Self-directed IRAs and other plans are popular tools savvy investors use to create diversity by investing in alternative assets to build retirement income. These are the top 10 facts about self-directed IRAs.
- Self-directed plans give you the freedom to choose your own investments as well as control of your own retirement funds.
- Type of accounts that can be self-directed: traditional, Roth, SEP, and SIMPLE IRAs, and individual 401(k) plans. Health and education savings accounts can be self-directed, as well.
- Alternative investments allowed in self-directed plans include: real estate, notes and mortgages, crowdfunding opportunities, single-member LLCs, hedge funds, precious metals, energy options, and much more.
- The IRA prohibits these investments within IRAs: life insurance and collectibles (works of art, antiques, jewelry).
- Income flows directly into the IRA on a tax-sheltered basis.
- All expenses incurred for the IRA must be paid with funds from the IRA.
- Prohibited transactions (personally using vacation rental property) and transactions with disqualified persons (IRA owner and spouse; lineal descendants and ascendants of IRA owner and spouse) can cause penalties, taxation, and/or disqualification of your IRA. See IRC Section 4975 for explicit details.
- IRAs can partner with others to pool investment funds. For example, Sam Jordan’s IRA can own 60% of a condo and Susan Smith can personally own 40%. Income and expenses are split at an ownership ratio of 60/40. Sam’s IRA gains tax-sheltered income; Susan’s personal investment gains are taxed at a rate appropriate for her income bracket.
- IRAs can borrow money in the form of non-recourse loans. Most banks require 35% down and a minimum loan amount of $100,000. A portion of gains relevant to the leverage may be subject to Unrelated Business Income Tax (UBIT) and/or Unrelated Debt Financed Income (UDFI). Individual(k) plans are not subject to the taxes of leveraged assets.
- Qualified plans from previous employers, such as 401(k), 457(b) and 403(b) plans, can be rolled into self-directed IRAs. Individuals can have multiple custodians and in these cases partial transfers are allowed.
Self-directed retirement plans give you the freedom and flexibility to choose investments best suited for you based on your knowledge of assets you acquire. Now that you know the top 10 facts about self-directed IRAs and other accounts, contact us to get started investing in alternative assets today.
If you have questions about self-directed retirement plans and alternative investments allowed in these accounts, please contact Midland Trust today.