Before we start exploring the do's and don'ts of investing in a self-directed IRA, it's important to understand what an IRA or self-directed pension plan is (p. e.g. The term self-directed is not a technical or legal term, but rather a descriptive term in relation to the way in which IRA is managed. You can have a self-directed IRA at a brokerage firm or a custodian specializing in self-directed IRA, such as members of the RITA Association.
This includes investing in physical gold backed IRA, which is becoming increasingly popular among investors. This includes setting up an IRA gold account, which allows you to invest in gold and other precious metals. The main difference between these two types of self-directed custodians is that brokerage firms and traditional banks that offer self-managed IRA services generally restrict investments to publicly traded assets, such as stocks and mutual funds; in contrast, truly self-directed custodians will consider investing in all legally acceptable investments. The IRC (Internal Revenue Code) doesn't state what investments you can make, only what investments you can't make. Under section 4975 of the IRC, the Internal Revenue Code states that an IRA holder cannot purchase life insurance or collectible items (works of art, stamps, carpets, etc.). The list of investment instruments that cannot be included in an IRA or qualified plan should not be confused with the list of prohibited transactions that cannot be made with these accounts, such as lending money from an IRA.
If the aggregated ownership of the plan and IRA of any class of equity in an entity is 25% or more, the entity's assets are considered assets of the IRA or investment plan for the purposes of the rules on prohibited transactions, unless an exception applies. A self-directed IRA LLC (SDIRA) is a type of individual retirement account that allows retired investors to use their IRA funds to make investments in alternative assets, such as real estate, cryptocurrencies, and more. An IRA owner who discovers a collectible or antique worth thousands of dollars for sale at a garage sale will not be able to protect the income tax from the sale of this asset within an IRA or other retirement plans. If the percentage of ownership of the IRA, including what would be after the general partner invested their IRA in the fund, equals or exceeds 25% of the equity shares, the fund's assets are considered “plan assets”.
In addition, most IRA custodians or fiat IRA providers only offer “traditional investment opportunities”, when, anyway, there is virtually no possibility of initiating a prohibited transaction. The possibility of doing so often creates confusion with IRC 4975, which prohibits an IRA from investing in an entity owned by the IRA and related persons are owned by 50% or more. In other words, “ignorance” is no excuse when it comes to prohibited IRA transactions, nor are the assurances of a self-directed IRA provider about the viability of holding several alternative assets in a self-directed IRA. Fortunately, the reality is that prohibited IRA transactions are quite rare, due to the simple fact that the vast majority of IRA assets are only invested in traditional publicly traded securities, where a prohibited transaction is generally not feasible in the first place.
The Swanson decision supports the idea that the mere creation of a company by the IRA alone or, by a reasonable extension, between an IRA and unrelated parties (or, in fact, related parties) is not a prohibited transaction. Since IRAs (plans) own more than 25% of ABC, LLC, an “investment company”, the assets of ABC, LLC are assets of the plan and are considered the property of each IRA. This regulation explains that a transaction between a person disqualified, such as the S corporation in this case, from an IRA and an entity that does not have the plan assets of those IRAs is generally not considered a prohibited transaction. Which, once again, can be considered a prohibited transaction and disqualify the IRA (since the owner of the IRA would be a party to the prohibited transaction).
This means that it is time to be more aware of the risks of prohibited transactions and of the situations that can trigger them, not only with regard to self-managed IRAs and the increasing use of various types of “alternative investments” that may have adverse consequences, but also to “simpler” situations, such as possible prohibited transactions with financial advisors who are compensated for investing the IRA dollars of family members. . .
