Source: https://www.iraaa.org/faq
Timestamp: 2019-04-22 08:01:51+00:00

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Is it legal to purchase non-standard assets using my IRA?
The answer is yes! The Employee Retirement Income Security, ERISA, Act of 1974 passed the responsibility of retirement saving from the employer to the employee. Created in 1975, IRAs provide individuals a chance to direct where their retirement funds were invested.
The IRS code, instead of distinguishing which investments are allowed, identifies which investments are not permitted under these laws. Under both ERISA and IRS Codes, there are only two types of investments excluded: Life Insurance Contracts and Collectibles such as works of art, rugs, jewelry etc. Refer to Internal Revenue Code Section 401 (IRC § 408(a) (3)).
The securities markets, when the ERISA was passed, were responsible for bringing the IRA and 401(k) to the public. Brokerage houses and banks created a misconception that buying stocks, bonds and mutual funds was all that was allowed through retirement products. This is 100% false! Brokerage houses and banks have a vested interest in having you invest in stocks, bonds and mutual funds—not real estate, businesses and other non-traditional investments. Don’t limit your ability to maximize the investment potential because of the lack of knowledge of your financial advisor. There are infact many great brokers who do understand that true diversification occurs when your funds are invested in a variety of different markets.
It needs to be noted that most employer sponsored plans like 401(k) will not let you roll your account into a new vehicle while you are still employed. Some employers, however, will allow you to roll a portion of your funds. To be certain you will need to contact your current 401(k) provider.
Are there a lot of people who have self-directed IRA accounts?
The self-directed industry is growing very strong and is expected to see around $2 trillion enter the market in the next two years. In the U.S. there are over 45 million IRA holders and less than 4% of those are held in non-traditional assets. This number is expected to grow significantly over the next 5 years as more individuals and their financial advisors attain a greater awareness of self-directed IRAs.
You cannot invest in Collectibles or Life Insurance Contracts. There are also certain transactions in which you cannot participate when using IRA funds. These transactions are referred to as “prohibited transactions”. Prohibited Transactions are defined in IRC § 4975(c)(1) and IRS Publication 590. These transactions were established to maintain that everything the IRA engages in is for the exclusive benefit of the retirement plan. Sometimes professionals refer to these as “self-dealing” transactions. Self-dealing happens when an IRA owner uses their individual retirement funds for their personal benefit instead of benefiting the IRA. If you violate these rules, your entire IRA could loose its tax-deferred or tax-free status. It is important that you work with a competent Retirement Account Facilitator to avoid violating these rules.
If you participate in a transaction which does not fit SPECIFICALLY within these guidelines, the Department of Labor or the IRS will analyze the specific facts and circumstances in order to decide whether you have engaged in a prohibited transaction. A Retirement Account Facilitator can help educate you regarding how these may apply to investment you are considering.
What classifies as a disqualified party?
Why are the rules so complex?
Are there consequences of a prohibited transaction?
Yes, if an IRA holder is found to be engaging in prohibited transactions with IRA funds, it will result in a distribution of the IRA. The penalties and taxes can be severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
How do I following the rules?
The IRA states which investments are prohibited and what makes certain transactions prohibited. Being able to identify, interpret and follow these rules can be complicated but is not impossible. An IRAAA Network Associate can help you follow Internal Revenue guidelines and steer clear of prohibited transactions.
Why do CPA and Financial Advisors say this is illegal?
Usually it is because they are simply uninformed. Attorneys will conform to their core competencies and rarely deviate from them. Most financial advisor’s company or agency may either be disinterested in this type of business or have not been educated in this type of investing format.
IRAAA’s Professional Network embraces the self-directed industry. You can search our site to find professionals near you.
As defined in IRC § 408(n), the custodian is actually a bank or savings and loan institution. For a self-directed IRA to exist, it needs to be held with a custodian who will allow investments into non-traditional investments. There are not too many of these types of custodians.
Why are there not a lot of custodians?
There are not a lot of non-traditional IRA custodians simply because the business is not as profitable as it is for the brokerage houses. The work requires many more hours to complete a real estate transaction than to purchase stocks over an electronic computer. Traditional banks do not compete because it does not fit within their business objectives, instead, they make money by leveraging the money you have sitting in their accounts.
How do custodians make their money?
Asset fees are usually based off a percentage of the value of your self-directed IRA. When your IRA increases in value, they are able to charge you more – even if you never purchase an asset. Under this system, larger accounts are penalized.
Transactional fees are when your IRA purchases an asset. With real estate, there can be fees assessed for wiring an escrow deposit, reviewing a purchase and sale, recording each document, and fees for the final wire of funds to complete the purchase. When you sell that asset the process repeats itself.
Holding fees are assets that are held with a custodian. If your IRA ever purchases a piece of real estate, the custodian can assess a quarterly fee for just holding the deed on behalf of your IRA.
Special fees include expediting service, express mail, wire funds and so on. They can add up especially when trying to close transactions quickly.
Does it take a long time to make an investment with a self-directed IRA?
Sometimes. A traditional self-directed IRA custodian makes investments like tax liens, foreclosure homes and real estate difficult and the client cannot have any personal interaction with the IRA funds. The client also has to petition the IRA custodian to make an investment on their behalf. Banks move at a much slower rate than the investment community.
Can I use my IRA purchase real estate that I currently own?
Although companies may say this is allowed, this is strictly forbidden under IRC § 4975. Do not put your retirement account at risk by engaging in a “self-dealing” transaction such as this.
Maybe. If the company has a self-directed 401(k) like the ones IRAAA Network Associates’ establishes then yes. Most companies do not have a self-directed 401(k) so there is a high probability that it won’t be possible. To be certain contact your current 401(k) administrator.
Can I use leverage to purchase real estate?
Absolutely! Leverage is a very powerful tool when purchasing real estate, but there are complications when using a self directed IRA and leverage. The “prohibited transaction” rules state that you as a disqualified person cannot extend credit to an IRA or IRA asset. What this means is that if your IRA gets a loan on a piece of real estate – you cannot personally guarantee the loan. Refer to IRC § 4975(c) (1) (B) for more specific information.
An IRA must secure what is called a non-recourse loan, which is solely based on the property. A bank will then lend money based on the investment rather than lending to a borrower who has a great credit score. Since banks do not have any recourse against the IRA or IRA holder, they might require a high down payment.
Am I allowed to use a self-directed IRA to buy a business?
Yes, however, we do not suggest you use a self-directed IRA to purchase a business. IRAs and 401(k) that engage in business activity can generate Unrelated Business Taxable Income (UBTI).
What is UBTI and how is it different from UBIT?
UBTI is an acronym for Unrelated Business Taxable Income and occurs when a plan generates income from operating a business, acquiring or improving property through debt financing, or certain partnerships from which the plan owns an interest. It is income generated by a trust when engaging in business activity that is unrelated to its general purpose.
UBIT was implemented to keep the plans that open businesses and the typical small business owners even. If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount. UBIT erases that risk for the typical business owner. It is imperative you seek professional help to make sure you do not incur any severe tax penalties.
UDFI stands for Unrelated Debt Financed Income, which means it is income generated by an IRA, or other retirement plans, through debt-financing or leverage. UDFI is taxed much like UBTI and is sometimes as complicated. UDFI only applies to the profit realized through debt and is based on the highest amount of leverage carried within the past 12 months. Refer to IRC § 514(a) (1).
Can I purchase a piece of real property by mixing personal funds with IRA funds?
If it is structured correctly, yes. Individuals using personal or IRA cash to benefit the other are prohibited by prohibited transactions code. This can be easily violated through “formation issues”.

References: § 408
 § 4975
 § 408
 § 4975
 § 4975
 § 514