Self-Directed IRA Rules by IRA Financial Group
Even with the growth in popularity of alternative asset investments, many IRA owners are unaware that they can buy real estate and other alternative assets with an individual retirement account.
By using a Self-Directed IRA (SDIRA), you can make both traditional investments and alternative asset investments. Alternative assets include real estate, notes and tax liens. You can establish a Self-Directed IRA at one of many IRA custodians dealing with self-directing, like IRA Financial Trust. It’s best not to go through a traditional bank or financial institution. This is because, Self-Directed IRA custodians don’t sell investment products, like mutual funds. Additionally, they offer no investment advice. In other words, with a Self-Directed IRA custodian, you have more flexibility to make investments you want, and control over your IRA.
A Self-Directed IRA custodian is essentially a non-fiduciary facilitator of IRA investments into alternative assets. Most SDIRA custodians simply charge a flat annual fee for their administrative services.
Two Important Self-Directed IRA Rules
Self-Directed IRA investors must focus on two main rules:
- The prohibited transaction rules
- Unrelated business taxable income (UBTI or UBIT) rule
Prohibited Transaction Rules
The Internal Revenue Code doesn’t tell IRA investors what they can invest in. However, the IRC does say what investments you cannot make. These investments are very few. In general, your IRA cannot invest in life insurance or collectibles, like stamps. Additionally, there are transactions you can’t make with certain people – these are called “disqualified persons.” The definition for a disqualified person varies. However, it typically includes you (the IRA holder) and ancestors or lineal descendants of the IRA holder. It also includes entities in which the IRA controller or other disqualified persons hold an equity or manage interest.
In other words, you can’t use your IRA to invest in transactions directly or indirectly involving yourself or a parent, child, spouse, daughter/son-in-law. Again, this includes entities these persons are affiliated with.
It’s important to understand the IRS prohibited transaction rules. If you don’t, you may be hit with penalties for triggering the prohibited transactions, which are steep. Such transactions can lead to the disqualification of the Self-Directed IRA and a penalty that can go as high as 100%.
Working with a Self-Directed IRA Custodian
If you wish to make non-traditional investments, such as real-estate, tax-liens and cryptocurrencies, it’s important that you choose the services of a self-directed IRA custodian.
By law, every IRA must have a custodian or trustee, which means you can also establish your IRA with a bank, financial institution, or authorized trust company. An IRA trustee, also called a custodian, is the institution that administers your plan.
However, when you work with a self-directed IRA custodian (passive custodian) you can engage in alternative asset investments. On the other hand, most banks and financial institutions that offer IRAs only allow their clients to invest in traditional assets. This includes equities, mutual funds and ETFs.
If you wish to make alternative investments, like real estate, you must open an IRA at a self-directed IRA custodian, such as IRA Financial Trust Company.
The IRA custodian is responsible for complying with all IRS reporting requirements with respect to the IRA.
Self-Directed IRA Services Fees
Depending on whether you will elect to use a special purpose limited liability company (LLC) to make the IRA investments, the types of self-directed IRA services fees will differ.
When you make alternative asset investments with an IRA, you have two options:
1. Custodian Controlled
A custodian controlled self-directed IRA is a special IRA custodian that serves as the custodian of the individual retirement account. The custodian allows you to make all IRS approved non-traditional (alternative) investments.
The IRA custodian will invest the IRA funds at your sole discretion. The investment is held in the name of the IRA custodian, for example, IRA Financial Trust Company FBO John Doe IRA.
The IRA custodian is responsible for making all payments regarding the IRA investment, including paying expenses.
The fees for establishing a custodian self-directed IRA are quite reasonable. Fees generally are about $350-$500 annually, but do include some nominal transaction fees for issuing checks.
2. Checkbook Control
Self-directed IRAs with checkbook control allows you to make all types of investments as easily as writing a check. With a self-directed IRA with checkbook control, an LLC (limited liability company) is established, which the IRA will own and the IRA holder (you) will manage.
Because you are manager of the self-directed IRA LLC, you have authority to make investment decisions for your IRA on your own. In other words, you don’t need any custodian consent.
Since all IRA funds will be held at a local bank in the name of the IRA LLC, you simple need to write a check directly from the IRA LLC bank account to make an investment transaction. You can also wire the funds from the IRA LLC bank account.
An LLC is a necessity in order to establish a self-directed IRA with checkbook control. The set-up fee is generally around $1,200. The annul IRA custodian fee is typically low, such as $180 per year. There are no transaction fees involved since the IRA custodian is not truly involved in the operations of the IRA LLC.
Additionally, most self-directed IRA custodians don’t include any asset valuation fees.
Annual Self-Directed IRA Services
Important self-directed IRA services involve make sure that the self-directed IRA structure remains in full IRS compliance. That’s why it is important to work with a reputable and experience facilitation firm, such as IRA Financial Group, that can help you navigate the IRS rules and provide you the necessary types of self-directed IRA services you need.
Self-directed IRA services should include:
- Assistance with Disqualified Person and Prohibited Transaction Rules from in-house tax attorneys.
- Consultation services on the UBTI and UDFI rules from in-house tax attorneys.
- Access to experts who can provide relevant updates in the law relevant to your self-directed IRA.
Before establishing a self-directed IRA, it is important to understand all the relevant self-directed IRA services and rules in order to make sure your self-directed IRA investments will in compliant with IRS rules.
In addition, working with the right self-directed IRA custodian is crucial in terms of making self-directed investments easy and cost effective.
Get in Touch
Do you still have questions regarding the types of self-directed IRA services you should receive with a self-directed IRA? Contact IRA Financial Group directly at 800-472-0646. We will provide you a rundown of our services and answer any questions you may have. You can also fill out our contact form to speak with an IRA specialist today.
Q for You About Self-Directed IRA Rules:
How well do you know the Self-Directed IRA rules, such as UBTI and prohibited transactions?
Author, Adam Bergman is the founder of the IRA Financial Group & IRA Financial Trust Company. For more information on this topic please call 800-472-0646 or fill out the form at IRA Financial Group.