Self Directed IRA

So what is a Self Directed IRA and how does it work?

A Self Directed Individual Retirement Account (SDIRA) is an IRA that requires the account owner to make investment decisions and investments on behalf of their retirement plan. The IRS requires that a custodian or a qualified trustee holds these assets for the IRA owner. Self directed IRA accounts can be held in a variety of assets including traditional investments of stocks, bonds and mutual funds, as well as other IRS-permitted investments. These permitted investment options include real estate (both domestic and foreign), private equity, tax liens, franchises and mortgages. A self directed IRA allows more investment choices. In most circumstances, the custodian/trustee maintains the assets and the records pertaining to all the self directed IRA transactions. They will issue account statements, file the required IRS reports, are an advisor to the owner on regulations pertaining to these transactions, and they perform the administrative work on behalf of the owner of the self-directed IRA for the life of the account.

Prohibited Activities, Penalties

Having a self-directed IRA allows investment diversification, since there are numerous investment options. If you are interested in a self-directed IRA, it is imperative that you educate yourself to be sure that the choices you make are in compliance with current IRS regulations. Your custodian/trustee will not be able to provide you with legal or tax advise. If you are 59 ½ years old or younger, there is a 10% early withdrawal penalty for distribution from your IRA. Be aware that some investments are not permitted within your IRA. These include life insurance, collectibles and prohibited transactions with disqualified persons as defined by the Internal Revenue Service in IRC 4975 (c) (1.) Real estate and other investment assets employed for personal benefit, other than for a return for the IRA, may not qualify and may become immediately taxable. A self-directed IRA will give you options for building a strong retirement fund and it’s up to you to know the rules and plan accordingly.

Limited Liability Company (LLC) Self Directed IRA Structure

Some self directed IRA investors choose to use a Limited Liability Company structure as a means of reducing fees and to streamline paperwork and transaction processing. The account holder manages the limited liability company himself, and directs the custodian/trustee to invest in the LLC, enabling him to execute transactions as the LLC without involving the IRA custodian/trustee. This is often done to bypass custodial fees and avoid transaction delays. Profits for the LLC have nearly identical tax-favorable treatment for the IRA with this scenario. Internal Revenue Code Section 401 does not require use of a custodian, and this structure is frequently referred to as ‘checkbook control” since the IRA holder likely has sole signing authority for the LLC. There has been discussion that the IRA LLC strategy was legitimized by a 1996 tax-court case, Swanson vs Commissioner, 106 TC 76, although some disagree with the validity of the case.

Types of Self Directed IRAs, Contributions and Limits

Contributions limits (2007, 2008) are $5000 under age 50, and $6000 age 50 and older. Traditional IRAs can be either deductible or nondeductible. A nondeductible is an option if you do not qualify for a deductible IRA or a Roth IRA. A deductible IRA allows you to deduct all or part of your contribution from your taxable income. If you are under 70 ½ years old and do not have a retirement plan at work, you can invest in a deductible IRA and deduct the entire contribution from your taxes. If you have a retirement plan, such as a 401K, where you work, you may fully or partially deduct your contribution if your adjusted gross income (AGI) qualifies. If you are not eligible to contribute to a deductible IRA, you may qualify for a Roth IRA. For the Roth IRA, your AGI should be below $114,000 if you are single, or below $166,000 married and filing jointly. The 2007 guidelines for eligibility on a deductible IRA are $62,000 or below for a single head of household, and $103,000 or less for married filing jointly. For those not covered by and IRA but with a spouse who is, an AGI below $166,000 may still qualify you for a full or partial deduction.

Choosing a Self Directed IRA

A nondeductible IRA is a way to grow your savings in a tax-deferred environment if you do not currently qualify for a deductible or Roth IRA plan. If you expect to be in a higher tax bracket at retirement than you currently are in, a Roth IRA will probably be your better option. Whichever plan you choose, you will be taking steps to fund your future and retirement years. The self directed IRA offers an investor the most hands-on control over retirement savings and investments in his/her individual retirement account.