Turn Your Retirement Account into a Cash-Machine!

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2 Turn Your Retirement Account into a Cash-Machine! Introduction Did you know you can have total control over your retirement? Did you know you can invest in alternative assets outside of the choices provided by your financial advisor? What if you can take your retirement money and help invest in your nephew s start-up business? Or buy that investment property by the beach? These are just some examples of what you can do with a truly self-directed investment account. Self-Directed investing is not a brand new strategy. In fact, it has been around for over 30 years. Over the past few years, we have seen a significant increase in the amount of retirement funds (IRA) being moved to the self-directed investing arena. So why are we seeing such a dramatic increase in the amount of retirement funds being invested through self-directed investing? This phenomenon has often been referred to as the Perfect Storm. Several factors that contribute to the Perfect Storm are: 1) Significant decrease in value of traditional retirement investments such as stocks, bonds, and mutual funds. 2) The opportunities which now exist in the market such as real estate, notes, and start-up businesses. 3) Increased awareness: for the first time the public is becoming aware of this opportunity that has been available for over 30 years. The goal with retirement investing is to shift money that would otherwise go to the IRS into your retirement account. You may be wondering just how exactly we can accomplish this. Well, the answer is simple: with tax loopholes that are legally allowed by the IRS. If you didn t know what a tax loophole is - a loophole is a tax incentive provided by our government as a way of encouraging the economy to grow. It should come as no surprise that the majority of tax loopholes are found in the areas the government would like us to concentrate on. Such as starting and operating our own businesses and saving for retirement! It s classic carrot and stick psychology.

3 Many loopholes are quite well known. For example, you can make a $5,000 contribution to an IRA and save some taxes. Other loopholes are hidden little treasures. They take a bit more looking to uncover, but like most treasures, they are certainly worthwhile. It s not that our government doesn t want you to find these loopholes; it s just the reality of our present IRS Tax Code - a multiple headed monster, growing larger and more complex by the day. There are tons of loopholes that are available for all of us to take advantage of. In fact, there are so many that we have taken the time to carefully select some of the most powerful tax loopholes specifically related to IRAs in our audio course: 17 Rules You Must Know and how to Capitalize on Them. If you re serious about taking advantage of all the loopholes that you are legally entitled to, then visit our website at to find out more about this audio course. As we discussed earlier, tax savings is more than just minimizing your tax liabilities. Tax savings means more cash flow for you to enjoy, grow and invest. We will be sharing with you some strategies that you can use to turn your retirement account into a cash machine. Please note that the examples referenced to within this ebook are all based on actual client cases. The strategies, details, and numbers all depict actual client cases. As such, the names have been changed to protect the privacy of our clients utilized in this ebook. As a bonus item, we have also included a special report written by self-directed investing expert Kaaren Hall on the 8 Best-Kept Secrets about Investing with Your IRA.

4 Disclaimer Information Only - Not Legal Advice This publication is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual's legal, tax, and financial situation are different, specific advice should be tailored to their particular circumstances. For this reason, you are advised to consult with your own attorney, CPA, and/or other advisor regarding your specific situation. The information and all accompanying material are for your use and convenience only. We have taken reasonable precautions in the preparation of this material and believe that the information presented in this material is accurate as of the date it was written. However, we will assume no responsibility for any errors or omissions. We specifically disclaim any liability resulting from the use or application of the information contained in this ebook. To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. Always seek advice based on your particular circumstances from an independent advisor. Any disclosure, copying, or distribution of this material, or the taking of any action based on it, is strictly prohibited.

5 Copyright Turn Your Retirement Account into a Cash-Machine! a Keystone CPA, Inc. Publication Copyright 2012 by Keystone CPA, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopied, recorded, or otherwise, except in the case of brief quotations embodied in critical articles or reviews, without the prior written permission of the publisher. For more information, write 1912 N. Batavia St. Suite J Orange, CA or visit

6 Table of Contents How to Put Your Retirement Money to Work for You... 6 The IRA Smack Down: Traditional vs. Roth... 7 Creating an Exit Strategy for Your Retirement Account Do's and Don ts of Self-Directed Retirement Investing Retirement Planning Strategies for Small Businesses Leverage Your Retirement Account to Get More Investing Power A Bad Piece of Advice That Cost $85,000 in Taxes Bonus Report: 8 Best-Kept Secrets about Investing with Your IRA..18

7 How to Put Your Retirement Money to Work for You So why use retirement planning as a tax savings tool? Well here are the top two reasons: Benefit #1: Retirement accounts are great vehicles that you can use to minimize your current taxes with contributions When you make contributions on a pre-tax basis to your retirement account (IRA, 401K, SEP), you generally take a tax deduction on your tax return. So for example if you are in the 25% tax bracket, making a contribution of $17,000 to your retirement account can save you $4,250 in taxes. Keep in mind that you now have money that can be put to work for you by using benefit #2. Benefit #2: Money in the retirement account allows you to supercharge your investing power with Tax Deferred (or Tax Free) investments You may know that a common way to invest tax efficiently is through your retirement accounts. Generally, investments in a retirement account can grow tax deferred for a number of years. For traditional retirement accounts, tax is typically not due on that money until the funds are withdrawn or distributed out at retirement age. The traditional retirement accounts allow you to grow your wealth in a tax deferred manner. Tax deferred investing is great because it alleviates the tax burden that typically slows down an individual s wealth building potential. By combining the two benefits above with your ability to do self-directed investing, you too can turn your retirement money into a cash-machine. For retirement accounts that are set up as self-directed accounts, you as the investor may have the ability to invest your money outside of the traditional stocks, bonds, and mutual funds. For the most part, self-directed accounts can invest in just about anything you can think of including real estate, precious metals, farms, or your cousin s start-up company!

8 The IRA Smack Down: Traditional vs. Roth Before going into the smack down, we need to first have an overview of the differences between Traditional IRAs versus Roth IRAs. With the traditional IRA, you make pre-tax contributions to the retirement account but pay taxes on the money once you withdraw upon retirement. What this means is that you get a tax deduction when you put money into the traditional IRA. You do not pay taxes on the income that is generated from the investments within that retirement account so it is growing you for tax-deferred. When you take your money out at retirement however, you must pay taxes on the amount that is distributed. Conversely, with a Roth IRA, you make after-tax contributions to the retirement account, but the withdrawals upon retirement are tax free. What this means is that there is no tax deduction when you put money into a Roth IRA. You still do not pay taxes on the income that is generated from the investments within that retirement account. With a Roth, there are no taxes due when you take your money out at retirement. So in summary, the traditional IRA allows for tax deferred growth while a Roth IRA generally provides for tax-free growth. Which one is best for you will depend on your own unique situation. With taxes rising, the Roth IRA has become an essential strategy for those who are interested in having a bucket of money to be permanently protected from taxes. So the benefit of the strategy of converting your money from a traditional IRA into a Roth IRA lies in the number of years to retirement and the number of years of compounding growth that are left. So if you can pay taxes now on a smaller amount and then let that money grow taxfree, then you are able to accelerate your wealth building potential by eliminating the tax drag on your investments.

9 In the past, the ability to have a Roth IRA and get that permanently tax-free benefit was not available to those making higher income. Higher-income is defined as someone making above $110,000 per year ($173,000 for married). Today, although that limit still exists on paper, there are now strategies where an individual can have a Roth IRA regardless of their income level. What this means is that currently, someone who makes $1 million dollars or more can also have a Roth IRA and receive tax free growth. So what exactly would be the benefit of having a Roth IRA? The best way to demonstrate this would be to share an example with you. Tax-Free Income for Life Bob is retired from the police force in Huntington Beach California. In addition to being an outstanding cop and putting the bad guys behind bars, Bob is one of those savvy investors with a keen eye when it comes to great opportunities in start-up businesses. He invested in a company that does research on hand-gun parts for safety and accuracy. Bob used his Roth IRA money for this investment and just this year, the company got their patent approved and has started to license out their product to some of the major gun manufacturers. Now Bob is looking at receiving royalty income from his investment of $30,000 per year. Here is the quiz: how much tax does Bob have to pay on his income of $30,000? ZERO. Quiz question #2: Assuming Bob takes the money out to spend, how much tax does Bob have to pay? ZERO Essentially for Bob, he will be able to receive this royalty income on his investment COMPLETELY TAX FREE for as long as he lives. Not a bad deal to get $2,500 per month tax free, right? That is $30,000 of tax free income to him EACH YEAR for as long as he lives. What we have also done is to help Bob put together a Legacy Roth IRA where Bob can extend the tax free income from this account to even beyond his lifetime. Once our strategy is complete, not only will Bob be able to receive tax free income but his kids and grandkids will also be able to receive tax free income over their

10 lifetimes as well.now that is the power of tax planning when you can receive Generational Tax Free income! Creating an Exit Strategy for Your Retirement Account First, I want to make it clear that when we speak of the Legacy Roth IRA, we are not referring to the gifting of your retirement accounts to your future generations. Rather, in a Legacy IRA, you are still in full control as the owner of the retirement account. The power of the Legacy IRA only comes into effect when your retirement funds outlive you (and your spouse). It is a way for the IRA to continue to exist and provide tax deferred or tax free growth independent of you after you are gone. Simply put, a stretch IRA, if structured correctly, allows the funds of the IRA to receive tax deferred or tax free growth beyond the life of the account holder. For example, a correctly structured IRA can allow the assets within the retirement to continue on over the lifetime of the children or grandchildren of the account holder. Would you like to leave a rental property to your children and allow them to receive rental income tax free and not have to pay taxes when they eventually sell the property? This is the power of the Legacy Roth IRA. If you have a Roth IRA, you must work with your tax strategist to investigate the opportunities of a Legacy IRA. Since the funds in your Roth account have already been taxed, your goal is to stretch that tax free money for as long as possible! Stretching Roth IRA funds allows your future generations to benefit from TAX FREE income and growth. If you are worried about potential increases to the US tax rates, stretching your Roth account is a safe bet to make against future tax rate hikes. As with anything in investing or business, you need to have an exit strategy. The stretch IRA is one of many exit strategies which come into play should you not outlive your retirement funds. Now the question is: what is your exit strategy for your retirement accounts? If you do not have one, then the IRS is likely to be your #1 beneficiary!! A good tax advisor asks the right questions to ensure you receive the most benefit from your investments. If you are interested in stretching your retirement accounts, we would be happy to work with you to develop your own IRA Legacy Plan.

11 6 Do's and Don ts of Self-Directed Retirement Investing Investing in what you know best via self-directed accounts is one way to accumulate massive amounts of wealth in a relatively short period of time. This is what we mean when we talk about turning your retirement account into a cash machine. But you need to know the rules before you begin! There are things you can do, and things you can't. Here's a quick run-down of the do's and don'ts of self-directed retirement investing: Do's 1. Make sure you have a truly self-directed retirement fund with an independent trustee or custodian. Many plans sound self-directed--as long as you only choose from the custodian's list of pre-approved investments. 2. If you're using a Roth IRA, make sure you keep it going for at least 5 years! Holding a Roth IRA for less than that can result in paying tax on the distributions. 3. If you want almost complete control over your retirement investments, consider using a special type of LLC, that we call an "IRA LLC" (although it applies to all kinds of retirement plans), that allows you to manage your retirement funds. If you go this route, make sure you understand how this LLC functions and how you fit into the equation. You don't want to fall into the prohibited transaction trap! 4. If you buy property with your retirement funds, you can't live in it! Neither can your children, parents or grandparents. However, you can rent that property to your non-lineal family members, including brothers, sisters and cousins. 5. You are not limited to only purchase houses with your retirement plan. Raw land, condos, commercial properties, franchise businesses, start-ups and notes are all permitted purchases with retirement funds. 6. When in doubt - even just a tiny doubt - check a proposed transaction out with your CPA and IRA custodian first! If you self-direct, YOU are solely responsible for avoiding a prohibited transaction. A good CPA or custodian will try to offer their input if they see you heading for a prohibited transaction, but at the end of the day it's your responsibility.

12 That's the best way to stay safe that we can think of. Your IRA custodian is a crucial part of your investing team! Don'ts 1. Your retirement fund can't buy real estate, directly or indirectly, from you, your spouse, your kids, your parents, your grandparents, or your retirement account s trustee or custodian. You can't get around this by using your spouse's IRA instead, either. 2. You can't use business structures to get around #1above. If you own 50 percent or more of a business structure, that structure can't sell real estate to your IRA. The same goes for officers, directors and key employees who own 10 percent or more of a business structure that wants to sell property to your IRA. 3. You can t use others to get around #1 above. For example, lending IRA money to your friend and having that friend lend it back to you is not allowed. The IRS looks at where the money started and where the money ended. In this case, the money ultimately went from the retirement account back to you and thus it is a prohibited transaction. 4. You can't personally guarantee a loan for your IRA, or vice-versa. 5. If you are using the IRA LLC to manage your IRA, you can't also be a member of that LLC. It may ONLY be owned by your IRA. 6. Do not co-mingle retirement funds with other money. Be sure to keep retirement money separate from your personal or business funds so that the IRS does not try to classify these as distributions or prohibited transactions.

13 Retirement Planning Strategies for Small Businesses If you are a business owner and you are not currently using retirement investing strategies, you are overpaying your taxes! You may already know that the IRS favors businesses by providing some great loopholes for businesses that are not available for individuals. The same inequality applies when it comes to retirement accounts. There are a tremendous amount of opportunities in retirement planning related to businesses. First, please note there are several key items to take into consideration when determining which type of retirement account is best for your business. When we talk to clients about this exact subject, there are 4 items we like to keep in mind, and they are: 1) the type of plan that is best suited for your business, 2) the deadlines for creating the plan, 3) the timing rules for making contributions to the plan, and 4) the tax benefits generally available for the plan. You and your tax strategists should work together to evaluate your situation and determine what type of retirement plan is best for your scenario. There are SEP IRA s, SIMPLE IRA s, Defined Benefit Plans, and Defined Contribution Plans to name a few. Some things to keep in mind when making this decision are: Do you have any employees? What are your goals for the business? What kind of vesting requirements do you want to have? Would you like to be able to borrow from the plan? After you determine the best plan for your business, you and your advisors need to determine what the deadline is for creating the plans. Some plans have to be set up by October 1 st or December 31 st, so it is vitally important to incorporate this analysis in your tax planning as soon as possible.

14 Even though there are certain deadlines in terms of when retirement accounts need to be set-up, you typically have additional time to actually fund the retirement accounts. On a handful of plans, the contributions may not have to be made until the following April 15 th or possibly even later to still be a tax benefit for the previous tax year. For example, there are retirement plans where you can take a deduction for 2012 even though the actual retirement contribution is not made until October 15, So why are retirement plans for businesses so much more powerful than retirement plans for individuals? Well, as a business owner, you can generally deduct the contributions you make on behalf of your employees. This can help reduce your business and personal adjusted gross income on your tax returns. There are plans available where you could stock away $50,000 or more each year in your retirement account. This could result in significant tax savings over time. How great would it be to write a check towards your retirement account rather than writing a check to the IRS? A Solo 401(k), commonly referred to as a Solo K, is a retirement plan designed for the small business owner. How small is small you may be wondering? You qualify if you are a self-employed individual with no full time employees other than a spouse. One thing to note is that employing independent contractors in your business does not disqualify you from establishing a Solo 401k. Sole proprietors, independent contractors, C corporations, S corporations, partnerships and LLCs can qualify for this plan if the above requirement is met. This means that as long as you have an active business, you do not need to have a legal entity to have a Solo(k)! One Powerful Strategy Take the example of a one of our clients Megan. Megan owns a successful marketing business. Her clients are some of the big restaurant chains like Carl s Jr., Taco Bell, and Cold Stone. Megan had a great year netting $300k in her business last year. Instead of losing half of that to taxes, we helped Megan to contribute $40k towards her retirement account which allowed Megan to take a write-off for the entire amount. Instead of losing this money to the IRS, this saved Megan close to $18k in taxes that year alone!

15 Even though Megan took a $40k tax deduction on her contribution did she lose that money? No! Instead, now that $40k is in her retirement account and she can use it to invest and put that money to work for her. With the $40k in her retirement account, Megan put that money to work by investing in real estate trust deeds that are expected to provide her with 10% annual returns. The best part of this is that her returns on the trust deed investing are now protected from taxes! This is great because had Megan invested in these real estate trust deeds with her personal cash, she would have had to pay taxes on her 10% return per year. But because she is investing now with the money in her retirement account, her returns are protected from taxes until she reaches retirement age. What a powerful concept it is to be able to create a huge tax deduction immediately by shifting your money that would otherwise go to the IRS into your own retirement account and at the same time shift taxable money into a bucket where you can invest and defer the tax on your earnings! With this one strategy, Megan got a huge tax savings of $18k that year and instead of losing her money, she still has $40k of that money that is now invested and working for her, free from current taxation!

16 Leverage Your Retirement Account to Get More Investing Power If you plan on using your retirement money to invest in Real Estate, then you may want to supercharge your earning potential by using leverage. The great news is that you can also do it with your self-directed money! There is however, a tax trap associated with self-directed IRA investing. Some of you may have heard of the term Unrelated Debt Financed Income Tax (UDFI). Essentially, this is a tax imposed in certain instances when you self-direct your retirement funds into real estate and use leverage at the same time. For example, if you purchase real estate using your self-directed IRA with 50% debt and the investment earns $50,000 of income, 50% of that income is generally subject to the UDFI tax of 35% resulting in a tax bill of close to $9,000 for the year. Before you get discouraged, there is a loophole around this and it is very simple. Rather than using a self-directed IRA to invest in leveraged real estate, instead use a self-directed 401(k) to invest in real estate. One of the biggest benefits of investing in real estate with your self-directed 401(K) is that this vehicle actually allows you to use your retirement funds to invest in leveraged real estate without the taxes potentially associated with UDFI!! With leverage being one of the preferred ways to invest, real estate investors need to tap into the benefits of this loophole. To continue with the example above, if you make the same purchase under your 401(K) rather than your IRA, you can avoid the UDFI tax all together which saves close to $9,000 in taxes each year! This is a great advantage that the Solo 401(K) plans have above most other types of retirement plans.

17 A Bad Piece of Advice That Cost $85,000 in Taxes A recent report revealed that less than 4% percent of CPAs (not just tax preparers or enrolled agents but the top of the rank CPAs) are not up to par on understanding the tax strategies relating to retirement investing. This is extremely sad and unacceptable since these are the people who are advising you. Make sure you are working with someone who understands retirement planning strategies and selfdirected investing. We recently came across a gentleman who wanted to have more control of his money by moving it out of the stock market and using it to do fix-nflip real estate. So what did his tax advisor tell him? The CPA told him the only way he can do that is to take a $200k distribution from his IRA and then use it to do fix-n-flips. As part of this BAD advice, this gentleman ended up having to pay federal income taxes, state income taxes, and early distribution penalties totaling $85k! At the end of the day, this person lost $85k of hard earned money due to this bad advice. Had he sought out a tax expert who was well versed in self-directed investing, he could have used that entire $200k to invest in real estate without paying any current taxes. Having bad tax advisors cost this person over $85k in unnecessary taxes ouch! This example is clearly an indication that as a profession, we as CPAs need to make sure our skills remain sharp so we can advise our clients appropriately. As a consumer, it is your responsibility to ensure your tax advisor is part of the 4% who actually understand the power of retirement investing to help you achieve your wealth goals. Does it ever seem to you that CPAs and Attorneys have their own language? They do! The better you can speak their secret language the better the results you will have. Keystone CPA, Inc. was founded to de-mystify tax laws and explain strategies in simple language so that anyone can take advantage of the wealth building techniques of the rich. We provide powerful tax strategies and the latest strategies in tax planning.

18 Want to know how you can take more advantage of these strategies? Simply give us a call at (877) and we can help you to turn Your Retirement into a Cash Machine! Be sure to register for FREE tax strategy updates delivered via at You will benefit from the advice of one of the nation s leading tax advisors for the wealthy in a short, easy to read E-newsletter. We will update you on current tax law changes, as well as proactive tax strategies the wealthy use! We specialize in innovative tax planning which minimizes tax liability and maximizes cash flow. Our tax strategists will evaluate your financial and tax situation, develop and maintain your tax savings plan with ongoing tax coaching (including tax preparation) that are suited for changes to your circumstances. We will make sure you take full advantage of all tax law changes! Are you ready to pay less tax? The average Keystone CPA client saved over $18,000 a year in taxes using the guaranteed Tax Savings Strategy and Evaluation system. Please visit our website at or call to get started on your Tax Savings Plan today! We can help you start paying less tax immediately.

19 ra.com (877) The Eight Best Kept Secrets About Investing with your IRA

20 Dear Reader, Thank you for responding to our offer for a special report. At this me next year, you will be richer for the informa on you are about to read! In this report, we will look at how you can build wealth with strategic yet simple use of self directed IRAs. There are many reasons why you should consider a self-directed IRA for your re rement. We will not only discuss the reasons, we will also educate you on what makes a self-directed IRA, why you should consider one, and why they are so important for your re rement future. I hope you enjoy this report. Please feel free to call me with any ques ons or comments you may have! Kaaren Hall President info@udirec ra.com (877) , LLC. All rights reserved. This publication is intended to provide general information in regard to the subject matter covered. It is presented with the understanding that, LLC is not rendering legal or accounting advice or financial advice. 2 The Eight Best Kept Secrets About Investing with your IRA

21 Table of Contents What is a self-directed IRA? 4 How did self-directed IRAs evolve? 4 Why do I need a self-directed IRA? 4 What can I invest in with a self-directed IRA? Real estate 6 Commercial real estate 9 Foreign real estate 10 Notes 11 Partnerships and Private Stock Offerings 13 Foreign Currency 14 Precious Metals Tax Liens and Tax Deeds 17 Conclusion 18 info@udirec ra.com (877) The Eight Best Kept Secrets About Investing with your IRA

22 What is a self-directed IRA? Most IRAs are typically invested in stocks, bonds and mutual funds. With a selfdirected IRA from, as the name implies, you make the investment choices. The types of investments are almost limitless. With the self- directed IRA account, udirect acts simply as an independent administrator handling the investment transac ons you dictate. With a self-directed account from udirect, you can invest your re rement dollars in non-tradi onal investments including: Real estate, private placements, life se lements, trust deeds, oil-gas-energy and thinly traded or limited offering investments, both public and private. Self-Directed means you or your investment advisor make all the buy and sell decisions. We only engage in investments, transac ons and sell orders which you or your investment advisor dictate to us. For a large number of people, the self-directed approach makes the most sense because you aren t locked into the narrow choices and self-serving interests of a mutual fund, bank, brokerage or life insurance company custodian. Take the reins and direct your own re rement future today! Give us a call and ask us how at. How did self-directed IRAs evolve? The concept of self-direc on was created by Congress through the Internal Revenue Code Sec on 4975 and other sec ons. Congress only dictates what investments are NOT allowed. Since investments with a self-directed IRA are not on that list, you have a great opportunity to grow re rement plan assets. In fact, knowledge of this IRS code may provide you with a strategy that allows you to accumulate tax-free wealth throughout your life me, provided you know how to use it. Most do not realize the full power of self-direc on, even financial professionals. Self-direc ng investments in re rement plans is not new. It was part of the government s plan in the 70 s to help all of us save for our increasingly expensive and long re rement years. info@udirec ra.com (877) Why do I need a Self-Directed IRA? You can build wealth and secure your future more effec vely. Combining the tax advantages of a re rement account with access to a larger range of investment choices offered, a self-directed IRA can help you build more wealth for your re rement. 4 The Eight Best Kept Secrets About Investing with your IRA

23 With a self-directed IRA, you choose your investments, such as homes, apartments, raw land, co-ops, condos, and commercial property and more. A self-directed IRA enables you to invest in what you know best. You can create passive income for your re rement. Passive income is an income stream where money is received usually on a regular basis, without con nuing effort, such as income from a rental or property. Crea ng passive income is easy with a self-directed IRA. Give us a call at udirect IRA Services and ask us how at. Life Expectancy is Climbing! According to Stanford University, medical advances in an -aging technologies could increase average life expectancy from just less than 80 years to 100. How long will your re rement savings last? How can you make sure? Social Security is Not Guaranteed CNN Money reports that the Social Security trust fund will be exhausted in Are you depending on Social Security as part of your re rement income? Economic Changes Within Society are More Prevalent Than Ever. The cost of 9/11 has been es mated at $28 billion, including the effect to the stock market. Are you prepared for these types of unforeseen cost increases and market fluctua ons? Soaring Health Care Costs are Pu ng Seniors into Debt Employee Benefit Research Ins tute reports that the debt load of seniors grew from 1992 to 2004, the percentage of households 55 and older with overall debt grew faster than the rate of the overall popula on. Those 75 and older packed it on most quickly. Are you prepared for your long-term health care costs? The professionals would be happy to assist you with any ques- ons you may have, or help you to open an IRA account. info@udirec ra.com (877) Ge ng started is as easy as 1, 2, 3: 1. Open an account 2. Fund your account 3. Invest Give us a call and ask us how at. 5 The Eight Best Kept Secrets About Investing with your IRA

24 What can I invest in with a self-directed IRA? 1. You can buy real estate with the money in your IRA. Not many people know, but it is absolutely legal to buy real estate in your IRA. The Internal Revenue Code does not tell you what you can do with your IRA, only what you can t do. Besides restric ons on purchasing life insurance, capital stock in an S corpora on and most collec bles in your IRA, nearly everything else is fair game. Unless your IRA is self-directed, however, your custodian may not allow investments in real estate. Examples of real estate related investments made by individuals self-direc ng their individual re rement accounts includes: Raw land Farms Pre-construc on investments Residen al property Condominiums Mul -family units Commercial property Resort property Real estate development companies Private real estate investment funds Things to Consider Your IRA can even partner with other people s IRAs to purchase property. Keep in mind that if you are considering this, you may be asked to provide evidence proving that you did not receive any immediate benefit from your IRA s par cipa on in the investment if the IRS ques ons the transac on. The transac on s ll must be an arms-length transac on, and the investment remains subject to the same restric ons as if the en re investment were in your IRA. It is just a be er idea to separate your IRA s investments from your own investments. info@udirec ra.com (877) You may also purchase debt-financed property with your IRA. The debt must be financed by a non-recourse loan and any disqualified person may not supply the funds. Also, the IRA may have to pay UBIT (unrelated business income tax) or UDFI (unrelated debt financed Income tax) on the profit from debt-financed property. Generally speaking, taxes must be paid on profits from an IRA-owned property that is debt-financed, including profits from the sale or disposi on of the property, in the same propor on that it had debt. 6 The Eight Best Kept Secrets About Investing with your IRA

25 While purchasing real estate with the money in your IRA is permi ed, there are some important things to keep in mind: You may not collect a fee for managing property owned within your IRA. This is considered a prohibited transac on. You may not collect a commission for any property sold to your IRA. This is also considered a prohibited transac on. You may not sell property that you currently own to your IRA. There is a list of disqualified persons who are prohibited from dealing with your IRA or benefi ng from its investments. The list of disqualified persons includes you, your spouse, your parents, your children, their spouses, certain business partners and key employees and persons providing services to your plan, among others. Your IRA owns the asset. Many people think the money is distributed and is taxable first; this is not true. Real estate can be purchased 100% by the IRA account or just a percentage interest in real estate as Tenants in Common (i.e. Robert J. Jones 50% Undivided Interest and The Custodian FBO William Bush IRA # % Undivided Interest) You may not buy/sell/lease your real estate from a disqualified person. This is considered self -dealing and is strictly prohibited. All income (rents or sales proceeds) that is produced by the Real Estate IRA must be returned to the IRA cash account. Expenses are treated the same way; all expenses must be paid by the IRA account. If the real estate were owned as a percentage, the IRA would pay the applicable percentage of the expenses. If there is financing involved with an IRA asset, it must be nonrecourse financing (IRA owner cannot personally guarantee the note.) Typically, lenders will require larger down payments on nonrecourse loans. The lender can be the seller. Real Estate owned inside an IRA account must be for investment purposes with no personal use. Also, if you visit that IRA property, you cannot write off the trip nor can you stay in the unit to do maintenance. info@udirec ra.com Arms Length Transac on IRA owners must make sure they do not engage in prohibited transac ons when inves ng their IRA assets in real estate. They must make sure the real estate transac ons are arm s length or third-party transac ons. This means that an IRA owner cannot invest in property he or she, a rela ve, or his or her business, already owns. (877) In order to prevent a prohibited transac on, the individual should not have access to or use of the property while a por on of the real estate is held within their IRA. Also, while frac onal interests in real property may be purchased or sold, such interests may not be bought from the IRA owner or members of family or business, except siblings. 7 The Eight Best Kept Secrets About Investing with your IRA

26 All income and expense related to the property needs to be divided and/or paid according to ownership percentage. In such cases, it is wise to have a third-party property manager handle these ac vi es to ensure that no self-dealing transac- on occurs. Some Essen al Facts The regula ons include: When purchased, the property becomes an asset of the IRA. Neither the IRA owner, spouse, nor family members (other than siblings) may have owned the property prior to its purchase by the IRA. Neither the IRA owner nor family members (other than siblings) may have access to or use of the property while it s in the IRA. The IRA owner cannot manage the property; however, he or she can hire a third party -- a real estate broker or local manager -- to collect rents and maintain or improve the property. Property related expenses cannot be paid with personal funds and then be reimbursed by the IRA. The IRA owner s business may not lease or be located in or on any part of the property while it s in the IRA. All rental profits must be returned directly to the IRA. The IRA owner can not earn a commission or fee on any transac ons involving the re rement account. Property owned within an IRA will not be able to take advantage of write-offs, such as deprecia on or other property related expenses. The property must remain in the IRA un l distributed or sold to a third party. Examples of a Self-Dealing Transac on Here are a few examples of what the IRS or DOL may consider self-dealing with IRA funds: Borrowing money from an IRA IRAs are prohibited from making loans to IRA owners and any disqualified person. Using the IRA as a security for a loan IRA owners are not allowed to use the IRA as collateral for a loan, as the amount they pledge as security will be deemed a distribu on by the IRS. Selling assets to an IRA - If the IRA owner sells property to their IRA, the sale is a prohibited transac on. Buying property for personal use (either by the IRA owner and/or a family member), such as a lake cabin or a condo in the mountains, is strictly prohibited. Purchasing property from a rela ve. Issuing a mortgage on a rela ve s new residence. info@udirec ra.com (877) The Eight Best Kept Secrets About Investing with your IRA

27 2. That also includes commercial real estate! Here is an example: John Smith buys an apartment building. John Smith located a 15-unit apartment for an investment property in his IRA and for his partner Sam Frank. The asking price for the building was $800,000. John made an offer of $720,000 and it was accepted. John funded half of the purchase with funds from his partner and half his own IRA. To complete the purchase, John completed an Investment Direc on Form for his IRA. Escrow was opened. Collingwood Escrow accepted a $72,000 deposit on the property in two checks: One check from udirect IRA (on behalf of John s IRA) for $36,000. One check from Sam Frank for $36,000. USA Title provided a preliminary tle report to the buyers (John and his IRA and Sam). The deed was recorded in the purchasers names: 50% undivided interest in the name of Sam Frank; 50% in the name The Custodian FBO: John Smith IRA. The se lement statement provided a breakdown of the cost and charges allocated among the buyers and sellers. John made a check to escrow for the amount needed for the remainder of his 50% or $324,000. The udirect IRA funded $324,000 for the other 50%. Assignment of Rental Agreement Rental agreements were assigned to John and his plan equally. John hired a property management service to collect the rent on the units. The property management agreement was signed by the Custodian of the IRA. When making payments to John, the property management made 50% of the net receipts out to The Custodian FBO John Smith IRA and the other 50% to Sam Frank. In the case of co-ownership by an IRA or other persons or en es, it is advisable to employ the services of a property manager or outside bookkeeper. info@udirec ra.com (877) The opera ng income looked like this: Ini al deposits from new tenants $40,000 Maintained in account for poten al expenditures $20,000 Monthly income $20,000 TOTAL $80,000 $20,000 stays in the account for repairs and maintenance. $60,000 is split between Sam & John s IRA 9 The Eight Best Kept Secrets About Investing with your IRA

28 3. You can purchase foreign real estate. As long as it is investment property, a real estate IRA can purchase investments outside of United States. And, the Internal Revenue Service allows incorpora ng a foreign-based real estate property into a self-directed IRA. Here are some items to consider if you are thinking about inves ng in foreign real estate: Make sure that you understand the country s economic and poli cal climate as this can affect the price of the real estate. Make sure that you understand the country s taxa on laws. Understand what you are buying. Make sure that you have seen the asset. Understand who you are dealing with. Make sure that the real estate professional is the person qualified to make the sale. Keep in mind that the IRA cannot purchase property that you want to use as your primary residence, vaca on rental or as your business office. However, at 59.5 years or older, you can withdraw your real estate from your IRA to use it as a primary or second home without a penalty. Depending on the type of IRA that held the real estate, there may be taxes associated with the process. A self-directed IRA real estate account can offer a wider-based global area for foreign real estate, if properly set up. There are pockets and clusters of geographical en es worldwide such as Central America, some Arab countries and the Asia Pacific regions where real estate property inves ng is going at a feverish pace. Millions of Europeans have, for a long me, looked outside their own borders, scooping up ski resorts in places like Spain and Portugal, Bulgaria, and Costa Rica. These countries have become so popular among foreign investors that proper es have increased in value tremendously. Real estate developers and promoters are now on a scavenger hunt in less well-known countries so they can offer projects to interested investors including investors with self-directed IRA accounts. Ge ng Started info@udirec ra.com (877) To get started inves ng in real estate with a self-directed IRA, you ll first have to open a self-directed IRA account with. Transferring funds from your old IRA account can take some me. So, prior to looking for a property, make sure that you have your account open and ready to invest. Next, locate a property. It s best to work with a qualified real estate professional to do this. Finally, contact to obtain a Investment Direc on le er. Complete the Investment Direc on form and send it to udirect. UDirect will purchase the property in the name of your IRA account. 10 The Eight Best Kept Secrets About Investing with your IRA

29 4. Tax-Free And Tax-Deferred Inves ng with Notes In this me of economic uncertainty, purchasing discounted notes can provide excellent investment opportuni es. Inves ng in notes becomes par cularly a rac- ve using tax-deferred funds in your IRA or other re rement plan. The payment streams come into your IRA and in the final analysis, on a first trust deed, the worst case is that you own the property. The simplest part about using IRAs as a source for funds to invest in real estate and notes is that it is like any real estate transac on that uses a third-party en ty as the owner. Think of it like this your company buys a note or piece of property. A company officer or designee signs and approves documents and authorizes events to go forward. It works the same way for your IRA. Here are some basic rules that you need to keep in mind: You cannot receive a current benefit from the IRA or it s assets. That means: - No living on the property at all. - No receiving rent or income directly. You can only receive income (and pay those expenses) propor onate to your investment. - The IRA can t deal with you or members of your family who are ascendants or descendants or their spouses. This means that parents and children, their spouses and you and your spouse may not be included. Qualified plans assets, such as an office building invested in by a plan, can have a certain part allocated to having you rent space for the purposes of the plan. Ge ng Started To get started inves ng in notes with a self-directed IRA, you ll first have to open a self-directed IRA account with. Next, find a note investment. Purchasing a trust deed or mortgage requires you to complete an investment direc on form for real estate notes. It is important to closely follow the guidelines provided on these forms to ensure mely and efficient transac ons. info@udirec ra.com (877) When tle and/or escrow companies are involved, ensure that proper instruc ons are provided for all documents for your account. Local tle or escrow companies may have addi onal requirements other than those we provide so make sure to check with them. udirect must receive all loan documenta on before the funding of any loan. We cannot fund without a complete loan package. This package includes a trust deed and note, tle insurance (when applicable), and appropriate ves ng. If you have selected a third-party servicer, a servicing agreement must be provided to udirect describing the note in accordance with the documents we have received. Your servicer may retain the original note documents. 11 The Eight Best Kept Secrets About Investing with your IRA

30 While we are not licensed as a mortgage servicer, as record keeper we can receive payments directly from your payer, as well as process loan payments and other informa on for your loan. All original documents will be maintained in safekeeping and eventual reconveyance. As part of your arrangement with a payer, you may receive all payments for your note(s) for personal inspec on. However, we must receive such payments intact. udirect cannot apply personal checks from you as an account holder to pay for obliga ons of notes in your account, as this violates IRS rules. In all cases, all note informa on is required before funding can take place. This informa on includes the name, address, and Social Security number of the payer. If the payer is different from the one described by other documents provided, such informa on needs to be supplied so that proper credit can be applied. All payments must contain your account and loan number. If this informa on is not supplied, there may be a delay in pos ng funds to your account. All payments are promptly deposited in your IRA. If note payments are not made when due, and a third party is servicing your note, all collec on ac vity becomes the responsibility of you and your servicer. udirect does not provide any collec on services for past-due notes other than those agreed to at the me of funding of the loan. In addi on, any foreclosure op ons that may be required are your responsibility. Our role is solely to provide informa- on to the outside foreclosure service of your choice. You may obtain transac on history on your account online at any me. You may also receive this history online via fax or phone by calling udirect at. info@udirec ra.com Regulatory repor ng All regulatory repor ng for mortgage income is made by the servicer. If udirect provides mortgage record-keeping services, the 1098 forms will be sent to the payer, as required. (877) The Eight Best Kept Secrets About Investing with your IRA