Self-Directed IRA – What it is not?
Published on December 2, 2013
In our second part of our self-directed IRA primer, we will explain what is NOT a self-directed IRA-type investment.
A self-directed IRA is not directed by another party. Financial planners, banks, accountants, or tax or estate planning attorneys do not direct a client’s self-directed IRA. These financial and legal professionals may advise the account holder about how to manage his retirement finances or discuss the ramifications of certain investments; however, it is ultimately up to the investor to do the research and legwork associated with any of the alternative assets allowed through self-direction, make the decisions, and to instruct the account administrator about what is needed to execute the transaction.
Self-directed IRAs are not administered by the individual. All the paperwork, filing, reporting, and execution of the transactions are managed by neutral, third-party retirement plan administrators. A professional self-directed retirement plan administrator does not advise the client about his asset choices or give investment advice; the administrator will provide account administration, transaction support, and guidance and education about self-direction when needed. This includes informing the client if an investment will fall outside of IRS guidelines.
A self-directed retirement plan is not an investment free-for-all. It is important to note that there are certain guidelines regarding the transactions allowed—there are a few prohibited classes of investments.
Under the Employee Retirement Income Security Act (ERISA) and IRS codes, several types of investments are excluded from self-directed retirement accounts: life insurance contracts, S-Corp stock, gemstones and metals (except for certain US coins and bullion), and collectibles (art, rugs, jewelry, coins, stamps, etc.).
There are also rules about who may not benefit in any way from the self-directed IRA (disqualified individuals) which are addressed below.
The self-directed assets are not for your personal benefit or those of disqualified individuals. There is a list of “disqualified individuals” addressed in IRC § 4975 who may not directly, personally benefit or use the assets within a self-directed IRA. These parties would disallow a transaction and include the investor, spouse, ascendants, descendants and their spouses, business partners, fiduciaries, and anyone providing a service to the retirement account.
Examples of these exclusions are:
• Borrowing funds from the account
• Use the self-directed IRA as security against a loan
• Receiving unreasonable compensation from managing property held by the IRA
• Allowing fiduciaries to use the retirement plan’s assets or income for their own interest
• Conducting transactions involving disqualified persons, including:
o Selling, exchanging, or leasing property
o Lending money or extending credit
o Furnishing goods, services, or facilities
o Transfer of plan income or assets
If in doubt about a transaction in your self-directed IRA it is best to consult your account administrator or your trusted advisors about IRS guidelines.
The self-directed assets don’t belong to the account holder, per se. The assets held in a self-directed IRA belong to the IRA; it is the retirement account that is earning tax-free or tax-deferred income from the assets, and the IRA pays for all the expenses related to its assets and transactions. When the asset is sold, the proceeds go back to the self-directed IRA, to be reinvested as the account holder instructs.
A self-directed IRA can open the door to a wealth of investment opportunities to build a more eclectic retirement portfolio. If you have any questions about self-directed retirement accounts, or are ready to start building retirement wealth through investment in alternative assets, give us a call or send us an email.
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