Wealth Management Group Newsletter – Fall 2022
Jacqueline N. Janczewski, Frank L. Washelesky



Traditional bank and investment firm IRAs typically allow you to select from a menu of stocks, bonds and mutual funds. If you would like more control over how your retirement dollars are invested, you might want to consider a self-directed IRA. Offered by certain financial institutions, self-directed IRAs give you nearly complete control over investment decisions.

With greater diversification and potentially higher returns come significant risks and disadvantages. Many alternative investments are more volatile than traditional investments, and you will need to conduct your own due diligence and oversee your account’s assets. Before you choose this option, review both the potential risks and rewards.

DIY portfolios

Many self-directed IRA holders are attracted by the wide array of traditional and alternative investments available. These include real estate, closely held stock, LLC and partnership interests, options, hedge funds, oil and gas, mineral rights, timber and even certain precious metals and coins. Those who choose this type of IRA should be knowledgeable and experienced investors willing to research investments and monitor their portfolios closely.

But even if you do most of the investment “work” yourself, you may pay more in expenses than traditional IRA owners. This is because account custodians usually charge annual fees, as well as fees for each transaction.

Prohibited transactions

There is another pitfall of self-directed IRAs: “prohibited transactions.” Under the Employee Retirement Income Security Act (ERISA), dealings are prohibited between an IRA and certain “disqualified persons,” including yourself, certain members of your family, businesses that you or your family control and certain advisors.

Among other things, a disqualified person cannot:

  • Sell property to or buy property from the IRA;
  • Provide goods or services to it;
  • Lend money or guarantee a loan to it nor pledge its assets as security for a loan;
  • Receive compensation from it; or
  • Personally use its assets.

If you engage in a prohibited transaction, the consequences generally are severe. Your IRA could lose its tax-advantaged status and its assets will be deemed to have been distributed to you on the first day of the year in which the prohibited transaction took place. This distribution immediately triggers income taxes and, in many cases, a 10% early withdrawal penalty.

Prohibited transaction rules make it difficult — if not impossible — for you or your family to actively manage a business, real estate or other assets held by your self-directed IRA. Suppose, for example, you invest in rental real estate and perform certain repairs and maintenance yourself. If the IRS finds out, it will likely claim that you violated the prohibited transaction rules by providing services to the IRA. So, while a self-directed IRA gives you control over how funds are invested, once you make an investment, you will need to accept an essentially passive role in it. 

Related Read: Exploring IRA Investments in Commercial Real Estate

Physical possession

There is another potential risk. Self-directed IRAs can invest in physical assets such as precious metals or coins, but only if they are in the possession of the IRA custodian. In a recent U.S. Tax Court case, a taxpayer learned this lesson the hard way. The taxpayer set up an LLC within a self-directed IRA and had the LLC purchase gold coins. However, even though the LLC held legal title to the coins, the taxpayer kept the coins in a safe at her home. The court ruled that, because the taxpayer “had complete, unfettered control over the … coins and was free to use them in any way she chose,” she had received a taxable distribution equal to the value of the coins.

Other investments by a self-directed IRA, although allowed, may generate unrelated business taxable income or unrelated debt-financed income. For example, income earned by the IRA on investments in unincorporated operating companies or debt-financed property may be subject to current taxes because the income is unrelated to the IRA’s tax-exempt purpose (to save for retirement). You will need to consider these taxes when selecting investments for a self-directed IRA.

Discuss your plans

Self-directed IRAs offer owners investment flexibility but also present real risks and a need for careful adherence to regulatory rules. Before opening an account, discuss your plans with your investment and tax advisors.

For more information, contact Jacqueline Janczewski at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Estate and Gift Planning Check-Up

Frank Washelesky, CPA, JD, CVA, PFS

As we move into the New Year, it is a good time to re-visit your estate and gift planning.  With the market down and inflation and interest rates rising, there are several ideas that you may want to consider.

Using Annual Exclusion Gifts

The gift tax annual exclusion allows you to transfer cash or other assets to as many individuals as you choose without a gift or estate tax cost. From 2018 through 2021, the gift tax annual exclusion amount held steady at $15,000 per individual.  In 2022, the amount increased to $16,000 and, due to increased inflation, increases again to $17,000 for 2023.

A married couple can give $32,000 in 2022 and $34,000 in 2023 to any one individual.  However, if the gift is from only one spouse, a gift tax return may be required. 

It can be a good practice to make your annual exclusion gifts early in the year to move more appreciation and income to your beneficiaries and ensure they are completed while you are alive and well.

You may also consider gifting appreciated property to individuals that are in the zero capital gain brackets so that they can sell the asset without a tax cost.  The tax rate on capital gains is zero for single individuals with less than $40,400 of taxable income and married couples with less than $80,800 of income.

It also can be beneficial to use gifts to fund ROTH IRAs for your loved ones that are just starting out.  They would need to qualify, and the limit for a ROTH IRA is $6,000 for 2022 and $6,500 for 2023 ($7,000 for 2022 and $7,500 for 2023 for qualified individuals over age 50).  A ROTH IRA can grow tax free and, in most cases, distributions are tax free as well.

Utilizing the Lifetime Exemption

The federal gift and estate tax exemption is $12.06 million for 2022 and increases to $12.92 million in 2023. Under current law, this exemption is expected to be cut in half in 2026, so utilizing the historically large exemption amount over the next few years is something to consider for individuals with significant wealth.

If you have already used your lifetime exemption, the large increase in the exemption in 2023 of $860,000 will still be available to you.

If you are married and concerned about gifting away a significant amount of your wealth, consider a Spousal Lifetime Access Trust (SLAT). A SLAT allows one spouse to gift into a trust that includes the other spouse as a beneficiary.  While The SLAT is out of the estate for estate tax purposes, the couple still has some access to the funds as long as the beneficiary spouse is alive. 

Related Read: Spousal Lifetime Access Trust: A Tool for Creditor Protection and Estate Planning 

Converting to a ROTH IRA

The stock market has had a difficult year and many portfolios are down by 15% to 20% or more.  If the value of your qualified retirement plan assets has dropped over the recent downturn, it may be an ideal time to consider converting some of those assets to a ROTH IRA.  You will pay income tax now but at the depressed values, and your other income may be down as well. 

Related Read: Planning for Required Minimum Distributions from IRAs: Why You Should Consider Making/Taking ROTH IRA Conversions in Low Income Years

General Review of Financial Plan

It is also a good practice to review your overall estate and financial plan periodically.  At a minimum, you may want to verify that you have accurate beneficiary designations in place for all insurance policies and retirement accounts, consider any life changes including divorces, marriages, births and deaths in the family that may change your overall estate plan and confirm that executors and successor trustees are appropriate, willing and able to act on your behalf if needed.

For more information, contact Frank Washelesky at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Forward Thinking