Life and Death Planning for Retirement Benefits

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Chapter 8: Investment Issues; Plan Types 399
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. This exception does not apply to IRAs.
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). Reg.
“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 thi 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 a tax sheltered annuity (or
mutual fund) arrangement established under or an individual retirement account (IRA)
created under or 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.
8.3.01 Overview of types of plans
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 (unde 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 (definition of lump sum distribution;
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.