Frequently Asked Questions (FAQ)

Why haven’t I heard about rolling your IRA into real estate before?

Once ERISA was passed, the securities markets were primarily responsible for bringing the IRA and 401(k) to the mass market. The banks and brokerage houses created a misconception that buying stocks, bonds and mutual funds was all that was allowed through retirement products such as an IRA. This is 100% false! Banks and brokerage houses have a vested interest in having you move forward in stocks, bonds and mutual funds - not real estate, businesses and other non-traditional income potentials. Do not let the interests, or lack of knowledge of your financial advisor limit your ability to maximize the income potential of your retirement accounts. There are many great brokers who understand that true diversification happens when your funds are in a variety of different markets. ACE Capital Group would be more than happy to introduce you to one or more Financial Professionals who will be able to help truly diversify your retirement account portfolio.

What or who is ERISA?

The Employee Retirement Income Security Act of 1974 (ERISA) establishes minimum standards for pension plans in private industry and provides extensive rules on the federal income tax implications of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by requiring the disclosure to them of financial and other information concerning the plan; by establishing standards of conduct for plan fiduciaries; and by providing for appropriate remedies and access to the federal courts.

What kind of retirement funds am I able to use to purchase real estate?

With most qualified retirement plans that allow you to define and/or self-direct the type of investments in your retirement account, you have the ability to purchase real estate within the plan. These plans typically include:

• Traditional IRA
• Roth IRA
• SEP IRA
• Keogh
• 401(k)
• 403(b)
• And many more!

It must be noted that most employer sponsored plans such as a 401(k) will not let you roll your account into a new vehicle while you are still employed. However, some employers will allow you to roll a portion of your funds or your personal contributions to the plan. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current plan administrator.

How many people have self-directed IRA accounts?

This is a difficult number to determine. However, the self-directed industry is growing at a rapid pace and is expected to see upwards of $2 trillion enter the market during the next two years. Some of the latest numbers show more than 45 million IRA holders in the U.S. and less than 4% of those funds are held in non-traditional assets. This number is expected to increase significantly during the next five years as more and more individuals and their financial advisors attain a greater awareness of self-directed IRAs and other flexible investment plans.

Specifically, what are prohibited transactions in your self-directed IRA?

Internal Revenue Code 4975(c) (1) identifies prohibited transactions that include any direct or indirect:

• Selling, exchanging, or leasing any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
• Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
• Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
• Transferring or using, by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family to use.
• Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
• Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.

If you participate in a transaction which does not fit SPECIFICALLY within these guidelines, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to decide whether you have engaged in a prohibited transaction. Many Financial Professionalscan help educate you regarding how these may apply to income potentials you are considering.

Who are disqualified parties?

Many of the prohibited transactions are the result of a very simple equation: Plan (or plan asset) + Disqualified person = Prohibited Transaction. A plan is defined to include tax-qualified plans, IRAs and other tax favored arrangements. For the complete definition you can reference IRC § 4975(e) (1) & (2). A disqualified person is defined as:

• The IRA owner
• The IRA owner’s spouse
• Ancestors (parents, grandparents)
• Lineal Descendents (daughters, sons, grandchildren)
• Spouses of Lineal Descendents (son or daughter-in-law)
• Income potential advisors
• Fiduciaries – those providing services to the plan
• Any business entity i.e., LLC, Corp, Trust or Partnership in which any of the disqualified persons mentioned above has a 50% or greater interest.

Why are the rules considered to be complex?

These rules exist to ensure that your IRA does not engage in any income potential activity other than for the exclusive benefit of the IRA. There are many types of income potentials which violate this law. For example, buying a house and then letting your mother rent it would potentially create a conflict of interest. If your mother, who was making rent payments, all of a sudden could not - you would be conflicted from evicting her and finding a more reliable tenant. You would then have a conflict of interest between your relationship with your mother and what is in the best interest of your IRA. These rules were put in place to help avoid these sorts of scenarios. See IRC § 408.

What is the consequence of a prohibited transaction?

If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.

How do I make sure that I am following the rules?

As mentioned previously, the IRS does not identify what income potentials or transactions you can make in your IRA. They instead state which income potentials are prohibited and what makes certain transactions prohibited. Identifying, interpreting and following these rules can be complicated, but not impossible. Again, there are many Financial Professionals who can help clarify IRS guidelines and steer clear of prohibited transactions.

My CPA and Financial Advisors say using your IRA to invest in real estate is illegal. Why?

It may be that they are influenced by self interest or they are simply uninformed. Often times an individual will ask their CPA, attorney or financial planner for advice and in turn are told: “That’s illegal,” “You can’t do that,” or “It is very risky.” Attorneys stick to their core competencies and rarely deviate from them. Tax preparers are taught to do just that: prepare taxes. Your financial advisor’s company or agency may either be disinterested in this type of business or have not been educated regarding this type of format. A stock broker makes money when they sell stocks, bonds and mutual funds-not real estate. ACE can recommend to you a competent Financial Professional who understands and embraces the self-directed industry. Use this area of our Web site to find professionals available to you in the self-directed industry.

What is a Self-Directed IRA custodian?

The custodian is a bank or savings and loan institution, as defined in IRC § 408(n), or any other entity that has the approval of the IRS to act as custodian. In order to have a Self-Directed IRA, it needs to be held with a custodian who will allow income potentials into non-traditional income potentials. There are very few of these types of custodians.

Why are there not more of these custodians across the country?

There are very few non-traditional IRA custodians simply because the business is not as profitable as it is for the brokerage houses. It requires many more hours to complete a real estate transaction than to purchase stocks over an electronic system. Traditional banks do not compete because it does not fit within their business objectives. They make money by leveraging the dollars you have sitting in their accounts.

Is my money safe with an IRA custodian?

In order to work with ACE Capital Group, a custodian must be a registered Trust Company. For one to register as a Trust Company, the institution must meet stringent state requirements and have adequate reserves. Your money is kept in a separate account for your benefit and not subject to creditors of the custodian. Further, under ACE programs, the custodian never has control of your money-you do! You are ALWAYS in control.

How does a custodian make money?

You are charged a fee for simply having an account with a custodian each year. A custodian generates revenue in a variety of ways:

• Asset based fees.
• Transactional fees
• Holding fees
• Special fees

Asset fees are typically based on a percentage of the value of your Self-Directed IRA. As your IRA continues to increase in value, they are able to charge you more – even if you never purchase an asset. Larger accounts are penalized under this system.

Transactional fees apply when your IRA purchases an asset. In regards to real estate, there can be fees assessed for wiring an escrow deposit; fees for reviewing a purchase and/or sale; fees for recording each document; and fees for the final wire of funds to complete the purchase. The process repeats itself when you sell that asset. This can add up quickly for active accounts. Holding fees are also assessed for assets that are held with a custodian. If your IRA purchased a parcel of real estate, the custodian could assess a quarterly fee for just holding the deed on behalf of your IRA. Special fees include things like expediting service, express mail, wiring funds and so on. Special fees can add up quickly, especially when trying to close transactions quickly.

Is ACE Capital Group an IRA Custodian?

No. ACE Capital Group is a real estate company. We are the principals who purchase and sell the carefully selected pre-developed real estate that you purchase in your IRA. We don’t even require an escrow deposit at the time you execute a purchase agreement. However, upon request, we will direct our clients to the a qualified Custodian in the ACE Professional Network.

How long does it take to make a purchase with a Self-Directed IRA?

That depends. Working with a traditional Self-Directed IRA Custodian who is not familiar with owning real estate in your IRA can be very difficult. With a traditional Self-directed IRA Custodian, you typically cannot have any personal interaction with the IRA funds. You need to petition the IRA custodian to make an investment on their behalf. Banks move at a pace even slower than the investment community and it can take months to complete a transaction. On the other hand, the custodians that regularly work with ACE have extensive experience in the purchasing of real estate with retirement funds, so they can move quickly and efficiently! It typically only takes a matter of a few days to set-up a new custodian and then two to three weeks to actually verify and move the funds from your current custodian.

If I have a 401(k) with my current employer, will I be able to use these funds to purchase non-standard assets?

Perhaps, but most employers do not have a self-directed 401(k) so there is a high probability that it will not be possible. The only way to be sure is to contact your current 401(k) administrator.

Can I use a Self-Directed IRA to buy land?

Yes you can. ACE can assist you in the process. Since, our real estate agents our also Land Banking Specialists, they not only will help you select the perfect parcel of property but walk you through the entire process. Our business is to make this process simple to establish, easy to understand and effortless to maintain. We believe that owning land in your portfolio, when carefully selected, is the most efficient and profitable method of realizing significant long-term returns on your money. We have a proven formula for a better retirement.

Can I use a Self-Directed IRA to buy a business?

Yes you can, however, we do not suggest you use a self-directed IRA to purchase a business. Plans such as IRAs and 401(k) which engage in business activity generate Unrelated Business Taxable Income (UBTI), and therefore become more difficult to manage and costly to operate than other investment options.

Is it legal to purchase other assets using my IRA?

Yes. ERISA essentially passed the responsibility of retirement saving from the employer to the employee. IRAs were created in 1975 to provide individuals a chance to direct where their retirement funds were allocated. Rather than delineating which income potentials are allowed, the IRS code instead identifies which investments are not permitted under these laws. There are only two types of investments excluded under both ERISA and IRS Codes: Life Insurance Contracts and Collectibles (such as works of art, rugs, jewelry, etc). Refer to Internal Revenue Code Section 401 (IRC § 408(a)(3)) or contact a tax professional before making any such purchase.

If my brother is not a disqualified party, can I buy a house and let him rent it from me?

Theoretically, yes. Your brother is not a disqualified person. However, as in the scenario mentioned above, if he occupied a rental property owned by your IRA and could not make the payments, you could run afoul of the exclusive benefit rule. This could cause your IRA to have participated in a prohibited transaction. It is important that you treat every income potential the same, to benefit your IRA and only the IRA.

Can my IRA buy real estate that I currently own?

Even though there are companies which claim you can, this is strictly forbidden under IRC § 4975. There are many great real estate transactions available so do not put your retirement account at risk by engaging in a “self-dealing” transaction such as this.

Can I use leverage to buy real estate?

Yes! Leverage is a very powerful tool when purchasing real estate. However, there are unique requirements when using a self-directed IRA and leverage. The “prohibited transaction” rules state that you as a disqualified person cannot extend credit to an IRA or IRA asset. This means that if your IRA gets a loan on a piece of real estate – you cannot personally guarantee the loan. This would be viewed as extending credit. Refer to IRC § 4975(c) (1) (B) for more specific information.

An IRA must secure what is called a non-recourse loan. This type of loan is given solely based on the property. A bank who lends money this way is lending money based on the income potential rather than lending to a borrower who has a great credit score. Because banks do not have any recourse against the IRA or IRA holder, they typically require a high down payment. In the past we have seen banks require 50% down with marginally high interest rates. Banks are not in the business of foreclosing on homes, so they need to make sure if your self-directed IRA cannot make the payments that it is in a protected position and will not lose its investment.

Can I mix personal funds with IRA funds to purchase a piece of real property?

Yes, if it is structured correctly. You must be very careful to whom you are listening. The prohibited transactions code prohibits an individual from using personal or IRA cash to benefit the other. This can be easily violated through “formation issues”. If you are considering using your personal funds to move forward in real estate with your IRA either through Tenant-in-Common or a Partnership Entity, consult with ACE Professional Network Financial Advisors first. Do not be a test case for an inexperienced professional.

How do I find a realtor, CPA or mortgage lender in my area who knows about self-directed IRAs?

ACE understands the difficulties in finding competent professionals who understand and embrace the self-directed industry. After registering with ACE, users have access to ACE’s Professional Network and you can contact an advisor in their area.

Audio and Video

Self-directed IRA investing is a wonderful instrument for those who wish to take control of their retirement goals. To help you discover this new world of opportunity, Ace Capital Group has put together several presentations. For complete access and additional material, click here to log in. If you need a username and password, click here to register.