Contributions to IRAs are deductible. If not deductible, the taxpayer has basis in his IRA so that this amount is not taxable when taken out of the IRA. The idea is that the taxpayer probably paid income taxes on the money prior to putting it into the IRA and should not be taxed on it…
Category: Retirement Accounts
Retirement Accounts
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Tax Court Says Royalties Paid to Roth IRA Were Excess Contributions to IRA
The U.S. Tax Court recently issued another opinion involving a LLC owned by a self-directed IRA. The case is Block Developers, LLC v. Commissioner, T.C. Memo. 2017-142. The case invovles an IRA LLC that purchased a patent and then licensed the patent back to the prior owner, with the intent of the IRA LLC collecting…
Appeals Court Upholds IC-DISC Roth IRA Tax Strategy
The Sixth Circuit Court of Appeals upheld the IC-DISC Roth IRA tax strategy in In Summa Holdings, Inc. v. Commissioner, No. 16-1712 (2017). This tax strategy allows business owners to sidestep the annual Roth IRA contribution limits, thereby allowing the taxpayers to amass sizable amounts in their Roth IRAs to grow tax-free. The case is…
Using IRA Funds to Settle a Probate Dispute
Inherited IRAs can present a number of challenges. In Ozimkoski v. Commissioner, T.C. Memo. 2016-228, the court considered the tax implications of a withdraw from an inherited IRA that was used to settle a probate dispute with the couple’s son. The case shows what not to do when using IRA funds to settle a probate…
LLC Owned by Self-Directed IRA Cannot Pay Wages
The U.S. Court of Appeals for the Eleventh Circuit recently affirmed Ellis v. Commissioner, which held that the payment of wages for services to a self-directed IRA owner for his services rendered to an LLC owned by a self-directed IRA was a prohibited transaction. This case provides yet another example of how not to handle…
Self-Directed IRA Purchase of Real Estate is Taxable
Self-directed IRAs present a number of opportunities. But what if the self-directed IRA custodian chooses to limit the account holder’s options? Can the IRA account holder go around the custodian’s wishes? The recent Dabney v. Commissioner, Docket No. 14566-12, provides an example where the purchase real estate by a self-directed IRA was a taxable distribution from…
Self-Directed IRA can Flip Houses & Share Ownership of Property
In In re Cherwenka, the U.S. Bankruptcy Court for the Northern District of Georgia concluded that house flipping activities in a self-directed IRA and shared ownership of property with the IRA and the account holder were not prohibited transactions. Facts & Procedural History Mr. Cherwenka was in the business of flipping houses. Mr. Cherwenka established…
Promissory Notes Distributed by Self-Directed IRA Were Not Worthless
Self-directed IRAs are usually profitable. But there are times when they lose money. In Berks v. Commissioner, Docket No. 26883-11S, the U.S. Tax Court addressed a situation where the IRAs held promissory notes that may have been worthless. Facts & Procedural History The Berks rolled over money from pre-existing IRAs to self-directed IRAs, with the…
Personal Guarantees for Self-Directed IRAs Are Prohibited Transactions
If you have a self-directed IRA, the IRA invests in LLCs, can you personally guarantee a loan for the LLC? The court addressed this in Peek v. Commissioner, 140 T.C. 12. Facts & Procedural History Mr. Fleck identified a business opportunity that he intended to invest in. Mr. Peek, Mr. Fleck’s lawyer, approached Mr. Fleck about…
When Tax-Free IRA Rollovers as Short-Term Loans Fail: Two Examples
Taxpayers often withdraw funds from their IRAs to cover short-term expenses with the hope that they can put the funds back in their IRA within the 60-day window for making a tax-free IRA rollover. This can work out well when taxpayers put the funds back into their IRAs within 60 days. When taxpayers miss the…