Investments Tips for The Average Joe

Overview of Self-Directed IRA Rules and Regulations

U.S. tax codes dictates that an IRA to be a trust or a custodial account established in the United States for the sole benefit of an individual or the beneficiaries thereof. The account needs to be governed by written instructions and meet particular requirements in relation to holdings, distributions, contributions, and the trustee or custodian’s identity. These give rise to a special type of IRA known as a self-directed IRA (SDIRA).

The Differences between Self-Managed and Self-Directed IRA

All IRAs permit account owners to select from investment opportunities acceptable under the IRA trust agreement, and to buy and sell those investments upon the account owner’s good judgment, on the condition that the sale proceeds will remain in the account. The restriction on investor choice results from because IRA custodians being permitted to decide on the types of assets they will handle within the confines set by tax regulations. Most IRA custodians only accept investments in extremely liquid, easily valued products in the likes of bonds, ETFs and CDs, approved stocks, etc.

However, a number of custodians are willing to manage accounts with alternate investments and to provide the account owner considerable control to “self-direct” such investments within the confines of tax regulations. The list of alternative investments is extensive, limited only by certain prohibitions against illegal or illiquid activities as per self-directed IRA rules, and the keenness of a custodian to manage the holding.

The most commonly cited example of an SDIRA alternative investment is direct ownership of real estate, which could involve redevelopment of a property or a rental case. Direct real-estate ownership contrasts publicly traded REIT investments, as the latter is usually available through more traditional IRA accounts.

Advantages of a Self-Directed IRA

The benefits associated with an SDIRA are related to an account owner’s capacity to make use of alternative investments to attain alpha in a tax-fortunate manner. In the end, SDIRA success depends on the unique knowledge or expertise of the account owner in terms of capturing returns that, after getting tweaked for risk, surpass market returns.

A general idea in self-directed IRA rules and regulations is that self-dealing, in which the IRA owner or other selected individuals use the account for personal gain or in a way that evades the intent of the tax law, is illegal. The main elements of self-directed IRA rules and regulations and compliance are identifying disqualified individuals and the nature of transactions they cannot initiate with the account. The effects of disobeying transaction rules can be severe, such as the whole IRA being declared by the IRS as taxable at its market at the start of the year in which the prohibited transaction took place, which means the taxpayer may need to pay settle deferred taxes, besides a 10% early withdrawal penalty.

Besides the IRA owner, self-directed IRA rules describe a “disqualified person” as anybody who controls the assets, disbursements and investments and receipts, or those who can affect investment decisions.