To view each answer, simply click the appropriate question.
Is it legal to purchase non-standard assets using my IRA?
The IRS code, instead of distinguishing which investments are allowed, identifies which investments are not permitted under these laws. Under both ERISA and IRS Codes, there are only two types of investments excluded: Life Insurance Contracts and Collectibles such as works of art, rugs, jewelry etc. Refer to Internal Revenue Code Section 401 (IRC § 408(a) (3)).
How come I haven’t known about this?
What are the different retirement funds I can use?
- Traditional IRA
- Roth IRA
- SEP IRA
- And much more!
It needs to be noted that most employer sponsored plans like 401(k) will not let you roll your account into a new vehicle while you are still employed. Some employers, however, will allow you to roll a portion of your funds. To be certain you will need to contact your current 401(k) provider.
Are there a lot of people who have self-directed IRA accounts?
What are the limits to the investments I can make?
What are prohibited transactions?
- Selling, exchanging, or leasing, any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
- Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
- Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
- Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intends to use.
- Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
- Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.
- If you participate in a transaction which does not fit SPECIFICALLY within these guidelines, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to decide whether you have engaged in a prohibited transaction. A Retirement Account Facilitator can help educate you regarding how these may apply to investment you are considering.
What classifies as a disqualified party?
Plan (or plan asset) + Disqualified person = Prohibited Transaction
By definition a plan is to include tax-qualified plans, IRAs and other tax favored arrangements. For the complete definition you can reference IRC § 4975(e) (1). A disqualified person (IRC §4975(e) (2)) is defined as:
- The IRA owner
- The IRA owner’s spouse
- Ancestors (Mom, Dad, Grandparents)
- Lineal Descendents (daughters, sons, grandchildren)
- Spouses of Lineal Descendents (son or daughter-in-law)
- Investment advisors
- Fiduciaries – those providing services to the plan
- Any business entity i.e., LLC, Corp, Trust or Partnership in which any of the disqualified persons mentioned above has a 50% or greater interest.
Why are the rules so complex?
Are there consequences of a prohibited transaction?
How do I following the rules?
Why do CPA and Financial Advisors say this is illegal?
IRAAA’s Professional Network embraces the self-directed industry. You can search our site to find professionals near you.
What is a self-directed IRA custodian?
Why are there not a lot of custodians?
How do custodians make their money?
- Asset based fees.
- Transactional fees
- Holding fees
- Special fees
Asset fees are usually based off a percentage of the value of your self-directed IRA. When your IRA increases in value, they are able to charge you more – even if you never purchase an asset. Under this system, larger accounts are penalized.
Transactional fees are when your IRA purchases an asset. With real estate, there can be fees assessed for wiring an escrow deposit, reviewing a purchase and sale, recording each document, and fees for the final wire of funds to complete the purchase. When you sell that asset the process repeats itself.
Holding fees are assets that are held with a custodian. If your IRA ever purchases a piece of real estate, the custodian can assess a quarterly fee for just holding the deed on behalf of your IRA.
Special fees include expediting service, express mail, wire funds and so on. They can add up especially when trying to close transactions quickly.
Does it take a long time to make an investment with a self-directed IRA?
Can I use my IRA purchase real estate that I currently own?
Can I use my 401(k) funds with my current employer to purchase non-standard assets?
Can I use leverage to purchase real estate?
An IRA must secure what is called a non-recourse loan, which is solely based on the property. A bank will then lend money based on the investment rather than lending to a borrower who has a great credit score. Since banks do not have any recourse against the IRA or IRA holder, they might require a high down payment.
Am I allowed to use a self-directed IRA to buy a business?
What is UBTI and how is it different from UBIT?
UBTI is subject to Unrelated Business Income Tax or UBIT which can be a very complicated form of taxation. Like Federal Income Taxes, UBIT is set to a laddered schedule, however, it is compressed on much tighter levels. In 2005, UBIT is taxed at the following rates:
- $0 – $2,000 = 15%
- $2,000 – $4,700 = 25%
- $4,700 – $7,150 = 28%
- $7,150 – $9,750 = 33%
- Over $9,759 = 35%
UBIT was implemented to keep the plans that open businesses and the typical small business owners even. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT erases that risk for the typical business owner. It is imperative you seek professional help to make sure you do not incur any severe tax penalties.
What is UDFI?
Can I purchase a piece of real property by mixing personal funds with IRA funds?