STC

What is an IRA?

A self directed IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement. Provided you meet certain Self Directed IRA rules and income guidelines, this traditional IRA allows you to deduct your contribution in the tax year it is made, and investment earnings accumulate tax deferred. Upon reaching retirement age (59½ years old), distributions are treated as ordinary income. If you take a distribution before reaching retirement age, you will incur a 10% penalty as well as federal and state income taxes. You must begin taking distributions at age 72.

What is different about a Roth IRA?

Contributions to a self directed Roth IRA are made on an after-tax basis, meaning that contributions to your Roth IRA are not deductible. However, investment earnings accumulate without tax and once you have reached retirement age distributions are tax-free. Also, there are no mandatory distribution requirements and self directed IRA rules with a self directed Roth IRA.

How much can I contribute to my IRA?

Subject to self directed IRA rules and income limits, you may contribute up to $6,500 in the 2023 tax year to either your Traditional or Roth IRA. If you are 50 years old or older, you may contribute up to $7,500.

What types of accounts can I rollover into my IRA?

Among others, you may rollover a Traditional IRA, Roth IRA, SEP IRA, 401(k), or 403(b). In addition, you may consolidate multiple retirement accounts into one IRA. For example, if you have two 401(k) accounts and IRA open with a former employer, you may rollover all three accounts into one self directed IRA plan.

Are there any investments that I can’t make with my self-directed IRA?

You cannot invest in Life Insurance Contracts or Collectibles (as defined by the IRS). Also, you may not participate in prohibited transactions. As an self directed IRA owner, if you violate these rules, you may forfeit your entire IRA. There are many self directed IRA rules and stipulations, so it is important that you work with competent advisors to help you avoid such transactions.

What exactly is a prohibited transaction?

Self directed IRA transactions must be for the exclusive benefit of the retirement plan and must not directly or indirectly benefit the IRA owner, or other “unqualified” people. Here are some self directed IRA rules and guidelines to follow: You may not make loans to unqualified individuals, extend credit to your IRA, and you may not pledge the assets of your IRA to secure a loan. Your self directed IRA plans may not purchase the home in which you live, it may not rent real estate it owns to your children, and it may not personally guarantee a loan that your IRA uses to finance the purchase of real estate.

There are many self directed IRA rules, guidelines, and prohibited transactions one must be aware of. As a self directed IRA owner you must comply and obey by these stipulations. STC can help you navigate these complex rules and keep your plan in compliance.

Self Directed IRA Plan Penalties

The penalties for failing to comply with the self directed IRA rules can be severe, so you should work with an IRA administrator that will help you steer clear of any self directed IRA pitfalls. These penalties can range from a penalty tax to forfeiture of your entire IRA plan. To develop a true understanding, let’s invent a hypothetical prohibited transaction. Assume you have a single family residence in State College owned by your self directed IRA plan. You are renting to your son and his friends while they attend college. The IRS sends you a notice explaining that you are involved in a prohibited transaction and gives you the opportunity to correct the situation. You then find your son a new apartment and get a new, unrelated tenant for your rental property.

Assume the same set of circumstances, but in this case you ignore the IRS’ notice and continue to let your son rent the house. The IRS will send you a notice stating that your failure to comply has resulted in the forfeiture of your investment property. The IRS seizes your real estate, removes your son from it, and sells the property. The proceeds of the sale go into the US Treasury and your once-substantial IRA is now gone. The best way to avoid this type of situation is to make sure you have a solid team of advisors helping you navigate the process.