What is a Self-Directed IRA?
Have you been held to the belief that your IRA can only invest in stocks, bonds and mutual funds? “Self-directed IRA” is not a legally defined term, it is simply a description of an account that allows the account owner to invest in any investment the law allows. The fact is that your IRA accounts can be used to acquire virtually any investment such as real estate, secured and unsecured notes, and other. Your retirement account should be one that allows you to invest in what you know.
Some Investment Options:
- Real Estate – This includes single and multi-family residential rental properties, commercial property, bare land
- Businesses – Including LLC’s and LLP’s
- Oil and gas
- Commercial Paper
- Stocks, bonds and mutual funds
- Notes and Mortgages – Both secured and unsecured
- Many Others…
The IRA is established for the exclusive benefit of the individual, so no “self-dealing” or dealing with disqualified individual-members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant); manager of your IRA, investment advisor to your IRA, or person with discretionary authority over IRA.
Examples of prohibited transactions:
- Borrowing money from it
- Selling property to it
- Receiving unreasonable compensation for managing it
- Using it as a security for a loan
- Buying property for personal use (present or future)
Generally, a prohibited transaction in connection with an IRA account at any time during the year will result in the account ceasing to be treated as an IRA as of the first day of that year.
Unrelated Business Income & Unrelated Financing Tax
If income is derived from non-IRA activity or IRA property is leveraged, then any appreciation or revenues attributed to the other activity/leverage is considered “unrelated” and tax applies.
The IRA may borrow funds against the property although the loan must be to the IRA and not to the IRA beneficiary.
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