Self-Directed IRA FAQ
A self-directed individual retirement account (IRA) is an IRA in which the account owner personally directs the investments. The tax code allows IRA account holders to direct contributions into nonstandard investments that are not typically available in other retirement plans, such as 401(k) and 403(b) plans. Traditional IRAs have the advantage of tax deferral of contributions and no capital gains tax on transactions within the account. Instead, IRA assets are taxed as income when withdrawn, subject to certain restrictions and penalties.
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What Types of Investments Are Available?
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In addition to the usual array of stocks, mutual funds and bonds generally available in IRAs, self-directed IRAs allow for investment in real estate, mortgages, small businesses and franchises, farms and ranches, partnerships, closely-held corporations and even tax liens.
Are There Any Restrictions on My Investments?
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Yes. No IRA, including self-directed IRAs, may invest contributions in collectibles such as jewelry, coins, dolls, stamps or baseball cards. You may not use IRA money to purchase life insurance. In addition, you cannot borrow money from the IRA, nor can you lend money to a close relative. You may not purchase property for your own use, either now or in the future. If you do, the IRS may disallow the contribution to the IRA, and the entire investment may become immediately taxable.
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Can I Take Money Out Freely?
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No. The self-directed IRA is subject to the same liquidity restrictions of any other traditional IRA. You cannot withdraw money before age 59 and 1/2 without paying income tax, plus a penalty of 10 percent. However, in cases involving disability or to avoid an eviction or foreclosure, you may be exempted from the 10 percent penalty. No 10 percent penalty applies if the money is used to fund higher education for yourself or a relative or to make a down payment of up to $10,000 on a first home for yourself or a family member.
How Much Can I Contribute?
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As of 2010, the maximum contribution to all IRAs combined was $5,000. Taxpayers over age 50 can contribute another $1,000 per year in "catch-up contributions." Your income must be below certain thresholds, however, to invest in an IRA. As of 2010, you may not invest in an IRA if your adjusted gross income as a single taxpayer exceeds $65,000, or $109,000 if you are married and file a joint return. However, you may be able to contribute to a Roth IRA, provided your income is below $120,000 if you are single or $177,000 if you are married and file jointly. Additionally, you may roll an unlimited amount of money into an IRA from a qualified retirement plan such as a 401(k) or 403(b) plan.
What Special Measures Do I Need to Take?
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With a self-directed IRA, you cannot act as your own custodian. Instead, you must appoint someone to hold the property on your behalf. You maintain full control of the asset. You may wish to consider forming a limited liability company. This LLC exists to manage your investments. When you appoint a custodian to hold assets, you direct it to invest the money with your LLC, which you manage yourself. This allows you to make decisions to move money around within the LLC without having to consult the custodian. You must maintain a strict segregation of your IRA investments from your nonretirement money. You cannot take income without paying taxes and a penalty, nor may you intermingle funds from an IRA with any other type of asset.
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