Self Directed IRA Rules and FAQ’s
IRAs, 401(k)s and other tax-deferred retirement plans were designed to benefit the owner at a future point in time…presumably at retirement.
Because the rules and regulations are complex, it is strongly recommended the account holder utilize the services of competent advisors and attorneys who are experts in the area of Self Directed IRA investing. Safeguard Advisors attorney consultants are specifically trained in ERISA law.
Top 3 Frequently Asked Questions:
YES…In 1974, Congress passed the Employee Retirement Income Security Act (ERISA). making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS Code Sec. 401 IRC 408(a) (3)
It‘s really quite simple. Government regulators decided the Securities industry was best suited to inform the public and bring these new products to market. From the beginning, brokers and bankers created the misconception that buying stocks, bonds and mutual funds was all that was allowed. It wasn’t true then…and it’s not true now. You can probably guess why they kept it a secret.
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
Other Important Questions:
The Employee Retirement Income Security Act (ERISA) passed the responsibility of retirement savings from the employer to the employee. IRAs were created in 1975 to provide individuals a chance to direct where their retirement funds were invested. Rather than distinguishing which investments are allowed, the IRS code instead identifies which investments are not permitted under these laws. Only two types of investments are excluded under ERISA and IRS Codes:
- Life Insurance Contracts
- Collectibles such as works of art, rugs, jewelry, etc.
IRS Code Sec. 401 IRC 408(a) (3)
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Profit Sharing Plans
- Qualified Annuities
- Coverdale Education Savings
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll your account into a new Self Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
The self directed industry is growing at a rapid pace and is expected to see upwards of $2 trillion enter the market over the next two years. Some of the latest numbers show over 45 million IRA holders in the U.S. and less than 4% of those funds are held in non-traditional assets. This number is expected to increase significantly over the next 5 years as more and more individuals and their financial advisors attain a greater awareness of self-directed IRAs.
Yes. As discussed previously, you cannot invest in Collectibles or Life Insurance Contracts. In addition, there are certain transactions in which you cannot participate when using IRA funds. These are referred to as “prohibited transactions”. Prohibited Transactions are defined in IRC 4975(c)(1) and IRS Publication 590. They were established to maintain that everything the IRA engages in is for the exclusive benefit of the retirement plan. Professionals often refer to these as “self-dealing” transactions. Self-dealing occurs when an IRA owner uses their individual retirement funds for their personal benefit rather than to benefit the IRA. As an IRA owner, if you violate these rules, your entire IRA could loose its tax-deferred or tax-free status. It is very important that you work with competent professionals to help avoid violating these rules.
IRC 4975(c) (1), identifies prohibited transactions to include any direct or indirect:
- Selling, exchanging, or leasing, any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
- Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
- Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use personal furniture to furnish your IRAs rental property.
- Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a vacation property you or your family intends to use.
- Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your CPA.
- Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.
If you participate in a transaction which does not fit SPECIFICALLY within these guidelines, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to decide whether you have engaged in a prohibited transaction.
Many of the prohibited transactions are the result of a very simple equation: Plan (or plan asset) + Disqualified person = Prohibited Transaction A plan is defined to include tax-qualified plans, IRAs and other tax favored arrangements. For the complete definition you can reference IRC 4975(e) (1). A disqualified person (IRC 4975(e) (2)) is defined as:
- The IRA owner
- The IRA owner’s spouse
- Ancestors (Mom, Dad, Grandparents)
- Lineal Descendents (daughters, sons, grandchildren)
- Spouses of Lineal Descendents (son or daughter-in-law)
- Investment advisors
- Fiduciaries – those providing services to the plan
- Any business entity i.e., LLC, Corp, Trust or Partnership in which any of the disqualified persons mentioned above has a 50% or greater interest.
These rules exist to ensure that your IRA does not engage in any investment activity other than for the exclusive benefit of the IRA. There are many types of investments which violate this law. For example, buying a house and then letting your mother rent it would potentially create a conflict of interests. If your mother, who was making rent payments, all of a sudden could not – you would be conflicted from evicting her and finding a more reliable tenant. You would then have a conflict of interest between your relationship with your mother and what is in the best interest of your IRA. These rules were put in place to help avoid these sort scenarios. See IRC 408
A Solo 401(k) can accept rollovers from many retirement plan types. Firstly, funds must be eligible for rollover. Most any IRA may be rolled over at any time. A 401(k) or similar employer retirement plan from former employment can be rolled over. A current employer retirement plan may not be eligible for rollover. Any tax-deferred retirement plan such as an IRA, SEP IRA, or old 401(k) may be rolled into the Solo 401(k). The Roth portion of a prior employer 401(k) may also be rolled. A Roth IRA may not be rolled into a Solo 401(k). Learn more.
Theoretically yes. Your brother is not a disqualified person. However just like the scenario mentioned above, if he occupied a rental property owned by your IRA and could not make the payments, you could run afoul of the exclusive benefit rule. This could cause your IRA to have participated in a prohibited transaction. It is important that you treat every investment the same – to benefit your IRA and only the IRA.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type. Learn more.
No taxes are incurred by moving to a self-directed IRA or Solo 401(k) plan.
Our self-directed retirement plans are still retirement plans provided tax-sheltered status by the IRS, and are in most all respects identical to similar plans offered by mainstream financial services firms. What is different is that our self-directed plans are configured to invest differently, and expand your choices beyond conventional publicly traded assets.
Assuming your funds are eligible to be rolled over, they can move from one plan to another without tax implications.