Are Self Directed IRAs Legal?
Self-directed retirement accounts allow investors to invest in alternative assets like real estate, private debt and cryptocurrency without restricting themselves to traditional retirement investments like stock. But with this comes responsibility; such as researching investment opportunities carefully before entering prohibited transactions.
Prohibited transactions are like landmines that could wreak havoc with your retirement account and result in expensive taxes and penalties from the IRS. To prevent this from happening, follow certain guidelines established by them.
Taxes
There are specific rules and guidelines pertaining to self directed IRAs that must be strictly observed, which is why working with a financial advisor or tax attorney is so essential. Failing to abide by them could incur serious penalties from the IRS and/or prohibited transactions (landmines that could obliterate any tax advantages from investing).
Example: It is prohibited to invest in property or investments with disqualified people, including yourself; your spouse/descendant of an IRA owner; fiduciaries for an IRA owner’s IRA; or entities at least 50% owned by such an owner. The IRS would void your entire IRA if such transactions occur.
Alternative assets may be difficult or intangible to value, which requires you to manually verify information such as asset prices and asset values listed on your account statements. While this requires time and effort on your part, this could potentially yield better-than-market rate returns over time.
Investments
Investment can be challenging within a self directed IRA, particularly when it comes to avoiding prohibited transactions that violate IRS rules and may result in steep penalties including possible account closure. To help avoid such penalties, it’s vital that you understand which investments can be made with an SDIRA and their differences from traditional IRA assets.
Real estate is the go-to investment asset in SDIRAs, but other options exist such as single-family homes, apartment buildings, commercial property and raw land in both domestic and foreign locations.
An essential element of creating a successful self-directed IRA is investing in a diverse portfolio. However, it’s equally essential to keep an eye out for potential fraud warning signs, including new companies that promise high returns or lack third-party oversight. According to the Securities and Exchange Commission warnings that criminals often target those using self-directed IRAs to perpetrate fraudulent investments.
Custodians
Custodians serve as administrators of self-directed IRAs. These financial institutions or trust companies typically ensure account holders adhere to IRA rules and avoid engaging in illegal transactions that could incur IRS fines.
One prohibited transaction includes purchasing real estate you personally use, like a vacation home. Another is performing services on real estate investments you own that you own – these activities will raise taxes or disqualify your IRA entirely! Before starting to manage a self directed IRA account yourself, consult with our tax attorneys at McLaughlin & Quinn first to make sure the custodian you select can handle such an undertaking successfully.
After your SDIRA is set up, funding it requires a taxable distribution from your current custodian. When making deposits to this new account, make sure your check is addressed to “IRA”. Also when investing using offers and contracts as the name must include “IRA”.
Rollovers
If you want to convert funds from an old employer’s retirement plan into a self-directed IRA, contact your custodian and complete their funding form. Please be aware that processing can take up to one month depending on their size.
Self-directed IRAs give investors access to expanded investment options beyond stocks and bonds available through traditional retirement accounts, including real estate, private equity investments, notes and precious metals.
However, when investing in real estate or other alternative assets using an IRA account, it’s essential to adhere to IRS guidelines strictly or else risk incurring costly penalties. Working with an experienced tax advisor when contemplating making any moves is also highly advised.
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