Self-directed IRAs have become all the rage as of late. A self-directed IRA is an IRA that is directed by you. In a self-directed IRA, you could invest in real estate, trust or mortgage deeds, precious metals, energy investments, closely held stock, private LPs and LLCs, promissory notes and corporate debt, and the list goes on. However under IRC (Internal Revenue Code) Section 408, federal law prohibits the IRA from investing in things such as life insurance, collectables which include artwork, gemstones, etc. Aside from these restrictions, there are many advantages of a self-directed IRA. With a self-directed IRA, you can stay ahead of inflation and expand your retirement portfolio beyond mutual funds and stocks. If you are skittish with the fluctuation of the stock markets, this investment vehicle will allow you to invest in some other types of assets.
Self- Directed IRAs are typically funded by making a Rollover or a Direct Rollover to the plan. You can also fund the plan by making IRA Contributions. The most common way to initially fund this plan is through a rollover from an existing employer sponsored plan. Another option is to make annual IRA contributions. The downside to the contributions is that it can take several years or more for you to accumulate sufficient funds to purchase assets within the plan.
Depending on the plan that you set up, you can contribute up to $51,000.00 per year into a self-directed IRA. If you are self-employed, you can invest through a Solo 401(k), SEP, or SIMPLE plan. If you are an individual, you would make contributions to the plan through an IRA, and the amount you could put in yearly would be limited by the plan that you choose.
Other than the limitations mentioned earlier, in a self-directed IRA, you can invest in many things. You can start your own Limited Liability Company that is owned by you, you can invest in certain precious metals such as gold, silver, and platinum coins. In addition, you can invest in gold, silver, and platinum bars. The most common investment that you can make is with real estate. You can buy and sell real estate and rental properties in the U.S., and take advantage of the down real estate market right now and buy these properties dirt cheap. I could also be a good idea to convert your current IRA to a Roth. You would pay tax on the conversion,. But you would reap the tax free savings down the road.
When using a firm to manage your Self-Directed IRA, you need to be careful. The Securities and Exchange Commission (SEC) has issued a warning regarding trustees. There are several companies out there that are looking to rip you off. They look for people that are rolling over their assets to a Self-Directed IRA, and they end up stealing their money.
Nothing is all good. That being said the IRS has very strict rules regarding Self-Directed IRAs. In 26 USC § 4975 – Tax on prohibited transactions is clear on what you can do and what you can’t do. The code states that “prohibited transactions” means any direct or indirect-
(A) Sale or exchange, or leasing of any property between a plan and a disqualified person;
(B) Lending of money or other extension of credit between a plan and a disqualified person;
(C) Furnishing goods, services, or facilities between a plan and a disqualified person;
(D) Transfer to, or use by or for the benefit of a disqualified person of the income or assets of the plan;
(E) Act by a disqualified person which is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
(F) Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan
The code section goes on to define disqualified persons. Disqualified persons are individuals or entities between whom or which an IRA is prohibited (absent of special exception) from engaging in any direct or indirect sale or exchange or leasing of any property; lending of money or other extension of credit; furnishing of goods, services or facilities; or transferring to or permitting the use of IRA income or assets.
· Fiduciaries (which in the case of a self-directed IRA is you)
· Spouses
· Parents
· Grandparents
· Children (and their spouses)
· Grandchildren and Great Grandchildren (and their spouses)
· Service providers of the IRA
· An entity of which % or more is owned directly or indirectly or held by a fiduciary or service provider
Note that the term disqualified person under this code does not include siblings, aunts, uncles, and cousins of the IRA owner.
A Self-Directed IRA, can be a very useful investment vehicle. You just have to be careful, as the rules on these plans are very strict.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, and Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle
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