Self-Directed IRA: 9 Things You Should Know – Buyer Beware


By – Cindy Toran

Nest Egg3Have you ever thought about how you could benefit from a self-directed IRA? Any ideas on how you might use one to your financial advantage? It would seems simple enough. Invest in any creative alternative idea you can dream up and reap the benefits tax free!  Some examples of investments that have been made are:  golf courses, freight truck fleets, tractors, race horses, mineral rights, sugar, and hardwood trees.

What are the rules and risks of a self-directed IRA?

Before you jump into your own self-directed IRA, here are some considerations:

  1. No self-dealing:  IRS rules prohibit transactions that benefit you or those deemed “disqualified” persons, including:
    •         IRA owner
    •         Spouse
    •         Descendants and their spouses
    •         Service providers, such as custodians or brokers.
    •         Must be real investments:
    •         No collectibles, such as art, coins, antiques, vintage cars, wine collections, etc.
    •         No tangible personal property or life insurance.
    •         No investment in an active business owned or managed by a disqualified person, including S-Corp, LLC or partnership.
  2. Real Estate can be financed with a mortgage but it must be non-recourse (i.e., neither the IRA nor its account owner or family may be liable on the loan).
  3. Gains on real estate held in a traditional IRA will be taxed at ordinary tax rates as distributions are taken, thus losing the favorable capital gains rate. However, gains in a Roth IRA would be tax free.
  4. Rental real estate must generate positive cash flow to cover all expenses. Loaning money even by writing personal checks for repairs, etc. are prohibited and will make the IRA fully taxable.
  5. No disqualified person may occupy real estate, including land, owned by a self-directed IRA.
  6. Assets in an IRA must be valued annually, which may require expenses for appraisals.
  7. Holding illiquid assets, such as real estate or equipment, in an IRA when the owner reaches 70-½ years and must begin taking distributions, could be a problem.
  8. There is a general lack of scrutiny in self-directed IRAs. Accounts administered by custodians lack regulation and seem to attract unscrupulous promoters of dubious investment schemes.  Administrators do not vet investments, that is the job of the IRA owner (i.e., “buyer beware”).

Self-directed IRA’s offer a wider variety of investment options. Those may seem more financially attractive than traditional accounts. However, be sure you know the rules and risks before taking this leap with your retirement funds.

What do you think?

Maybe you have some questions regarding a self-directed IRA, please feel free to leave your question below or post to our Facebook or Google+ page. You are also welcome to contact us.

For more information, call Alex Franch at 781.789.7200. WorthTax has locations in Norwell, Dedham, and Weymouth, Massachussetts.
Alex Franch

Mr. Franch is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Mr. Franch is an Enrolled Agent and has eight years of tax preparation experience. He has been serving individuals, families, and businesses for several years with tax and financial planning strategies and is a junior partner with the firm. Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA) with a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.