Preface: Do you have an IRA and want to do more with your retirement asset? Self-directed IRA’s are a developing area of the tax deferred retirement investments. Continue the Read……
Self-Directed IRA’s
Individual Retirement Accounts (IRA’s) are investment vehicles used on behalf of tens of millions of American’s for retirement savings. IRA’s permit account holders to contribute towards retirement savings in an account either pre-tax (Traditional IRA) or post tax (Roth IRA). Traditional IRA’s permit a deduction from taxable income in the year of contribution and a deferral of investment gains on asset gains until distribution of the funds. Roth IRA contributions are taxed before contribution to the account, and all gains are tax free when in the parameters of qualified retirement withdraws. Because financial advisors make commissions from selling securities, e.g. bonds, mutual funds, and stocks, self-directed IRA’s are not widely advertised as a retirement investment option.
Self-Directed IRA’s were affirmed by the Tax Courts in 1996, and offer retirement investments options to account holders in a variety of investments, e.g. domestic or foreign real estate, private mortgages, precious metals, stocks, bonds, mutual funds, forex, futures, tax liens, private businesses, etc. Approximately 2.5 million self-directed IRA accounts are working for retirement investments in the US.
The IRS requires a fiduciary (custodian or qualified trustee) to hold the IRA assets as a custodian of the asset(s), manage investments, and approve and maintain records pertaining to the self-directed IRA. Fiduciaries help guide compliance of the self-directed IRA to ensure regulation compliance of the self-directed IRA, and avoidance of prohibited transactions. Prohibited transaction include: life insurance, collectibles, stamps, coins, alcoholic beverages, and certain other tangible personal property. The Internal Revenue Code doesn’t list permitted investments, only those prohibited. Prohibited transaction can result in a 15% on assets at assessment, and 100% if not corrected.
Gold bullion can be held in a self-directed IRA if the investment asset meets certain regulations, described in IRC 408(m)(3). Permitted gold investments include American Eagles, and bullion meeting certain standards of fineness and, i.e. manufactured by a COMEX or NYMEX refiner. Certain collector coins are not permitted. With a prohibited transaction, the tax can be expensive, so you can understand why self-directed IRA’s require knowledgeable fiduciary oversight.
Self-directed IRA’s can invest in any type of real estate too, if the custodian of the IRA manages the real estate. Self-directed IRA’s can even partner with a person or another IRA, or obtain a non-recourse loan to invest in real estate. For instance with the approval of your custodian you could invest in a rental property with a non-recourse loan, and collect rental income on your IRA investments, while benefiting from price appreciation on the property. Certain real estate purchases are prohibited, i.e. disqualified persons may not sell you the real estate, rent, live, or vacation on the property, e.g. certain family members or IRA fiduciaries. The IRA holder is also prohibited from maintaining the real estate, but can select a management company for maintenance, e.g. you cannot pay yourself to rehabilitate a property for real estate rental purposes that is purchased with your self-directed IRA funds.
Investments in private companies are permitted too with self-directed IRA’s, such as private equity or shares of stock, (but not S-Corporations) as long as the business interest is not a disqualified investments, e.g. ownership or employment with a disqualified person. Earnings from business investments may be subject to unrelated business income tax (UBIT) if the business has operating income. In addition, neither you nor a disqualified person may be employed by the business if the self-directed IRA has an equity position.
Summary: Self-directed IRA’s are a developing area of tax deferred investing. If you have further interest in how a self-directed IRA’s can benefit your retirement savings, talk with your CPA or investment advisor.