Frequently Asked Questions
Listed below are some of the frequently asked questions about Self-Directed IRAs.
What is a Self-Directed IRA?
A Self-Directed IRA is an IRA that is controlled by the investment owner. Typically when a person invests money into their IRA it is done through their local bank or investment broker. A Self-Directed IRA is set up with a custodian who is accustomed to non-traditional investments.
What Types of Investments Am I Allowed to Invest?
You are basically limited only by your imagination and the IRS of course. Whereas many IRA’s are invested in stocks, bonds and mutual funds, a Self-Directed IRA allows for real estate, precious metals, limited partnerships and many other entrepreneurial ventures.
What Investments Are Not Allowed?
The IRS regulations contain prohibited transactions that detail what and with whom an investor may or may not transact. Collectibles such as artwork, coin collections and life insurance are specifically excluded by the IRS.
Can I Open a Self-Directed IRA Online?
You can open a Self-Directed IRA online by contacting a custodian and downloading their form and return it via email or by filling out an online questionnaire on their website. The custodian recommended by IRAYourWay.com is The Kingdom Trust Company and they’re one of the first companies to implement an online application.
Can I Roll Over or Transfer Existing Retirement Accounts into a Self-Directed IRA?
Yes, this can be done by completing the appropriate forms with your custodian. The links for Kingdom Trust’s forms can be found here.
Why are Self-Directed IRA’s Such a Well-Kept Secret?
Your local banker isn’t set up to handle non-traditional investments. I’m sure it’s a great company with nice people running it, but you need to have a custodian with substantial trust holdings (i.e. Kingdom Trust's assets are valued at over $8.5 billion – that’s a B for billion lol)!
Can a Kentucky LLC do business in Ohio or any other state for that matter?
A limited liability company formed in one state may do business in any state is chooses, but depending on the type of transaction, the company may need to register as a foreign entity. For example, a Kentucky LLC would be a foreign entity (an out of state company) that must file an application for registration or certificate of authority if it transacts business in Ohio. Most state statutes do not specifically define “transacting business, instead they will list activities that do not constitute transacting business. Generally, a foreign entity is transacting business in a state if it has an office or an employee in the state or is otherwise pursuing one of its purposes in the state. If you are unsure whether registration is required, you should consult with your legal counsel.
How hard is it to maintain an LLC?
Forming and operating a limited liability company is not much different than running any other type of business entity. To form an LLC you’ll need to file a document with the Kentucky Secretary of State. You’ll also want to sign an operating agreement that gives your company structure and details how important matters are to be handled. You’ll need to maintain these documents and keep track of your meetings and actions by keeping minutes. Consents and Resolutions are two forms that can be used to document the major undertaking of the company. You’ll also be responsible for keeping track of all income and expenses and take special care to never commingle the Company’s funds with your own. Your company will have its own checking account and you should keep a check register and reconcile your account with your bank statement each month.
Are there any special terms or restrictions that I need to know about?
With a Self-Directed IRA you’ll need to have a basic understanding of the terms prohibited transaction and disqualified person mean. And while extensive knowledge would be great, you should also be aware of the terms Unrelated Business Taxable Income and Unrelated Debt-Financed Income. These concepts are discussed further below.
What is a prohibited transaction and who are disqualified persons?
Generally, a prohibited transaction is any inappropriate use of your IRA by you, your beneficiary or any disqualified person. Disqualified persons include your custodian and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).
The following are examples of prohibited transactions with a traditional IRA:
- Selling property to it,
- Borrowing money from it,
- Using it as security for a loan,
- Receiving unreasonable compensation for managing it and
- Buying property for personal use (present or future) with IRA funds.
What does the IRS consider unrelated income and why does it matter?
Debt-financed property in an IRA is subject to the Unrelated Business Income Tax (UBIT) or Unrelated Debt-Financed Income (UDFI), provided that the net gain is more than $1,000 in a year. UBIT/UDFI is applied to profits made on the sale of a debt-financed property. Preparation of the 990-T tax forms is performed by the investor. The custodian’s representative will file such taxes and sign the tax forms on behalf of your plan. IRAYourWay.com recommends that you always contact your attorney and/or tax advisor whenever your company borrows money and when preparing your taxes. Make sure you consult a professional with experience in this area and understand and heed the advice you receive.
Are there any important deadlines to be aware of?
Yes, keeping track of important deadlines is crucial to the existence and success of your company. The tax return deadline for LLC’s depends on their fiscal year which is usually specified in the Articles of Organization. The annual report for the company to the state is due by July 1 of each year. You will also need to contact your custodian and determine what date he will need to have the valuation reported by. The IRA owner is responsible for estimating and reporting the value to the custodian.
IRA owners need to keep April 1 in mind as the deadline for taking a Required Minimum Distribution (RMD). Taxpayers have until April 15th of each year to make a contribution to their IRA deductible for the previous tax year.
April 15 is also notable for being the deadline to perform an IRA recharacterization and remove any excess contributions. Likewise, if you received an extension on your 2014 tax return, October 15 is the deadline for recharacterizing IRA contributions. If you would like to change (i.e. recharacterize) a Traditional IRA contribution to a Roth IRA contribution, or vice versa, or recharacterize an asset held in your account in-kind, then it must be done by this date to count toward the current year. For more information on whether this is beneficial to you and your Self-Directed IRA, consult your attorney, tax advisor and/or investment advisor.
December 31 is also the deadline to convert a Traditional IRA into a Roth IRA. Note that in a conversion the year of the distribution transaction determines the year of taxation.