The list for possible Self-Directed IRA investments is virtually limitless.
This section will provide a very basic introduction to the rules and restrictions you should be aware of and discuss with your tax advisor ways to try and reduce unnecessary income taxes and penalties regarding your IRA accounts. For a more thorough explanation of these rules and restrictions please carefully read the section of this website titled "IRA Rules, Regulations, Restrictions, & Recommendations."
Note: It is of the utmost importance for you to seek and receive advice from qualified tax, legal, and financial advisors regarding any questions you have, or actions you plan to take, regarding your Self-Directed IRA.
We feel that it is very important to first understand what can cause an IRA owner to pay unnecessary income taxes and penalties. In IRS Publication 590, it is stated:
What Acts Result in Penalties or Additional Taxes?
The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities.
- Investing in collectibles
- Making excess contributions
- Taking early distributions
- Allowing excess amounts to accumulate (failing to take required distributions)"
Prohibited Transactions
The list for possible Self-Directed IRA investments is virtually limitless. Instead of stating what an IRA owner can invest in, the Internal Revenue Service tells us specifically what an IRA owner cannot invest in. Investments that are NOT allowed in an IRA include:
- Life Insurance on yourself or related party
- Sub-Chapter S Corporations
- Investment in Collectibles - the following information is from IRS Publication 590: If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions. Collectibles include:
- Artworks
- Rugs
- Antiques
- Metals
- Gems
- Stamps
- Coins
- Alcoholic beverages
- Certain other tangible personal property
Exception: Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
According to Jason Helquist, MA, LL.M, and Chief Compliance Officer of the Provident Group, a Self-Directed IRA Custodian located in Las Vegas Nevada:
"The Internal Revenue Code does not tell IRA investors which asset classes are appropriate. It only identifies those assets in which IRA investors cannot invest, such as collectibles (rare coins, artwork, antiques, rugs, alcoholic beverages, metals, gems or stamps) or life insurance on the life of the IRA owner. There is no restriction, for example, against real estate investments, limited partnerships, limited liability companies, etc. Thus, through Self-Directed IRAs, the account owner can invest in single-family homes, multi-family homes, condos, commercial buildings, apartment buildings and land, real estate investment trusts, or Regulation D offerings.
Relatively few financial institutions permit IRA owners to direct IRA monies to non-traditional asset classes. The institutions providing such a service typically will act only at the direction of the IRA owner. Most will not provide advice or direction regarding the prudence of the IRA owners’ actions. Indeed, as an additional measure, the institutions generally cause the IRA owners to acknowledge that there is no assumption of liability when an institution acts at the direction of an IRA owner. Thus, when a Self-Directed IRA asset underperforms or becomes worthless, the institution assumes no liability for the loss.
It is for this purpose, and the fact that there is little formal Self-Directed IRA guidance to rely upon, that IRA owners should seek the advice and counsel of trusted professionals. These professionals might include investment advisors or financial planners well versed in Self-Directed IRAs, tax attorneys or certified public accountants, retirement plan and employee benefit professionals, and where appropriate real estate attorneys." |
