Many people hear the term “Self-Directed” IRA and think that it is a special type of IRA. However, in reality, the IRS does not recognize a Self-Directed IRA as a type of IRA. Any IRA, whether it be a Traditional, Roth, SEP, or a Simple IRA can be Self-Directed. Even qualified employer plans, such as a 401(k) or pension plan can be Self-Directed, if set up properly. The term Self-Directed is used because the beneficiary of the account is making 100% of the investment decisions. The account holder directs the Self-Directed IRA custodial to make legal investments on behalf of the IRA.

 

Typical IRA custodians only allow for investments in what they sell (i.e., stocks/mutual funds). You can self-direct your investments as long as you choose something that they sell. A truly self-directed plan does not put these limitations on the account holder. They can choose from a multitude of investments. Real Estate, Promissory or Mortgage Notes, Private Placements, LLC’s, LP’s, Private Stock, and Gold are just a few of the examples of investments that are allowed in a retirement plan, with certain restrictions.

 

There are a few other limitations that the IRS puts on IRA investments. An IRA cannot invest in life insurance or collectibles (i.e., art, gems, antiques, etc.). The IRA cannot purchase from or sell assets to the IRS beneficiary, spouse, or lineal descendants (disqualified parties). Finally, the IRA cannot benefit a disqualified party. In other words, if your IRA owns real estate, a disqualified party cannot live, vacation, or rent the property from your IRA. Similarly, if income (i.e., rent) is generated from the asset, that rent must be paid to the IRS (the rightful owner).

 

Thank you for reading this issue of Cox & Nici’s E-News. Please visit our website or call us for more information regarding this subject or to answer any other questions you may have.