Archive for the ‘self directed ira rules’ Category

Why These Self-Directed IRA Rules Are Important

Monday, November 20th, 2017

You being able to invest in what you want is equally as important as you become familiar with the rules and laws involved. It can definitely be overwhelming, but it’s not at all impossible to go from novice to knowledgeable. The reason we stress this so much is that is due to the off chance that your IRA gets disqualified by the IRS because of a rule violation. The only way to avoid that is to vigilantly abide by the set IRS rules, and get cozy with these self-directed IRA rules.

Self-Directed IRA Rules

Disqualified Transactions

The IRS has outlined two things that are not allowed inside of an IRA and so you will want to stay clear of these types of investments or they will surely disqualify your IRA.  What are the two disqualified transactions?

  1. Insurance Policies- You cannot take out a life insurance policy on yourself inside of an IRA. We will get more into why this is the case under the self-dealings section.
  2.  Collectibles- This includes stamps, coins, artwork, guns, cars, and any other asset that could be deemed a collectible. If it seems like a collectible then the best bet is to stay clear of the investment. Note:  The IRS does allow gold and silver as long as it meets certain criteria.

Disqualified Persons

This is a very big issue when investing with a self-directed IRA. In regards to disqualified persons you cannot lend money to them through your IRA, invest in their businesses through your IRA or let them live in a real estate property that you purchased through your IRA. The following is directly from the IRS website and explains what constitutes someone as a disqualified person. So who is considered a disqualified person? The following image should help show you who is considered disqualified and who may be disqualified.

This is the general rule for disqualified persons. You will want to make sure for your specific situation that you are not doing any dealings with disqualified persons. Contact us today for help in determining if you are dealing with a disqualified person.

Self-Dealing

This is another topic that can be easily broken but easily forgotten. IRA owners cannot make investments that benefit themselves, even indirectly. For example, you cannot use your IRA to buy a house that you will be living in. Nor can you use your IRA to buy a house that any of your family members will be living in or be renting. This is another area that you will want to make sure your specific situation is in line with the self-directed IRA rules. If you need help trying to make sure you are not self-dealing then contact us and we can help.

These are just a few of the biggest rules to investing with your IRA. We want you to be fully aware and educated so that you can have the best experience investing with your IRA. It should also be noted that if you fail to abide by any of these rules you risk significant tax liability to your IRA and in turn, you would be removing all the benefits that come with IRAs.

Self-Directed IRA Rules and IRS Regulations

Monday, September 11th, 2017

If you’re new to the retirement world, you may be feeling overwhelmed by the amount of jargon and rules. If you familiarize yourself with the essential rules, you can avoid penalties, and reach your retirement goals.

Disqualified persons

One of the easier ways someone can violate self-directed IRA rules is by not understanding who exactly is a disqualified person. These people include the IRA owner’s parents, spouse, their children, and grandchildren. These people are excluded from benefitting from the IRA owner’s investments, for example, if the IRA owner’s adult child needs a home to rent, and the IRA owner has property in their IRA, their child cannot stay in that investment property.

Investment Types

The first thing you learn about self-directed IRA rules is that you, as the owner, are allowed to invest in pretty much anything you’d like. For the most part, that’s true, but there are limitations and exclusions to keep in mind. The IRS has a handful of basic assets that aren’t allowed:

  • Life insurance
  • Collectible items (like paintings, antiques)
  • Gems and coins

Borrowing and lending money

Borrowing and lending in a self-directed IRA gives the owner the ability to loan their IRA money to non-disqualified persons. How it works is that if pre-agreed to, an IRA can receive a certain amount of principal and interest, just like a bank would. What’s appealing is that the IRA holder chooses who to lend to, the interest rate, the principal amount, length of the loan, payment amount, and frequency, and whether the loan is secured by collateral or not.

Rules and Limitations for Owning Real Estate Through an IRA

Monday, November 9th, 2015

real estate and IRA long

Buying real estate through your IRA is a lucrative and competitive business. It can substantially increase the return on your IRA’s investment, and make for a big, cushiony retirement nest egg. One of the biggest reasons that more people don’t take advantage of owning a real estate IRA is all the rules and confusion that comes along with it. It can be a meticulous task, but well worth it.

Self-Directed Real Estate IRA

Although IRS rules permit IRA funds to be invested in real estate, IRS rules do not require an IRA trustee to offer real estate as an investment option. Most trustees who offer traditional IRA investments, such as depository banks, do not allow an IRA owner to invest in real estate because of the extra administrative burden of real estate management. As a result, if you want to invest your IRA funds in real estate, you will most likely have to convert your traditional IRA to a self-directed IRA, which is an IRA that requires you to decide what investments to make, such as real estate.

Prohibited Transactions

IRS rules require IRA-owned real estate to be for investment purposes only. This requirement places several prohibitions on how the real estate can be purchased and used, the key to understanding the prohibitions is the term “disqualified persons”. This term is used in the IRS rules regarding IRA-owned real estate to refer to the IRA owner and related persons–that is, the IRA owner and spouse, ancestors (mother, father, grandparents) and descendants (children, grandchildren and their spouses). The term disqualified person also includes the IRAs investment advisers, including a trustee of the IRA funds, and any business in which a disqualified person has a5 0 percent or greater interest. IRS rules prohibit the use of IRA funds to purchase real estate from a disqualified person, the rules also prohibit a disqualified person from using any real estate IRA purchased with IRA funds, either as a home or business. These rules even preclude you from purchasing a vacation home that is only partly for personal use and otherwise rented to others.

Tax Consequences

If you violate the IRS rules regarding prohibited transactions, the IRS will consider the IRA funds used in the transaction as a distribution of your IRA. You will be taxed on the funds from the first year in which the transaction occurred, with penalties and interest included. Depending on your age, you may also incur an additional penalty for taking an early distribution.

Author: Tanya

What’s Prohibited Within your Self-Directed IRA?

Thursday, October 8th, 2015

prohibit ira

Before opening a self-directed IRA, it’s important to know the rules that are in place. Failure to understand, to partake in prohibited transactions, or deal with disqualified persons can have serious implications like the disqualification of your self-directed IRA, which may lead to penalties and taxes.
The good news is that it’s pretty easy to avoid prohibited transactions and investments by familiarizing yourself with the rules and regulations that the IRS has put into place.

Disqualified persons

The people that are disqualified from conducting activity, or directly benefiting through your self-directed IRA investments include:

  • The IRA holder (you cannot directly benefit from your IRA, the money that’s earned must go back into your SDIRA)
  • The IRA holder’s spouse
  • The IRA holder’s ancestors and lineal descendants (children, grandchildren)
  • Spouses of the IRA holder’s lineal descendants
  • Investment managers and advisors
  • Anyone providing services to the IRA, such as the IRA trustee or custodian
  • Any corporation, partnership, trust, or estate in which the IRA holder has a 50% or greater interest

Click on the image to enlarge

Disqualified persons

However, it is acceptable to conduct activity within your self-directed IRA with aunts, uncles, siblings, cousins, and friends. For more information on disqualified persons, go to IRS.gov.

Prohibited transactions

  • Borrowing money from a self-directed IRA (known as self-dealing, which means loaning yourself money from your IRA)
  • Using the self-directed IRA as security for a loan
  • Selling personal assets to the self-directed IRA
  • Buying property in the self-directed IRA for personal use
  • Purchasing property from a disqualified person (see above).
  • Issuing a mortgage on a disqualified person’s residence

People who own real estate often make the most common prohibited transactions, like paying for expenses out of their own pocket instead of from funds in their IRA. Anything associated with the IRA-owned property (taxes, bills, and HOA fees, so on) should be paid out of the IRA directly.

Types of investments

Self-directed IRAs are known as such an attractive option because of the wide-range of investments that someone can make. One thing that everyone should be aware of though, is that there are types of investments that are not allowed within your self-directed IRA.
The prohibited investments include life insurance, because life insurance is meant to benefit your heirs, who are disqualified persons, and collectibles, and they are not allowed as it is difficult to determine a true value. Examples of collectibles:

  • Coins
  • Gems
  • Antiques
  • Stamps
  • Metals other than gold, palladium and silver
  • Rugs
  • Works of art
  • And alcoholic beverages (although, note that investing in a winery or brewery IS allowed, just not the direct ownership of alcoholic beverages, such as a wine collection)

Remember, your IRA is meant to benefit you once you choose to retire, so vigilant and responsible dealings and investments are what you want to help your IRA grow and prosper. So if you’re considering making alternative investments in your self-directed IRA, do so with a full-range knowledge of the ins and outs of a self-directed IRA.

Author: Tanya