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Bna Ir As 062010 V3


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  • 1. IRAs: Alternative Investments and Other Strategies David N. Levine and Richard K. Matta Groom Law Group, Chartered June 17, 2010
  • 2. What We’ll Cover
    • Background - IRAs and Roth IRAs
    • Roth conversions and rollovers
    • Valuation issues facing IRAs holding alternative assets
    • Potential alternative investment strategies and the basic legal risks attendant with each
    • Potential legislation introducing new IRA options
  • 3. Background – IRAs and Roth IRAs
    • Historically – Two Types
      • “Traditional” IRAs
      • Roth IRAs – 1998
    • Conversions to Roth IRA
      • Income Limits
      • Initial Transition Rules
    • Roth IRAs and Non-Deductible IRAs
      • Income Limits
      • Basis
  • 4. Background – IRAs and Roth IRAs
    • Growth of IRAs
      • Rollover Contributions In
      • Limits on Rollover Contributions Out
    • Mandatory Distribution Requirements
      • Traditional IRAs
      • Roth IRAs
  • 5. Roth Conversions and Rollovers
    • Roth Conversions
      • Pre 2010 Rules
      • 2010 and Forward –The End of Income Limits
    • Methods of Conversion
      • Existing IRAs
      • Direct Rollover to Roth IRAs from Retirement Plans
      • Conversions Inside Plans – Without IRAs?
    • 2010 Key Decisions
      • To Convert or Not to Convert
      • To Pay Taxes in 2010 or in 2011/2012
      • To Recharacterize or Not
  • 6. Roth Conversions and Rollovers
    • To Convert or Not to Convert
      • Current Income Tax Implications
        • What Assets Are Available?
        • What Assets to Use?
      • Long Term Tax Rates and Individual Planning
        • Retirement Tax Rates
      • Required Minimum Distributions – Traditional Versus Roth IRAs
      • Basis in Traditional IRAs
      • Investment Fees / Share Classes on Rollovers
  • 7. Roth Conversions and Rollovers
    • To Pay Taxes in 2010 or in 2011/2012
      • Health Care Reform
      • Projected Tax Rates – 35% Versus ?
      • Cash Flow and Availability
      • Time Value of Money Issues
    • To Recharacterize or Not
      • Multiple Versus Single IRA
      • Recharacterization Strategies
  • 8. Roth Conversions and Rollovers
    • Rollovers
      • Ability to Roll Over to IRAs – In Service and Post-Termination
        • IRAs
        • Tax-Qualified – Defined Benefit and Defined Contribution Plans
        • 403(b) Plans
        • 457(b) Plans
      • Direct Rollovers to Roth IRA
      • Rolling Out – A Good Idea?
  • 9. Valuation Issues
    • Reporting Requirements
      • 5498
      • Required Minimum Distribution Statement
    • Common Issues
      • Alternative Investments
        • Who is Responsible?
      • Illiquid Investments
      • In-Kind Distributions
  • 10. Alternative Strategies
    • Alternative Investment Strategies
      • Real Estate
      • Unregistered Funds (hedge funds, private equity, etc.)
      • Business Start-ups
      • Etc.
  • 11. Alternative Strategies - “Red Flags”
    • Handing Custody to a Non-Approved Custodian
    • “Checkbook LLC”
    • Transactions with Family Members
    • “Coinvesting” Personal and IRA Assets
    • Residential Real Estate for Future Personal Use
    • Investing in Business Start-Ups
      • Managed by the Accountholder
      • Managed by Family Members
    • Investing in Employer’s Business
  • 12. Alternative Strategies - “Red Flags”
    • Handing Custody of Assets to a Non-Approved Custodian
      • Risk of losing tax exemption for failing to meet the requirement of having a qualified trustee/custodian
      • Risk of losing your money
      • Key issue in the Fiserv class action suit (Bernie Madoff)
  • 13. Alternative Strategies - “Red Flags”
    • “Checkbook LLC”
      • This is merely a variation on the use of non-approved custodian
      • The principal “theory” appears to be that an interest in an LLC is an asset, i.e ., a “security,” custody of which remains with your qualified corporate trustee, so that custody is not compromised
      • A secondary argument is that the custody rule does not apply “down the chain” but only at the first level. Analogy (false?) to ERISA regulations.
      • However, IRS rules completely disregard a single-owner LLC, i.e ., it does not exist for tax purposes
      • Can you solve by having more than one member? Maybe, but consider the new risks you create.
  • 14. Alternative Strategies - “Red Flags”
    • Any Transaction Involving a Family Member
      • Transaction with a disqualified person automatically prohibited unless an “exemption” is available
      • “ Indirect” transactions are also prohibited (AO 2006-01a)
      • You should probably assume that you have an “interest” in any other relative or in-law that may affect your judgment as a fiduciary unless you can prove otherwise
      • What “proof” might suffice?
        • Commercially reasonable terms
        • Evidence that they are doing your IRA a favor, not vice-versa (but watch out for disguised contributions)
  • 15. Alternative Strategies - “Red Flags”
    • “Coinvesting” Personal and IRA Assets
      • Department of Labor has confirmed that it is not per se prohibited (AO 2000-10a)
      • But note these red flags:
        • If you need the IRA money to meet a minimum investment requirement
        • If you personally obtain different or better investment terms
        • If the entity in which you are investing, or any other person associated with it, is a disqualified person
      • Need to anticipate future conflicts
  • 16. Alternative Strategies - “Red Flags”
    • Residential Real Estate for Future Personal Use
      • Transactions with disqualified persons:
        • Leasing to family member
        • Hiring family member to provide services
        • In-kind distribution as a “sale or exchange”
      • “ Sweat equity” as a possible disguised contribution
        • Problem of distinguishing between managing the IRA and managing the property
      • Liquidity issues
      • Undervaluation issues
      • Loan guarantees
  • 17. Alternative Strategies - “Red Flags”
    • Investing in Business Start-Ups
      • Managed by the Accountholder
      • Managed by Family Members
    • Potential Red Flags:
      • If you receive any compensation from the business
      • If any of your family members receive any compensation from the business (whether as owners, employees, contractors, etc.)
      • If you use the funds to repay a loan someone else has made to the business
      • If you use the funds to make a distribution (return of capital or dividend)
    • IRS “ROBS” Memo and Expected DOL Guidance
  • 18. Alternative Strategies - “Red Flags”
    • Investing in Employer’s Business
      • If investing in your employer’s business is “expected” as a condition of employment or otherwise linked to a promotion, your salary, etc.
      • Related issue – hedge fund employees investing in employer’s funds
  • 19. Alternative Strategies – Action Steps
    • Obtain expert advice – legal, accounting, tax, valuation
    • Carefully evaluate the investment risks
    • Carefully evaluate the investment structure
    • Document the entire decision-making process
    • Consider the financial consequences if the transaction is challenged
      • Potential costs of fighting an IRS audit
      • Potential loss of tax qualification
      • Consider “isolating” a questionable investment in a separate IRA
  • 20. Potential Legislation
    • Automatic IRAs
      • Structure and Operation
      • Investment Options
      • Impact on Existing IRAs and Rollovers Funding Existing IRAs