Investing with a self-directed IRA or 401k doesn’t have to be hard. It just takes a little bit of effort to learn some of the rules. Once you know some of the rules you can then get to investing without much worry. Even after you have learned about the rules there will be times when you aren’t sure what to do. That is where we come in. We are here to help make sure you are on track and not doing anything that may negatively impact your retirement account. If you have any self-directed IRA or 401k questions contact us. In the mean time enjoy learning about some of the more popular mistakes made inside of a self-directed IRA and 401k.
Mistakes Made Inside of Self-Directed IRAs and 401ks
I have explained what a disqualified persons is enough times that instead of explaining it again, check out, “Disqualifed Persons in Regards to Self Directed IRAs and 401ks.” A retirement account (IRA or 401k) is an investment tool to benefit retirement! The keyword there is retirement. Because there are already some great benefits to retirement accounts (namekly tax benefits) there are rules put into place that say you can’t do things that would unfairly benefit your retirement account. That is one of the reasons why you can’t do any dealings with disqualified persons because there are chances that a disqualified person would give you a better deal or would unfairly benefit your IRA. An example would be if a disqualified person you knew wanted to sell you real estate at a much lower price than they could generally get elsewhere.
Making a personal guarantee
Because disqualified persons are such a big deal no matter what the type of transaction you can’t deal with disqualified persons. This also rings true with trying to guarantee a loan for your IRA from a disqualified person. For example, if you are going to buy a real estate property with your IRA but don’t have enough money to purchase the property then you would need to get a loan. You cannot however go to a person who is considered a disqualified person to get a loan for your IRA. Typically, if you don’t have enough money in an IRA or 401k the type of loan that some banks will offer is a non-guaranteed loan. A non-guaranteed loan is riskier for a bank than a regular guranteed loan. Because of the risk they are offered at significantly higher interest rates.
How does sweat equity pertain to self-directed IRAs and 401ks? Sweat equity is when the self directed IRA owner (or as the IRA LLC manager) were to use their personal tools and equipment to improve the property (e.g. use your saws, materials, truck, employees, to add a new roof). Another potential mistake is the self directed IRA owner provides all of the labor for making the improvements.
This is one of those rules that is quite frustrating to self-directed IRA owners because it is simply doesn’t make sense unless you remember that you are dealing with a retirement account. The other way to look at it more specifically think of the self-directed IRA or 401k as the owner of the property. If you truly look at it that way then there is no way that you would for free provide services like repairing the roof because you aren’t the owner. Whether this completely makes sense to you this is the rule and there isn’t really any way of getting around it.
These are just a few of the more popular mistakes made inside of self-directed IRAs and 401ks. If you have any specific questions about your situation feel free to reach out to us as we are self-directed IRA and 401k professionals.
Author: Nick Barker