Frequently Asked Questions
An IRA, or individual retirement account, is a type of savings vehicle that offers tax advantages to its owner, provided he or she follows IRS requirements. With a traditional IRA, a person’s contributions are tax-deferred—that is, the funds are not subject to income tax until withdrawn or distributed from the account (usually at retirement). And contributions are deductible on your yearly income taxes. In a Roth IRA, the government has already taxed the money deposited, so it can grow tax-free.
No, an IRA is an individual retirement account and can only be held in the name of one person—usually the one who is earning income from a job.
In this case, you can use a “spousal IRA,” whereby the married partner with earned income contributes toward an IRA that is in the spouse’s name and is fully controlled by the spouse. There are certain requirements and restrictions, which you can read more about in this blog post, entitled “How Does a Spousal IRA Work?”
Individuals who are younger than 50 can contribute up to $5,500 to their traditional IRA in 2017. If you are 50 or older, you can contribute up to $6,500 (the extra $1,000 is considered “catch-up.”) The amounts for a Roth IRA are the same.
Very simply, a self-directed IRA is an individual retirement account in which the Custodian allows you to invest in any asset allowed by law. You are not limited to investing in only stocks, bonds or mutual funds (as is the case with many traditional employer-sponsored retirement plans) but can also choose to invest in real estate and a variety of other assets. In most cases, the Custodian is free to determine which types of investments it will allow.
By law, any IRA must be officially held by a Custodian. The Custodian may be approved and directly regulated by the IRS or affiliated with a bank or trust company. In that case, the Custodian is regulated by the state Banking Commissioner and/or Comptroller of the Currency and FDIC. The role of an IRS-approved Custodian is to take direction from you, the owner of the self-directed IRA, and execute investments on your behalf. You can learn more about the roles of Custodians, Administrators and Facilitators here.
In an age of negligible returns from assets like stocks, bonds, certificates of deposit and the like, more people like the idea of controlling their own destiny. With a self-directed IRA, the account owner is in charge, deciding what to invest in and in what amount. Not all Custodians allow their clients to self-direct their accounts, and some Custodians set limits on the assets in which they will invest for you, so be sure to research before choosing one.
There are a number of ways to fund a self-directed retirement account. If you do not already have a retirement plan in place, you can open a new account with a Custodian and make a new contribution. Other individuals choose to roll over their existing 401(k), IRA or employer account to one that can be self-directed. A rollover specialist, as well as a Custodian or Administrator, can help you understand the process and requirements.
Any type of retirement account for employees or business owners may be self-directed: traditional and Roth IRAs, SIMPLE and SEP IRAs, 401(k) plans and some health savings and Coverdell education accounts. You can find out more about each type by clicking on each link to helpful information from the IRS.
Just as there are different types of IRAs—such as Traditional, Roth and SEP, for example—there also are different structures of self-directed accounts. Two of the main ones are Custodial Self-Directed IRA, in which only the IRA Custodian can write checks and pay bills, and IRA-LLC Self Directed IRA, also known as a Checkbook IRA. Under this structure the IRA owner may write checks from the IRA LLC account for the purpose of making investments and paying costs associated with those investments. For a closer look, click here to read our blog post, “What’s the Advantage of a Checkbook IRA?”
Among the assets in which you can invest are various types of real estate (developed or undeveloped), trust deeds, mineral and water rights, precious metals and private equity.
Law prohibits an investor and close linear relatives from giving or receiving any benefit from the retirement investments. The IRS has very specific rules prohibiting “self-dealing” (under Internal Revenue Code Section 4975) and tax regulations are prone to varying interpretations, so it is always advisable to seek the counsel of your own CPA or attorney. For more information on prohibited transactions and disqualified persons, refer to our blog post, “2 Potential Pitfalls in Self-Directed Investing.”
Generally, you cannot withdraw funds from your IRA until reaching age 59½. Doing so will subject the account owner to penalties in the form of additional taxes for these “early” or “premature” distributions. Click here for a chart showing exceptions to the 10% tax on early distributions.
No, any investment is subject to risk. Do you due diligence before making any investment.
Yes. The custodian must be a bank, credit union or regulated trust company, all of which are licensed and regulated by the Federal Deposit Insurance Corporation/Office of Comptroller of the Currency or an individual state’s Department of Financial Institutions.
When the assets in your self-directed retirement account generate income, those funds become subject to what the IRS calls “unrelated business income taxable” (UBIT). If your SDIRA invests in real estate, that scenario is especially likely so it is important to understand UBIT. Your own tax or financial adviser can help, and you also can find more information from the IRS by clicking this link.
Click here to join the growing list of subscribers to our newsletter and other periodically distributed information about rolling over or investing in a self-directed retirement account. You can also refer to the “Resources” tab on our website for links to other information providers.