Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, a Certified Public Accountant and Utah-licensed attorney. For over thirteen years, I have assisted clients with estate planning and administration, tax mitigation, tax controversies, small business planning, asset protection, and nonprofit law.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Asset Protection for IRAs

What is the best way to ensure that an Individual Retirement Account (IRA) is protected from the claims of creditors? As with any asset, developing a protection plan should include considering the following questions: Is the asset already protected by state or federal statute? Can the asset be moved or the owner's residence changed so that the asset would be protected by the statutes of a different jurisdiction? Can an unprotected asset be converted to a protected asset? Can the asset be protected by incorporating a protective structure?

Applying this framework to IRAs, the first consideration is whether the IRA is already protected by state or federal statute. The 50 states and the federal government provide a patchwork of statutory protection for various types of assets in various scenarios. IRAs are protected up to $1 million under federal bankruptcy statutes.

However, states may "opt out" of the federal exemptions and require that debtors filing for bankruptcy in a district within that state be subject to the state exemptions instead. While some federal bankruptcy provisions will always trump state law, the IRA provisions do not. California, for example, has opted out of the federal exemptions and only offers limited protection for IRAs.

If an asset is not already statutorily protected, the next question is whether the asset can become statutorily protected by utilizing the laws of another state. For example, Florida has very liberal asset protection laws for real property, so purchasing a property in Florida can offer protection from creditors. However, since IRAs don't have a distinct physical location, they tend to be governed by the owner's state of residence; and the only alternative would be to move and establish residency in a state that protects IRAs, such as Washington state.

If changing domicile is not an option, another is to convert an asset that is not protected into an asset that is protected. Converting cash to real estate is one example mentioned previously. Given the special tax treatment of IRAs, any such strategy would need to avoid tax penalties. While IRAs may not be protected in a particular state, 401(k) and other ERISA-qualified retirement plans are under federal law that trumps any state law affording 401(k)s less protection. In Patterson v. Shumate, 504 U.S. 753 (1992), the United States Supreme Court confirmed that creditors may not reach an individual's interest in ERISA-qualified plans, whether in a bankruptcy, lawsuit, or otherwise.

However, only certain kinds of IRAs can be rolled into a 401(k). Inherited IRAs may not be rolled into a 401(k), neither can non-deductible IRA contributions. Only IRA funds that constitute tax-deductible contributions or a previous 401(k) rollover can be rolled over into a 401(k). Furthermore, the employer and the 401(k) plan administrator must approve the rollover.

If converting the non-protected asset into a protected asset is not an option, placing the asset into a protective structure such as an irrevocable trust or LLC should be considered. Almost without exception, income-producing property such as rental real estate should be owned by an entity, probably an LLC, for asset protection purposes. While the owner of an IRA must be the individual, an LLC can still be incorporated by changing the investment of an IRA to a limited liability company with a friendly manager. This will work to invoke the protections provided by LLC statutes. In order for this strategy to work, the IRA must be managed by a custodian that allows self-directed investments.

In summary, if an asset is not protected by state or federal statute, consider whether it can be moved or the owner's residence changed, whether the unprotected asset can be converted to a protected asset, or whether the asset can be protected by incorporating a protective structure.

Introduction to Self-Directed IRAs

An individual retirement account (IRA) is a tax advantaged, custodial account set up for the exclusive benefit of the owner. The account must meet the following requirements: First, the custodian must be a bank, a federally insured credit union, a savings and loan association, or another entity approved by the IRS to act as custodian. The custodian is responsible for receiving and holding IRA assets, maintaining accurate records, making distributions, and providing annual statements to the IRA owner.

Second, the custodian generally cannot accept contributions that exceed the IRA contribution limits, with the exception of rollover contributions. Contributions, except for rollovers, must be in cash. Third, the owner must have a nonforfeitable right to the account at all times. Fourth, assets in the account cannot be combined with other property, except in a common trust fund or common investment fund, and fifth, the rules on distributions must be followed.

Most IRA custodians only allow IRAs to select from investments that their company offers, such as stocks and bond portfolios. However, the Internal Revenue Code (IRC) only prohibits investing in life insurance contracts or collectibles under IRC § 408. Collectibles include works of art, rugs or antiques, any metal or gem, any stamp or coin, or any alcoholic beverage.

In other words, the only restrictions on using an IRA to invest in real estate, notes, or any asset other than those listed above would come from the IRA custodians themselves, not any law or regulation. The IRS website states that IRA custodians “are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

The alternative is a self-directed IRA. A self-directed IRA is simply an IRA account in which the custodian agrees to allow the owner to exercise greater control over investment decisions. However, because there is so much more flexibility over a self-directed IRA, the owner must be aware of the rules regarding prohibited transactions with related parties. The IRS imposes significant tax penalties if any “disqualified person” engages in a “prohibited transaction” with a retirement plan. A “disqualified person” according to IRC § 4975 includes any of the following people or entities:

      The owner of the plan;
      A family member such as a spouse, ancestor, lineal descendant, and their spouses;
      The administrator of the plan;
      Any person providing services to the plan;
      Any corporation, partnership, trust, or estate in which the IRA owner owns, either directly or indirectly, 50% or more; or
      An officer, director, 10% or more shareholder, or highly compensated employee of any entity described above.

A prohibited transaction according to IRC § 4975 is any direct or indirect:

      Sale or exchange, or leasing of any property between a plan and a disqualified person; or a transfer of real or personal property by a disqualified person to a plan where the property is subject to a mortgage or similar lien placed on the property by the disqualified person within 10 years prior to the transfer, or the property transferred is subject to a mortgage or similar lien which the plan assumes;
      Lending of money or other extension of credit between a plan and a disqualified person;
      Furnishing of goods, services, or facilities between a plan and a disqualified person;
      Transfer to, or use by or for the benefit of, a disqualified person of income or assets of a plan;
      Act by a disqualified person who is a fiduciary whereby he or she deals with the income or assets of a plan in his or her own interest or account; or
      Receipt of any consideration for his or her own personal account by any disqualified person who is a fiduciary from any party dealing with the plan connected with a transaction involving the income or assets of the plan.

In short, a prohibited transaction is one that violates the purpose of IRA law, which is to benefit the owner in the future after retirement, when distributions are permitted. The owner has a fiduciary relationship with his or her self-directed IRA, and with these rules in mind, they can take use their IRA funds to make a wide range of of the investments.

In Excel, Use Index-Match Instead of Vlookup

While searching the web for help with a nested VLOOKUP formula I was attempting, I happened upon a post by Charley at ExcelUser Blog about the INDEX-MATCH function combination that has made working with spreadsheet data a little easier and faster for me. VLOOKUP searches a table for a value in the left-most column and can return a value in the same record from different column to the right. A number of times when using VLOOKUP, I've needed to search for a value in a column other than the left-most column and return a value from a record in a column to the right or left.

For example, the following state abbreviation table can be used with VLOOKUP to return the full state name by looking up the abbreviation, but not vice versa.

 A   B   C   D 
 1   AL   Alabama       1 
 2   AK   Alaska        Alabama 
 3   AZ   Arizona        AL 

Of course, I could copy column A and paste into column C and use the table B1:C3 to return the abbreviation by looking up the full state name, but that isn't very clean and becomes impractical with larger tables and more complicated data needs.

INDEX-MATCH uses two functions. The MATCH function returns the record number to the INDEX function, which returns the data actually being sought. The formula in D1 is =MATCH(A1,A1:A3,0). The first argument is the search term, "AL", the next argument specifies the table being searched, and third argument specifies that we want an exact match. The result of the formula is the row number on which the lookup value, "AL", appears.

The formula in D2 utilizes the INDEX function to return the actual value we want, the full state name. The first argument is the table or array, and the second argument is the record number, calculated by the same MATCH function from D1. The formula is =INDEX(B1:B3,MATCH(A1,A1:A3,0)). Note that the two table references need to start and stop on the same cells or else incorrect data could result.

The formula in D2 could just as easily be =VLOOKUP(A1,A1:B3,2,FALSE). However, INDEX-MATCH does not require the lookup value to be in the left most column. The formula in D3 looks up the value in B1 and returns the corresponding abbreviation: =INDEX(A1:A3,MATCH(B1,B1:B3,0)). VLOOKUP is unable to accomplish this with the current table.

These same principles apply with HLOOKUP, which is is the same as VLOOKUP except it utilizes a table turned on its side. INDEX-MATCH is more flexible and it apparently faster as well.