wow, did everyone already know this about new self-directed retirement options?

Comments

• msf

  August 2016 edited August 2016

  I did know about these, but in part that's because one invested in an insolvent company from which I'd previously disassociated myself. Out of curiosity, I did a fair amount of digging at the time.
  
  These are for people who want to have private offerings (usually requiring one to be an accredited investor) or other ultra-high-risk stuff in their IRAs.
  
  For maximum flexibility (and risk, both investment and tax), people use their self-directed IRAs to buy a shell LLC that they control. It's the LLC that then makes the investments. Do a search for "checkbook control" IRA.
  
  There are a handful of companies that serve as trustees for self-directed IRAs. Here's a writeup of checkbook control from one of them. What it doesn't tell you are the risks.
  
  Here's an SEC page telling you about the investment risks (Ponzi schemes and such):
  http://www.nasaa.org/5866/self-directed-iras-and-the-risk-of-fraud/
  or pdf version: https://www.sec.gov/investor/alerts/sdira.pdf
  
  Assuming people here are all "sophisticated investors" and of course would never be taken in by any of these investment schemes, a perhaps more interesting risk is the tax risk. Problems can arise through inadvertent self-dealing (which disqualifies the IRA), or by earning unrelated business taxable income (UBTI), or by missing filing requirements, or ...
  
  Here's a Journal of Accountancy article on the tax risks: Self-directed IRAs: A tax compliance black hole
• davidrmoran

  August 2016

  I shoulda figured you would know all this. Pretty recent, looks like:
  
  https://en.wikipedia.org/wiki/Self-directed_IRA
• claimui

  August 2016

  This was brought up during Mitt Romney's presidential campaign, when the media noted that he had an IRA worth $100 million. IIRC the answer was that as a partner at a private equity fund, Romney was able to put some of his partnership interest in his IRA. When the partnership made money, all that return went straight into his IRA.
• hank

  August 2016

  You have to get up early in the morning to sneak anything past msf.
• Old_Joe

  August 2016

  "You have to get up early in the morning to sneak anything past msf."
  
  @hank- Not sure getting up early works, either.
• msf

  August 2016

  Thanks guys, but as the saying goes, it is better to be lucky than smart.
  
  I'd looked into this because of a fluke event, not because of personal interest. Though I'll admit to a bit of curiosity about how the other half (whoops, 1%) lives.
  
  I hadn't looked much into Romney's IRA - it was just so extreme that it didn't strike me as interesting even in passing. I believe @claimui is correct, though I also believe there is more to it - notably how investments, even partnership interests, can generate that much income.
  
  Related is something that I noticed briefly not long ago. When rich folk gift minority interests in a business, they are allowed to undervalue it. It seems there's a proposal (or something more concrete, I forget) floating around now to do away with this estate/gift tax loophole. It is likely that whatever interests Romney put into his IRA were similarly undervalued.
  
  Here's one wealth advisor's writeup about this valuation discount and possible changes to the rules:
  "Discounts are commonly claimed for lack of control (minority interest discount) and lack of marketability."
  
  https://www.cbiz.com/insights-resources/details/articleid/4298/dramatic-proposed-changes-to-impact-estate-and-gift-tax-planning-article