Self Directed IRA: Glossary of Terms

Banks and other institutions approved by the IRS to hold retirement funds. And, like all other banking type institutions, they are compensated through an asset and transaction fee structure. By law, every qualified retirement plan must have a custodian or trustee approved by the IRS in accordance with the requirements of IRC section 408.

Usually referred to as an Individual Retirement Account, it is a a tax-favored account that an individual can establish which complies with applicable tax rules. Earnings grow tax-free and the funds can be invested into a broad range of assets. This includes real estate, notes & mortgages, tax liens, private companies, business loans, foreign investments, equipment leases and more.

The only type of loan allowed for a Self Directed IRA. According to rules & regulations, the holder of the account, the IRA or any business entity funded by the IRA cannot be held liable for the loan repayment.

When a transaction occurs between a retirement plan and a Disqualified Person this generates a prohibited transaction. Such prohibited transaction are a violation of IRS rules, and result in severe tax penalties.

A prohibited transaction occurs when there is any direct or indirect:

• Sale or exchange, or leasing, of any property between a plan and a disqualified person;
• Lending of money or other extension of credit between a plan and a disqualified person;
• Furnishing of goods, services, or facilities between a plan and a disqualified person
• Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
• Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
• Receipt of any consideration for his own personal account by any 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.

A plan that meets the requirements of Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA), thus making it eligible for favorable tax treatment. Contributions and earnings enjoy tax-deferred investment growth.

Also called a Checkbook Control IRA, Self Directed IRA or IRA LLC, generally known as a Real Estate IRA when used to purchase income-producing real estate to hold within a retirement investment portfol

A term that typically refers to funds being moved from an ex-employer’s retirement plan to another qualified plan because of change of jobs, lay-off or retirement. A “rollover” maintains the tax-deferred status of the account.

A type of IRA funded with nondeductible contributions or amounts converted (and taxed) from another type of IRA. Qualified distributions from a Roth IRA are free from income tax. Contributions or conversions to a Roth IRA may be made only in years in which the individual’s modified adjusted gross income within specified limits.

401(k) is a particular section of the Internal Revenue Code that refers to pension, profit sharing and stock bonus plans. These plans have two components, salary deferral and profit sharing contributions. In 2001, Congress passed rules allowing for easy set up and administration of the Solo or “mini-version” of the 401(k) plan. A 401(k) plan combined with a profit-sharing plan, usually adopted by a sole proprietor or other business with no non-owner employees. Because 401(k) contributions do not count towards the limit on plan contributions which can be deducted (25% of compensation), a solo 401(k) plan enables some self-employed individuals to contribute and deduct more than under the 25% limit, which would apply under a regular profit-sharing plan or SEP-IRA.

An Individual Retirement Arrangement (IRA) which is not a ROTH, SEP or SIMPLE IRA.

The movement of a retirement account assets from one custodian directly to another. An asset transfer is not a distribution and is not taxable or reportable to the IRS. There are no limits as to the number or frequency of IRA transfers.

Income taxable to an IRA (or other tax-exempt entity) because it is “unrelated” to the IRA’s tax-exempt purpose. Typical examples are income from a manufacturing, sale or service business operated by an IRA or a partnership or LLC in which an IRA is a member, as well as unrelated debt-financed-income. The tax on this income is called unrelated business income tax, or UBIT.