| Self-Directed IRA questions |
Real estate IRA questions |
Service questions |
LLC questions |
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What is a Self-directed IRA?
A Self-directed IRA allows you and/or your investment advisor to manage and direct the investments in your IRA. Most IRA
custodians restrict your investment options to assets such as stocks, bonds, mutual funds, or bank certificates of deposit. The investments in a Self-directed IRA are not limited to these options. |
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What types of assets may I hold in my Self-directed IRA?
IBC Trust will hold real estate, limited partnership (LP) real estate interests, limited liability company (LLC) real estate interests,
and certificates of deposit, etc. |
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Are there any assets I cannot hold in my Self-directed IRA?
IBC Trust will not hold general partnership interests, sub-chapter S corporation stock or collectibles. Custodians determine the
type of assets they will hold and may not choose to hold all assets the IRS allows. |
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Are there any transactions IBC Trust would not allow me to direct in my IRA?
Yes. Prohibited transactions as defined in Section 4975 of the Internal Revenue Code are not allowed. The definition of a
prohibited transaction is multifaceted. If IBC Trust feels a transaction could be prohibited, we will suggest you review your
transaction with an ERISA attorney, who specializes in retirement law. |
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If I open a Self-directed IRA, administered by IBC Trust, what are the roles of IBC Trust and the custodial
bank?
IBC Trust is a third party administrator. IBC Trust does not sell investment products or give investment advice. The trust agreement
defines the responsibilities of the custodial bank, IBC Trust, and the IRA holder. IBC Trust processes the paperwork for each
transaction, produces quarterly statements, prepares annual IRS reports, and stays current with IRS regulations affecting
IRA's. The custodial bank requires authorization from an IBC Trust representative and you, the IRA holder, to process
transactions.
The custodial bank holds the assets as the legal owner for the benefit of the IRA holder. |
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Is there a maximum or minimum amount I am able to invest within my IRA?
There are no limits to the amount you may invest; however, IBC Trust requires you to maintain a minimum cash balance. If
your IRA holds income-producing assets you are required to maintain a minimum balance of $500 in the IRA demand deposit or
money market account. If your IRA holds assets that do not generate income, i.e., limited partnership real estate interests,
limited liability company real estate interests, you will be required to maintain a minimum balance of $1,500 in the IRA money
market account. If the cash account is below the required minimum balance on the last day of any month, your IRA is charged
a low balance fee for that month (see current fee schedule).
Fees are deducted from the money market account; therefore, initial funding of the IRA must allow sufficient cash reserves
above the minimum balance to cover current and ongoing fees. We can help you determine the appropriate cash reserve
needed before funding your IRA. |
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How does IBC Trust collect maintenance fees?
Maintenance fees, as well as any other transaction fees and any other expenses incurred, are automatically deducted from your IRA.
IBC Trust is able to keep administration fees competitive by eliminating invoicing, the need to manage receivables, etc.
Maintenance fees are deducted quarterly on the first day of each quarter. Any other expenses are
deducted the date they are incurred. The only fees charged by the custodial bank are those that arise in the normal course of
business, such as wire and NSF fees. |
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Who takes receipt of my assets, i.e., executed note, recorded trust deed?
Our custodial bank has requested that original documents be held in safekeeping at the bank. Documents to be held in
safekeeping are recorded documents, i.e., deeds of trusts, assignments. Exceptions are handled on a case-by-case basis, i.e.,
multi-beneficiary notes secured by deeds of trust. |
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Once funds are available in my Self-directed IRA, administered by IBC Trust, how do I purchase an asset?
A Buy Direction Letter is required to process a transaction in your IRA. Upon direction from you and IBC Trust, the
bank processes your request, mails and/or wires the funds. IBC Trust signs the paperwork on your behalf. Prior to processing the
direction letter, IBC Trust reviews drafts of documents (note, trust deed, subscription agreement, etc.) to ensure correct
vesting. We do not determine the appropriateness, risk, or legality of the investment. These drafts may be faxed to IBC Trust,
Attn: IRA Dept. Your investment will be funded within 48 hours of receipt of the required documents if the cash required is
available in your IRA. |
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Can I purchase real estate in my IRA? |
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What are the differences between buying real estate for myself, personally, and purchasing a real estate investment for my IRA? |
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Can I have funds remitted directly to a seller? |
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Can I transfer/rollover funds from an existing IRA, 401(k), or 403(b) to a self directed IRA at IBC Trust, for the purpose of investing in real estate? |
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I plan on purchasing a property with my IRA that will generate rental income. Does the rental income have to go back to my IRA? |
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How does the rental income actually get back into my account? |
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Can my IRA purchase real estate that I own presently? |
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Can my IRA purchase real estate that my corporation, partnership, or LLC owns? |
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May I live in or work in a property that my IRA owns (e.g., personal residence, retirement home, office)? |
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Can my IRA invest in a newly-formed entity (e.g., limited partnership, limited liability company, c-corporation, land trust) that will invest in real estate? |
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Can my IRA purchase an interest in a Subchapter S Corporation? |
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Who is a disqualified person? |
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What are the consequences of a prohibited transaction in my IRA? |
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What if I do not have sufficient funds in my IRA to purchase a property outright? |
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How do I sell a property owned by my IRA? |
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When I sell a property owned by my IRA, may I keep a portion and send the remaining portion to IBC Trust? |
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Can I purchase real estate in my IRA?
Yes. |
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What are the differences between buying real estate for myself, personally, and purchasing a real estate investment for my IRA?
There are four main differences between purchasing real estate for yourself and for your IRA:
1.Title: When purchasing an asset for your IRA, it is imperative that it be properly titled to your IRA. Specifically, it must read: International Bank of Chicago (IBC) Trust Service, Custodian FBO Your Name IRA. IBC Trust will not accept any investments, which are not properly titled.
2.Funding: When purchasing an investment (or any portion of an investment) for your IRA, funds must come directly from your IRA. IBC Trust will send the funds directly to the title company/closing agent/attorney, per your instructions.
3.Expenses/Income: Any expenses associated with your IRA investment must originate in your IRA account and any income must be remitted to your IRA account.
4.Signatures: Documents pertaining to your IRA investments must be signed by IBC, serving as custodian on behalf of your IRA. |
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Can I have funds remitted directly to a seller?
Yes. By completing a Real Estate Buy Direction Letter form and a properly executed purchase agreement, you will instruct IBC Trust with Payment Authorization Letter form where to remit funds. |
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Can I transfer/rollover funds from an existing IRA, 401(k), or 403(b) to a self directed IRA at IBC Trust, for the purpose of investing in real estate?
Yes. You can choose to transfer your existing retirement accounts to IBC Trust, in order to self direct them into real estate investments in which you have confidence, knowledge and expertise. |
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I plan on purchasing a property with my IRA that will generate rental income. Does the rental income have to go back to my IRA?
Yes. All income generated by a property owned by your IRA must return to your IRA, in order to retain the tax-deferred or tax-free status of the investment. |
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How does the rental income actually get back into my account?
Rental payments are remitted to IBC Trust for the benefit of your IRA. The checks or money orders are made payable to "IBC Trust, Custodian FBO Your Name IRA #xxxxx". Once received, the checks or money orders are deposited into your account. All checks must be remitted with an IBC Trust custodian account coupon.
Checks may be mailed directly to IBC Trust, or they may be mailed to the property manager for record-keeping purposes before being forwarded to IBC Trust. If several checks are to be remitted per month, mailing them in one envelope will time and postage, but they must include a separate payment coupon for each check.
Please note: As the investment is owned by your IRA, all rental checks must be made out to the IRA with proper titling: "IBC Trust, Custodian FBO Your Name IRA #xxxxx". |
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Can my IRA purchase real estate that I own presently?
No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property or interest in a property,which is presently owned by a disqualified person. Disqualified persons would include yourself and family members of lineal descent. See Prohibited IRA Transactions. |
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Can my IRA purchase real estate that my corporation, partnership, or LLC owns?
No. See previous questions. |
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May I live in or work in a property that my IRA owns (e.g., personal residence, retirement home, office)?
No. This is considered a prohibited transaction (see IRC 4975). |
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Can my IRA invest in a newly-formed entity (e.g., limited partnership, limited liability company, c-corporation,
land trust) that will invest in real estate?
Yes. Investments in newly-formed private entities are not prohibited under the IRS, with the exception of Subchapter S
corporations (please see IRS Letter Rulings). |
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Can my IRA purchase an interest in a Subchapter S Corporation?
No. IRA's are not qualified as investors in Subchapter S Corporations (please see IRS Letter Rulings). |
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Who is a disqualified person?
Generally, disqualified persons include your immediate family members: you; your spouse; your lineal descendants or ascendants and their spouses (i.e., son, mother, daughter-in-law); a fiduciary of the IRA or person providing services to the IRA (i.e., the trustee or custodian); an entity at least 50% of which is owned (or at least 50% of the beneficial interests are held) by a combination of the above (i.e., if you and your spouse own 50% of an LLC, that LLC is a disqualified person with respect to your IRA); or a 10% owner, officer, or director or highly compensated employee of such an entity. The IRS does not consider siblings, aunts, uncles, etc., as disqualified persons. |
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What are the consequences of a prohibited transaction in my IRA?
If you engage in a prohibited transaction, all the special tax benefits accorded the IRA are lost. That means the entire IRA will become taxable to you as of the first day of the tax year in which the transaction occurs. |
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What if I do not have sufficient funds in my IRA to purchase a property outright?
In general, IRA investments should be bought outright, as any use of debt financing might incur the production of unrelated
business income tax.Please see How it Works. If debt financing is used, it must be in the form of a non-recourse loan,
meaning that, if your IRA fails to make payments, the only collateral the lending institution can come after is the property
itself, and not the IRA. IRA's may purchase an undivided and a proportionate interest in a property, which would eliminate the occurrence of UBTI. |
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How do I sell a property owned by my IRA?
When you are ready to sell a property that is owned by your IRA, you will need to request the original documents from IBC
Trust. Completing a Sale Direction of Investment form does this. Once the property has been sold, all funds from the sale must
be remitted directly to IBC Trust for the benefit of your IRA. This ensures maintenance of the tax-free-deferred environment.
These funds will need to be remitted with a payment coupon stating what asset the payoff is for. |
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When I sell a property owned by my IRA, may I keep a portion and send the remaining portion to IBC Trust?
No. All income generated from the sale of a property owned by your IRA must return directly to your IRA. |
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What type of accounting and/or reporting will IBC Trust provide on my IRA?
IBC Trust provides quarterly statements, annual 1099-R forms reporting distributions, and 5498 forms reporting contributions, rollovers, conversions, and the December 31st fair market value. |
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I currently have an IRA at a brokerage firm or bank. How do I move the assets into a Self-directed IRA administered by IBC bank & trust?
You may liquidate and transfer cash or you may sell assets into cash and rollover to our IBC Trust. The IRS allows you
unlimited transfers of assets from one custodial IRA to another custodial IRA. When transferring IRA's the receiving firm (IBC
Trust) initiates the transfer paperwork. |
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May I open an IRA or SEP IRA with a contribution?
Yes. Make your check payable to "IBC Trust, Custodian FBO IRA Holder's Name IRA # " and include the check with your
paperwork to open your account. To ensure accurate reporting, please note on your check the tax year of the contribution,
i.e., "Contribution for Tax Year 200_". |
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I am terminating or have terminated my employment and have assets in a qualified plan. How do I move
these assets into a Self-directed IRA, administered by IBC Trust?
Contact the plan administrator of your qualified plan and inform them you would like the paperwork required to directly rollover
your account, after it is converted to cash, into a Self-directed IRA, administered by IBC Trust. If you do not know the plan administrator contact your Human Resources Department to assist you. |
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I took a total or partial distribution from my IRA held at a brokerage firm or bank. How do I move some or
all of this distribution into a Self-directed IRA, administered by IBC bank & Trust?
You may establish the account with a 60-day Rollover from a Traditional IRA. You may rollover cash and/or assets within 60-days from the date you received the distribution. The IRS allows one rollover per IRA in a 12-month period. |
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I am currently taking required minimum distributions. Can I continue taking these distributions from my
Self-directed IRA administered by IBC Bank & Trust?
Yes! You may set up periodic distributions to be taken monthly, quarterly, or as often as you wish. Our periodic distributions
are processed around the 25th of the month for receipt by the 1st of the month. |
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Can IBC Bank & Trust administer my whole SEP plan?
No. This service is outside the scope of our Self-directed IRA administration. IBC Trust's IRA Department administers the
employee's Self-directed IRA, which is funded by the employer's SEP Plan. |
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What are the steps that I take in order to invest in real property through my IRA at IBC TRUST?
You can invest directly in real estate or join a qualified LLC or LP, then invest real property through LLC or LP. The Operating
Agreement and/or Subscription Agreement of LLC or LP must list your IRA's membership/partnership interest as "IBC TRUST
Custodian FBO IRA Holder's Name IRA #". You review and approve these documents; however, the IBC TRUST must sign as
the subscribing member/limited partner. Once you have reviewed and approved the documents you complete our Direction
Letter (which directs the custodian to sign the documents and purchase the LLC interest) and forward the Direction Letter and
the Agreement to our office. The funding process for investing in an LLC or an LP is the same; therefore, the terms LLC and
LP are interchangeable within these FAQ.s. |
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If my IRA is a member of the LLC that is buying property, how should the purchase offer be drawn up?
All offers must list the LLC as the buyer whether the LLC is the only buyer, or buying as a tenant in common. The LLC is
purchasing the real property in the name of the LLC. |
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How is the deposit on the property paid?
When your IRA purchases property as a member of an LLC the deposit or earnest funds are paid by the LLC. Typically, the
LLC will have a bank account in its name to hold the members' funds for investment and to pay expenses. |
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Who signs the closing documents?
The managing member/general partner of the LLC/LP signs all escrow documents on behalf of the LLC/LP. |
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Are there restrictions on the type of property that my IRA can purchase?
No. As long as it is an investment, your IRA can purchase any type of real estate (raw land, pre-development, commercial,
residential, etc.). |
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Will IBC TRUST hold real property invested in the LLC?
IBC Trust will not hold real property but will hold interests in Limited Liability
Companies (LLCs) or Limited Partnerships (LPs) that hold title to real property. |
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Can my IRA or the LLC that is owned by my IRA purchase real estate I already own?
No. This would be considered a prohibited transaction. Your IRA may not purchase property (or any asset) which is currently
owned by you or any other disqualified person. |
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Who is a disqualified person?
Generally, disqualified persons include your immediate family members: you; your spouse; your lineal descendants or ascendants
and their spouses (i.e., son, mother, daughter-in-law); a fiduciary of the IRA or person providing services to the IRA (i.e., the
trustee or custodian); an entity at least 50% of which is owned (or at least 50% of the beneficial interests are held) by a
combination of the above (i.e., if you and your spouse own 50% of an LLC, that LLC is a disqualified person with respect to
your IRA); or a 10% owner, officer, or director or highly compensated employee of such an entity. The IRS does not consider
siblings, aunts, uncles, etc., as disqualified persons. |
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Can my IRA invest in an LLC with other members?
Yes. You, any family members, their IRA's, eligible 401(k)s (or other qualified plans), and unrelated third parties may all be
initial members of an LLC created to purchase real property. Each member's interest is held separately within the LLC. Once
the initial funding of the LLC is complete, however, future transactions may be limited due to the prohibited transaction and
self-dealing rules. |
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Can I personally guarantee a loan to the LLC in which my IRA is a member?
No. You cannot guarantee a loan for any amount personally, even in the LLC. |
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If the LLC buys an income producing rental property, what happens to the rental income?
The income goes back into the LLC. The LLC can reinvest or hold the cash according to its Operating Agreement. The IRA is
treated as any other member of the LLC. If dividends or principal are returned to members, the IRA's share is paid to IBC
Trust Custodian FBO IRA Holder's Name IRA # " and sent to IBC Bank for deposit to the IRA Custodian account. |
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Will the income generated by the real property in my IRA be subject to taxation?
Although your IRA is tax-exempt, the manner in which the IRA generates tax-exempt income is limited by the unrelated
business taxable income (UBTI) rules. If the IRA conducts an active trade or business, the income derived from that activity is
taxed as UBTI. Some rents or debt-financed property may be subject to UBTI. If there is UBTI, IRS Form 990-T must be filed
and the taxes must be paid from the IRA. We recommend that you consult with your tax advisor to determine if there is any
UBTI and if so, to prepare the necessary tax returns. |
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If the LLC buys vacation property can my family stay there on vacation?
No. You cannot personally benefit from the assets in your IRA. |
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Does IBC trust need the fair market value (FMV) of the property held in the LLC/LP every year?
We are required to report the FMV of your IRA to the IRS annually. FMV, for this purpose, is defined as "the price at which
the property would change hands between a willing buyer and a willing seller, neither under any compulsion to buy or sell and
both having a reasonable knowledge of relevant factors." It is your responsibility to confirm that the value being reported to
the IRS as your share of the LLC/LP*, which is reflected on your December year-end statement, is accurate.
*Determining the FMV of a limited partnership and/or limited liability company interest can be difficult. The Investment
Partnership Association (IPA) issued a practice standard in 1989 outlining how it recommended its members deal with the
valuation problems inherent in limited partnerships. The IPA practice standard recommends that the general partners of a
limited partnership value the limited partnership at cost for the first three years of the partnership's operations. After that,
the general partners are advised to have the value of the partnership appraised by an independent appraiser at least once
every three to five years. In the intervening years, the general partners must exercise good faith in determining the fair
market value (FMV) of the partnership. (If, however, the partners are unable to make a good faith determination, an
independent appraiser should be used.) |
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The answer of the following question should be "NO" in the LLC agreement:
1. Does the transaction require your IRA to make additional investments, capital contributions or loans after the initial
investment?
2. If the transaction requires additional investments, capital contributions or loans and you fail to put up additional money,
would you lose your entire IRA investment?
3. Are the IRA funds invested in an enterprise in which you have, or will have, some other relationship, such as current
owner, employee, creditor, director or officer?
4. Does the transaction involve the sale or exchange, or leasing of any property between the IRA and a "disqualified
person"?
5. Does the transaction involve the lending of money or other extension of credit between the IRA and a "disqualified
person"?
6. Does the transaction involve the furnishing of goods, services or facilities between the IRA and a "disqualified person"?
7. Does the transaction involve the transfer to a "disqualified person" or the use by any "disqualified person" of any of the
income or assets of the IRA?
8. Does the transaction involve any dealings by you with the assets of the IRA for your own interest or own account This
would include items such as the receipt of personal benefits outside the IRA in the form of compensation, the right to use
property and the like?
9. Will you receive any fees, commissions or other form of compensation from any third party dealing with the IRA in
connection with this transaction? |
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