Life and Death Planning for Retirement Benefits

Chapter 8: Investment Issues; Plan Types

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also does not create debt-financed income (or loss) for the borrower-seller; even though it does involve borrowing the securities to be sold, this borrowing creates an “obligation” but it does not create “indebtedness.” Rev. Rul. 95-8, 1995-1 CB 107. C. Real estate mortgages create UBTI for IRAs. A qualified retirement plan (QRP) gets the benefit of an exception for certain mortgages used to finance the plan’s purchase of investment real estate. § 514(c)(9) . This exception does not apply to IRAs. § 514(c)(9)(C) . Thus, owning mortgaged real estate will cause rental income from the property and/or gain upon sale of the property to be UBTI. D. Exception for property used for exempt purpose. There is an exception to the debt- financed property rule for property that is more than 85 percent used for the exempt entity’s exempt purpose (other than its need for funds). § 514(b)(1)(A)(i) , Reg. § 1.514(b)- 1(b)(1)(ii) . “In furtherance” of the exempt purpose means inherent in or essential to the fulfilment of the exempt purpose. Borrowing for investment purposes, though it may be useful for the accumulation of funds in a retirement plan, does not meet this “essential” test. Elliot Knitwear Profit-Sharing Plan, 614 F. 2d 347 (3d Cir. 1980), which was followed in Henry E. & Nancy Horton Bartels Trust, 209 F. 3d 147 (2d Cir. 2000); Cert. Denied 531 U.S. 978 (2000). 8.3 Types of Retirement Plans An in-depth discussion of the characteristics of retirement plans is beyond the scope of this book. The purpose of this ¶ 8.3 is to explain the differences among the various types of plans only to the extent such differences are likely to have an impact on individual planning choices. In this book, a “ retirement plan ” means a corporate or self employed (“Keogh”) pension, profit-sharing, or stock bonus plan that is “qualified” under § 401(a) , a tax sheltered annuity (or mutual fund) arrangement established under § 403(b) , or an individual retirement account (IRA) created under § 408 or § 408A . The narrower term qualified plan or qualified retirement plan (QRP) includes only 401(a) plans. Sometimes the term “plan or IRA” is used to emphasize that a statement applies to both “employer-type” plans (such as QRPs) and “individual account plans” (IRAs and Roth IRAs). Generally the term “IRA” includes both traditional and Roth IRAs, but sometimes the term “IRA or Roth IRA” is used to emphasize that the statement applies to both types. What’s most confusing about the various types of retirement plans is that there is not one set of mutually exclusive categories; instead, there are different overlapping classifications for different purposes. For example, Qualified Retirement Plans (QRPs) are divided into two types (Defined Benefit and Defined Contribution) for purposes of the limits (under § 415 ) on what may be contributed or accrued for a participant, but into three types (pension, profit-sharing, and stock bonus) for purposes of plan aggregation under § 402 (definition of lump sum distribution; ¶ 2.4.04 (B)). Profit-sharing and stock bonus plans must be Defined Contribution plans, but a pension plan may be either a Defined Contribution or a Defined Benefit plan. A Keogh plan can be any type of QRP other than a stock bonus plan or ESOP. Overview of types of plans