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More IRA Creativity


Cash flow can come in a number of interesting ways when using an IRA or qualified plan funds. Quite recently, we looked at some possibilities of transactions which may have multiple benefits.

One in particular provided an interesting approach to income to both an Individual Retirement Account as well as income to the beneficial owner of the account, but not simultaneously, without violating prohibited transaction rules.

Nancy has a Roth IRA with $250,000. She has a friend, Sam who is a contractor who needs cash to build an apartment complex. The deal is as follows:

Nancy’s Roth IRA lends Sam $250,000 at 6% for eight months. This money is used as a down payment on the property. Sam will simultaneously obtain a loan for the balance needed to for construction purposes.

The loan to Nancy’s Roth IRA will be paid in full as the property is completed. As an additional benefit, Nancy and Sam propose to split the profits on the sale of the complex equally.

The questions which arise to make this a viable deal for all three parties are:

Is the loan from the IRA secured by the property? Is the agreement to split the profits part of the deal for Sam to obtain the loan from Nancy’s IRA?

If the IRA makes the loan as secured by the real property, the IRA is in the safest position. If that is the case, and at the same time Nancy makes a deal with Sam that they will split the profits from a subsequent sale equally, there is a problem with Nancy receiving a current benefit from the deal involving her IRA.

If the loan is unsecured, then the deal between Sam and Nancy is unrelated to the IRA and Sam.

The unsecured loan proceeds may be used by Sam for any purpose. Any deal that Nancy and Sam make then may involve any deal the two acting as individuals wish to make.

If the loan is secured by the real property involved, and no other agreement between Nancy and Sam about the profit split occurs during the time that the loan is not repaid to the IRA, any subsequent deal is also not subject to prohibited transaction rules.

There is a definite break between the payoff and what follows. This also does not appear to violate any indirect rule, as this is not “getting around” the prohibited transaction rules; these are just separate deals.

Another approach is to have the loan from Nancy’s Roth IRA secured by another property unrelated to the apartment complex. In this way there is no nexus between properties and Nancy’s IRA is in a secured position. The loan proceeds to Sam are used for whatever purpose Sam has.

The deal to split proceeds between Sam and Nancy is unrelated to the IRA. If Nancy wants to have part of the sale of the apartment complex profits go to her IRA and part to her, she would normally have to be partners with her IRA. If she wanted her half of the profits split between the IRA and herself equally, for example, she would have to partner with the IRA 50-50.

Of course the alternative is that she arranges an agreement with Sam to not only have the IRA repaid the loan, but also after payoff receive 25% of any sale proceeds as part of the deal.

Once the loan is paid off, the IRA owns an agreement with Sam to receive 25% of the profits from the sale. Also, after that time, Nancy could make a separate agreement with Sam to receive 25% personally from sale proceeds.

In this way, Nancy is not dealing with the assets of her IRA, she is merely dealing with Sam on a separate deal involving his sale of the complex.

The IRA asset is a contract to receive revenue, and Nancy has a similar transaction, which does not involve the contract with her IRA.

Both Nancy’s IRA and Nancy benefit from the deal with Sam. It is just a matter of how the transaction is structured to insure compliance with the IRS code, and simultaneously meet the objectives of the parties.

With over 20 years of experience, Entrust has been in the business of helping investors self-direct their IRAs, and other Qualified Plans. Entrust conducts workshops and seminars nationwide.

To learn more about self-directed retirement plans and for the locations of local Entrust offices nationwide, visit our web site at Join Hugh Bromma at the NoteWorthy Convention as he goes into detail on your options with your money!!

Hugh Bromma is President of Entrust Bank & Trust Inc.

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