Basic Pointers for Self-Directed IRAs

The option of controlling your own IRA is appealing for investors who have the knowledge and experience to handle the responsibility. There are IRS rules and regulations and strict compliance is mandatory. The tax benefits of the self-directed vehicle are attractive for those contemplating their retirement needs. Staying with prescribed parameters will ensure good profits and income down the road.

Below are ten pointers that will help investors stay on track when choosing a self-directed IRA to add to their retirement portfolio.

1. 1.The options are extensive and can include most any investment other than collectibles (art and gems) or insurance. This opens up a world of choices that can fulfill an investor’s assumptions about the future of the economy including stocks and bonds (in the form of mutual funds as a rule), real estate, annuities, LLCs, notes, limited partnerships, startup businesses, and commodities.
   
   
2. 2.Many types of accounts can be self-directed: Roth IRA, traditional IRA, SEP, SIMPLE IRA, 401(k), 403(b), educational IRA (ESA), Roth 401(k), and the HAS (health savings account). These can contain a large array of investment vehicles and may also be combined.
   
   
3. 3.Self-directed accounts are available to most investors with the exception of the Roth which has an income limit. There is no age limit and no restriction if an individual has an IRA at work. This is not the case with a traditional IRA.
   
   
4. 4.Self-directed IRAs are suitable for small account balances. Real estate is a viable area including wholesaling property, options, property subject to financial or with a non-recourse loan (from a bank, financial friend, hard money lender, etc.), or IRA partnerships. These are creative ways a small amount can earn decent profits.
   
   
5. 5.Prohibited investments do exist for self-directed IRA and IRS laws are strict. They entail transactions with disqualified persons such as a spouse, parents, grandparents, and children. It is a form of illegal self-dealing such as renting a property to family or your corporation, or living in a home within the IRA.The distinction may be subtle, but the investments must benefit the plan, not the owner. Financial advisors may be used to steer you in the right direction and away from the wrong ones.
   
   
6. 6.Tax benefits are associated with IRAs, but there are times when taxes are incurred. An LLC or limited partnership in a self-directed plan may entail taxes on “unrelated business income.” In addition, income from a rental mobile home or personalproperty (not categorized as real estate) will result in a tax liability as will income from that portion of a property subject to debt (UDFI).
   
   
7. 7.An inherited Roth IRA provides tax-free income whatever the heir’s age. A distribution is mandatory for a non-spouse beneficiary. When the five-year test has been met, the full benefits of the Roth can be achieved in a self-directed IRA.
   
   
8. 8.While Roth IRAs have had income limitations, self-directed IRAs do not. The government wants potential retirees to have sufficient funds growing for a future time of withdrawal with tax-free growth. A Roth conversion is the answer allowing for a rollover of a traditional IRA, SEP, SIMPLE IRA, 401(k) or 403(b).
   
   
9. 9.Real estate deals can be financed with a self-directed IRA to take advantage of an attractive market. There are several ways to do this with private lenders and secured or unsecured loans. It is an open-ended opportunity.
   
   
10. 10.Real estate options are perfect for a self-directed IRA. They are rather unexplored and less common than other forms of tangible property investing. You can exercise them to buy a property, let them lapse, assign or cancel them for a fee.