, pay ordinary income taxes on the amount, etc. That seemed extraordinarily harsh for what I would characterize as a de minimis violation.) So, to steer you away from “prohibited transactions” and deals with “prohibited parties” you should pay a company like Pensco, with whom I am very familiar, the substantial fees they charge and jump through all the time-consuming hoops they require? I don’t think so. And if you do need expert advice about a deal you are contemplating, then you can go to a suitably knowledgeable CPA or tax attorney for it, paying them on the basis of their time rather than a % of the money involved. You can then decide whether to follow their advice or not, accepting the risk or not, unlike with a custodian who will grant or deny you permission, with their inclination being to keep their own skirts clean and thus be be very conservative in their own self-interest. If your intention is to own real estate as an investment with the expectation of rents and appreciation in value, that is not to operate a business on the property, then UBIT won’t be an issue unless you have taken on debt to purchase the property (e.g., a morgage), in which case there will be UBIT in the form of UDFI (unrelated debt financed income). And if you own the real estate through a solo 401(k) rather than an IRA, you won’t face UDFI no matter if you leverage the purchase to the absolute max. Also, while UBIT and UDFI may make everything less simple and more costly, they need not be deal killers depending on the numbers. You don’t seem to understand the need for liquidity at all times (“my goal is to have nothing but real property in my self directed IRA vehicle not cash. I understand that the rental income goes back to the IRA as cash but I would immediately reinvest in property or utilize it as a 72T distribution.”) And your LIFO notion (last in, first out) is not how it works when the authorities have to untangle the financial messes of fraudsters.
Permalink Submitted by Alan - IRA critic on Wed, 2014-06-04 02:33
Permalink Submitted by Jose Morales on Wed, 2014-06-04 18:21
One thing that you posted that is of concern is your desire to maintain no cash in your IRA and only property. You stated that you feel confident in your ability to avoid a prohibited transaction, but I’m curious as to how you think any expenses related to the property held in the IRA would be paid if there is little to no cash? You are aware that if you pay any expenses out of your own pocket you have commited a prohibited transaction? It is absolutely impossible to hold real estate in your IRA with little to no cash. Having very large cash reserve is even more important when you hold alternative investments such as real estate in your IRA.
Permalink Submitted by Jose Morales on Wed, 2014-06-04 18:27
Also, APS was not the IRA Custodian. The Custodian was First Utah Bank, who I’m sure had no clue what their responsibilities would be when they allowed APS to open business accounts with them. Knowing who is the actual IRA Custodian is an extremely important piece of information when dealing with a “Self Directed IRA.”