Adam Bergman

Can I Buy a Business with my Retirement Account?

Buy a Business with Your Retirement Account

IRA Financial has two great solutions that allow you to buy a business with your retirement account. Each of our solutions is a little different. The first solution is to use your IRA. The second solution is Rollover Business Startups (401k Business Financing). Despite the differences, each solution allows you to purchase a new or existing business with your retirement account.

Benefits of Using Retirement Funds to Buy a Business

Using your retirement funds to buy a business has multiple benefits. Although there are different ways to achieve this goal, some of the benefits of using your retirement funds to buy a business include:

Access to Capital: Unlike using a loan, using funds in your retirement account to buy a business does not require a waiting period, underwriting, or exposure to interest rates.

Starting a Business with no Debt: Starting a business with debt can be detrimental to the business's long-term health. However starting a business without having to take on debt can free up capital, reduce your stress, and allow you to give yourself the time and energy to help the business grow.

Tax Benefits: Depending on the structure and whether it's a new or existing business, there may be tax benefits to using your retirement funds to buy a business.

Using Your IRA to Buy a Business

If you plan to leave your job and you have an IRA or 401(k) retirement plan, why not use your IRA funds to invest in yourself? This is a much safer route than going into a volatile stock market you may not understand. Stop using putting your funds into traditional investments. Use your IRA funds for a business you can run, manage, and even earn a salary from. If you plan to invest in yourself and start a business, the ROBS 401(k) may be right for you.

Previously known as the Business Acquisition Solution (BACSS) at IRA Financial, you may already know the structure, but let’s briefly recap the foundation of ROBS 401(k) and how it can benefit you. With ROBS 401(k), a C Corporation is formed which will adopt a 401(k) Qualified Plan. Your existing retirement funds can then roll into the new 401(k) Plan tax-free. The 401(k) Plan will then purchase the stock of the new corporation. Finally, the new corporation will use those funds to purchase a new business or franchise tax-free!

With the IRS ROBS Solution, you can earn a reasonable salary from your new business or franchise. You can also use your new 401(k) Plan to make high tax-deductible contributions. Additionally, you can borrow up to $50,000 for any purpose. If you are over the age of 50, you can borrow up to $62,000.

Learn More: What is ROBS 401(k)?

Advantages of the ROBS 401(k) Solution

The ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules. These do not apply to a Self-Directed IRA structure.

How Does the Rollover Business Start-up or ROBS 401(k) work?

The Rollover Business Start-up (ROBS) arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsors, and then investing the rollover 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes.

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The following is how a typical Rollover Business Start-up structure works:

Business Start-up Structure

1. Jim, an entrepreneur or existing business owner, establishes a new C Corporation in the state where the business will be operating. The ROBS structure must involve a C Corporation and not an LLC or S Corporation because the exemption to the IRS prohibited transaction rules under IRC 4975(d) involves the purchase of “Qualifying Employer Securities”, which is defined as the stock of a corporation. Using an LLC would not satisfy this definition and only individuals can be shareholders of an S Corporation and a 401(k) Plan is a trust.

2. The new C Corporation adopts a prototype 401(k) plan that specifically permits the plan participants, including Jim, to direct the investment of their plan accounts into a selection of investment options, including employer stock, also known as “qualifying employer securities.

3. Jim elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover of a prior employer’s 401(k) Plan funds into the newly adopted 401(k) plan.

4. Jim then directs the investment of his or her 401(k)-plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that Jim wishes to invest in the new business).

5. Jim also invests personal funds equal to more than 1% of the purchase price so that the structure is not considered an Employee Stock Option Plan (ESOP).

6. The C Corporation utilizes the proceeds from the stock sale (the amount of rollover funds and personal funds used) to purchase the assets for the new business.

7. Joe would be able to earn a salary from the revenues of the business as well as personally guarantee any business loan.

ROBS 401(k) vs Self-Directed IRA LLC

The ROBS structure at IRA Financial is IRS-compliant. The ROBS is the only legal structure that individuals can use to invest retirement funds into a business they will operate and be employed by. As you may know, with a self-directed IRA LLC, an individual can invest retirement funds in a private business, but not a business that he or she is involved in. According to the Internal Revenue Code 4975, that is a prohibited transaction.

With a Solo 401(k), an individual can only borrow up to $50,000 or 50% of his or her account value (whichever is less). He/she can then use that loan for any purpose, including starting or financing a business. Notably, if an individual requires more than $50,000 for a business, then the ROBS is the only solution that will allow one to use their retirement funds to start or finance a business. You can start your business today tax and penalty-free!

Get in Touch

Do you have questions about using ROBS to buy a business that we did not cover in this article? Contact IRA Financial directly at 800-472-0646 and ask us your questions.

Did you know

Only the ROBS solution will allow you to use your IRA or 401(k) funds to buy a business or franchise. And it is the only legal way to use retirement funds to purchase a business or franchise from which you can draw a salary, without tax or penalty, which can help you to live your dreams.

by Adam Bergman

Bitcoin Investing with a Self-Directed IRA

Bitcoin investing with a Self-Directed IRA has become increasingly popular over the last few years. Bitcoin was the first and perhaps most well-known cryptocurrency. Bitcoin was created in 2009 and has continued to grow in price since this period. Bitcoin was created by a person under the pseudonym Satoshi Nakamoto, who created Bitcoin, and authored a white paper focused on Bitcoin, which serves as the original reference for Bitcoin documentation.

Key Points

One can use retirement funds to invest in Bitcoin and other cryptocurrencies
You must self-direct your IRA to be able to invest in alternative assets
Depending on the exchange you use, you might need to set up an LLC
The McNulty opinion significantly limits one's ability to hold retirement account-owned Bitcoin on a cold wallet.

Bitcoin has no corresponding physical element, like coins or paper bills (despite the popular image of an actual coin, above, to illustrate it). The value and verification of individual Bitcoins are provided by a global peer-to-peer network.

Bitcoin's current goal is a store of value as well as a payment system, there is nothing to say that Bitcoin could not be used in such a way in the future.

Bitcoin is often compared to gold since it shares some crucial characteristics such as the limited supply and supply growth through mining and the non-centrality and independence of central banks.

Gold:

Durable/Divisible/Scarce
1/2% growth a year in historical supply
Hard to transplant
Functionality – can turn in jewelry

Bitcoin:

Supply limited by design of its protocol
Borderless/Decentralized
Only 21 million - predictable issuance rate
Far more portable
volatile

Bitcoin Blockchain

One of the most exciting aspects of Bitcoin is the concept of blockchain. A Bitcoin holds a very simple data ledger file called a blockchain. A Block refers to a set of Bitcoin transactions from a certain time period. Blocks are “stacked” on top of each other in such a way that one block depends on the previous. In this manner, a chain of blocks is created, and thus we come to the term “blockchain”. Below is an example of how the Bitcoin blockchain works.

After one sends Bitcoin using a Bitcoin wallet, this transaction information is relayed throughout the network — passes from node to node (from a server to server) until it is transmitted to all the nodes.
The miners (computers) then pick up this transaction information from nodes and perform a special process called mining on it, typically by using special processors called Application Specific Integrated Circuits (ASICs).
The transaction information is then converted into a unique 32-character length string called hash.
After hashing a transaction, miners then link it with the immediately preceding hash and thus create a chain of transactions after mining a few and linking them together. This chain of mined transactions is called a block.
The block is then linked to the previous block using the previous block hash found on the Blockchain.

Bitcoin Key Terms

Private Key: Secret number that allows bitcoins to be spent. Every Bitcoin wallet contains one or more private keys, which are saved in the wallet file. The private keys are mathematically related to all Bitcoin addresses generated for the wallet.
Public Key: The public key is used to verify the digital signature, which proves ownership of the private key.
Blockchain: Decentralized record-keeping technology behind the Bitcoin network.
Mining: Miners receive Bitcoin as incentive that motivates people to assist in the primary purpose to legitimize and monitor Bitcoin transactions, ensuring their validity.
Nodes: Node stores and verifies each block in the blockchain. Nodes form a network by connecting and sharing blocks and transactions with one another.
Hash: This is the value obtained by passing the previous hash value, the data and the nonce through the SHA-256 algorithm; it is the digital signature of the block. SHA-256 is a cryptographic hash algorithm that produces a unique 256-bit alphanumeric hash value for any given input, and that is the unique feature of this cryptographic algorithm: Whatever input you give, it will always produce a 256-bit hash.

Below we will review how you can invest in Bitcoin (and other cryptos) with your Self-Directed IRA. Please note, however, we are not telling you to invest in Bitcoin. This article is for educational information about Bitcoin investing with IRA funds. Investing in Cryptocurrencies is a very risky investment. Be sure to consult with a financial advisor to determine the best investments for your situation.

Buying Bitcoin in a Self-Directed IRA

Retirement accounts are allowed to invest in just about anything. The IRS simply tells you what you cannot invest in. These include life insurance, most collectibles, and transactions involving disqualified persons (more on this later).

In IRS Notice 2014-21, the IRS issued guidance on the tax treatment of cryptos. In the Notice, the IRS confirmed that cryptos, such as Bitcoin would be treated from a tax perspective as a capital asset, such as property, like a stock or real estate. Thus, since an IRA and 401(k) plan can purpose property, such as stocks, cryptos are also permitted investments for retirement accounts. The sale of a cryptocurrency is not subject to tax and all gains are tax-deferred or tax-free in the case of a Roth IRA or Roth 401(k).

https://youtu.be/da0zX_PtQcQ

What Type of Retirement Accounts can be used to Buy Cryptocurrency with IRA Financial Crypto Solution?

Any IRA, Roth IRA, SEP IRA, SIMPLE IRA, Solo 401(k), or defined contribution plan (401(k), 403(b), 457(b)), so long as you have access to those funds. In the case of a defined contribution plan, if you are seeking to use funds from an employer plan where you are currently employed, you will generally need to be over the age of 591/2 to get tax-free access to those funds. Note – any defined contribution plan funds from a former employer can be rolled into an IRA tax-free and invested in crypto.

Tax Advantage of Buying Cryptos in a Self-Directed IRA

Investing in alternative assets with retirement funds is seen as both tax-advantageous and way to better diversify your assets. The former allows for tax-deferred growth of your gains, while the latter opens your holdings beyond the usual stocks, bonds and mutual funds.

One of the main tax advantages of using a Self-Directed IRA to invest in cryptos, such as Bitcoin is that, in general, all income and gains are tax-deferred or tax-free in the case of a Roth IRA. In other words, an IRA would not be subject to ordinary income tax or any capital gains tax on income or crypto gains allocated to an IRA, irrespective of holding period. For active crypto traders, using a self-directed is a huge tax advantage. Most active Bitcoin traders will not hold the underlying asset for longer than twelve months, meaning the gains from the capital investment would be subject to short-term capital gains, which is taxed based on the taxpayer’s ordinary income tax rate. Whereas, if the investor used a self-directed IRA to invest in Bitcoin, no tax would be due on any of the trading gains allowing the investor to take advantage of the power of tax deferral and compounding returns.

Read More: Crypto IRA Fees

Best Ways to Buy Bitcoin in a Self-Directed IRA

Bitcoin in an IRA LLC

Most crypto exchanges do not offer one the ability to open an IRA at a crypto exchange. The only legal way to purchase cryptocurrencies, such as Bitcoin, is through a regulated crypto exchange. Using an LLC wholly owned by an IRA has become a popular approach to investing in Bitcoin with retirement funds. Opening a crypto IRA using an LLC will allow the IRA owner to essentially select any cryptocurrency exchange in the U.S. as well as internationally. In addition, using a Bitcoin IRA LLC solution will offer the IRA owner the ability to hold the Bitcoin private key on a cold wallet (see below for info on the McNulty case). Considering the FTX bankruptcy, holding one’s Bitcoin private key has become almost a requirement from a security standpoint. This is especially important when one owns Bitcoin in a retirement account. Moreover, using a Bitcoin IRA LLC solution would allow one to open a crypto exchange account at a foreign exchange and purchase XRP and other cryptos that may not be available in the United States. Although, one should be cautious about holding cryptos on a foreign exchange, especially considering FTX.

Below is a breakdown of how it works

The individual opens an IRA at IRA Financial, a regulated Self-Directed IRA trust company
IRA would own 100% of the LLC and IRA owner would serve as manager of the LLC
You, as manager of the LLC, would open an account with a crypto exchange
IRA owner would open the LLC account at the crypto exchange (i.e. Coinbase or Binance)
LLC’s bank account would be linked to the crypto exchange account
IRA owner would have total control over the account and can hold cryptos on the exchange or pull cryptos off the exchange and hold in a cold wallet.

The Bitcoin IRA LLC is the only Self-Directed IRA crypto solution that will offer a retirement account owner with the ability to hold their crypto private key as well as use a US or foreign crypto exchange of their choice. For more information on the rules surrounding the ability to hold your retirement account owned Bitcoin on a cold wallet, please see below.

IRAfi Crypto™

We are very proud to have the industry’s premier solution for buying Bitcoin and other major cryptocurrencies on an exchange in the name of an IRA or 401(k). IRA Financial was the first Self-Directed IRA company to allow their clients to invest in cryptocurrencies, such as Bitcoin, directly via a cryptocurrency exchange without the need for a third-party broker or the use of an LLC. Now, investors can use their retirement funds to buy all the major cryptocurrencies directly through Bitstamp, one of the leading US cryptocurrency exchanges using IRAfi Crypto™. Bitstamp was founded in 2011 and is present in over 100 countries, with offices in the UK, Luxembourg, the USA, Singapore, and Slovenia, and caters to over 4 million customers across the globe.

IRAfi Crypto™ is the first structure to allow retirement holders to hold cryptocurrencies in an IRA directly on an exchange. The account is opened in the name of the IRA but controlled by you as the authorized representative on the account. The IRA holder has 100% control over the account and can trade anytime.

How Does the IRAfi-Bitstamp Crypto Solution Work?

Step 1: Open an IRA or Solo 401(k) account at IRA Financial Trust.

Step 2: Move IRA or 401(k) funds to new IRA Financial account tax-free.

Step 3: Funds are moved From IRA Financial to Bitstamp

Step 4: Begin buying and selling cryptos 24/7 on your own without the need for any broker or the use of an LLC on the IRA Financial app.

With the Bitcoin IRA direct solution, you can invest in cryptos directly. In other words, you do not need a costly broker or LLC. In addition, the Bitcoin will be held in the name of the IRA custodian. This will be in the benefit of the IRA holder. As a result, it’s much cleaner from a tax reporting perspective.

Advantages

No requirement to use broker
No requirement to use LLC
Ability to buy, sell, or exchange cryptocurrencies at any time through a PC or mobile application
Flat low annual IRA custodian fee – no asset valuation fees

Disadvantages

You can only purchase the most popular cryptocurrencies.
The cryptos must be held on the Bitstamp exchange

Holding Your Bitcoin Private Key in a Self-Directed IRA

The only provision in the Internal Revenue Code (“IRC”) that addresses the ability to personally possess, and IRA asset is IRC 408(m). IRC 408(m) prohibits an IRA owner from taking personal possession of an IRS approved precious metal or coin. The tax court in In McNulty v. Commissioner, 157 T.C. No. 10 (November 18, 2021) expanded on the concept of personal possession of an IRA asset by holding that an IRA owner cannot take personal possession of an IRA asset and cannot have unfettered control over any IRA asset. So how does the tax court ruling in McNulty impact the ability of a retirement account investor to hold Bitcoin on a cold wallet? The short answer – is that the court opinion would seem to potentially prohibit one from holding their retirement account owned Bitcoin on a cold wallet.

A Bitcoin cold wallet is a device that allows Bitcoin to be held offline. By using a cold wallet, Bitcoin investors can securely hold their Bitcoin off an exchange prevent hackers from being able to access their holdings via traditional means. Considering the FTX bankruptcy and the potential for crypto exchange contagion, holding one’s Bitcoin on a cold wallet has become more important. Considering McNulty, which would seem to make holding Bitcoin owned by a retirement account in a cold wallet controlled by the retirement account owner, what are some arguments that can be made to minimize the impact of McNulty on holding retirement account owned Bitcoin on a cold wallet?

Cryptocurrency, such as Bitcoin is a new type of digital asset that is based off blockchain technology. It is a unique asset because even though it is an intangible asset, it can still be held physically in a cold wallet. Thus, applying the traditional rules of McNulty to a digital asset would be inappropriate
Blockchains are entirely open and accessible to everyone. Thanks to the transparency of the blockchain, it is easy to track the movement of Bitcoin. If the identity behind a Bitcoin wallet address is known, then the transactions made can be traced back and traced in the future. All these transactions can be viewed in detail. Therefore, a retirement account owner would be able to provide to the IRS or any third-party that the crypto held in the cold wallet was not used for any personal purpose by simply providing the IRS with the Bitcoin wallet number
For retirement account investors seeking to use an LLC to invest in Bitcoin, moving the Bitcoin off the exchange to a cold wallet that is held at a depository, like metals could be a solution. The advantage of this option is that you would be able to get the cryptos off the exchange and held secure in a depository that specializes in safe keeping of valuable assets, such as gold. The downside is that you do not retain total control over the wallet, although, considering the McNulty case, retaining total control is likely not a viable option.
The bankruptcy of FTX crypto exchange in November 2022 has created a sense of urgency amongst Bitcoin investors seeking to protect their Bitcoin from crypto exchange risk. Bitcoin held on an exchange are controlled by the exchange and since the exchange controls the Bitcoin private key, a crypto exchange bankruptcy will put Bitcoin on the exchange at risk. For retirement account investors shielding their Bitcoin from exchange risks is even more vital since for many Americans, their retirement account is their primary source of savings.

The IRA Financial Crypto Solution

The internal technology team at IRA Financial is working on a multi-signature wallet option that will allow the retirement account owner to take personal possession of a Bitcoin wallet but would need the signature of IRA Financial to move the Bitcoin off the wallet. This would provide the retirement account owner with ability to protect themselves from crypto exchange exposure and hacking, while at the same time satisfying the McNulty case since IRA Financial, as IRA custodian, will still maintain custody of the Bitcoin. Of course, providing the Bitcoin owner with total control over the retirement account owned Bitcoin would be ideal, however, based on the “unfettered command” requirement in McNulty, a multi-signature approach may ultimately be the most attractive option.

by Adam Bergman

401(k) In-House Tax Filing, IRS Reporting, and BOI Reporting

IRA Financial is the only Self-Directed Solo 401(k) provider that offers its 401(k) clients an in-house tax filing, IRS tax reporting, and annual tax consulting service. Starting in 2024, the annual service will also handle BOI reporting requirements under the Corporate Transparency Act (CTA) with FinCEN.

IRA Financial has designed a specialized Solo 401(k) tax annual tax filing and compliance service, which will now offer our clients the necessary IRS filing services to keep your plan in IRS compliance. Now – as part of annual consulting service, IRA Financial will prepare and file Form 1065 (U.S. Return of Partnership Income), Form 990-T (UBIT income tax return), IRS Form 5500-EZ, IRS Form 1099-R, and the BOI Report with FinCEN.

The following are the IRS tax forms that IRA Financial will now help file for your Self-Directed Solo 401(k) plan.

IRS Form 1065 - U.S. Return of Partnership Income

With a Self-Directed Solo 401(k) plan with checkbook control, a special purpose LLC is established that would be owned by the 401(k) and managed by the 401(k) trustee (you). As manager of your Solo 401(k) LLC, you have the authority to make IRS-approved alternative asset investments on behalf of your 401(k) on your own, in privacy, and with limited liability protection. With a Solo 401(k) with Checkbook Control, you will be able to make investments, such as real estate, by simply writing a check. Since all your 401(k) funds will be held at a local bank in the name of the 401(k) LLC, all you would need to do to make the investment is write a check straight from the 401(k) LLC bank account or simply wire the funds.

In the case of a Self-Directed Solo 401(k), a single-member IRA LLC is not required to file a partnership return (IRS Form 1065) as it is treated as a disregarded entity for federal income tax purposes. However, an LLC owned by two or more retirement accounts is treated as a partnership for federal income tax purposes, and, in general, a partnership return (IRS Form 1065) must be filed BY MARCH 15, 2024 for the 2023 taxable year.

IRS Form 990-T - UBIT income tax return

Form 990-T is the tax form where a charitable organization or retirement account, such as a Solo 401(k), reports income that would be subject to the unrelated business taxable income tax (UBTI or UBIT). In general, a Solo 401(k) plan will trigger the UBTI tax in the following circumstances:

Use of a nonrecourse loan to acquire an asset, such as stock
Investment in an active business operated through a pass-through entity, such as an LLC

For Solo 401(k) investors who will have unrelated business taxable income or unrelated debt-financed income (UDFI) in excess of $1,000 after taking into account allowable deductions and expenses, such as depreciation, debt servicing, etc., the IRA would be required to file IRS Form 990-T, and Schedule A by April 15, 2024, for the 2023 taxable year. Filers may request an automatic extension of time to file Form 990-T by using Form 8868, Application for Automatic Extension of Time to File an Exempt Organization Return.

The return must be filed by the 401(k) plan and not by the individual or plan trustee. In addition, the retirement account should acquire its own tax Identification number if it does not already have one.

IRS Form 5500-EZ

The IRS Form 5500-EZ is an annual information return that is required to be filed by every “One-Participant Plan” (owners and their spouses) with plan asset value in excess of $250,000 as of December 31 of the previous tax year. The purpose of filing and reporting the fair market value (“FMV”) of your plan’s assets is to inform the IRS of assets over $250,000 annually held in a Solo 401(k) plan. The Form 5500-EZ is due every July 31^st of the next plan year. Ex: for a plan that was established in 2023, the IRS Form 5500-EZ is due by July 31^st, 2024.

IRS Form 1099-R

IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., must be filed for each Solo 401(k) plan participant that either made a distribution, Roth conversion, or 401(k) rollover. For the 2023 tax year, February 15, 2024 is the due date to distribute recipient copies. February 28, 2024 is the due date if you choose to file by paper, and March 31, 2024 is the deadline for Form 1099-R electronic filing.

BOI Report

Beginning on January 1, 2024, a significant number of companies in the United States will have to report information about their beneficial owners (the individuals who ultimately own or control the company). The beneficial owners will have to report the information to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury.

All entities formed or registered to do business in the United States will need to either (i) confirm they qualify for an exemption from the CTA’s reporting requirements or (ii) timely submit a BOI report to FinCEN.

A Reporting Company must disclose the following information with regard to each individual beneficial owner to FinCEN via the BOI report:

full name.
date of birth.
complete current residential street address.
ID number and jurisdiction of issuance for one of the following:
- US passport
- state, local, or Indian tribal identification document, or
- state-issued driver’s license; and
an image of the document from which the ID number was obtained. If the individual has none of the above listed documents, a passport issued to them by a foreign government will suffice.

Does my Solo 401(k) Need to File a BOI?

A full-service Solo 401(k) is exempt from filing a BOI report. The BOI requirements under FinCEN will only apply if your Solo 401(k) owns an entity, such as an LLC (“checkbook control”), and you, as the 401(k) trustee, manages the entity.

Does my Solo 401(k) LLC Need to File a BOI?

Under the CTA rules, a Solo 401(k) LLC would be deemed a reporting company and would, thus, be required to file a BOI report with FinCEN. A “Checkbook Control 401(k)” is an investment structure where a 401(k) plan owns an LLC and is managed by the plan trustee. Since the BOI report must be completed by an individual and a 401(k) is not an individual, but a retirement account, the report would need to include the information for the 401(k) owner, who is the person in control of the LLC as the manager.

Solo 401(k) LLC Established Prior to January 1, 2024

If you have a Solo 401(k) LLC that was established prior to January 1, 2024, you will until December 31, 2024 to complete the BOI report with FinCEN.

Solo 401(k) LLC Established After January 1, 2024

If you establish a Solo 401(k) LLC on January 1, 2024 or later, a BOI report will be required to be filed with FinCEN within 90 days of formation.

Will IRA Financial will File the BOI Report with FinCEN for My Solo 401(k) LLC?

In order to relieve our clients of the stress and responsibility of acquiring a FinCEN number and filing a BOI report for their Solo 401(k) LLC, we will be offering this service to all our clients that have elected to join our annual consulting/compliance program. Note – we can only file the BOI report if ALL members of the entity are retirement accounts administered by IRA Financial.

Conclusion

IRA Financial has helped over 24,000 clients with over $3.2 billion in assets take control of their future by investing in alternative assets with a self-directed retirement plan. We are proud to be the only self-directed retirement company that offers an in-house tax filing, IRS reporting, and annual tax consulting service for its Self-Directed Solo 401(k) clients. IRA Financial is the only self-directed retirement company that will handle all your Solo 401(k) setup, administration, and IRS tax filing/reporting needs.

by Adam Bergman

IRA Financial Self-Directed IRA In-House Tax Filing, IRS Reporting, and Annual Consulting Services

IRA In-House Tax Filing, IRS Reporting, and BOI Reporting

IRA Financial is the only Self-Directed IRA provider that offers its clients an in-house tax filing, IRS tax reporting, and annual tax consulting services. Starting in 2024, the annual service will also handle BOI reporting requirements under the Corporate Transparency Act (CTA) with FinCEN.

IRA Financial has designed a specialized Self-Directed IRA tax annual tax filing and compliance service, which will now offer our clients the necessary IRS filing services to keep the Self-Directed IRA retirement solution in IRS compliance. Now – as part of annual consulting service, IRA Financial will prepare and file Form 990-T (UBIT income tax return), and the BOI Report with FinCEN.

The following are the IRS tax forms that IRA Financial will now help file for your Self-Directed IRA.

IRS Form 1065 - U.S. Return of Partnership Income

With a Self-Directed IRA with checkbook control, a special purpose LLC is established that would be owned by the IRA and managed by the IRA holder (you). As manager of your Self-Directed IRA LLC, you have the authority to make IRS-approved alternative asset investments on behalf of your IRA on your own, in privacy, and with limited liability protection. With a Self-Directed IRA LLC with Checkbook Control, you will be able to make investments, such as real estate, by simply writing a check. Since all your IRA funds will be held at a local bank in the name of the IRA LLC, all you would need to do to make the IRA investment is write a check straight from the IRA LLC bank account or simply wire the funds.

In the case of a Self-Directed IRA, a single-member IRA LLC is not required to file a partnership return (IRS Form 1065) as it is treated as a disregarded entity for federal income tax purposes. However, an LLC owned by two or more IRAs is treated as a partnership for federal income tax purposes, and, in general, a partnership return (IRS Form 1065) must be filed BY MARCH 15, 2024 for the 2023 taxable year.

IRS Form 990-T - UBTI Income Tax Return

Form 990-T is the tax form where a charitable organization or retirement account, such as an IRA, reports income that would be subject to the unrelated business taxable income tax (UBTI or UBIT). In general, a Self-Directed IRA plan will trigger the UBTI tax in the following circumstances:

Use of a nonrecourse loan to acquire an asset, such as stock
Use of a nonrecourse loan to acquire real estate. Note – there is an exception for a Solo 401(k) plan
Investment in an active business operated through a pass-through entity, such as an LLC

For Self-Directed IRA investors who will have unrelated business taxable income or unrelated debt-financed income (UDFI) in excess of $1,000 after taking into account allowable deductions and expenses, such as depreciation, debt servicing, etc., the IRA would be required to file IRS Form 990-T, and Schedule A by April 15, 2024, for the 2023 taxable year. Filers may request an automatic extension of time to file Form 990-T by using Form 8868, Application for Automatic Extension of Time to File an Exempt Organization Return.

The return must be filed by the IRA and not by the individual or plan trustee. In addition, the retirement account should acquire its own tax Identification number if it does not already have one.

BOI Report

A Reporting Company must disclose the following information with regard to each individual beneficial owner to FinCEN via the BOI report:

full name.
date of birth.
complete current residential street address.
ID number and jurisdiction of issuance for one of the following:
- US passport
- state, local, or Indian tribal identification document, or
- state-issued driver’s license; and
an image of the document from which the ID number was obtained. If the individual has none of the above listed documents, a passport issued to them by a foreign government will suffice.

Does my Self-Directed IRA Need to File a BOI?

A full-service Self-Directed IRA is exempt from filing a BOI report. The BOI requirements under FinCEN will only apply if your Self-Directed IRA owns an entity, such as an LLC (“checkbook control”), and you, as the IRA owner manages the entity.

Does my Self-Directed IRA LLC Need to File a BOI?

Under the CTA rules, a Self-Directed IRA LLC would be deemed a reporting company and would, thus, be required to file a BOI report with FinCEN. A "Checkbook Control IRA" is an investment structure where an IRA owns an LLC and is managed by the IRA owner. Since the BOI report must be completed by an individual and an IRA is not an individual, but a retirement account, the report would need to include the information for the IRA owner, who is the person in control of the LLC as the manager.

Self-Directed IRA LLC Established Prior to January 1, 2024

If you have a Self-Directed IRA LLC that was established prior to January 1, 2024, you will until December 31, 2024 to complete the BOI report with FinCEN.

Self-Directed IRA LLC Established After January 1, 2024

If you establish a Self-Directed IRA LLC on January 1, 2024 or later, a BOI report will be required to be filed with FinCEN within 90 days of formation.

Will IRA Financial will File the BOI Report with FinCEN for My Self-Directed IRA LLC?

In order to relieve our clients of the stress and responsibility of acquiring a FinCEN number and filing a BOI report for their Self-Directed IRA LLC, we will be offering this service to all our clients that have elected to join our annual consulting/compliance program. Note – we can only file the BOI report if ALL members of the entity are retirement accounts administered by IRA Financial.

Conclusion

IRA Financial has helped over 24,000 clients with over $3.2 billion in assets take control of their future by investing in alternative assets with a self-directed retirement plan. We are proud to be the only self-directed retirement company that offers an in-house tax filing, IRS reporting, and annual tax consulting service for its Self-Directed IRA clients. IRA Financial is the only self-directed retirement company that will handle all your Self-Directed IRA setup, administration, and IRS tax filing/reporting needs.

by Adam Bergman

Have a Side Hustle? Establish A Solo 401k

Key Points

Your side hustle can do more than provide additional income.
If you have a side hustle, you become eligible to establish the Solo 401k.
A Solo 401k is a robust retirement plan and the most popular among the self-employed.

In 2024 more people than ever will be looking for a side hustle that can provide additional income. Whether it’s blogging, driving for DoorDash, reviewing products on YouTube, or hosting for Airbnb, the options are really endless.

Working for oneself has a number of benefits, including the opportunity to establish a Solo 401k. With the Solo 401k, monies earned outside of working for someone else, i.e. income from your side hustles, can be invested as desired within the limits of the law. A Solo 401k allows investors to make personalized decisions on what to invest in.

Types of Side Hustles

Getting a side hustle to profit can be quick and easy, with a little forethought and planning. Driving for a car service like Lyft or Uber during bad weather may mean additional opportunities to earn money. In the same way people are always looking for a taxi in bad weather, they may also be looking for a driver during events – New Year’s Eve or Saint Patrick’s Day can be good opportunities to earn some extra money that can be invested in the future with a Solo 401k.

Delivering food for Door Dash and Uber Eats is also an opportunity to earn some additional cash. During big games and live events, or whenever people don’t want to leave where they are, food delivery services can have a booming business.

Become an Airbnb Host

Making big money from a side hustle can often be achieved by being an Airbnb host. You may know that you can invest in an Airbnb with a Solo 401k, but you can also become an Airbnb host to satisfy one of the two Solo 401k requirements: generating self-employment income.

When it comes to this side hustle, consider the physical location of the home you’re offering. Is it near a college football stadium? Near a professional baseball park? Close to an area where celebrations take place, like Times Square in New York City?

The location of the real estate makes the biggest difference here, but thinking outside the box can help, too. Maybe the home is a large one, with recreational facilities nearby. That could make it a perfect place for family reunions in the summer, or ski vacations in the winter. Even if a location is not right next door to an attraction, it may be close enough for vacationing families who are looking to spend less than on a theme park hotel, and are willing to drive to a site.

Earning $5.00 a day from a side hustle x 365 days per year, equals $1,825 extra dollars per year. An extra $10.00 per day yields $3,650 in one year. This can mean some serious money from something not even being done full-time, and hardly being done part time, depending on the job being done. As with all decisions, it is important to consider any initial investment of funds required, time spent doing a job vs. return on time, and any risks that may be inherent in a job.

Explore Outside the Box

Explore outside the box of your typical side hustle and take on more creative ventures. Airbnb and Uber are not the only opportunities available - and unfortunately, Uber may not be an option at all, depending on where you live. Think creatively when looking for a side hustle. For example, in snow there’s the chance to shovel and earn some money that way. Bicycle courier, greeting card arranger, mover… there are lots of ways to increase income. Renting out a car is a new opportunity that wasn’t available even a few years ago. Traditional options include dog walking and babysitting.

And the side hustle money collected can go right into a Solo 401k, to be directed to the investment of choice. Solo 401ks can be used to invest in every option traditional 401ks have, as well as additional areas of interest traditional 401ks usually will not venture into. Solo 401k investors have used their funds for cryptocurrency, real estate, and traditional value investments.

by Adam Bergman

Convertible Note Investments & Your Self-Directed IRA

Investing in convertible notes has become a popular note-structuring transaction. As a result of the banking crisis and the reluctance of many banks to lend funds to small businesses, a growing number of small businesses and start-ups are looking to convertible notes as a way to finance their business or start-ups.

This article will explore the use of convertible notes by Self-Directed IRA investors and some of the tax matters to consider when electing to use them with retirement funds.

Key Points

A convertible note allows a loan to be converted into equity instead of being paid back with interest
A Self-Directed IRA can act as the lender to a business (the borrower)
You must be aware of the tax implications of the equity, depending on the type of business entity involved

What is a Convertible Note?

A convertible note is a hybrid between a loan and equity investment where the loan can be converted into equity rather than being paid back solely in interest. Convertible notes are popular among start-up businesses that have trouble borrowing money from banks. At the same time, a convertible note or bond can also be used by mature businesses, such as publicly traded corporations. They are private instruments that can vary based on the terms agreed upon by the lender and borrower. However, it is common that when structuring a convertible note for a start-up, the note will convert based on a triggering event, which can be the startup’s next round of financing that exceeds an agreed-upon minimum threshold, a period, or on a specific business achievement.

In sum, a convertible note is originally structured as a debt investment but contains an option that allows the principle, plus accrued interest, to convert into an equity investment at a later date. This provides the lender with the potential economic upside of an equity investment, which is especially exciting for start-ups.

Below is a breakdown of the steps involved in making a convertible note investment:

Step 1: The convertible note holder (the Self-Directed IRA for our purposes) lends capital to a startup (the borrower). The terms of the convertible note is outlined in a convertible note agreement and promissory note.

Step 2: As part of the convertible note investment, the Self-Directed IRA lender earns interest while the loan is still outstanding, which is typically a short period (12-24 month is common). However, because the borrower is typically a start-up, the interest is usually paid in the form of an accrual; for example, the interest is added to the principle rather than paid in cash as interest.

Step 3: With a traditional loan, the borrower is contractually obligated to repay the principle on the maturity date. But in the case of a convertible note, the hybrid instrument will convert into equity, contingent on the terms of the note.

Equity vs. Debt vs. Convertible Notes

Below is a table that characterizes the differences between equity and debt, which is helpful in understanding the characteristics of being a lender versus an equity owner:

	Equity	Debt
Ownership	Yes	No
Voting Rights	Yes	No
Repayment of Investment	No guaranty of repayment until sale of company.	Repayment on fixed schedule.
Payment of Dividends or Interest	In the case of a corporation, dividends may be paid	No dividends. Interest paid on fixed schedule.
Payment on Sale of Company	Entitled to sale proceeds based on ownership percentage, subject to debt and other payments made first.	Paid prior to equity, and receives remaining capital plus any unpaid interest. Benefit limited to invested capital plus interest.

How to Invest in a Convertible Note with a Self-Directed IRA

In order to invest in a convertible note in a private company using an IRA or rollover 401(k) plan, one will need to use a Self-Directed IRA, which is a plan that allows for alternative asset investments. Banks and traditional financial institutions do not generally offer alternative investments to their clients, which is why you need to self-direct your plan with a regulated trust company, such as IRA Financial.

The following are the steps required to use an IRA Financial SDIRA to invest in a convertible note investment:

Setup an account at IRA Financial through our app
Move funds from another retirement account to your new Self-Directed IRA tax free
Provide IRA Financial with the convertible note documentation necessary to facilitate the note investment
IRA Financial will send the money to borrower/corporation.
The lender would be titled in the name of the IRA for the benefit of the IRA owner or in the name of an LLC, in the case of a Self-Directed IRA LLC. All interest would flow to the IRA tax-free, or in the case of a conversion, the equity would be titled in the name of the IRA.

Taxation of Self-Directed IRA Convertible Note Investments

Taxation of Debt

A convertible note starts out as a debt instrument. Therefore, from a taxation standpoint, a convertible note that is owned by a Self-Directed IRA is taxed as a loan. The interest and principle from a loan would return to the IRA without tax. Using an IRA to make a loan is very tax advantageous since interest on a loan is taxed as ordinary income – not capital gains – which could potentially save the IRA owner up to 37% in income tax.

Taxation of Equity Interests

Once the convertible note converts from debt to equity, the taxation of the equity interests is taxed based on the type of equity. In the case of a corporation, dividends would return to the IRA without tax. Whereas if the convertible note converted from debt to an equity interest in an LLC or other pass-through entity, profits allocated to the IRA over $1,000 could be subject to the UBTI tax. A pass-through business is a business, such as a store, that is operated via an LLC or other flow through entity. Whereas if a business is owned via a corporation, the UBTI tax would not apply since a C corporation is not a flow through entity as it has a corporate level tax.

In other words, the sale of the C corporation stock and all corporate dividends allocated to the IRA would not be subject to tax. The UBIT tax imposes a maximum 37% tax on pass-through income allocated to an IRA above $15,000 or so. However, the sale of the LLC interests would be tax-free and not subject to UBTI, assuming the company did not have any outstanding leverage.

Hence, it is important to consider the tax implications if you are considering investing in a convertible note from a pass-through entity Note – a Self-Directed IRA may not invest in an S Corporation as an IRA is not an eligible S corporation shareholder based on the rules under the Internal Revenue Code.

Conclusion

Investing in convertible notes have become a popular way for investors to invest in start-ups and growth businesses. The hybrid nature of the convertible note gives the Self-Directed IRA the potential upside of an equity investor based on a contingent event. The tax advantages to lend money as well as own equity on a capital event makes the convertible note investment option very attractive for IRA investors.

by Adam Bergman

Direct Register GameStop (GME) Stock Using an IRA

For retirement investors of GameStop (GME) and other meme-type stocks looking to learn how they can direct register their shares, you will want to read this article. This article will explain the concept of direct stock registration, its benefits, and the impact it can have on the future price of GME and other types of stocks.

Key Points

GameStop was big news in 2021 thanks to Reddit investors
Direct registering your stocks can save you from a short sale
Using a Self-Directed IRA LLC to direct register your stocks also comes with tax advantages

The GME Story

With the emergence of online gaming and cloud servers, the idea of a brick-and-mortar business selling games seemed like a thing of the past for some investors. The seeming certainty of GameStop’s demise made it an clear target for short sellers.

Things started heating up between short sellers and individual investors in GME stock in January 2021.

A tug-of-war between everyday investors and hedge funds heated up and support grew for GameStop on reddit/wallstreetbets. On January 22, 2021, the stock skyrocketed more than 50%. During after-hours and pre-market trading that weekend, the GME continued to climb. On Jan. 25, it opened at $96.73. On January 26, 2021: 'GameStonk' gets celeb backing from Elon Musk. Shares soared by nearly 140% in after-hours trading. The stock opened on Jan. 27 at a whopping $354.83 a share. On January 27, 2021, major short seller hedge funds close their GME stock positions at a significant loss.

On January 28, popular trading platforms, such as Robinhood and TD Ameritrade, restricted transactions that involved the stock. Robinhood stated "the decision was made based on clearinghouse-mandated deposit requirements."

What happened was a crazy day of trading, which saw the stock rise to around $483, before settling in at $112 by the time the markets closed.

Why did GME stock go up so much?

Much of the surge in GME share price seems to be at the hands of short sellers who were covering short positions by buying back GME shares. Shorting a stock is often riskier than owning one. When you own a stock, the maximum amount you can possibly lose is whatever amount you’ve invested—if you buy $100 worth of Apple, and Apple crashes to $0, you’re out $100. But with short selling, your maximum loss is hypothetically limitless, as there’s no cap on a company’s value. If you short Apple at $100, and Apple announce they have a cure for cancer, causing Apple’s stock to hit $2,000, you would be out $1900. Yikes!

How Does Short Selling Work?

Below are four steps that best explain how short selling works.

Borrow shares from a broker who is willing to lend them for a fee.
Shares are then sold on the open market.
The shares are then bought back after the stock goes down in price.
The shares are then delivered back to the lender who keep the price difference.

In practice, short sellers are supposed to borrow shares from real investors. The interesting fact is that in many cases, the real owner of the shares is not even aware that the shares they own have been lent out by the brokerage firm used by the investor. The brokerage firm is more than happy to offer up the investors' shares to short sellers. Stock lending fees are a significant source of broker revenue

The GME Short Squeeze

Short sellers have ways to defend against a surging stock they have taken a short position in. For instance, if a company stock being shorted suddenly jumps in value, they can buy the shares back at a slightly higher price rather than risk a bigger loss. For example, if you short Apple at $100 and it climbs to $150, you may decide to eat the $50 loss rather than chance an even worse outcome.

But when a huge number of people are shorting a particular stock that suddenly skyrockets, it can trigger a “short squeeze,” where short sellers hurry to buy up more shares to give back to their lenders. That drives up demand and reduces supply, further increasing the price and thus getting even more short sellers to buy, and so on. It’s a brutal cycle that can annihilate short sellers, but benefit investors who owned the stock before the squeeze.

https://youtu.be/lHUgA_uoeQw

How Are Stocks Titled for Ownership Purposes?

Before computers, stock ownership was reflected in paper certificates which were mailed to the investor. The share certificate contained the actual name of the owner. Today, book entries are used in place of paper certificates. Initially, several institutions were tasked with handling the book entries and clearing of trades. However, over the last twenty or so years, one single private organization has taken over complete control over the handling and registration of shares. The organization is known as the DTCC (Depository Trust and Clearing Corporation).

Under the DTCC, when an investor uses a broker to buy stock, the DTCC’s subsidiary, the DTC (Cede & Co.), is the name that is entered on the “books” at a transfer agent, such as Computershare, for every single existing share. The investor is only the “beneficial owner” on your broker’s books, but the broker is the “beneficial owner” on the DTCC’s books. The DTCC is the primary owner, while the broker is the secondary owner, and the investor is a third-level owner on the share that the investor actually bought and paid for.

In essence, the only way for an average investor to be the primary owner of any shares of stock they purchase is to direct register that stock with the transfer agent for the company. Direct registration of stock puts the investor on the same level of ownership as the DTCC.

Why Direct Register a Stock?

At its core, the main reason why one would want to direct register their GME or other stock they own is to prevent an ongoing market manipulation and price suppression of that stock. This is what was believed to have occurred with GME stock. Whether it was through naked short selling or other means, the ability of short sellers to acquire GME shares to cover their short positions was highly controversial, to say the least. It was reported that GME investors called their brokers in droves requesting that their shares be barred from being lent out. Nevertheless, brokers continued offering GME stock for lending purposes.

The direct registration process allows any company that issues stock to use a third-party company to maintain a stockholder record of exactly which investors own each single share that exists. It can be compared to a digital stock certification. GameStop uses Computershare as their third-party company or “transfer agent.”

For GME and other company shares, the idea is that if more shares became direct registered, fewer shares would be available to short sellers. If short selling increases artificial share supply into the marketplace, direct registration of shares reduces real supply available for shorting.

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How to Direct Register GME Stock in Your Self-Directed IRA

Of course, one can own stock, such as GME, personally or in a retirement account, such as an IRA. The advantage of owning stock in an IRA is that all gains will go back to the IRA without tax; this is known as tax-deferral.

IRA Financial Trust is a regulated state charted trust company authorized to administer and custody retirement accounts. IRA Financial is not a brokerage firm and does not sell equities or provide investment advice. IRA Financial is solely responsible for the administration of IRA and other retirement accounts.

Below are the steps involved for direct registering your GME stock in a Self-Directed IRA:

Open a Self-Directed IRA account with IRA Financial.
Request an in-kind indirect rollover of the GME stock from their current custodian (brokerage firm). The brokerage firm will DRS (Direct Registration System) the shares into Computershare in the name of the individual IRA owner. The shares will go from the brokerage firm into the name of the IRA owner and then into the name of the IRA (IRA Financial Trust Company FBO John Doe IRA). IRA Financial, we will need a copy of this statement as well as a completed Deposit form, which you can complete on our app. The process will need to be completed within 60 days. Note – one can only do one indirect rollover every twelve months.
IRA Financial will establish a limited liability company (LLC) that will ultimately be owned by your IRA. The LLC can use any available name. The ultimate title to the GME stock will be in the name of the LLC, which will be 100% owned by the IRA and managed by the IRA owner (you). This is known as a Self-Directed IRA LLC. The IRA owner will serve as the manager of the LLC giving the IRA owner complete control over the LLC. IRA Financial will simply be the custodian of the IRA and will have no authority over the GME stock as the LLC operating agreement provides that the LLC is controlled by the LLC manager (the IRA owner). Since a single member LLC is treated as a disregarded entity for tax purposes, no federal income tax return is required.
The ownership of the GME stock will then be changed from the IRA owner’s name to the name of the LLC. This must be done within 60 days of having the GME shares titled in the name of the individual IRA owner. The GME stock will be re-titled from the name of the IRA owner to the name of the IRA and then to the name of the LLC.
The GME shares will be directly registered in the name of the LLC. You, as manager of the LLC, will have complete control over the LLC.

IRA Financial will offer retirement investors of GME stock with a discounted flat low annual fee for establishing a Self-Directed IRA LLC for the direct registration of the GME stock.

Please contact a Self-Directed IRA expert for more information at 800-472-0646.

by Adam Bergman

Crypto IRA - Do I Have Access to My Private Keys?

Key Points

Crypto IRAs are legal
Private v Public Key is an important distinction
IRA Financial can help you

There is a well-known saying among crypto enthusiasts – “no keys, no cheese.” The idea behind this phrase is that without having total control over your Crypto IRA private keys you don’t really have complete ownership of the cryptos. Unfortunately, when it comes to a Crypto IRA, holding your IRA private keys is not so simple.

Crypto IRA & The IRS

Even though Bitcoin is labeled as a “cryptocurrency”, from a federal income tax standpoint, Bitcoin and other cryptocurrency are not considered a “currency.” In Notice 2014-21, the IRS offered guidance on the tax treatment of cryptocurrency. The IRS Notice was clear that virtual currency, such as cryptocurrency, should treated as property for U.S. federal tax purposes, just like stocks or real estate. Therefore, since an IRA and 401(k) plan can invest in capital assets, such as stocks and real estate, a retirement account is permitted to invest in cryptocurrency.

What is a Crypto IRA?

A Crypto IRA is a type of Self-Directed IRA that allows one to invest in cryptocurrency. There are a variety of different types of Crypto IRAs. The most common is a Crypto IRA where a crypto account is opened at a regulated exchange, such as Bitstamp, and the IRA owner has direct control over the crypto investments. The IRA is custodied by a Self-Directed IRA custodian, such as IRA Financial, while the cryptos are held for custody at Bitstamp, for example.

Below is a breakdown of the various type of crypto IRA solutions and the corresponding crypto exchange options available.

Use of an LLC (Checkbook Control)
Direct Crypto Investment

Crypto IRA LLC

The only legal way to purchase cryptocurrencies is through a regulated crypto exchange. However, most crypto exchanges do not offer one the ability to open an IRA. Using an LLC, wholly owned by an IRA, has become a popular way to purchase cryptos. Opening a Crypto IRA using an LLC will allow the IRA owner to essentially use any cryptocurrency exchange they wish to buy and sell cryptos, in the U.S., as well as globally.

In addition, using a Crypto IRA LLC solution will allow the IRA owner to hold the crypto private key on a cold wallet. In light of the FTX meltdown, holding one’s private key has become almost a necessity from a security standpoint. This is especially important when one owns cryptos in a retirement account. Moreover, using a Crypto IRA LLC solution would allow one to open a crypto exchange account at a foreign exchange and purchase XRP and other cryptos that may not be available in the United States. Although, one should be cautious about holding cryptos on a foreign exchange, especially considering of FTX.

Here's how it works:

Individual opens an IRA at IRA Financial, a regulated Self-Directed IRA trust company
The IRA would own 100% of the LLC and IRA owner would serve as manager of the LLC
You, as manager of the LLC, would open an account with any crypto exchange
You would open the LLC account at the crypto exchange (i.e. Coinbase or Binance)
The LLC’s bank account would be linked to the crypto exchange account
You would have total control over the account and can hold cryptos on the exchange or pull cryptos off the exchange and hold in a cold wallet

Crypto IRA Direct

We are very proud to have the industry’s best solution for buying Bitcoin and other major cryptocurrencies on an exchange in the name of an IRA or 401(k). IRA Financial was the first self-directed IRA company to allow their clients to invest in cryptocurrencies, such as Bitcoin, directly via a cryptocurrency exchange without the need for a third-party broker or the use of an LLC. Now, investors can use their retirement funds to buy all the major cryptocurrencies directly through Bitstamp, one of the leading US cryptocurrencies exchange. Bitstamp was founded in 2011 and is present in over 100 countries, with offices in the UK, Luxembourg, the USA, Singapore, and Slovenia, and caters to over 4 million customers across the globe.

The IRA Financial crypto solution is the first to allow retirement holders to hold cryptocurrencies in an IRA directly on an exchange. The account is opened in the name of the IRA but controlled by you as the authorized representative on the account. The IRA holder has 100% control over the account and can trade anytime.

How Does the IRAFI-Bitstamp Crypto Solution work?

Step 1: Open an IRA or Solo 401(k) account at IRA Financial Trust

Step 2: Move IRA or 401(k) funds to new IRA Financial account tax-free

Step 3: Funds are moved From IRA Financial to Bitstamp

Step 4: Begin buying and selling cryptos 24/7 on your own without the need for any broker or the use of an LLC on the IRA Financial app*.

With the Crypto IRA direct solution, you control the purchase and sale of Bitcoin (and other cryptocurrencies) directly. In other words, you do not need a costly broker or LLC. In addition, the cryptos will be held in the name of the IRA custodian. This will be in the benefit of the IRA holder. As a result, it’s much cleaner from a tax reporting perspective.

Advantages

No requirement to use broker
No requirement to use LLC
Ability to buy, sell, or exchange cryptocurrencies at anytime through a PC or mobile application*
Flat low annual IRA custodian fee – no asset valuation fees

Disadvantages

You can only purchase the most popular cryptocurrencies.
The cryptos must be held on the Bitstamp exchange

What is a Crypto IRA Private Key?

The concept of cryptocurrency keys is to verify that a spent transaction was indeed signed by the owner of the funds and was not forged. When one owns cryptocurrencies, controlling the private key demonstrates your ownership of the associated cryptocurrency. In essence, your private key unlocks the right for the crypto owner to control the associated cryptocurrencies and, thus, have the power to spend it. Since the private key is the pathway to access to your cryptocurrencies, it should remain private. Hence, gaining control of your crypto’s private key is a common way to ensure a higher level of security for the underlying cryptocurrency.

The crypto public key is akin to a username, and identifies the wallet so that other parties know where to transfer coins during a transaction. Whereas, the private key is similar to a password, and is the wallet’s owner’s special access code which acts as a security device to help make sure others cannot access the cryptos stored within.

In light of the recent developments in the cryptocurrency industry, specifically the recent bankruptcies of FTX, Blockfi, Celcius, and Voyager, many crypto investors have looked to take control of their private key as a way to best protect their cryptos from exposure to crypto exchange risks. This is especially true for many retirement investors who want to better safeguard their hard earned retirement investments from loss. We know that the party that controls the private key of the corresponding crypto has control and ultimate ownership of that coin. Accordingly, since a centralized exchange controls the private keys of the coins purchased from that exchange, a surge of retirement crypto investors have been looking to find a solution that allows them to control the private keys of the cryptos owned in their retirement account. The Crypto IRA LLC solution is the only solution that will allow IRA or 401(k) investors to take control of the private keys associated with the cryptos owned in their retirement account.

What is a Cold Wallet?

The onus to keep your cryptocurrency secure typically falls on the Crypto IRA owner. The Crypto IRA owner must decide how to store Bitcoin and other cryptocurrency tokens in the safest, most secure way possible.

For a Crypto IRA investor, crypto wallets operate in a similar way to traditional wallet most of use to hold cash and credit cards. In the crypto universe, wallets can be thought of as a storage device for cryptocurrency tokens. A crypto wallet can be a physical or digital medium for storing your crypto public and private keys.

A cold storage wallet is essentially a storage devices like a USB drive which are used to keep the crypto public and private keys. Such devices, such as a Ledger Nano, can be kept safe in a safe or deposit box to make sure that they don’t fall into the hands of any bad actors.

Hardware cold wallets, such as the Ledger Nano, are becoming the most popular way to secure a wallet in an offline mode not connected to the internet. These are small devices which are water and virus proof and even support multi signature transactions. Many Crypto IRA investors wish to hold their IRA owned cryptos in a cold storage wallet for security purposes, however, a recent tax court case creates some complexity for Crypto IRA investors.

The McNulty Case

In McNulty v. Commissioner, 157 T.C. No. 10 (November 18, 2021), the tax court ruled that an IRA owner cannot take personal possession of an IRA asset and cannot have unfettered control over any IRA asset. The McNulty case involved a taxpayer who used a Self-Directed IRA LLC to invest in precious metals and real estate. The McNultys decided to take personal possession of the IRA-owned coins, which violated a provision in the tax code.

However, the tax court’s opinion focused on the taxpayer’s personal possession of the IRA-owned metals, which can have significant implications for Crypto IRA owners who wish to hold their cryptos in a cold wallet. The tax court did not reference cryptos in the written opinion, however, since cryptos can be held physically in a cold wallet, the court’s ruling in McNulty seemingly would prohibit a Crypto IRA owner from holding the cryptos in a cold wallet in his or her personal possession.

On the other hand, unlike metals, cryptos are not tangible and are a new type of digital asset. Cryptocurrency is intangible but when its private keys are held in a cold wallet, it can be tangibly controlled by the IRA owner. This is why applying IRC 408(m) and the principles of the McNulty case to holding cryptos on a cold wallet may not be an accurate comparison. In addition, there is a real security risk to holding cryptos on an exchange. The cryptos owned in an IRA are visible on a blockchain. In other words, when one buys cryptocurrency, the public address of the coin can be found on a blockchain. The blockchain provides accountability and transparency for investors but also to the IRS. Hence, unlike gold, which cannot be traced by the IRS if held personally, cryptos held on a cold wallet can be traced on the blockchain providing the IRS with the ability to audit and trace the movement of any crypto.

In sum, the opinion in the McNulty case seems to apply a broad requirement that an IRA owner does not gain unfettered command over any IRA assets. The McNulty case was based on the personal possession of metals and coins, which IRC 408(m) clearly states must be held in the physical possession of a U.S. trust company. Moreover, the fact that cryptocurrency is a new intangible asset class that due to its cryptography makeup has a real security necessity to take physical control over such asset via a cold wallet. Unlike metals, because blockchain technology offers full transparency to the movement of any cryptocurrency, holding cryptos in a cold wallet will still provide the IRS with the ability to audit the movement of said crypto. However, there is currently no direct IRS guidance on the ability of a retirement account holder to hold retirement account owned cryptos on a cold wallet.

by Adam Bergman

How to Complete a Self-Directed IRA Rollover

In general, a Self-Directed IRA may be funded by a transfer from another IRA account or through a Self-Directed IRA Rollover from an eligible defined contribution plan. Eligible defined contribution plans include qualified 401(k) retirement plans under Internal Revenue Code Section 401(a), 403(a), 403(b), and governmental 457(b) plans.

What is the most Common Way to Fund a Self-Directed IRA?

Transfers and rollovers are types of transactions that allow movements of assets between like IRAs – Traditional IRA to Self-Directed IRA and Roth IRA to Self-Directed Roth IRA. An IRA transfer is the most common method of funding a Self-Directed IRA LLC or Self-Directed Roth IRA.

IRA Transfers to a Self-Directed IRA with a Traditional IRA

An IRA-to-IRA transfer is one of the most common methods of moving assets from one IRA to another. A transfer usually occurs between two separate financial organizations, but a transfer may also occur between IRAs held at the same organization. If an IRA transfer is handled correctly the transfer is neither taxable nor reportable to the IRS. With an IRA transfer, the IRA holder directs the transfer, but does not actually receive the IRA assets. Instead, the transaction in completed by the distributing and receiving financial institutions. In order for the IRA transfer to be tax-free and penalty-free, the IRA holder must not receive the IRA funds in a transfer. Rather, the check must be made payable to the new IRA custodian. Also, there is no reporting or withholding to the IRS on an IRA transfer.

The retirement tax professionals at the IRA Financial will assist you in funding your Self-Directed IRA LLC by transferring your current pretax or after-tax IRA funds to your new Self-Directed IRA or Self-Directed Roth IRA structure tax- and penalty-free.

Read More: The Self-Directed Roth IRA Secret

How the Self-Directed IRA Transfer Works

Your assigned retirement tax professional will work with you to establish a new Self-Directed IRA account at a new FDIC and IRS approved IRA custodian. The new custodian will then, with your consent, request the transfer of IRA assets from your existing IRA custodian in a tax- and penalty-free IRA transfer. Once the IRA funds are either transferred by wire or check tax-free to the new IRA custodian, the new custodian will be able to invest the IRA assets into the new IRA LLC “checkbook control” structure. Once the funds have been transferred to the new IRA LLC, you, as manager of the IRA LLC, would have “checkbook control” over your retirement funds so you can make traditional as well as non-traditional investments tax-free and penalty-free.

Can I Move a 401(k) Plan to a Self-Directed IRA?

The 2001 Economic Growth and Tax Relief Reconciliation Act expanded the rollover opportunities between employer-sponsored retirement plans, such as 401(k) Plans and IRAs. Since 2002, individuals may rollover both pretax and after-tax 401(k) plan fund assets from a 401(a), 403(a), 403(b), and governmental 457(b) plans into a Traditional IRA tax-free and penalty-free.

In general, in order to rollover qualified retirement plans to a traditional IRA there must be a plan-triggering event. A plan-triggering event is typically based on the plan documents, but they generally include the following: (i) the termination of the plan, (ii) the plan participant reaching the age of 59 1/2, or (iii) the plan participating leaving the employer. If you have a triggering event, you can move your 401(k) funds into a Self-Directed IRA.

https://youtu.be/7kkyPWiY_Qo

A Direct Rollover to a Self-Directed IRA

A direct Self-Directed IRA rollover transpires when a plan participant, who has access to his or her retirement funds, moves the eligible qualified retirement plan funds to an IRA custodian. In other words, a direct rollover is between a qualified retirement plan and an IRA, whereas, a transfer is between IRA financial institutions. In general, employer 401(k) plan providers must offer the direct rollover option if it is reasonable and anticipated that the total amount of eligible rollover distributions to a recipient for the year would be more than $200.

How to Complete a Direct Rollover

Your assigned retirement tax professional will work with you to establish a new Self-Directed IRA account at a new FDIC and IRS approved IRA custodian. With a direct rollover from a defined contribution plan, the plan participant must initiate the direct rollover request. What this means is that the plan participant must request the movement of 401(k) plan funds to the new IRA custodian, not the IRA custodian, like with an IRA transfer. Your assigned retirement tax professional will assist you in completing the direct rollover request form which will allow you to move your 401(k), 403(a), 403(b), 457(b), or defined benefit plan assets to your new IRA account.

A direct Self-Directed IRA rollover may be accomplished by any reasonable means of direct payment to an IRA. Regulations state that the reasonable means may include wire, mailing the check to the new IRA custodian, or mailing the check made out to new IRA custodian to the plan participant.

Reporting a Direct Rollover

When an individual directly rolls over a qualified retirement plan distribution to a Traditional IRA, the employer is generally required to report the distribution on an IRS Form 1099-R, using Code G in Box 7, Direct rollover and rollover contribution. The receiving IRA administrator would them be required to report the amount as a rollover distribution in Box 2 of IRS Form 5498.

Rollover Chart

An Indirect Rollover to a Self-Directed IRA

An indirect Self-Directed IRA rollover occurs when the IRA assets or qualified retirement plan assets are moved first to the IRA holder or plan participant before they are ultimately sent to an IRA custodian.

60-Day Rollover Rule

An individual has sixty (60) days from receipt of the eligible rollover distribution to roll the funds into an IRA. The 60-day period starts the day after the individual receives the distribution. Usually, no exceptions apply to the 60-day time period. However, in cases where the 60-day period expires on a Saturday, Sunday, or legal holiday, the individual may execute the rollover on the following business day.

An individual receiving an eligible rollover distribution may rollover the entire amount received or any portion of the amount received. The amount of the eligible rollover distribution that is not rolled over to an IRA is generally included in the individual’s gross income and could be subject to a 10% early distribution penalty if the individual is under the age of 59 1/2.

How the 60-Day Rollover Works with a Self-Directed IRA

The retirement tax professionals at the IRA Financial Group will assist you in rolling over your 60-day eligible rollover distribution to a new FDIC and IRS approved IRA custodian. Once the 60-day eligible rollover distribution has been deposited with the new IRA custodian within the 60-day period, the new custodian will be able to invest the IRA assets into the new IRA LLC checkbook control structure. Once the funds have been transferred to the new IRA LLC, you, as manager of the IRA LLC, would have checkbook control over your retirement funds so you can make traditional as well as non-traditional investments.

Related: Self-Directed IRA Investments

60-Day Rollover from an Employer Retirement Plan

In general, when a plan participant requests a distribution from an employer qualified retirement plan. IRS rules require the employer to withhold 20% from the amount of the eligible rollover distribution. If an individual receives an eligible rollover distribution and then elects to rollover the assets to an IRA custodian within 60 days, the individual can make up the 20% withheld by the employer retirement plan provider for federal income tax purposes.

Employer sponsored retirement plans are required to withhold at a rate of 20% on all eligible rollover distributions of taxable funds or assets, unless the participants elect to directly rollover the distribution to an IRA or to another eligible retirement plan. In other words, when taking an indirect rollover from an employer qualified retirement plan, the employer is required to withhold 20% of the eligible rollover distribution. The 20% withholding requirements is not applicable for IRA-to-IRA transfers or for direct rollover distributions.

Reporting Indirect Rollovers

When an individual takes a distribution from an employer sponsored retirement plan, such as 401(k) Plan, the employer should make the individual, even if the individual intends to roll the funds over to an IRA. The employer would be required to withhold 20% from the eligible rollover distribution since the funds will be rolled to the plan participant and not directly to the IRA or qualified retirement plan custodian. The employer (payer) would report the indirect distribution on IRS Form 1099-R, using the applicable distribution Code (1,4, or 7). If the funds are deposited with an IRA custodian within 60-days, the receiving IRA custodian would report the rollover assets on the IRS Form 5498 as a rollover contribution in Box 2.

Self-Directed IRA Transfer & Rollover Experts

The retirement tax professionals at the IRA Financial will assist you in determining how best to fund your Self-Directed IRA or Self-Directed Roth IRA LLC structure. Whether it’s by IRA transfer or direct or indirect Self-Directed IRA Rollover, each client of the IRA Financial Group will work directly with an assigned retirement tax professional to make sure his or her Self-Directed IRA LLC structure is funded in the most tax efficient manner.

Learn More:

Real Estate Investing with a Self-Directed IRA

by Adam Bergman

What is Fair Market Value in a Self-Directed IRA?

Pursuant to Internal Revenue Code Section 408, an IRA must be established by a “trustee.” A trustee is defined as either a bank, financial institution or state-chartered trust company authorized to administer IRAs. The institution used to administer an IRA is also known as an IRA custodian. An IRA custodian that is responsible for the IRA administration, which includes complying with all IRS filing requirements, including fair market value assessments.

Key Points

Every IRA needs to submit the fair market value of its assets
IRS Form 5498 is used by your custodian to submit the information
The value of each asset is determined on December 31 of the previous year

IRS Form 5498

One of the most important roles of an IRA custodian is completing the IRS Form 5498. It must be filed with the IRS by May 31 of the following year for each IRA maintained by the IRA custodian during the previous year. The IRA custodian is required to file IRS Form 5498, not the IRA owner.

The form provides the IRS with a snapshot of the IRA based on the information as of December 31 of the previous year. In general, the IRS Form 5498 provides the IRS with the following information:

Fair market value of IRA as of 12/31
Amount of IRA of Roth contribution
Amount of rollover
Amount of RMD, if any
Fair market value of certain specified alternative assets
Indication if the IRA invested in the following assets:
- Stock or other ownership interest in a corporation that is not readily tradable on an established securities market.
- Short- or long-term debt obligation that is not traded on an established securities market.
- Ownership interest in a limited liability company or similar entity (unless the interest is traded on an established securities market).
- Real estate.
- Ownership interest in a partnership, trust, or similar entity (unless the interest is traded on an established securities market).
- Option contract or similar product that is not offered for trade on an established option exchange.
- Other asset that does not have a readily available FMV

In sum, IRS Form 5498 will provide an overview of some of the key details involving the IRA for the previous year. However, it does not provide the IRS with the specific investment, such as stock in Company X. Instead, it provides the IRS with just the category of investment made by the IRA.

Tips on How to Value Your Self-Directed IRA

The Fair Market Value of a Self-Directed IRA is the price at which the asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts about the asset. The Fair Market Value may be an estimate of the value.

However, it is good practice to have a qualified independent third-party provide that estimated value. In other words, the value provided to the IRA custodian to compete IRS Form 5498 is not the price you paid for the IRA-owned asset(s), but the value of all IRA-owned assets as of December 31 of the previous year.

Self-Directed IRA LLC & Valuation

In the situation where the IRA owner has established a Self-Directed IRA LLC to make investments, when valuing the IRA, the IRA owner would provide the pro rata value of the entire LLC, including all LLC assets, as part of the IRA value.

For example, if the IRA owner invested $200,000 for 100% of an LLC and the LLC purchased two homes for $200,000, which are now worth $325,000, the IRA owner would provide the IRA custodian with a value of $325,000 for the LLC.

IRA is Part-Owner

If the Self-Directed IRA is a partial owner of an asset, the Fair Market Value used must reflect only the portion of the asset which is owned by your account.

IRA with Debt

If your IRA asset includes a loan or debt, the Fair Market Value of the IRA must include the amount of debt as part of the value. For example, if you use $100,000 in a Self-Directed IRA, and then acquire a $100,000 nonrecourse loan to buy a property for $200,000, the value of the IRA, for purposes of IRS Form 5498, is $200,000 and not the $100,000 of IRA funds used.

IRA with no Value Information

There are times when the IRA owner is not provided the necessary investment valuation information needed to provide to the IRA custodian. This often occurs in private investment fund-type investments that are not subject to the mark-to-market rules, such as private equity or venture capital funds. In these cases, it is common for the IRA owner to use the amount initially invested as the valuation provided to the IRA custodian.

IRA Valuation & RMDs

In the case of an IRA owner that is over the RMD age, which is currently age 73, and is required to take an annual distribution from his or her IRA in the aggregate, it is important that the IRA owner have a third-party certify the valuation of the IRA since the value will have a direct taxable impact. For example, IRA Financial requires all our IRA owners who are required to take RMDs to have a third-party certify the value being provided.

IRA Valuation & IRS Audit

A common question from IRA owners, is whether an extreme change in IRA valuation will trigger an IRS audit. For example, if an IRA was valued at $100,000 in 2021, and now, in 2024 it is valued at $950,000. The answer is no one knows. IRAs are typically audited by the Small Business/Self-Employed division and, thus, it is unclear how IRS Form 5498 fits into their audit process.

In addition, the IRA audit activity on IRAs tends to focus on IRA owners above the RMD age since a discrepancy in IRA valuation has a direct tax impact, whereas, if the IRA owner is under the RMD age, an undervalued IRA does not have an impact.

Conclusion

When providing a Fair Market Value for your Self-Directed IRA, it is important to remember that the value provided should not be what the IRA paid for the asset, but its worth as of December 31 of the previous year. Also, if you are above RMD age, it is extra important that the IRA Fair Market Value provided to the IRA custodian be accurate.

Whereas, for investors under RMD age, providing an accurate value of the IRA is important and should still be handled with care, although, you will have more flexibility in this regard. Remember to report the value to your IRA custodian in a timely matter, in order to submit Form 5498 before the deadline.

by Adam Bergman

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