Read some of the most frequently asked questions from clients and potential clients. This is a great way to start with your education about self directed accounts and the benefits of using CamaPlan as your administrator. It’s great to learn from your mistakes but it is better and less expensive to learn from other peoples mistakes. If you don’t get your questions answered please set up a complimentary phone call with one of our knowledgeable account executives 866-559-4430.
Disclaimer: These questions should be reviewed with your accountant or other professional tax advisor. More details are needed to accurately the answer questions you posed. The good news is not many IRAs are audited but that also means there are not a lot of precedents set, thus a fair amount of grey area exists.
How do I open and fund an account?
You can open an account online in about 10 minutes, just click here to get started. If you prefer a physical document, please visit our Forms and Downloads page for a copy. Or you can call our office and one of our associates will email or fax you a copy.
How long does it take to set up a Roth IRA?
A Roth IRA can be established in 48 hours and we usually see money transferred in 2-4 weeks from your existing custodian.
What are the fees to open an account?
There is a $75 account establishment fee that is due when you send in your application paperwork. There are no annual fees charged until your account makes an investment. You may choose between two options for your annual recordkeeping fee – Value-Based (based on the value of the account) or Asset-Based (based on the # of assets your account holds). As an example, an account with one property would pay $300 per year.
Most clients agree that the fees are inconsequential compared to the savings. Please download our Fee Agreement for complete details about your options.
Why does CamaPlan require so much personal information to open an account?
- Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. This is to minimize money laundering, terrorist funding , and other goals of the government laws such as the Patriot Act.
- When you open an account, we will ask for your name, residence address, social security number, date of birth, occupation, and other information that will allow us to identify you.
- We will ask for copies of your passport, driver’s license, social security card and other identifying documents. Your account name needs to match your social security card otherwise you may be fined (presently $100).
- We are required to compare your identity to lists of persons and organizations maintained by federal agencies designated by the Department of the Treasury and/or Homeland Security(such as OFAC). If your name appears on any of these lists, we must refuse to open your account, close your account if it is already open, notify federal authorities, and follow all federal directives.
- If you attempt to falsify or conceal your identity, we may be required to file documents such as a Suspicious Activity Report.
Types of Accounts
What kind of IRAs, 401(k)s, or other types of plans can be self-directed?
Traditional IRAs, Roth IRAs, Spousal IRAs, Coverdell ESAs, Health Savings Accounts (HSAs) individual or solo 401(k)s, Group 401(k)s and Defined Benefit Plans are just a few examples.
What is the difference between the 401(k) Roth and the Roth IRA?
Income limits apply to the Roth IRA, but not the Roth-like 401(k). Contributions for the Roth IRA are significantly less than for the 401(k). Retirement age for the 401(k) can be 55 years, while the IRA is 59.5 years. UBIT/UDFI may not apply in some cases with a 401(k), but would with respect to a Roth IRA. Also, RMD’s are required with a Roth-like 401(k) but not a Roth IRA for the plan owner.
What is the difference between a Traditional IRA and a Roth IRA?
Income deduction may apply with traditional IRA contributions, but not with Roth contributions. Both have earnings that are tax-deferred. Roth earnings and contributions are tax-free with qualified distributions, whereas Traditional IRA distributions are taxed at the owner’s tax rate as ordinary income. Roth contributions can be withdrawn at any time without penalty or taxation. Traditional IRA’s require mandatory distributions at 72 years of age; the Roth IRA does not. A person can contribute after 72 years old to a Roth, but not a Traditional.
What is the difference between 1031 exchanges and self-directed IRAs?
Both are tax-saving, wealth-building tools. 1031 exchanges have time constraints that are sometimes a problem. They are not mutually exclusive, so you may use them both. 1031 exchanges are used for properties an entity already owns and wants to sell and defer taxes. IRAs are used to defer earnings and build retirement wealth, and are used for ongoing investments.
What is an ESA or Coverdell account?
An Educational Savings Account is a tax-free vehicle used to save for educational purposes. Contributions can be made up until the age of 18 and must be used prior to the beneficiary reaching age 30. ESAs may be transferred to other relatives as circumstances warrant.
What do you think about Health Savings Accounts? Can they be invested in notes, mortgages, real estate, etc?
HSAs are great – there is a tax deduction going in, and the money is tax-free coming out; it doesn’t get much better than that! You can spend that cash on eyeglasses, dental procedures, etc. HSAs can be self-directed and can be used at any time. Most of our clients keep their contributions to build wealth more quickly and pay any deductibles from other available funds. You should discuss the merits of an HSA with your professional advisors in the tax and insurance fields.
Can I convert an inherited IRA?
Conversions are not permitted for an IRA you inherit from a person other than your spouse. When you inherit a Traditional IRA from your spouse, you’re permitted to elect to treat this IRA as your own. If you make this election, you can convert the IRA to a Roth IRA.
Can I consolidate my IRAs?
Yes. You may consolidate your IRAs into a single relationship with us by completing the appropriate transfer and rollover forms. Consideration of pre- and post-tax money should be discussed with your financial advisor and/or accountant.
Rollovers and Transfers
What is the difference between a Transfer and a Rollover?
Transfer – This is a trustee-to-trustee exchange of funds. You have an unlimited number of transfers. This is a transfer between like accounts such as an IRA to IRA or Roth to Roth. This is not for a 401(k) to IRA.
- A transfer request is submitted from the custodian/administrator when you would like to bring your money. It is required to have a signed acceptance letter from the accepting custodian/administrator.
- Some custodian/administrators require a Medallion Signature Guarantee Stamp in order to process a transfer request. This is to provide security for the client. You can get a Medallion Signature Guarantee Stamp from most national banks. They will need to watch you sign the form and verify your identity (like a notary would).
- Some custodian/administrators require a mailed original form, so they have the best version of your signature to compare to your signatures on file.
- Some custodian/administrators require both the Medallion signature guarantee stamp and original forms, while some do not require either.
- For an efficient transfer process in the shortest amount of time, it is best for the client who would like to have funds transferred, to ask their current custodian/administrator what they require to transfer the funds.
Rollover – A process when funds are moved from one account to another. This is a recordable event and can be sent to either the client or another custodian/administrator. This is best suited for moving funds from a qualified plan (401(k), 403B, Profit Sharing Plan…Etc) to an IRA or vice versa. It can also be done for an IRA to IRA transaction. You must initiate a rollover with your current custodian/ administrators.
- Direct Rollover – This is a rollover trustee to trustee. You would provide your current custodian/administrator with your new account number and request the funds be directly sent to the new custodian/administrator. You may need wiring instructions or check/mailing instructions.
- Indirect Rollover – This is the process when your current custodian/administrator send you funds personally. You then have 60 days to deposit the money in a retirement account. If you do not have the money in a retirement account before 60 days, you may be responsible for taxes on the funds. You can only do one of these per year.
Can I transfer or rollover a Roth IRA into a Roth 401(k)?
No, a Roth IRA can only be transferred or rolled into another Roth IRA. IRS Publication 590 states that a Roth IRA cannot be transferred/ rolled over to an employer retirement plan. For more information click here.
Are non-traditional investments right for everyone?
Non-traditional investments may not be right for everyone, but many of our clients like the diversification. They get to use their knowledge and expertise, they are in control and have less stress and anxiety about their investments. If you know what you are doing, why do it any other way? Many people find comfort when investing in hard assets instead of just paper products.
What can a self-directed IRA invest in?
Real estate (including single family residences, apartment buildings, raw land, parking spaces, duplexes/twins/quads, and commercial real estate, such as offices & warehouses), precious metals (gold and silver bullion), notes, mortgages, structured settlements, tax liens/deeds, LLC’s and LP’s, etc. Basically anything the IRS does not prohibit is permissible.
What happens to my un-invested funds?
As all plans are self-directed, you may direct all funds anywhere you wish. All funds for which we receive no instructions are held for your benefit in an FDIC-insured account. If you wish to use a bank or other institution closer to you, all you have to do is direct us.
Can I use borrowed money to purchase property within my Roth IRA?
Yes, we have many clients that do this type of investing. You can use borrowed money if your Roth IRA is the borrower (not you personally) and your Roth is also the owner of the property purchased. When an IRA borrows money to purchase real estate it most likely will be subject to taxation of a percentage of the borrowed amount –again this would be done through IRS form 990T and called Unrelated Debt Financed Income (UDFI), subject to taxation at trust rates. Many clients structure deals in different ways to minimize taxes, as an example instead of borrowing money in the above example– sell part of the deal and UDFI may not apply.
Can your IRA invest in foreign properties or entities?
Yes, if they are not considered terrorist or disallowed countries. We have many clients with investments outside of the US, including Mexico, Canada, Europe, the Caribbean, etc.
I have a self-directed account with my broker – can I use it to buy real estate or other non-traditional assets?
Most likely not, but you can always ask. Most brokers allow you to “self-direct”, but only in products they sell. You can transfer all or part of your account funds to a CamaPlan account that allows for true self-direction, and then invest.
Do you sell any non-traditional investments? Are you going to be calling with a deal every week?
No – we are a neutral third party. We do not sell any products, nor give investment advice to our clients. We specialize in the use of tax-free and tax-deferred retirement and savings plans, and only provide that service, along with bookkeeping and required IRS reporting.
We take the privacy of our clients seriously, and we will never give away or sell your information to outside sources.
Real Estate Specific
Can my IRA buy a house and rent it? Who gets the rent and who pays the bills/expenses?
Yes – your IRA gets the rent and is responsible for all expenses. CamaPlan will help you set everything up.
Why would an investor want to use their IRA or 401(k) plan to buy real estate?
Many clients already know the benefits and risks of investing in real estate, especially income-producing properties. There are a few key benefits for the investor using an IRA or 401(k). The investors are in total control, they dictate the rate of return, they feel they have less risky investments, and have less anxiety as opposed to the “hope is my strategy” approach.
- The investment gains from that property will go directly back into their IRA or 401(k) on a tax-deferred basis. Every year, the gains will compound or grow in a tax-free environment, which leads to tremendous wealth accumulation over time.
- Successful real estate investors can apply the same great returns they’re getting with their cash investments to their retirement savings plans.
- Many new investors can actually get started in this market by tapping into this money they’ve saved over time. In many cases it allows investors to buy properties they weren’t considering before, especially if they partner their IRA or 401(k) funds with more knowledgeable investors.
How do I buy a piece of property in my IRA or/401(k)?
The process is pretty simple – open an account with CamaPlan and make a contribution or initiate a transfer/rollover to fund it. Then, after performing necessary due diligence, identify the asset you want to buy (i.e. real estate) and make the offer in the name of the IRA. You, as the client, sign all papers as “read and approved’ and forward the documents to CamaPlan for final signatures.
CamaPlan then wires the funds to the closing agent. After closing, you can check your online account for the asset addition to your portfolio. For more details on the investment process, click here.
I have a 401(k) where I currently work. I would like to use those funds to invest in real estate on a tax-deferred basis. How do I proceed?
The 401(k) Plan Document or Summary Plan Description will specify whether you have complete self-direction (including real estate and notes). You should ask your plan administrator or Benefits Department at your place of employment about the investment options available. If you have a profit sharing, money purchase or defined benefit plan, the same applies.
Your plan may permit you to roll eligible funds from your 401(k) or other qualified plan account to a self-directed plan that permits complete investment flexibility. Again, your plan administrator or Benefits Department can provide you guidance.
CamaPlan would be glad to talk to your Benefits Department or the CEO to discuss the merits of incorporating true self-direction.
If I flip in my IRA, does anything need to go on my 1040?
Not necessarily on your 1040 but you may have to fill out a tax return for your IRA, Form 990T. I suggest you read the IRS 990T instructions. The IRS gives the IRAs exemption for owning real estate as an investment, but your real estate may instead be classified as inventory in a business because you flip it. Questions like how many houses constitute a business, how to establish intent to own real estate and what time frame for holding property appropriate to avoid having it classified as inventory is best discussed with your professional tax advisors and we would be happy to assist you in any way. If you are at the top of IRS tax bracket these concerns are most likely moot. If you don’t need the additional income to live on then it probably makes sense as a rule of thumb.
May I have a company that I own fix up the property that I have in my IRA/401(k)?
The IRS code on prohibited transactions precludes such an activity by an owner. This would mean providing a service and receiving a benefit from your plan or account to which you are not entitled, and are specifically prohibited. There are specific rules regarding ownership and what is a party in interest transaction, and who may or may not provide such services.
There are private letter rulings which have been obtained in the past permitting latitude under certain circumstances. Private letter rulings may be obtained by application to the IRS.
There are specific rules regarding taxation of prohibited transactions, which include a 100% tax if a prohibited transaction is not corrected in a taxable period, and a 15% tax on the amount of the prohibited transaction. Additional rules apply to IRAs established by employers, which disqualify the entire IRA. See IRS code section 4975 for more information.
IRS Regulations and Tax Questions
Do I need an EIN/TIN, and why?
Yes, it is best to have an EIN/TIN for real estate primarily because more and more utility companies require it for services, local governments need them for privilege tax, occupational licenses for rentals, use and occupancy licenses, water and sewer, etc. This has been getting worse and worse in the last decade.
We would use the CamaPlan companies TIN years ago but then it started to create problems. Example: A client would not pay a water bill and another client would be harassed when buying a property or selling property because of another clients’ outstanding balance.
In addition, if you ever get a non recourse loan you will also need the TIN for reporting on 990T IRS form.
I also believe it better protects your FDIC insurance by not confusing it with your social security number.
When applying for the number make sure the IRS is not expecting an IRA tax return.
Do I need to file state or local tax returns for property owned by my self-directed IRA or 401(k)?
Traditionally, entities exempt from having to file federal tax returns were also exempt from having to file state and local returns. But some local jurisdictions, including the cities of Philadelphia and Detroit, among others, now require returns as they seek to account for income generated within their borders. This may become more prevalent as city budgets and associated deficits continue to grow. The tax or filing requirement will have different names depending upon jurisdiction similar to the ‘business privilege tax’.
So we recommend contacting municipal authorities where your properties are located for information about requirements, and then consulting your accounting and tax advisors. This is a good time to get a separate Taxpayer Identification Number (TIN) for your account in case you need to file.
What about Unrelated Business Income Tax?
Debt-financed property in an IRA is subject to Unrelated Business Income Tax (UBIT or UBTI or UDFI), provided that the net gain is more than $1,000 in a year. UBIT/UDFI is applied to profits made on the sale of a debt-financed property.
Preparation of the 990-T tax forms is performed by you. The appropriate agent will file such taxes and sign the tax forms on behalf of your plan.
What are the Required Minimum Distributions (RMD’s)?
RMD’s are required from all Traditional or tax-deferred accounts. Beneficiary IRA’s will also have RMD’s. Roth IRA’s do not have RMD’s for the primary account holder. Please contact your accountant or financial advisor to help you determine the amount of your RMD.
Are there income limitations for contributing to a SIMPLE IRA?
Yes — if you choose nonelective contributions. Instead of matching contributions, an employer can choose to make nonelective contributions of 2% of each eligible employee’s compensation. If the employer makes this choice, it must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. An employee’s compensation up to $250,000 (for 2012; $255,000 for 2013) is taken into account to figure the contribution limit.
If the employer chooses this 2% contribution formula, it must notify the employees within a reasonable period before the 60-day election period for the calendar year.
Are there any special rules required by the IRS when you make these investments?
Yes – the purchase has to be an “investment”, meaning you cannot buy a property and live in it, or sell your plan a property you already own. There are rules and regulations regarding Disqualified Persons.
You must also have an IRS-approved IRA administrator or custodian, such as CamaPlan, hold your account for you.
What does the IRS prohibit?
The IRS specifically prohibits life insurance, collectibles, antiques, artwork, precious metals (see exceptions), rugs, alcohol and gems. These items are noted in the IRS code, section 4975, pubs 560 and 590. The IRS does not approve any investments; they only tell you what is prohibited.
Who in my family is considered a disqualified person?
Any ascendant or descendent of you and your spouse are considered disqualified. Children and their spouses, grandchildren and their spouses, parents and grandparents are prohibited. Family members such as siblings, nieces/nephews, aunts/uncles and cousins are allowed.
Partners, trustees and fiduciaries, as well as entities that any disqualified person or group of disqualified persons owns more than 50% of, are also prohibited. Please refer to IRS Code 4975 and Publication 590 for more details.
I’ve heard of people putting more than the annual contribution into their Roth IRAs in a year – how is that possible?
You must distinguish between “earnings” which can be unlimited and “contributions” which are limited—several clients put earnings in excess of their annual contribution in their IRAs each year. If someone contributes more than is allowed, it would be considered an excess contribution and would be taxed at the prevailing rate. Individuals over 50 are able to put in a catch-up contribution, presently $1,000/year, for traditional and Roth IRAs. You should always check with your accountant or financial advisor. Our website has contribution limits for all type of plans.
How long have self-directed IRAs been able to invest in non-traditional assets?
Self-directed IRAs have been around since 1975, shortly after Congress passed the ERISA legislation in 1974. Many unions and insurance companies have been doing it for longer than that. In the past, most banks and administrators would only do it for their best or wealthiest clients.
There have been many books and articles in the Wall Street Journal, Forbes, and other publications discussing the capability of self-directed IRAs. Google currently has information on the subject, which has been growing steadily for years.
Of course, IRS forms and publications (590 and 560 in particular) discuss these types of accounts as well, but how many people want to read those forms?
Why haven’t more people heard about this and is it legal?
There are probably several reasons why people haven’t heard of it:
- Most professional advisors, financial planners and/or accountants are not taught this for whatever reasons. In many cases, when CamaPlan conducts education courses for these professionals, it’s the first they’ve heard of it. We provide education credits for attorneys, CPA’s, CFP’s and realtors.
- If an advisor is selling products like mutual funds and life insurance, in many cases they are getting commission on those products. They would not have an incentive to encourage a client to invest in non-traditional assets such as real estate unless they were acting as real estate agents or real estate brokers. Quite simply, there may be a conflict of interest.
- Many realtors are unaware of the benefits for their clients looking for investment properties. Realtors should be telling their clients about this because it could mean buying a higher priced property or multiple properties, which ultimately leads to higher commissions for them.
What is an accredited investor?
Click here for more information.
What is Earned Income?
Why don’t we pay interest on cash balance?
This is self-direction , where clients can put their money anywhere they want it. The money has to be available to make a purchase at a moment’s notice. The interest the banks are paying is very low and we must maintain funds in FDIC insured institutions. If interest rates rise significantly, we may consider providing interest. This is covered in the account application documentation. Most of our clients find it better to find another investment that provides a significant yield improvement.
What to do if debtor doesn’t repay a loan to your IRA?
Any amount of money that your IRA may loan to an individual or business and do not receive back qualifies as an un-collectible debt because it was once included in your income. When you write off a bad loan in your Roth IRA you may be able to recover some tax deduction, however in a traditional IRA it is less likely you will recover any tax deduction because you never paid tax on the loaned money..
- Make a copy of the original loan agreement between yourself and the debtor. You must demonstrate to the IRS that you fully expected the debtor to repay the amount borrowed.
- Make copies of any proof that demonstrates that the debt is worthless. Although proof is not required, it supports your claim that the debt was once valid. An example of proof is a certified copy of a court judgment against the debtor for the unpaid loan balance.
- Subtract any funds the debtor has already paid you from the total amount you originally loaned him. The resulting number is the amount of your bad debt deduction.
- Write a statement to the IRS that includes any details about the loan that were not included in the original loan contract. If you do not have written proof that the loan debt is worthless, you may use the letter to notify the IRS of the reasons why you believe the loan is uncollectible.
- Send the debtor and IRS a Form 1099-C, Cancellation of Income form, if the loan balance totals $600 or more. Once the debtor receives the Form 1099-C, debtor must include the unpaid balance of the loan in the debtor’s annual income when debtor files the annual tax return.
The IRS then assumes the responsibility of collecting the remainder of the loan and or tax from the debtor.
Provide this information to your administrator/custodian and your asset should be re-valued or removed from the account.
- You do not have to wait until the debt becomes worthless to claim it as worthless. If you have a legitimate reason to believe that the debtor will not be able to make payments on the debt, such as if the debtor files for bankruptcy, is convicted of a felony, you may assume the debt is worthless and claim it as uncollectible debt. Verify with a tax professional to determine the extent of possible tax deductions.
What to do with an account when the account holder passes away?
When the account holder passes away, the beneficiary needs to send us an original copy of the account holders death certificate. Then the account needs to be changed into the beneficiary’s name. They must open an account with us to formally inherit the IRA.
Spouses who inherit an account are not required to open a beneficiary/ inherited account, whereas non- spousal beneficiaries (children, siblings or others) would open up a beneficiary account which is subject to Required Minimum Distributions (RMD’s).
If there are alternative assets in the account, such as property, notes or private placements, they can be moved over into the inheritors account while any retitling documents are being processed. Once the retitling of the asset is finished, CamaPlan requires copies of the documentation.
What happens to your HSA when you die?
It’s up to you to decide .When you open an HSA, you will be asked to designate a beneficiary who will receive the account at the time of your death. You can change the beneficiary or beneficiaries any time during your lifetime, though some states require your to have your spouse’s consent. Find out more.