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Self Directed IRA: Glossary of Terms

The terms below are in alphabetical order. Not intended to be comprehensive, they are the most common terms associated with Self Directed IRA investing.

Business Funding Pension Plan

A type of Self Directed IRA plan that combines a custom designed pension plan and a C Corporation allowing the owner to actively participate in a business and draw a salary.

Checkbook Control IRA

A type of IRA also referred to as a Self Directed IRA LLC , a Real Estate IRA or Solo401(k). In every instance of the terms being used, a bank account is established for the legal structure. Hence, the use of the term “Checkbook Control IRA”

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.
Individual Retirement Arrangement (IRA)
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.
Non-Recourse IRA Mortgage
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.
Prohibited Transactions

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.
Reference IRC 4975
Qualified Retirement 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.
Real Estate IRA
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.
Roth IRA
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.
Solo 401(k)
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.
Traditional 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.
Unrelated Business Taxable Income (UBTI)
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.
Unrelated Debt Financed Income (UDFI)
Income taxable to an IRA (or other tax-exempt entity) which is attributable to borrowing, either by the IRA directly or a partnership or LLC of which it is a member. Typical examples are income from real estate purchased with borrowing and securities bought on margin. Unrelated debt-financed income is a type of unrelated business taxable income.
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