Staying within IRS rules can save you from serious penalties, which include prohibiting transactions such as investing in real estate that you live in or contracting services with an IRA-owned property.
To avoid these traps, it’s important to conduct research thoroughly and remain alert, looking out for red flags of fraud such as unreasonably high returns from new investment companies or claims of unreasonably high returns from existing companies.
Taxes
When investing through an IRA, there are many rules you must strictly abide by in order to purchase assets. Any breach could see the IRS nullify the account and charge taxes accordingly.
As it’s against the rules to use assets owned by your IRA for personal gain, such as real estate investments. Therefore, using them for personal reasons such as living at a rental property owned by your IRA or providing services on any of their properties (even fixing broken toilets) constitutes a violation.
IRAs do not permit all investments, so if you wish to purchase alternative investments not eligible in a regular IRA, setting up a self-directed IRA with an approved custodian can help facilitate these transactions. Just make sure that any reviews or complaints filed with federal agencies about them is thoroughly researched before setting up the account. Self-Directed IRAs also make great choices for investing in real estate, precious metals or private equity not offered through traditional IRAs.
Restrictions
Self-directed IRAs give you more investment freedom than traditional IRAs; however, with that comes more responsibility. You will have to manage investments that might be unfamiliar, like real estate, promissory notes and tax lien certificates – something a traditional IRA does not require you to do. Therefore it’s crucial that a financial adviser, CPA or attorney oversee your investments to make sure they comply with IRS rules.
Be careful to not engage in transactions that violate IRS regulations on “self-dealing” or personal benefits. For instance, living in a property owned by your IRA would violate these regulations; you cannot buy or sell anything to yourself or a disqualified person (for instance your spouse, children, parents and siblings) who fall within its scope; you also cannot use your retirement account to buy life insurance policies, invest in collectibles like artwork or antiques or precious metals that do not meet IRS purity standards – among many other forbidden transactions! There may also be other prohibited transactions you should keep an eye out for.
Tax-Free Withdrawal Options
Self-directed IRAs may make sense for some experienced investors, but their limited liquidity means you may be unable to sell assets quickly should something arise that requires your immediate attention. Therefore, many prefer traditional brokerage accounts rather than self-directed ones for this very reason.
Self-directed IRAs provide all of the tax advantages associated with traditional IRAs, with additional flexibility to invest in alternative assets. Your custodian follows any direction given (within IRS guidelines), while they’re only accountable for fulfilling administrative duties required under IRA regulations.
As soon as you turn 59 1/2, self-directed IRA distributions become eligible to be taken. Or earlier if there is an eligible medical expense or you’re buying your first home – or as part of your Required Minimum Distributions if over 70 1/2.
Investment Options
Self-directed accounts allow investors to diversify their retirement portfolio by diversifying into alternative assets like real estate and private companies. Real estate investments are especially popular, with investors being able to purchase and sell residential, commercial and international property as well as tax liens and deeds without incurring a transaction fee; all earned income automatically returns back into the self-directed IRA account.
Self-directed IRAs provide investors with greater investment flexibility and potential returns from nontraditional investments, yet require additional oversight due to their freedom. Investors should take care to vet every purchase and independently verify information such as prices or asset values included on your statement if possible; otherwise you could run afoul of IRA rules prohibiting certain transactions and incur costly IRS penalties. Investing in property owned by yourself or using it as personal storage space are strictly forbidden as is using it as vacation home or secondary residence.
