No, Seriously, Follow the Rules!You may want to familiarize yourself with the self directed IRA rules before you set up an account. The rules regarding self directed IRAs are really the same as those that apply to any tax-deferred or tax-deductible retirement account. Here are the basics and a little background. Self directed IRA rules come from the Employee Retirement Income Security Act of 1974 or ERISA for short (thank God for acronyms, haha), the Internal Revenue Code on Prohibited Transactions and unrelated business income tax or UBIT. If you fail to follow the rules, your account could lose its tax-deferred status and there could be severe tax consequences. The laws and codes are long and sometimes difficult to understand, but let's just break it down into four categories. They are prohibited transactions and investments, self-dealing, indirect benefits and UBIT. There are certain transactions and investment types that can not be made within self directed IRAs. First we have prohibited transactions. You may not borrow money from it, sell property to it, use it as collateral for a loan or buy property for personal use. In addition, no one may receive unreasonable compensation for managing the account. Some people consider the self directed IRA rules concerning investment types to be vague. Primarily, because you can invest in just about anything, except the following; artworks, rugs, antiques, metals, gems, stamps, coins and alcoholic beverages. That's all pretty straight forward. It is this next one that confuses people; "Certain other tangible personal property." Companies that are familiar with self directed IRAs allow you to make specific types of investments that other clients have made over the years without running into problems. They include, but are not limited to, residential and commercial real estate, land and gold bullion, as well as, privately held and publicly traded stocks. Next are the self directed IRA rules regarding "self-dealing". In short, investments should be made at "arms-length". Self directed IRAs and other retirement accounts are meant to benefit you and your beneficiaries in the future, not today. If you used funds from the account to acquire an investment property on the beach, for example, you or your close family members cannot live there. That's just one example of self dealing. Another would be using the account to buy stock in a company that you or a family member owns. Sisters and brothers don't count though, only direct descendants and ancestors. The third category is "indirect benefits". The self directed IRA rules regarding indirect benefits are similar the self-dealing prohibitions. We have a few examples of transactions that are prohibited because you (personally) would receive indirect benefits right now. You cannot use account funds to buy; a building in which you will have an office or work space, a personal residence, a vacation home or a retirement home. Finally, there is the UBIT rule. Self directed IRAs are supposed to make money. Generally, those earnings are not subject to taxes, during the year in which they are earned. But in certain situations, UBIT may apply. In most cases, it is only applicable if the account borrows money to make an investment. For example, if there was not enough cash in the account to buy a specific piece of real estate, the account can apply for a mortgage. But, that would be considered "debt financing" and any profits or rental income from the deal would be subject to the UBIT tax. Briefly, those are the important self directed IRA rules. Your accountant, the IRS or your attorney should be able to answer any other questions that you might have. Labels: Follow the Rules, No, Seriously |
