Checkbook Control or Checkbook IRA
With the legal documents provided by IRAYourWay.com, an investor can form a Kentucky Self-Directed IRA limited liability company and name him or herself as the manager. The IRA account is the sole member and owner of the company and a custodial representative manages the account. The authority to open and operate a checkbook in the name of the company comes from the Operating Agreement entered into by the manager and the member.
Disqualified persons include members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant) and your custodian.
Employee Retirement Income Security Act of 1974 (ERISA)
A federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.
Individual Retirement Arrangement (IRA)
The acronym IRA stands for “Individual Retirement Arrangements.” An IRA is a personal savings plan that gives you an investor tax advantages for setting aside money for retirement. Contributions you make to an IRA may be fully or partially deductible, depending on which type of IRA you have and on your circumstances. Generally, amounts in your IRA (including earnings and gains) are not taxed until distributed. In some cases, amounts are not taxed at all if distributed according to IRS rules.
Limited Liability Company
LLC stands for limited liability company. An LLC is a company formed under state law and, except with respect to a nonprofit limited liability company, has one or more members. Unless the company’s documents provide otherwise, limited liability companies have the power to do all things “necessary or convenient to carry out its business and affairs”. A limited liability company is a legal entity distinct from its members offering the benefits of asset protection and pass-through taxation.
Manager Managed LLC
Limited Liability Companies can either be member managed or manager managed. This is usually required by states to be specified in the Articles of Organization. Otherwise, the determination is made according to the Operating Agreement between a member and a manager. In a member managed LLC all the members/owners participate in operating the company. With a manager managed LLC, only certain nonmembers/outsiders, or a combination of members and nonmembers are given the responsibility to run the business. The other members in a manager-managed LLC are passive investors who are not involved in business operations.
Non-Recourse IRA Mortgage
When a real estate investor forms a Self-Directed IRA LLC, there may be instances where it benefits the IRA account to borrow money to complete transactions. IRS regulations prohibit an investor from personally guaranteeing any debt of an IRA, so banks require a non-recourse mortgage. With a non-recourse mortgage, the property only stands good for the debt owed. The bank is not allowed to foreclose on an IRA.
A passive custodian handles Self-Directed IRA’s. The custodian is passive because except for major compliance issues, the investor has free reign over which investments he chooses to make. Typically, local banks and investment brokers limit investors to stocks, bonds and mutual funds because these traditional investments are easier to manage. A passive custodian allows non-traditional investments, such as real estate, precious metals and limited partnerships, to name a few.
A prohibited transaction, generally, is any inappropriate use of your IRA by you, your beneficiary or any disqualified person. Examples of prohibited transactions with a traditional IRA include borrowing money from it, selling property to it, receiving unreasonable compensation for managing it, using it as security for a loan or buying property for personal use (present or future) with IRA funds.
Qualified Retirement Plan
A qualified retirement plan is described in Section 401(a) of the Tax Code. Common types of qualified plans are profit sharing plans, including 401(k) plans, defined benefit plans, and money purchase pension plans. Typically, contributions won’t be taxed until money is withdrawn from the plan.
Most pre-retirement payments a person receives from a retirement plan or IRA can be “rolled over” by depositing the payment in another retirement plan or IRA within sixty days. The payment can also be directly transferred by your bank or plan to another plan or IRA.
A Roth IRA is similar to a traditional IRA except that a taxpayer cannot deduct contributions. The big benefit to a Roth IRA is that upon satisfaction of IRS requirements, qualified distributions are tax-free. Roth IRA’s also have certain other advantages including the ability to make contributions after the age of 70 ½ and amounts can be left in a taxpayer’s Roth IRA their whole lifetime. An account or annuity must be designated as a Roth IRA when it is set up and the same combined contribution limit applies to all of a taxpayer’s Roth and traditional IRA’s.
Self-Directed IRA Operating Agreement
A Self-Directed IRA Operating Agreement is the document that details the management, membership, special advisors and distribution of monies by an LLC.
A traditional IRA allows individuals to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their traditional IRA. Contributions to the traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status and other factors.
There are two ways to transfer your funds: trustee-to-trustee or rollover. In many cases, you can transfer your existing investments directly into your new account. Moving investments from one financial institution to another without selling the investments is called a "transfer-in-kind." In most cases, your existing investments (for example, stocks or mutual funds), can be transferred-in-kind to your new account. With a rollover, a check is made out directly to you and you have 60 days to deposit the check into a new IRA to avoid taxes and penalties.
The 4 legal requirements for creating a trust are:
- the grantor must have capacity to create a trust;
- the grantor intended to create a trust;
- the trust has funding;
- the trust has ascertainable beneficiaries.
Unrelated Business Taxable Income (UBTI)
Unrelated business taxable income (UBTI) is the tax placed on the income derived from unrelated business activities of an otherwise tax-exempt entity.
Unrelated Debt Financed Income (UDFI)
UDFI stands for Unrelated Debt Financing Tax and is related to an IRA receiving a loan for the purchase of property or other business activity.