The GAO Report and Self-Directed IRAs

GAO Report

The Government Accountability Office (GAO) recently released a publication on January 9th titled Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets. IRAs have become an integral part of retirement savings for many, and more people are beginning to branch out from more traditional assets in favor of alternative types of assets such as real estate, precious metals, private funds, crypto currency, and more. These types of assets are held in self-directed accounts, and the regulations for these types of accounts can be murky at best.

The GAO reported that currently, the IRS provides little guidance to IRA owners when it comes to the increased responsibility and potential challenges that arise when investing in unconventional assets. The following areas needed improved guidelines when it comes to compliance with IRS.
Prohibited Transactions

IRS Publication 590 A defines a prohibited transaction as any improper use of your IRA by you, your beneficiary, or any disqualified person.  These prohibited transactions usually fall into these categories: extension of credit or self-dealing. These prohibited transactions do not limit what your IRA can invest in, but dictates who can and cannot interact with your IRA.

Those with self-directed accounts are at a greater risk of engaging in a prohibited transaction with their IRA, and may not even know it. The GAO concluded that there should be more education about prohibited transactions in order to ensure compliance with IRC § 4975. For more information on prohibited transactions, you can click here.

Unrelated Business Taxable Income (UBTI)

Depending upon the assets in your account, your IRA may incur UBTI. Unrelated business taxable income is gross income generated from an ongoing trade or business that is not related to the IRA.  So if an IRA were to own a business, such as a grocery store, the proceeds from the store would be subject to UBTI because that would be considered business or ordinary income. The IRA would then file a 990-T tax return and would be responsible for the tax on the earned income. Certain types of income (such as dividends, rental income from property, or interest) do not incur UBTI, unless the rental property that is generating the income holds a mortgage. This type of tax, UBTI, is a very complicated issue and should be discussed with your tax advisor.

The GAO reported that there is not a lot of guidance when it comes to UBTI in publication 590-A or 590-B and warned that without guidance, IRA holders may invest in different opportunities that would subject them to this tax. To read more about UBTI, click here.

Fair Market Valuations

Fair market valuations are necessary for 5498 forms that are required by the IRS. These forms report the values of assets held in IRA accounts as of December 31st of the previous year. For accounts that hold stocks and mutual funds, it is much easier to report the value of the asset, as the value would be the closing market price of the stock or fund on December 31st of the previous year. For assets like real estate, the valuation is not as easy to come by and the valuation can be obtained using various methods.

The GAO recommended that the IRS develop guidelines on how to valuate these types of assets. Creating a guideline would make the valuations much easier for the IRA owners as well as the IRA administrators and custodians. To read more about Fair Market Valuations, click here.

These enhanced guidelines would improve the IRA owners experience with self-directing and make it much easier to include a self-directed IRA in your retirement portfolio. The professionals at Next Generation Trust Services are ready to assist you with any questions you have about any of these topics. If you are interested in self-direction, you can call one of our representatives at 888.857.8058 or email us at Info@NextGenerationTrust.com.

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