Bna Ir As 062010 V3

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Bna Ir As 062010 V3

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

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