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The Checkbook IRA: How It Works andWhat You Need to Know

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Scott MaurerDirector of Business Development

Advanta IRA

Member of Florida Bar since May 2005

Worked for Advanta since February 2006

About the Presenter

Advanta IRA, and its employees, do not provide legal, tax, or

investment advice or endorse any products.

Disclaimer

All information and materials are for educational

purposes only. All parties are encouraged to consult with their attorneys,

accountants, and financial advisors before entering into any type of

investment.

Key Points to Take Away from the Seminar3What accounts can you self-direct (checkbook or not)

IRA Administrator vs. Checkbook IRA

Advantages/Disadvantages of Checkbook Control

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Most common IRA’s are administered by banks and investment brokers…. Who offer limited investment products

…however IRS regulations allow a much broader range of investments (only exclusions are life insurance and collectibles)

Limited Investing

The Rules? Self-Direction

Self-Directed accounts add up to less than 4% of IRA investments

Why haven’t I heard of Self-Directed IRAs?

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• Raw Land• Commercial• Rehabs/Flips

Types of Assets: Real Estate (in any form)

•Residential•Condos•Duplexes

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Types of Assets: Paper Assets

• Mortgage Loans • Tax Liens• Unsecured Notes• Debenture Notes• Option Contracts • Assignments• Joint Venturing • Accounts Receivable

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Types of Assets: Other Alternatives

• Checkbook LLCs • Farm Animals• LLCs/LLPs• Movie Projects• Precious Metals

• Equipment Leasing• Forex Accounts• Private Stock• Commodities• Oil/Gas

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Types of Self-Directed Accounts

• Traditional/Roth IRAs

• Employer Based IRAs- SEP/SIMPLE IRAs

• Qualified Plan- Individual 401(k) or PSP

• Former Employer Plans (401k, 403b, 457, TSP, pension)

• Education Savings Accounts

• Health Savings Accounts

Self-Directed

Accounts

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How do I move money form my current account to a self-directed account?

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Transfer: Moving funds directly from one IRA account to another without the client handling the funds. This is a non-taxable, non-reportable event.

Direct Rollover: Moving funds directly from an employer-sponsored plan (401k, 403b, 457, TSP, pension, etc.) to an IRA, without the client handling the funds. This is also non-taxable.

Indirect Rollover: If you personally take possession of the funds from an IRA or employer plan, you have 60 calendar days to move those funds back to an IRA to avoid taxes. This can only be done once per 12 months.

Transfers, direct rollovers and earnings with an IRA are unlimited!!

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What are the Benefits of Self-Direction?

Choosing the investment that you understand

True diversity within your retirement account

Can invest in tangible assets

You choose what type of return is acceptable

Benefits of Self-Direction Include:

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Today’s Agenda and Topics

Types of Checkbook Control Disqualified Persons/Investments Things to Avoid with LLCs and

Trusts Case Studies: How to buy real estate

with an IRA or using an LLC/trust How to get started

1. Wake up

2. Get dressed

3. Give seminar

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Types of Checkbook Control: Using an LLC

Terminology of LLC Members = Shareholders

o Equity holders Manager = Officer/President

o Decision makers Operating Agreement: Lists the members and their ownership percentage

o IRA cannot be Manager or Managing Membero If IRA owner is a manager, they cannot receive compensation or

co-mingle funds.

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Checkbook-Control LLC

Other Notes:-Some custodians offer the “one-stop shop” of an IRA, LLC formation, and a checkbook to get started, but charge several thousand dollars for this arrangement.

-Advanta does not approve or disapprove of any investment structure but does permit the checkbook control LLC with disclaimer,

-Advanta can provide attorneys and CPAs who can assist with structure, set-up and advice.

If you are interested in reading the IRS cases on which the checkbook-control IRA-LLC is based, they are:

Swanson v. Commissioner 106 TC 76 (1996)

T. L . Ellis, TC Memo. 2013-245

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Types of Checkbook Control: TrustsMany different types of trusts

- Revocable trusts

- Special Needs trust

- Life insurance trusts

Parties to a Trust

- Grantor :Contributes assets to trust

- Trustee: Manages assets in trust (fiduciary)

- Beneficiary: Ultimate recipient of assets in trust

When an IRA invests into a Trust, the IRA is generally the Grantor and Beneficiary of the Trust, but the IRA or the IRA owner cannot be the Trustee.

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Two Main Types of Trusts with IRAs

Land Trust (to hold real estate)- Advanta administers like a real estate asset

(paying bills, receiving income, etc.)

Personal Property Trust (to hold notes, mortgages, other assets)- Similar to Checkbook control LLC

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Prohibited Transactions: Investment restrictions

1. Life Insurance

2. Collectiblesa. Antiquesb. Alcoholc. Artworkd. Stamps, Coins (Some

coins are allowed)

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Lineal Descendants of IRA Owner (kids and grandkids), as well as spouses of

Lineal Descendants

Lineal Ascendants of IRA Owner (parents and grandparents)

IRA Owner and Spouse

Business or Entity owned or controlled by One of the above

Others

Prohibited Transactions: Disqualified Persons

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Some examples of prohibited transactions between a disqualified person and an IRA are:

• Selling, Exchanging Or Leasing Property • Lending Money Or Extending Credit • Furnishing Goods, Services Or Facilities

Two Key Points With IRAs: NO Self Dealing & NO Personal Use!

Partnering with a DQ person though is possible!

IRS Rules and Regulations: Prohibited Transactions

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Things to Avoid with LLC or Trust

Purchasing Prohibited Investments (collectibles/life insurance) within the entity Dealing with Disqualified Persons Getting a Current Benefit from assets held within the entity Paying compensation to a disqualified person (addressed in TC memo in 2013) Lending your personal credit to the entity: MUST be non-recourse financing

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Case Study:

Joe decides to invest in a single family rental properties.

Joe has a Trad IRA ($150,000) and is interested in real estate.

He project the property will net cash flow about $1,000/mth after repairs.

He finds a house that is for sale at $100,000 and needs an additional $20,000 of work to get it ready to rent.

Joe’s real estate deal

So how can Joe buy this property?

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Purchase of Real Estate through IRA AdministratorSteps

Opens and funds an Advanta account-Completes IRA Application-Transfer/Rollover of Funds from other custodian-Acct # issued in less than 24 hours

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Identifies property for purchase and notifies Advanta-Contract written in name of IRA Advanta IRA FBO Joe Smith IRA#8001234-Approves contract and sends to Advanta for execution-Escrow deposit issued from IRA

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Advanta works with title agent/attorney on closing documents-All documents (deed, HUD, etc. drafted in name of IRA-Joe will need to read and approve of all closing documents

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Purchase of Real Estate through IRA AdministratorSteps, continued

Advanta completes closing-Representative of Advanta signs after approval from Joe-Advanta wires funds to closing

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After closing…..-Joe secures tenant and directs tenant to send rents to Advanta-Joe directs that all expenses (taxes, maintenance, insurance, etc.) to be paid by Advanta from cash in IRA-Joe tracks activity in account online and through email notifications-Advanta acts as recordkeeper and administrator

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IRA grows through rents and profits on sale-Joe can hold property indefinitely and continue to accrue rents to IRA or sell at a profit6

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Purchase of Real Estate Using LLCSteps

Opens and funds an Advanta account-Completes IRA Application-Transfer/Rollover of Funds from other custodian-Acct # issued in less than 24 hours

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Forms LLC with division of corporations -Chooses state to set-up LLC-Chooses name for LLC-Uses attorney/CPA/Legal services to file articles-Articles name Joe (or another individual) as manager-Articles should not mention IRA

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LLC Operating Agreement must be drafted-IRA is listed as 100% owner-Operating agreement must show IRA as Member

Advanta IRA FBO Joe Smith IRA #800123

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Purchase of Real Estate through LLCSteps, continued

Advanta signs operating agreement -Representative of Advanta signs operating agreement on behalf of IRA once Joe has approved it -Advanta issues check from IRA to fund LLC

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LLC Operations-Joe opens bank account in name of LLC-Joe enters into contract to buy real estate in name of LLC-Joe signs all closing documents on behalf of LLC in his position as manager

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Going forward…..-Joe deposits rents from tenant into LLC bank account-Joe pays that all expenses (taxes, maintenance, insurance, etc.) from cash in LLC bank account-Joe can use cash in LLC bank account to reinvest in other assets, establish brokerage accounts, CDs, etc.

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Purchase of Assets Using TrustSteps

Opens and funds an Advanta account-Completes IRA Application-Transfer/Rollover of Funds from other custodian-Acct # issued in less than 24 hours

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Drafts private trust document-Within private trust, IRA is listed as grantor and beneficiary of trust

Advanta IRA FBO Joe Smith IRA #8001234-Joe must name a non-DQ person as trustee-Trust is not public record

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Trust document is approved by Joe-Joe must read and approve trust and sends approved copy to Advanta-Joe also has trustee sign trust document-Advanta signs trust agreement on behalf of IRA

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Purchase of Real Estate through TrustSteps, continued

Funding of Trust-Joe’s trustee must get tax ID number for trust to open bank account-Advanta issues check from IRA to fund trust-Joe’s trustee deposits check to trust bank account

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Trust Operations-Joe instructs his trustee to purchase particular assets in name of trust-Trustee will sign documents, enter into contracts, etc. -Trustee will then deposit income to trust account and pay any bills out of trust account

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Two Main Types of Trusts with IRAsLand Trust (to hold real estate)• Advanta will act record-keeper

• Joe must approve all closing documents

• Joe’s trustee signs closing documents

• All rents and expenses flow in and out of IRA

Personal Property Trust (to hold notes, mortgages, other assets)

• Joe’s trustee opens bank account and purchases assets

• Joe’s trustee must maintain records of income and expenses

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What about partnering with IRAs using LLCs?

• Multiple parties (including IRAs) can be used to partner on real estate (and other) investments

• When an IRA partners on an investment with other parties, the IRA must receive its shares of income and expenses.

• With multiple parties, an LLC can make it less cumbersome to manage the investments for multiple parties.

• The manager of the LLC will hold all investor’s funds and will make investments on behalf of LLC

• Must be careful when partnering with disqualified persons

• Must be careful if needing to add additional capital

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Case Study: Purchase of Real Estate Using an LLC

They decide to form Real Estate Partners, LLC to consolidate their funds.

Sonny has Roth IRA, Michael has Traditional IRA and Fredo has personal savings ($50K each).

IRAs are opened and funds are transferred to those accounts.

They use an attorney to draft an operating agreement, listing each party as a 1/3 owner and selecting Michael to act as Manager.

Sonny, Michael and Fredo’s Purchase

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Case Study:Purchase of Real Estate using an LLC

Members in the LLC are the IRAs

• Advanta IRA fbo Sonny Corleone Roth IRA #1234

• Advanta IRA fbo Michael Corleone IRA #5678

• Fredo Corleone, personally

• Operating Agreement is signed by Advanta for the IRAs, Fredo signs personally and Michael signs as Manager

Michael opens up checking account for LLC Operating Agreement for LLC must state that each is a 1/3 owner in the LLC REMINDER: To purchase an interest in an LLC, Advanta will need to see the LLC operating agreement, NOT the real estate closing documents.

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Using an LLC to Partner on Real Estate

Things to Remember With Fractionally Owned LLCs

•Since the LLC is fractionally owned, if there is a capital call for the LLC, the IRAs would all need to put up the same percentage of the capital call to maintain ratios.

• If an IRA owner puts up the money for the capital call with personal funds, this would be a prohibited transaction.

• Adding of a new member to the LLC can dilute the ownership and result in indirect transfer/prohibited transaction, if new member is disqualified person.

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How to Remove Cash from LLC/Trust for Distribution

LLC/Trust

IRA at Advanta

Distribution to IRA Owner

1. The LLC/Trust would send funds back to the IRA as a

dividend or income.

2. Advanta will deposit the cash into the IRA.

3. The IRA owner would send in a distribution form and Advanta will send the

funds to the IRA owner and issue a 1099.

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to Using IRA Administrator

PRO: Less likely to engage in prohibited transaction

PRO: Keeping “arms length” from IRA funds

PRO: Clear records of all activity within IRA

CON: Possibly more administrative fees for multiple assets

CON: No ability to write checks for immediate purchases

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to Using Checkbook Control

PRO: Hold more assets in IRA with lower fees

PRO: Quick access to IRA funds for auctions

PRO: Possible asset protection/anonymity

CON: Lack of oversight by IRA administrator

CON: Easier to engage in prohibited transaction

CON: Responsible for keeping accurate records

Key Points to Take Away from the Seminar3What accounts can you self-direct (checkbook or not)

IRA Administrator vs. Checkbook IRA

Advantages/Disadvantages of Checkbook Control

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So which option is best for you? Consult with attorney, CPA, others to

decide which way is best for you to hold your assets (Advanta can provide references if needed).

Most clients choose to simply have assets held by Advanta and allow us to do recordkeeping.

It is possible to switch between strategies later (may require deeds, assignments, etc.)

Advanta will NOT be able to provide counsel or advice on which way to pursue.

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Effective retirement investing is critical

• Our professionals are trained in all areas of self-directed IRAs, and are ready to assist you.

• Fund your account by making a contribution or by transferring funds from another IRA or qualified retirement plan.

• If you are looking for investment ideas, seek out local investment clubs and organizations..

• Get started today!

Step One: Open an Account

Step three:

Choose an

Investment

Step Two:Fund your Account

Advanta makes it easy to start

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For More Information, contact:

Advanta IRA Scott Maurer

smaurer@advantaIRAgroup.com 800-425-0653, ext. 1123

Please also visit our website at www. AdvantaIRA.com for a list of upcoming events and seminars! At our website you will find a wealth

of information on self-directed IRAs.