Can I Sell an Asset to My IRA?
Importantly, it’s essential that you don’t “self-deal” with your IRA – meaning no investments or loans to disqualified persons (up and down your family tree), or entities you own more than 50% in.
Real estate investing requires that the title to the property be held within an IRA account and all income and expenses passed through this channel.
Taxes
Individual Retirement Accounts (IRAs) are tax-advantaged accounts created and sanctioned by the Internal Revenue Service to encourage Americans to save for important goals such as retirement, healthcare costs or higher education in exchange for some tax advantages. To access these advantages successfully, all account owners must abide by all of their respective account regulations including making and taking distributions.
For instance, both traditional IRAs and Roth IRAs allow you to trade investment securities tax-free; however, upon withdrawing them in retirement you typically will incur capital gains taxes (unless an exemption exists under IRS regulations).
As retirees age, it’s common for them to possess both a substantial retirement account and taxable investments that may need liquidating someday to meet living expenses. If this describes you, selling off the taxable assets first could prove advantageous as long as they don’t result in unanticipated capital gains tax liabilities.
Required minimum distributions
Many IRA owners worry about meeting required minimum distributions (RMDs). Failing to take RMDs by the due date could bring stiff penalties; however, there are various strategies you can employ in order to meet them without selling any assets from your retirement account.
Rule for prohibited transactions within an IRA are complex, but generally speaking they follow this basic tenet: investments made with your IRA should never benefit anyone other than yourself – this rule is known as the exclusive benefit rule and intended to prevent taxed benefits accruing to yourself through investments made within it.
Use of an IRA to buy real estate that you plan on renting, selling or living in is illegal and could incur fines from both the Department of Labor and IRS. There may be exceptions; if unsure, consult an attorney first before proceeding with any transaction.
In-kind transfers
Assets held within an IRA can be transferred from one brokerage account to the next in kind, making the transfer easier and faster than liquidating shares and using cash proceeds for tax payment. However, this process takes longer and will involve coordination with both brokers before moving all the assets over into your new account. In order to ensure smooth transition, monitor it regularly until all assets have moved over into it.
In-kind transfers may be beneficial to retirees looking to switch investment firms or needing RMDs; however, it’s essential that they understand all associated tax rules before proceeding.
When transferring assets to an IRA, it’s essential that you avoid engaging in self-dealing – which includes transactions with disqualified people and entities such as purchasing real estate using your IRA but then receiving rent payments yourself; engaging in prohibited transactions with fiduciary service providers; or moving assets into an account for which there will be favorable long-term capital gains treatment.
Self-dealing
Self-dealing may constitute a breach of fiduciary duty, since trustees, corporate officers, and directors must act in good faith and disclose any potential conflicts of interest. If they do not, courts can impose both legal and equitable remedies such as compensatory damages, disgorgement of profits and constructive trust agreements. Mediation or arbitration offer alternative dispute resolution methods which can help resolve these types of business disputes quickly without costly and time-consuming litigation proceedings.
Self-dealing occurs when an IRA purchases property and then rents it out on a rent-to-own basis to its beneficiary, even though such arrangements might appear harmless. Unfortunately, such arrangements are prohibited under DOL regulations. Furthermore, any transaction with disqualified people should generally be avoided as law prohibits IRA owners and beneficiaries from engaging in prohibited transactions with disqualified people (with certain limited exceptions).
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