Here are the most frequently asked questions we receive concerning Self-Directed Retirement Plans. If your question about self-directed IRAs isn’t addressed here, please contact us.
Getting Started with a Self-Directed IRA Account
1. What exactly is a self-directed IRA (SDIRA)?
A self-directed IRA is similar to a traditional Roth IRA, which allows you to save for retirement with it’s associated tax advantages. The main difference between the two accounts is simply the types of assets owned in your account. Standard IRA assets are all related to common investments, including stocks, bonds, etc. Self-directed IRAs , however, expand on the scope of assets owned including real estate investments and even cryptocurrency.
1. How do I open a self-directed IRA account?
It’s as easy as 1, 2, 3!
- Open an Account – To open an account, simply visit our retirement plans section and choose the right IRA for you. If you already know what type of account you’d like to open, open an account right away by selecting a local office and completing our EZ application. Once you have completed your IRA Innovations application, you will have to put money in your account by either transferring or rolling over funds from an existing account, or by making a contribution to your new account. The funding form is located in your application package or on the forms page of this web site. The setup of an IRA or Qualified Plan takes about one day. A transfer or a rollover may take from two weeks to 30 days, depending on the source of the funds or assets being transferred or rolled over. Cash contributions are immediately credited to your account.
- Select an Investment – With a self-directed IRA from IRA Innovations, you choose your own investments. For an overview of allowable investments, please visit our investments section. If you have additional questions regarding allowable investments, please contact us.
- Make an Investment – Direct IRA Innovations to purchase your investment choice with your IRA by completing a Buy Direction Letter, located in the Form Center of our web site. We’ll show you everything, including how to carry the investment in your IRA’s name.
Open your self-directed account today!
2. How much money should I deposit into my account to get started?
While there is no minimum amount, the amount you should start with depends on the nature of the deal or investment you plan to make.
If you invest in a note with a fixed rate of return, you must calculate the cost of administration and servicing to determine what the net to your account will be. If you are fixing up a property for resale, the results may be very different than a fixed rate over a long period of time.
Keep in mind that if you make a cash contribution to your account you need to check the contribution limits for that account type.
IRA Innovations will be happy to assist you with the purchase of your investments.
3. Once I purchase an investment in my IRA, is it in my name?
All assets purchased with retirement funds will be titled in the name of your IRA and your name. For example, if you purchased a piece of real estate in your IRA, the title of the investment would be:
IRA Innovations FBO (for the benefit of) John Smith (your legal name) IRA
4. How do I find out what the current contribution limits are for my retirement plan?
5. Are there investments that I cannot make with my IRA money?
There are some transactions that are prohibited by the IRS that we publish on our site. If you are considering making a prohibited transaction, there are basic requirements and procedures needed to apply for exemptions from the prohibited transaction rules (includes ERISA and non-ERISA plans and Individual Retirement Arrangements). Please contact us to discuss these types of transactions.
6. Can my IRA be sued?
Your IRA may be subject to legal action. IRAs are not always exempt from creditor claims, and are never exempt from federal or state taxing authorities; however, some states do not permit creditors to collect from IRAs.
7. What can I purchase in my IRA besides real estate?
You may purchase notes, commissions, options, private placements, accounts receivable, timber deeds, crops, cattle, or anything else that is not prohibited or collectible as defined by the Internal Revenue code.
8. What type of services does IRA Innovations provide?
For qualified plans (for example, the Traditional IRA), we assist you in establishing your account by providing the plan documents, which are qualified under the IRS code. IRA Innovations also provides record keeping services for the plan assets you elect. You may also Do Your Own plan, where IRA Innovations is the plan sponsor, and you perform your own record keeping functions.
For IRAs, IRA Innovations acts as agent for custodial banks and other banks and depositories. All uninvested cash is placed in FDIC insured institutions for your benefit.
10. How often do I receive a statement on my accounts?
Normal cycles are quarterly, although you may request a statement at any time you wish. If you elect to enroll in online statements, you can view your account at any time.
12. What happens to if I have to withdraw funds out of my plan for an emergency?
Borrowing funds from a plan for an emergency prior to your reaching age 59 ½ may be done without a 10% penalty if the emergency is in compliance with hardship withdrawal rules noted in the IRS code.
13. Can I put away more money if I am over age 50? What are the limits?
There are different limits for types of retirement plans and by year. Contact us to learn the contribution limits for your plan.
14. How do I determine which retirement plan is best for me?
The factors to consider are:
- Are you a sole proprietor or own a company that has a qualified plan or employer based IRA?
- Your age.
- Your contribution and deferral capability.
- Whether you have common law employees.
- When you wish to retire.
- Your tax situation.
Seek to make the highest contribution to your retirement that you can. It’s also important to choose the plan that will give you the most flexibility.
You can review the retirement plans section of our site for more information regarding plan aspects and contribution comparisons. You should also seek the services of a tax professional or financial planner.
15. What are the contribution deadlines for Qualified Plans, and IRAs?
Qualified plans must be established by the last day of your fiscal year if contributions are to be made for that year. If you have a calendar year end 12/31/2020, you need to establish the plan on that date for 2020 contributions. 401(k) deferrals must be made no later than 30 days after which the contributions are received. For 12/31/2020 that deadline would be 30 days later.
SEP and SIMPLE IRA contributions may be made by the company tax deadline plus extensions, except for defaults, which follow the above rules.
IRA contributions must be made by April 15 with no extensions.
16. What is the fee for managing and maintaining an account each year?
Our fees are described in two sections of our web site. Our Fee Schedule provides a general overview of our fee structure. For specific fees on each type of retirement account that we offer, visit the forms section of our site and follow the link to the fee section. Click on the Fee Schedule for the type of account you are interested in.
17. How can I learn more about the investment choices that I have for my IRA funds?
Visit the investments section of our site. The IRA Innovations Learning Center provides detailed articles, recommended books and other information regarding all investment types.
18. Can I consolidate my IRAs?
Yes. You may consolidate:
- Your traditional and SEP IRAs into a single traditional IRA.
- A SIMPLE IRA to a traditional IRA after two years.
- Roth IRAs to Roth IRAs.
Contact us to discuss this process.
19. What happens to the funds that I don’t invest into any assets?
As all plans are self-directed, you may direct all funds anywhere you wish. All funds for which we receive no instructions are held for your benefit in FDIC-insured accounts. If you wish to deposit the remaining funds in your choice of financial institutions, simply direct us to do it.
20. What are Required Minimum Distributions?
Required Minimum Distributions are the minimum amounts that must be distributed to you from your retirement account(s) when you reach age 72. Thanks to the new minimum distribution rules from the IRS, you can now take out less when you reach this age. This change is good news to retirees who have enough income from other sources and who want to continue letting their accounts accumulate value.
Purchasing Real Estate with Your IRA
1. I’ve heard that buying and selling real estate in my self-directed retirement plan is illegal. Is this true?
Neither the IRS nor Department of Labor has ever published a list of legal investments. All investments are “legal” unless specifically prohibited, such as collectibles.
There is a list of prohibited transactions, disqualified persons, and collectibles on our site. Real estate and other investments are permitted, provided you follow applicable rules.
2. Can I buy real estate with a partner using my IRA?
You may have partners, including yourself and any family members, their IRAs, eligible 401(k) s or other qualified plans, when you purchase property using your IRA. Once the property is acquired with your IRA, you may not sell it to yourself or any family members. A family member consists of ascendants and descendants, or spouses thereof.
3. How do I actually buy real estate in my retirement plan?
- Find a real estate investment that falls within the parameters of what you have in your plan budget. Include the funds contributed by your partners, yourself, loans or any combination.
- Direct IRA Innovations to purchase the property by completing a Buy Direction Letter.
- Selected a proper escrow/title company/attorney to work with us to close the transaction, as you would with any real estate transaction.
- IRA Innovations purchases the property you have specified with the funds in your retirement account.
- IRA Innovations wires the funds to escrow, as required.
- At closing, the title on the property is vested as shown in the closing documents.
- If the property is income-producing, funds are received by and expenses are paid from your retirement account, in accordance with your instructions.
4. What can I do if I don’t have enough money to buy real estate in my IRA?
There are several options:
- You may partner with others.
- You make allowable contributions.
- You may obtain debt financing through private sources or financial institutions on a non-recourse basis.
- You may arrange a seller carry back loan; you may sell other assets in your IRA to raise cash to make the purchase.
- You may transfer funds from other IRAs or roll over funds from qualified plans, such as 401(k), 403(b) or government 457 plans you may have had at employers where you no longer work.
- If you have a profit sharing or 401(k)plan where you currently work, you may be able to make in-service withdrawals and roll those to the IRA within 60 days.
5. Where can I get a loan to purchase real estate in my IRA?
Normally private lenders, seller carry-backs, and mortgage companies may lend to your IRA on a non-recourse basis. Sometimes banks and credit unions may make non-recourse portfolio loans to IRAs.
6. Can I buy property with my child’s IRA?
Your child’s IRA may purchase property, and may do so as partners with your IRA, or any other IRA as noted previously.
7. Where can I go to learn about using my retirement funds for real estate investing?
- Our local offices hold classes and seminars across the U.S.
- Articles on investing in real estate with your IRA funds and recorded webinars are archived in the IRA Innovations Learning Center.
8. I would like to use the funds that I have in a former employer’s 401(k) plan. Can do I do this—and if so, how?
Yes, you may roll these funds into a traditional IRA or a qualified plan (if you are eligible to have a qualified plan) that permits complete self-direction, such as an IRA Innovations self-directed IRA. Contact your former employer’s plan administrator or benefits department to determine what, if any, special procedures may be required.
You may roll over the assets you have in your old plan to your IRA Innovations IRA “in kind.” “In kind” means that the assets you held in your old qualified plan, 401(k), or other plan are rolled as is into your IRA. There may be restrictions from the fund provider, broker, or annuity company about “in kind” rollovers or transfers. Your old employer will advise you about any restrictions.
9. Is there any liability to my retirement plan when it holds real estate?
You always face liability whether your plan is an IRA or qualified plan, such as a 401(k) plan. If, for example, your plan owns real estate and a person is injured on that property, the plan or IRA would have the same liability issues that you would have to deal with, if the property was owned personally.
You can protect your real estate IRA investment by doing the same things to protect it and your property, such as purchasing insurance, or by having your IRA create a limited liability company that purchases a 100% of the investment properly. Limiting liability for assets in your IRA or plan should be discussed with competent professionals, such as attorneys.
10. Can you finance a property that’s held in your IRA?
As noted above, you may have debt-financed property in your IRA. You may not use any asset in an IRA for collateral for a personal loan from which you would receive a current benefit. The IRS code is clear on this subject, and deals with debt-financed property under the Unrelated Business Income Tax rules.
11. How do I know if tenants are making payments on my account?
There are several things you can do:
• If you hold rental property in your IRA, you may receive rental payments from the tenants. To ensure that you do not directly benefit from the rental of the property, and that your IRA does, the checks need to be made payable to your IRA Innovations account. You will be responsible for forwarding them to IRA Innovations.
• You may also have a third-party service person, such as a property manager (other than a disqualified person), receive the payments and forward the funds to your IRA account.
• You may also have the payments made directly to your account at IRA Innovations and request monthly statements.
12. What is UBIT?
The term UBIT stands for ‘Unrelated Business Income Tax’. UBIT applies to debt-financed property that you purchase in your IRA and also applies to operating income received from companies owned by IRAs and qualified plans.
If you purchase property with your IRA funds, and you finance some of the purchase through a loan, any income you receive is taxable under UBIT rules for the percentage of property that is debt-financed. The details can be found at www.irs.gov.
13. Can I pledge or hypothecate my plan to get more funds?
This is not permitted. Your plan may borrow money, however. The property purchased with borrowed funds will be subject to UBIT.
14. How do I buy foreclosed property using my Qualified Plan?
First, locate the piece of property you would like to purchase. You would negotiate the purchase price on the foreclosed piece of property with the lender in the same way you would negotiate the price with any seller on any property. To purchase the property, complete a Buy Direction Letter to IRA Innovations. This letter directs IRA Innovations to purchase the property with your IRA funds. The plan makes the payment to the lender and the property is then vested in the name of the trustee of the plan for your benefit.
Pre-foreclosures are negotiated with the owner of the property, as in any property purchase. The debt is paid out of escrow, and the property is then placed in the qualified plan for your benefit, as above.
15. Can a company that I own rehabilitate or “fix-up” property that I hold in my IRA or 401(k)?
Neither you nor a company you own, as specified in the prohibited transaction rules on our site, may provide any services to the assets in your IRA, which includes rehabilitating of “fix-up” property, unless you first obtain a Prohibited Transaction Exemption from the US Department of Labor.
There are private letter rulings that have been obtained in the past, permitting latitude under certain circumstances. Private letter rulings may be obtained by application to the IRS.
There are also specific rules regarding taxation of prohibited transactions, which include a 100 percent tax if a prohibited transaction is not corrected in a taxable period, and a 15 percent tax on the amount of the prohibited transaction. Additional rules that disqualify the entire IRA apply to IRAs established by employers.
16. Can I invest my 401(k) in real estate?
Your 401(k) plan may, at your direction, invest in real estate if the investment provisions of the plan permit it. If the employer contributions to your plan have been made, and the plan permits self-directed investments, there will be rules to the amount you may invest from that portion you are vested in.
You may also have an Individual (k), which limit participants to owners only, plus spouses and partners, you may decide on the investments to be completely self-directed by you.
Making other investments with your IRA
1. I am interested in buying mortgages with retirement plan funds. Can I pool this with other plans?
You may use any other plans, accounts, personal funds and assets as partners to purchase mortgages.
Getting a Loan in Your IRA
1. How do I take a loan from my IRA?
You may not borrow funds personally from your IRA under any circumstances. This is a prohibited transaction. You may lend to any person other than disqualified persons or companies.
2. How do I find the right lender?
Lenders may include mortgage lenders, personal lenders, credit unions, and community banks. Large institutional lenders usually do not lend on a non-recourse basis.
Lenders may also ask for additional collateral to make the loan to value ratio less. You may provide third party guarantors – provided they are not disqualified – or other property.
Making a Loan with Your IRA
1. A friend needs a loan. How do I protect my IRA if I use it to make the loan?
You may collateralize the loan just as you would any other debt instrument.
2. My daughter is buying a business. Can I lend her the money for the business out of my retirement plan?
Your daughter is a disqualified person, and you may not lend her the funds.
Options for Small Businesses
1. What are the best kinds of retirement accounts for small business owners?
If you have no common law employees, those that are not spouses, owners or partners, the best plan is the Individual (k), which permits the highest aggregate percentage of contributions and flexibility in defined contribution plans. The administration is straightforward and self-directed: you are the trustee, custodian and administrator, unlike any IRA plans.
The SEP-IRA is also a common and easy plan for employers, but percentage limitations on contributions, and lack of flexibility makes it less favorable, overall. The SIMPLE IRA is a small form of a plan allowing employee deferral, but limits the amount of contribution. The SIMPLE can be a good plan for those who have lower income. These employer based IRAs must always have a trustee or custodian as permitted by the IRS code, and may not be self-trusteed. These plans do not provide features of the qualified plan, such as being able to borrow from the IRA, and in some states are not creditor proof, among other things,
The defined benefit plan has even higher contribution levels depending on your age and retirement criteria. These are expensive plans to administer, but under the right circumstances are excellent plans for people who have the money to contribute, and are late in making the decisions to start making retirement contributions.
In all cases, you may always make contributions to IRAs if you have received compensation as outlined by the IRS.