Can I Sell an Asset to My IRA?
Many self-directed retirement account holders invest in nontraditional assets such as real estate or private equity, but these investments may present additional complications such as UBIT or RMDs.
To avoid potential complications, it’s essential that you understand the prohibited transaction rules. One key rule states that no “disqualified person” may personally benefit from transactions within an IRA account.
Tax Implications
An Individual Retirement Account, or IRA, exists to provide tax advantages during retirement. Therefore, all assets or property held within your IRA must only be used for your retirement and cannot be used personally or benefit from it in any way; similarly disqualified parties cannot use your real estate investments either (this could include your custodian, beneficiaries and certain family members such as spouses, ancestors or lineal descendants).
As part of an IRA investment strategy, real estate can be purchased using debt and then rented out to tenants to generate income; the mortgage must then be paid from within your IRA account. You can also buy alternative investment assets like real estate through limited liability companies (LLCs), partnerships or trusts; however you must take care when titling the investments as this ensures your IRA remains sole owner. Furthermore, your IRA cannot buy and sell property back and forth or take out loans against it.
Required Minimum Distributions
Real estate and other investment assets that are considered illiquid may take time to sell when desired, making it more challenging than expected to meet required minimum distributions (RMDs) as you near retirement age.
Investment property typically involves ongoing expenses like maintenance, management fees and insurance premiums which must be covered either from proceeds of sale or from funds set aside in an IRA plan specifically for it.
Your self-directed IRA custodian should inform you about any expenses associated with particular investments, so that any additional costs are fully understood before making the purchase decision. Furthermore, review any prohibited transactions such as leasing or transferring an IRA-owned asset to disqualified people as this may incur taxes, penalties and loss of tax deferred status for your account.
Distributions to Non-IRA Accounts
Even when investing with your self-directed IRA, it is still necessary to abide by IRS rules. Your property should generally be listed under your IRA name – for instance IRAR Trust Co FBO John Doe #12345). If using debt financing, unrelated business taxable income (UBTI) taxes may apply based on what percentage of profits were attributable to debt-financed purchases.
Be mindful that any investment cannot be used for personal gain by you or any third-party, as doing so would violate prohibited transaction rules and result in penalties, fees and possibly the loss of tax deferral status. Disqualified parties include your IRA custodian and certain family members like spouse, parents/grandparents, siblings and lineal descendants as well as any “sweat equity” work on the property including maintenance and repairs (to determine this rule speak with a financial or tax professional for advice).
Transfers to Non-IRA Accounts
If you sell investments from your taxable account and then transfer them into your IRA, this may constitute a prohibited transaction and could incur taxes. A better solution would be purchasing them directly within your IRA while taking care to ensure its ownership outright without loans or any other financial arrangements attached to it.
IRAs generally offer lower fees than regular investments, and self-directed IRAs often give investors more choices to select. However, certain assets such as gold and real estate may incur different charges, including maintenance, storage and insurance fees.
Some IRA providers provide low or no account management and trading fees. Firstrade, for instance, is well known for offering commission-free trades on stocks, ETFs and options; additionally it also provides CDs, mutual funds and pass-thrus – making them an excellent choice for active traders saving for retirement.
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