Letter: Complications of Advanced IRA Strategies

Editor:

I am not a tax preparer, but I have been a financial adviser for more than 30 years. I have been growing more concerned about potential government confiscation of a portion of the public’s Individual Retirement Accounts (IRA’s) and 401(k) plans (employer-sponsored retirement savings plans). The “myRA,” that Obama introduced in his State of the Union address, could be a precursor to a plan that would take part of the assets in these plans, and replace them with U.S. Treasury bonds.

One alternative, of course, is to take your money out of your IRA. You’ll owe taxes, of course, and a 10% penalty if you’re under 59 ½ years old at the time. If you’re over that age, the penalty will disappear. If you own a Roth IRA, withdrawn assets before the above age will be taxable and penalized, with no tax consequences after reaching that age.

I have read a variety of materials suggesting that investors in these plans should either set up self-directed plans or even use Limited Liability Corporations (LLC’s). The purpose here would be to make it more difficult for the government to get its hands on a portion of the assets, since a self-directed plan would be invested in physical gold and/or silver coins, and an LLC could invest in real property or even a business.

However, the government does not have to “get its hands on” assets in such plans. All it has to do is require plan custodians to convert a certain percentage of the assets to cash, and to send that cash to the government, under penalty of law for not doing so. Anyone who did not comply with such an order would be guilty of a felony. Becoming a felon can easily result, among other things, in not being able to legally own guns of any type.

In addition, once a taxpayer reaches age 70 ½, he or she must start taking Required Minimum Distributions (RMD’s) from a traditional IRA or employer-sponsored plan. The exact dollar amount is currently based on the value of the account on 12/31 of the previous year, and an actuarial table available on www.irs.gov in the publications section. If one has an LLC-run IRA entirely invested in real property, raising the necessary cash inside the IRA to take these distributions could be difficult.

My point here is to caution readers not to overreact and blindly follow someone who is selling a package that purports to avoid the problems of limited investment choices and potential government confiscation. Also, as a side note, owning real property in an IRA brings with it a set of VERY stringent rules; the violation of any of which can result in your IRA being entirely set aside and immediately taxable. The IRS has not yet targeted these strategies, but as they become more popular they will begin focusing more on anyone who is using them.

At the very least, if you are considering one of the more advanced strategies, have an independent tax preparer or attorney review what you’re planning to do. Do not rely blindly on the material provided by those selling you the strategy. – M.W.

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