A Self-Directed Individual Retirement Arrangement is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. IRS regulations require that either a qualified trustee, or custodian hold the IRA assets on behalf of the IRA owner. Generally the trustee/custodian will maintain the assets and all transaction and other records pertaining to them, file required IRS reports, issue client statements, assist in helping clients understand the rules and regulations pertaining to certain prohibited transactions, and perform other administrative duties on behalf of the Self-directed IRA owner for the life of the IRA account. The custodian usually offers a selection of standard asset types that the account owner can select to invest in, such as stocks, bonds, and mutual funds. In addition, most custodians will also permit the account owner to make other types of investments. The range of permissible investments is broad, however, the IRS does place limits on the types of assets that may be invested in and on the types of transactions that may be carried out.[1]
Contents
1 Prohibited asset types
2 Prohibited transactions
3 Permitted investments
3.1 Precious metals
4 Use of special purpose limited liability company for IRA investments
5 Tax filing requirements for a self-directed IRA LLC
6 IRA LLC Law
7 See also
8 References
9 External links
Prohibited asset types
Internal Revenue Code Section 408 prohibits IRA investments in life insurance and in collectibles such as artwork, rugs, antiques, metals (there are exceptions for certain kinds of bullion), gems, stamps, coins (there are exceptions for certain coins minted by the U.S. Treasury), alcoholic beverages, and certain other tangible personal property.
Prohibited transactions
IRS regulations prohibit transactions that are an improper use of the value in the account or annuity by the account owner, the account owner's beneficiary, or any other disqualified persons, as defined under Internal Revenue Code Section 4975. In essence, IRA prohibited transactions are transactions that Congress has deemed inappropriate between IRAs and certain people associated to those IRAs. The IRS prohibited transaction rules[2] apply to Individual Retirement Accounts, such as a Traditional IRA, Roth IRA as well as SEP plans and SIMPLE IRA plans. These rules are generally designed to prevent self-dealing or conflict of interest[3] transactions, which are transactions that directly or indirectly benefit the IRA holder or a disqualified person[4] and not the IRA or plan. Disqualified persons include the IRA holder, a fiduciary (e.g., the IRA holder or plan participant) and members of the IRA holder’s family, such as your spouse, ancestor, lineal descendant (e.g. children), and any spouse of a lineal descendant. In addition, other disqualified persons include:
Service providers of the IRA (e.g., custodian, CPA, financial planner, or trustee);
An entity (such as a corporation, partnership, limited liability company, trust or estate) of which 50% or more is owned directly or indirectly or held by a fiduciary or service provider;
An entity that is a 10% or more partner or joint venturer of with an entity that is 50% or more owned directly or indirectly or held by a fiduciary or service provider;
Additionally, in the case of a SEP or SIMPLE IRA:
The Employer;
50% or more owner of the Employer;
Officers, directors, 10% or more shareholders, and highly compensated employees of the Employer;
An entity 50% or more owned by the Employer;
10% or more partner or joint venturer of the Employer.
The following are examples[5] of prohibited transactions with an IRA:
Borrowing money from it.
Selling property to it.
Receiving compensation for managing it.
Personally guaranteeing an IRA loan[6]
Using it as security for a personal loan.
Buying property for personal use (present or future) with IRA funds.
Providing services to an IRA investment, such as real estate, if not covered by Treasury Regulation Section 54.4975-6
Receiving a credit card from a self-directed IRA LLC[7]
Using it to a pay for a personal expense
Living in a property owned by the self-directed IRA
If the account owner or beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to the IRA holder at their fair market values on the first day of the year in which the transaction occurred. The distribution would be subject to any taxes or penalties associated with an early distribution. Generally, a 10% early withdrawal penalty and treatment of the distribution as ordinary income for the purposes of income taxes. The penalty for engaging in an Internal Revenue Code Section 408 prohibited transaction differs from the Internal Revenue Code Section 4975 penalty. If IRA assets are invested in collectibles or life insurance, only the assets used to purchase the investment are considered distributed, not the entire IRA.
Examples of self-dealing include:
Having your IRA purchase real estate that you own or use.
Issuing a mortgage on a relative’s new residence purchased by a family member who is a disqualified person as listed above.
Granting a child a second mortgage for the down payment on his or her first home.
Buying stock from the account owner involving IRA funds and a disqualified person.
Purchasing stock in a closely held corporation in which the account owner has a controlling equity position.
Purchasing restricted stock from a family member who is a disqualified person listed above.
Permitted investments
The Internal Revenue Code does not describe what a self-directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibit Disqualified Persons from engaging in certain types of transactions.[8] Some of the additional investment options permitted under the regulations include real estate, stocks, mortgages, franchises, partnerships, precious metals.,[9] private equity and tax liens. Real estate may include residential and commercial properties (U.S. & Internationally), home flipping.,[10] farmland, raw land, new construction, property renovation, development, and passive rental income. Real estate purchased in a self-directed IRA can have a mortgage placed against the property, thus lowering the amount of total cash needed for a purchase; however, neither the IRA nor the account owner of the IRA can have personal liability on the mortgage. This type of mortgage is often referred to as a non-recourse loan. Note – using a non-recourse loan for a real estate transaction or margin with a security purchase can trigger a tax since the income would be considered “Unrelated Business Taxable Income tax” (UBIT or UBIT).[11] Business investments may include partnerships, joint ventures, and private stock. This can be a platform to fund a start-up business or other for-profit venture that is managed by someone other than the account owner of the IRA. Note – using a self-directed IRA to invest in an active trade or business via a pass-through entity, such as an LLC or partnership can trigger a tax as the income generated would be treated as UBIT.[12] Other alternative investments include: commodities, hedge funds, commercial paper, foreign stock, royalty rights, equipment & leases, American depository receipts, and U.S. T-bill.Source Wiks
A Self-Directed Individual Retirement Arrangement is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. IRS regulations require that either a qualified trustee, or custodian hold the IRA assets on behalf of the IRA owner. Generally the trustee/custodian will maintain the assets and all transaction and other records pertaining to them, file required IRS reports, issue client statements, assist in helping clients understand the rules and regulations pertaining to certain prohibited transactions, and perform other administrative duties on behalf of the Self-directed IRA owner for the life of the IRA account. The custodian usually offers a selection of standard asset types that the account owner can select to invest in, such as stocks, bonds, and mutual funds. In addition, most custodians will also permit the account owner to make other types of investments. The range of permissible investments is broad, however, the IRS does place limits on the types of assets that may be invested in and on the types of transactions that may be carried out.[1]
Contents
1 Prohibited asset types
2 Prohibited transactions
3 Permitted investments
3.1 Precious metals
4 Use of special purpose limited liability company for IRA investments
5 Tax filing requirements for a self-directed IRA LLC
6 IRA LLC Law
7 See also
8 References
9 External links
Prohibited asset types
Internal Revenue Code Section 408 prohibits IRA investments in life insurance and in collectibles such as artwork, rugs, antiques, metals (there are exceptions for certain kinds of bullion), gems, stamps, coins (there are exceptions for certain coins minted by the U.S. Treasury), alcoholic beverages, and certain other tangible personal property.
Prohibited transactions
IRS regulations prohibit transactions that are an improper use of the value in the account or annuity by the account owner, the account owner's beneficiary, or any other disqualified persons, as defined under Internal Revenue Code Section 4975. In essence, IRA prohibited transactions are transactions that Congress has deemed inappropriate between IRAs and certain people associated to those IRAs. The IRS prohibited transaction rules[2] apply to Individual Retirement Accounts, such as a Traditional IRA, Roth IRA as well as SEP plans and SIMPLE IRA plans. These rules are generally designed to prevent self-dealing or conflict of interest[3] transactions, which are transactions that directly or indirectly benefit the IRA holder or a disqualified person[4] and not the IRA or plan. Disqualified persons include the IRA holder, a fiduciary (e.g., the IRA holder or plan participant) and members of the IRA holder’s family, such as your spouse, ancestor, lineal descendant (e.g. children), and any spouse of a lineal descendant. In addition, other disqualified persons include:
Service providers of the IRA (e.g., custodian, CPA, financial planner, or trustee);
An entity (such as a corporation, partnership, limited liability company, trust or estate) of which 50% or more is owned directly or indirectly or held by a fiduciary or service provider;
An entity that is a 10% or more partner or joint venturer of with an entity that is 50% or more owned directly or indirectly or held by a fiduciary or service provider;
Additionally, in the case of a SEP or SIMPLE IRA:
The Employer;
50% or more owner of the Employer;
Officers, directors, 10% or more shareholders, and highly compensated employees of the Employer;
An entity 50% or more owned by the Employer;
10% or more partner or joint venturer of the Employer.
The following are examples[5] of prohibited transactions with an IRA:
Borrowing money from it.
Selling property to it.
Receiving compensation for managing it.
Personally guaranteeing an IRA loan[6]
Using it as security for a personal loan.
Buying property for personal use (present or future) with IRA funds.
Providing services to an IRA investment, such as real estate, if not covered by Treasury Regulation Section 54.4975-6
Receiving a credit card from a self-directed IRA LLC[7]
Using it to a pay for a personal expense
Living in a property owned by the self-directed IRA
If the account owner or beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to the IRA holder at their fair market values on the first day of the year in which the transaction occurred. The distribution would be subject to any taxes or penalties associated with an early distribution. Generally, a 10% early withdrawal penalty and treatment of the distribution as ordinary income for the purposes of income taxes. The penalty for engaging in an Internal Revenue Code Section 408 prohibited transaction differs from the Internal Revenue Code Section 4975 penalty. If IRA assets are invested in collectibles or life insurance, only the assets used to purchase the investment are considered distributed, not the entire IRA.
Examples of self-dealing include:
Having your IRA purchase real estate that you own or use.
Issuing a mortgage on a relative’s new residence purchased by a family member who is a disqualified person as listed above.
Granting a child a second mortgage for the down payment on his or her first home.
Buying stock from the account owner involving IRA funds and a disqualified person.
Purchasing stock in a closely held corporation in which the account owner has a controlling equity position.
Purchasing restricted stock from a family member who is a disqualified person listed above.
Permitted investments
The Internal Revenue Code does not describe what a self-directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibit Disqualified Persons from engaging in certain types of transactions.[8] Some of the additional investment options permitted under the regulations include real estate, stocks, mortgages, franchises, partnerships, precious metals.,[9] private equity and tax liens. Real estate may include residential and commercial properties (U.S. & Internationally), home flipping.,[10] farmland, raw land, new construction, property renovation, development, and passive rental income. Real estate purchased in a self-directed IRA can have a mortgage placed against the property, thus lowering the amount of total cash needed for a purchase; however, neither the IRA nor the account owner of the IRA can have personal liability on the mortgage. This type of mortgage is often referred to as a non-recourse loan. Note – using a non-recourse loan for a real estate transaction or margin with a security purchase can trigger a tax since the income would be considered “Unrelated Business Taxable Income tax” (UBIT or UBIT).[11] Business investments may include partnerships, joint ventures, and private stock. This can be a platform to fund a start-up business or other for-profit venture that is managed by someone other than the account owner of the IRA. Note – using a self-directed IRA to invest in an active trade or business via a pass-through entity, such as an LLC or partnership can trigger a tax as the income generated would be treated as UBIT.[12] Other alternative investments include: commodities, hedge funds, commercial paper, foreign stock, royalty rights, equipment & leases, American depository receipts, and U.S. T-bill.Source Wiks