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For February's national webinar we presented information about taxes on your retirement plans with an open forum Q&A. Participants who joined our national webinar had the opportunity to ask John Paul Ruiz, our Director of Professional Development, questions regarding their taxes in relations to their retirement plans. Continue reading to see what types of questions were answered...
Q: I converted my Traditional IRA to a Roth IRA, will my administrator send me an IRS Form 1099-R to submit to the IRS?
A: If there are distributions like a conversion, your IRA custodian is required to provide an IRS Form 1099-R for the distribution from your IRA.
Q: I have an LLC with the sole member being my Roth IRA, do I still have to submit tax forms on behalf of my LLC? Or does Entrust send a Fair Market Valuation to the IRS on my behalf?
A: If an IRA invests in an LLC, any required filings for the LLC is the responsibility of the General Manager of the LLC. If the General Manager of the LLC is the IRA holder, then the IRA holder will be responsible for any required LLC filings. The FMV provided by the General Manager to Entrust will be the amount reported by Entrust to the IRS on an IRS Form 5498.
Q: Is the tax-free income generated from a self-directed IRA taxable?
A: If there is an investment that earns tax free income in an IRA, it will not be taxable while under the IRA. When the income is distributed, taxation will be dependent upon the type of IRA that holds the investment.
Q: Is UBIT applicable to the sale of an apartment building held by an LLC owned by a 401(k) plan administered via Entrust?
A: Gains from the sale of property purchased out right using IRA funds will not be taxable when it is done under the IRA. The gains will be subject to tax treatment depending on the type of IRA upon distribution.
Q: If you have an investment such as real estate and the appraisal amount fluctuates from year to year, is there any tax implication to that?
A: No tax implications. It may affect other issues such as Required Minimum Distribution calculations if the IRA holder is age 70 1/2 with a Traditional IRA.
Q: Can you buy a portion of an LLC that owns a real estate investment with your IRA?
A: Yes, an IRA can invest in an LLC and be a member. The only caveat is that it works as long as the LLC is not a disqualified entity.
Q: When I report the Fair Market Valuation of an apartment building, does it reduce the FMV by the mortgage?
A: The best practice is to report the FMV of the property without considering the mortgage. The mortgage only affects the FMV during a distribution. The FMV is reduced by the mortgage since the amount went to the lender and not the IRA holder.
Q: If I want to transfer rental income to an IRA, is that money transferred from a bank account to Entrust to the IRA? Or can it go directly from the bank to the IRA?
A: Rental income from a non-IRA investment cannot be transferred which is a retirement industry term which means from one IRA of the same type to another IRA of the same type. If you wish to take rental income from a non-IRA investment to an IRA it will be considered a contribution which will be subject to limits.
If your question pertains to an IRA that has an investment property that receives rental income and you wish to transfer the rental income to another IRA of the same type, then yes you can.
Q: I had real estate in a Self-Directed Traditional IRA. I have since converted it to a Roth IRA and paid all the necessary taxes. Can I sell or use the property without any tax consequences?
A: Selling a property inside a tax deferred account such as a Traditional IRA or a Roth IRA does not result in taxation. Distribution of the assets from an IRA for sale is what causes the tax treatment. If you have a property held in your Roth IRA and you sell the property, there is no taxation on the gains from the sale. If you decide to distribute the proceeds from the sale out of your Roth, taxation will depend on whether you have satisfied the Qualified Distribution criteria to distribute tax free out of the Roth. The converted amount will automatically not be taxable if tracked under an IRS Form 8606.
Q: Can my LLC borrow money from a bank to buy an investment property?
A: Assuming your IRA invests in a single member LLC and wish to borrow to purchase a property 1) the loan will need to be a non-recourse loan, 2) There will be Unrelated Debt Financed Income that will need to be filed on behalf of the IRA under an IRS Form 990-T if the income is $1,000 or more.
Thank you to everyone who participated in our national webinar. We encourage our readers to post any additional questions regarding self-directed IRAs or retirement planning in the comments section below. You can view the full recording of this webinar here to get answers to questions which are not listed in this article.