From the Desk of a Self-Directed IRA Expert

From the Desk of a Self-Directed IRA Expert

By Kaaren Hall, President, uDirect IRA Services

My desk reminds me of Grand Central Station.  There is so much information that passes by this large chunk of wood in front of me.  Mostly I get questions from people who have wonderful investment ideas and they wonder if those ideas will work in a self-directed IRA.  Usually these ideas are simple as we will discuss, but sometimes they are more complex.

Investors are creative people.  I’ve heard some investment strategy ideas that would impress even the most seasoned investor.  My favorite is the gentleman who wanted to take his IRA and his wife’s IRA and invest in a farm from their uncle’s estate.  They wanted to run that farm as a business and then later have the farm pay them personally.  It’s a great idea.  The thing is that the IRS may take exception.  When it comes to self-directed IRA investing there are “Prohibited Transactions” to avoid. 

In the case of our would-be farmer there are several issues.  This would be a good place to tell you what the rules are:

·         Neither you nor any disqualified people may benefit from IRA (direct benefit, indirect benefit, personal benefit)

·         Cannot buy, sell or exchange property between plan and Self or Disqualified People

·         A “Disqualified Person” cannot provide goods, services or facilities to the IRA and its assets

So who is disqualified to your IRA?  Technically there are several relationships considered as “disqualified” but basically “Disqualified Persons” include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).  You can find greater detail in the Internal Revenue Code (IRC) 4975.  That’s the real rulebook on IRAs. 

So back to our would-be farmer.  Technically a husband’s IRA is disqualified to his wife and his wife’s IRA.  There is an exception to this rule, however, which would allow them to invest together if, before the deal, neither the husband nor the wife had any ownership interest.  They could invest concurrently. Because this is a new deal, Husband and Wife do not have to worry about the “disqualified person” rule.  The question is, did they have an interest before the deal?  It was part of their uncle’s estate and the husband had an interest in the estate.  In cases like this we require an attorney opinion letter or perhaps even a Department of Labor ruling to say there was no prior interest.  It’s touchy stuff and the IRS rules are not always black and white. 

They wanted to run this investment as a business.  An IRA can certainly purchase a business so long as the IRA owner does not personally operate the business and does not draw a salary (and no “Disqualified People” work there).  It’s not a prohibited transaction to run a business with your IRA; however the IRA owner would want to think twice.  There is a tax called Unrelated Business Income Tax or “UBIT” that applies when an IRA runs a business.  You can read more about this tax at www.IRS.gov Pub 590.

Our potential farmers also wanted to take funds personally from the proceeds of the farm business.  When an asset is IRA-owned, taking money for personal use first needs to flow through the IRA and secondly those funds are subject to tax.  They may be subject to a penalty if the IRA-owner is under 59 1/2.  In this case our potential farmer decided not to involve his IRA in this transaction.

Most of the people who call with questions are not looking to do anything nearly as complex.  Most are looking to have their IRA buy a piece of real estate with the intention of holding that property.  The rents then flow back into the Self-Directed IRA just as dividends from stock flow back to a typical IRA.  All expenses of the IRA-owned asset are paid for by the IRA so property taxes, utility bills, etc. are paid for from IRA funds. 

IRA-owners can do a little property management but not much.  If your IRA owns real estate you can screen tenants, collect the rent checks and hire third-party vendors.  Often times IRA-owners will hire a property manager so all interactions are arms-length.  This comes in handy when there are emergency repairs or other issues where the IRA-Owner cannot step in and personally resolve them.

There are so many things your IRA can invest in in addition to real estate.  The IRS says you cannot invest in Life Insurance Contracts and Collectibles.  Allowable investments at uDirect IRA Services include the following:

·         Residential real estate, including: apartments, single family homes, and duplexes

·         Commercial real estate

·         Undeveloped or raw land

·         Managed Futures

·         REITs (Real Estate Investment Trusts)

·         Real estate notes (mortgages and deeds of trusts)

·         Life Settlements

·         Promissory notes

·         Private limited partnerships, limited liability companies, and C corporations

·         Tax lien certificates

·         Foreign currencies

·         Oil and gas investments

·         Private stock offerings, private placements

·         Judgments/structured settlements

·         Gold bullion

·         Car paper

·         Factoring investments

·         Accounts receivable

·         Equipment leasing

There is some $17 trillion in retirement assets and only three percent is invested in alternative assets.  IRAs represent a huge amount of capital and you can choose to self-direct your retirement account into assets you choose.   It’s a pretty great freedom to have.  Many people want their retirement money out of the stock market but are unsure what to do.  What comes as a surprise to many is that you’ve been allowed to self-direct your retirement assets for over 35 years!  If you are interested in finding out more about how you can self-direct your retirement account, check out our website at www.uDirectIRA.com or call us at 714-460-5505.

Happy investing!