Dear Current and Future Bulletproof Veil Subscribers,

The use of nontraditional or alternative investments is at an all-time high with owners of Individual Retirement Arrangements (IRAs). These investments are usually done through “self-directed” IRAs, where the account owner makes investment decisions and investments on behalf of the retirement plan. Popular nontraditional investments include things such as real estate, mortgages and closely held business entities.

Aggressive promoters are pushing strategies involving self-directed IRAs. Some tell you to use a self-directed IRA together with a privately held business entity to make investments. Headlines like “Buy Real Estate, Tax Liens, Financial Paper, Discounted Notes, Invest in a Business, and Make Private Loans without Custodial Interference!” are common.

"Nothing in the United States Internal Revenue Code prevents you from using IRA funds to invest in things like privately held corporations, LLCs, or limited partnerships, and many people choose to do so. Still, acquiring or selling investments like these within an IRA can pose some significant risks. You should understand the risks and rules before you invest.

Bulletproof Veil can help you stay compliant if you have a private business entity linked to your IRA. Make sure you avoid painful and costly traps. Enroll now or contact your Bulletproof Veil representative for more information.

Take Care Before You Invest IRA Money in a Private Business

Investment Flexibility with IRAs

The Employee Retirement Income Security Act (ERISA), which created the IRA in 1974, places surprisingly few re- strictions on how retirement money can be invested. Ex- cept for life insurance or collectibles - such as artwork or coins - IRA funds can be placed in just about anything.

To take advantage of this flexibility, investors usually es- tablish self-directed IRAs. In a self-directed IRA, the IRA owner takes over investment decision making from the IRA trustee, who simply operates as a custodian with no discre- tion to manage the account’s assets. For example, if you have an IRA account with a firm like Charles Schwab, you can make the IRA self-directed and tell the Schwab people how to invest your IRA funds.

Tens of thousands of investors have switched their retire- ment savings to self-directed accounts since the stock mar- ket correction of 2000 and 2001. By some estimates, 3% of the approximately $3.5 trillion held in IRAs is now in alternative investments.

As a result, some self-directed IRA owners have enjoyed greater satisfaction and improved returns. Others, however, have made some painful mistakes that ended up costing a lot of money.

Three Major Self-Directed IRA Risks

Using a self-directed IRA to acquire or sell nontraditional investments poses three major risks. This is particularly true if the IRA invests in a privately held business entity such as a corporation or LLC.

1. Increased potential for a prohibited transaction

There are certain transactions in which you cannot partici- pate when using IRA funds. These are called “prohibited transactions”. Prohibited transactions are defined in section 4975(c)(1) of the Internal Revenue Code. You can also find them in IRS Publication 590.

Prohibited transactions were established to make sure that all an IRA’s actions are for the exclusive benefit of the retire- ment plan. Generally speaking, a prohibited transaction is a form of “self-dealing”, where you sit on both sides of the table in a financial transaction. Many prohibited transac- tions involve the participation of a “disqualified person”, any person restricted by IRA rules from being involved in a given IRA transaction.

Engaging in a prohibited transaction results in a loss of the IRA’s tax-exempt status and a deemed distribution of the account’s assets. In other words, if you’re guilty of a pro- hibited transaction, your IRA will lose its tax status and you will immediately incur a tax liability on any deferred in- come over the life of the IRA. This could be a financially catastrophic event.

2. Difficulty in complying with tax reporting and administrative duties

All IRAs have mandatory tax reporting and administrative responsibilities. One responsibility that can trip you up if you have nontraditional investments is valuation reporting.

Your IRA must report an accurate fair market value (FMV) of the IRA’s assets to the Internal Revenue Service. If your IRA invests in the stock of a publicly held company, for example, determining a fair market value is a simple matter of taking the current stock price times the number of shares held by the IRA.

However, if your IRA holds nontraditional investments that aren’t traded on public markets, such as part ownership of a limited liability company, establishing a fair market value that will withstand IRS scrutiny becomes much more diffi- cult. By their very nature, alternative investments frequently do not have a readily available market value. Still, the IRA must obtain an estimated FMV from a reliable source. This could add significant expense and difficulty to the manage- ment of your IRA.

3. Liability exposure

Traditional IRA investments are usually fairly low in risk. For example, if your IRA is a shareholder in a public compa- ny, the law protects your IRA and other shareholders from liability for the company’s actions. With bonds and other common IRA investments, liability risks to the investment holder are likewise minimal.

With nontraditional investments, liability risk can increase significantly. If your IRA is one of a few investors in a private investment, the risk of disputes and litigation can be significantly greater.

While state laws exist to protect assets held within IRAs, remember that IRA liability protection is much weaker than that for ERISA qualified plans such as 401k plans. Liability threats that would be thwarted by an ERISA plan could prove troublesome to your IRA assets.

Summary & Conclusion

There is a common theme in owning privately held businesses and self-directed IRAs: If you know and understand the rules, you can enjoy the benefits while avoiding the pitfalls.

Bulletproof Veil can help keep you on the straight and narrow.. Enroll today and contact your Bulletproof Veil Representative for more information.

Material discussed is meant for illustration and/or informational purposes only and it is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, note that individual situations can vary.