Folio and IRAs

[NorseBoric]

I read this entire thread but I don't think I'm any more informed. Is there still yet no resolution on whether selling notes from an IRA account on Fiolio is a no-no in the eyes of the IRS?

[Boatguy]

The money never leaves your IRA so why would the IRS care?  It's no different than having an IRA at a brokerage and buying or selling a stock, the proceeds/profits/losses stay in the IRA.  It's only a taxable event when the proceeds leave the IRA.

Foliofn is just a broker, not a custodian.

I populated my IRA almost entirely from Foliofn last year (i.e., transferred in cash from another IRA and bought notes on Folio) and have not seen any negative consequences.

[Rob L]

Yes, that seems to be correct. We just don't know.
All we know for sure is that LC has posted notices on its web site prohibiting IRA accounts from buying and/or selling notes on Folio.
We also know LC permits these transactions to occur. Maybe it's like a traffic light. When it's red you can still step out in front of that bus if you chose.

The only thing I might add is that Peter recently mentioned he had asked LC about this and not yet gotten an answer. Maybe real soon now.
It's not LC hasn't known for months this question is hanging out there. This thread has been one of the most read and responded in the history of LA.
You should know since you just read it all.

See the comments to the following blog post:

http://www.lendacademy.com/orchard-p2p-and-online-lending-ecosystem/

[PennySaved]

There was a lot of discussion before on why selling notes from your IRA lending club account might be a problem.  Could be viewed as a taxable distribution.  Status of Folio as an IRA custodian is not clear.  See this thread.

http://www.lendacademy.com/forum/index.php?topic=1674.0

[twigster]

I am in the process of opening a ROTH IRA account at Lending Club. 

Here is the reply from the application form:

Thank you for submitting your IRA application.

Your paperwork to set up your Lending Club IRA has been received and forwarded to our Custodian, SD IRA Services.

You can expect an email notifying you when your funds are available in your Lending Club account. The process may take 7 to 10 business days, or a little longer (15-20 business days) if your funds are coming from a third party, such as a transfer from your present custodian. You will be contacted by Lending Club or SDIRA should any further information be needed.

Please note that individual retirement accounts (IRA) may not participate in the Note Trading Platform, which means that you will not be able to purchase or sell Notes on the secondary market. Lending Club Notes purchased through an IRA must be held through maturity.

Please feel free to reach out to us with any additional questions.

I was also told on the phone previously I would not be able to trade notes on the Note Trading Platform. 

I wonder if this is something new, as it seems everyone else can still trade notes?

[twigster]

There was a lot of discussion before on why selling notes from your IRA lending club account might be a problem.  Could be viewed as a taxable distribution.  Status of Folio as an IRA custodian is not clear.  See this thread.

http://www.lendacademy.com/forum/index.php?topic=1674.0

Thanks for the link, I didn't see that before.  Seems like this discussion of whether you can or can't has been going on for a while.  While the rules say you can't do it apparently in practice you can.  When my account gets set up I will apply for a associated Folio and see if I can trade in it.

Thanks for all the inputs!!!

[Zach]

The money never leaves your IRA so why would the IRS care?  It's no different than having an IRA at a brokerage and buying or selling a stock, the proceeds/profits/losses stay in the IRA.  It's only a taxable event when the proceeds leave the IRA.

Foliofn is just a broker, not a custodian.

I populated my IRA almost entirely from Foliofn last year (i.e., transferred in cash from another IRA and bought notes on Folio) and have not seen any negative consequences.

The reason it can cause problems is because buyers/sellers determine a market price for their notes, and you could theoretically sell notes worth hundreds or thousands of dollars from a taxable account to your IRA for $0.01. While this is blatant tax evasion, I think LC would be wise to restrict IRAs to no trading, unless market prices become determined by LC in the future.

[twigster]

Just in case anyone stumbles on this thread I would refer you to the following recent replies on another similar thread that is tracking this.

http://www.lendacademy.com/forum/index.php?topic=1674.165

All we know for sure is that LC has posted notices on its web site prohibiting IRA accounts from buying and/or selling notes on Folio.
We also know LC permits these transactions to occur. Maybe it's like a traffic light. When it's red you can still step out in front of that bus if you chose.

The only thing I might add is that Peter recently mentioned he had asked LC about this and not yet gotten an answer. Maybe real soon now.
It's not LC hasn't known for months this question is hanging out there. This thread has been one of the most read and responded in the history of LA.
You should know since you just read it all.

The reason it can cause problems is because buyers/sellers determine a market price for their notes, and you could theoretically sell notes worth hundreds or thousands of dollars from a taxable account to your IRA for $0.01. While this is blatant tax evasion, I think LC would be wise to restrict IRAs to no trading, unless market prices become determined by LC in the future.

[Rob L]

The reason it can cause problems is because buyers/sellers determine a market price for their notes, and you could theoretically sell notes worth hundreds or thousands of dollars from a taxable account to your IRA for $0.01. While this is blatant tax evasion, I think LC would be wise to restrict IRAs to no trading, unless market prices become determined by LC in the future.

You are certainly right, but I hope there's more to it than that. There are already many examples of transactions that  the tax code requires to be at fair market value
 If challenged the tax payer must substantiate the value used or face the consequences.

I think the tax code, IRS and the Federal prison system already have this one covered without LC's help. As you said it's an obvious fraud.

[Keltset]

I wonder what the odds are even of being able to transfer notes like this without them being intercepted by a scripter and seeing major losses....

[core]

I wonder what the odds are even of being able to transfer notes like this without them being intercepted by a scripter and seeing major losses....

Manually, you're almost certain to lose them.  But if you use automation and the proper approach, it would be almost foolproof.  Hint:  You already know what the order_id will be ahead of time.  Other people don't.  I think the greatest risk would come from a temporary network outage/hiccup on your end.

[Rob L]

I wonder what the odds are even of being able to transfer notes like this without them being intercepted by a scripter and seeing major losses....

Manually, you're almost certain to lose them.  But if you use automation and the proper approach, it would be almost foolproof.  Hint:  You already know what the order_id will be ahead of time.  Other people don't.  I think the greatest risk would come from a temporary network outage/hiccup on your end.

I had also thought the same thing but didn't mention it since my posts are too long winded as it is.
If core is correct, and he appears to have a rudimentary understanding of the Folio market, then a fraudster if caught would have to explain not only fair market value manipulation, but also the use of automated tool(s) created for the sole purpose of implementing the fraud.

[Boatguy]

There are many ways to commit tax evasion and this thread has veered into one of the more obscure.

Let's assume a more benign situation where you just want to trade notes in your IRA, like you can trades stocks, ETFs, bonds, etc.  Where's the harm/foul?

[Rob L]

There are many ways to commit tax evasion and this thread has veered into one of the more obscure.

Let's assume a more benign situation where you just want to trade notes in your IRA, like you can trades stocks, ETFs, bonds, etc.  Where's the harm/foul?

Couldn't agree more. And until around July last year that was the case (or LC became aware it was not the case at that time).
There was no mention of Folio prohibition during the period I purchased the bulk of my notes in my IRA account (pre-July '13).
Then, for reasons unknown, LC began posting "thy shalt not" on it's web site while doing absolutely nothing to enforce the commandment.
My guess, posted on more than one occasion, is that my Folio account isn't an IRA.
Transfers of notes and money to/from it are taxable events no different than transferring same to/from my personal checking account.
When one looks at their Folio monthly statement it explicitly describes the flow of notes and money between your LC account and your Folio account.
This is a big can of worms that hasn't gone away, though I hope LC and Folio are working together to make it happen.
Who knows when; I was told this isn't a big priority for LC.

[Keltset]

Does Folio even hold cash or notes? I thought they only acted as a "broker" of them... This is an area I'm not well educated on but if that's the case wouldn't the loans never technically be leaving the lending club accounts? (Note in LC Act A is matched to a buyer LC Act B and "Lending Club" is notified by "Folio" that a transaction has settled and to move the note from LC Act A to LC Act B) I have real estate in an IRA and I can't help but associate what Folio does here is nothing more than what a real estate agent would be doing (facilitating in the transfer but never taking possession).

If that's the case, then folio wouldn't need to be IRA and it should hold no relevance. We all know the Folio isn't Folio anyway and that it's really LC. I guess I just don't understand the liability/legal issue here other than saying they said not to allows them to walk from any liability of  fraudulent activity by the investors.