Self-Directed IRA Guide: How to Expand Your Retirement Investment Options with a SDIRA

By Anthony Gardner, CPA, Tax Manager on November, 19 2019
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Anthony Gardner, CPA, Tax Manager


If you’re looking for something more than stocks, bonds and mutual funds, a SDIRA might be for you.

Individuals seeking alternative investment options with their retirement account funds should consider opening a Self-Directed IRA (SDIRA) with a qualified custodian. Unlike traditional IRAs where you may be limited to investments in stocks, bonds, or mutual funds, a SDIRA allows you to take advantage of investing in alternative assets such as limited partnerships, LLCs, gold, real estate, notes and more.

Getting Started with a Self-Directed IRA

Once you decide that you would like to have the added investment options of a SDIRA, your first step is to choose a qualified custodian. There will be custodian fees that vary depending on the chosen custodian; all fees should be considered during the process of deciding to open an SDIRA.

Once the custodian is identified, you’ll want to rollover or transfer funds into the account. If you already have an existing traditional or Roth IRA account, you could simply transfer all or part of the account funds into the newly opened SDIRA. You could also rollover all or part of the funds from a 401(k) account with a prior employer.

After it’s set up, you will be able to contribute funds annually to the SDIRA account just like any other IRA, subject to the same traditional and Roth IRA contribution limits set annually by the IRS; the combined annual contribution limit for all of your traditional and Roth IRA accounts for 2019 is $6,000, or $7,000 if you’re age 50 or older. (Roth IRA contributions are subject to a further limitation based on your modified AGI for the year.)

There are additional options for rolling over SIMPLE and SEP IRA accounts into an SDIRA. Business owners who are otherwise eligible for a SIMPLE or SEP account and are interested in the benefits of an SDIRA should consult with a tax advisor on the specifics of this process.

Managing Self-Directed IRA Investments

Once your SDIRA account is funded, you are free to choose your investments and direct the account custodian to send funds. The most convenient way to invest through an SDIRA is to create a SDIRA LLC and then direct the SDIRA funds into the LLC checking account. Creating an SDIRA LLC gives you, as the account owner, checkbook control of the retirement account funds allowing for maximum freedom in making qualified investment decisions on behalf of the IRA.

You should hire an experienced legal professional to manage the creation of the LLC. It can be a relatively complicated process and there are many potential traps for the unwary. Once the entity is created, you will be responsible for tracking the investments made through the LLC.

Prohibited Self-Directed IRA Investments

While the SDIRA gives you significantly more freedom to invest than traditional retirement accounts, there are still some limits on what you can do with the funds.

There are many prohibited transactions that the account owner needs to be aware of when creating an SDIRA and subsequently investing the funds of the account. The majority of prohibited transactions stem from the involvement of a disqualified person in a self-dealing transaction.

Disqualified persons are defined as:

  • The account owner
  • A beneficiary of the IRA
  • Your spouse
  • Your lineal ascendants/descendants and their spouses
  • Plan service providers and fiduciaries
  • An entity in which anyone described above owns at least 50% of the voting stock/capital or profits interest, directly or indirectly
  • An officer, director or a 10% or more shareholder or partner of an entity described above

Types of prohibited transactions between an IRA and a disqualified person include:

  • Extension of credit or cash loans
  • Yielding a commission/fee for the purchase, sale, or exchange of assets
  • Transfer of IRA income or assets to, or for use by or for the benefit of, a disqualified person
  • Executing renovations/repairs on property owned by the account
  • Paying a salary or fee for service
  • Retaining account earnings
  • Covering account expenses

The above list of prohibited transactions is not all-inclusive. The best policy when it comes to SDIRA transactions is to verify with an experienced professional that it is not prohibited before acting. Once you execute a prohibited transaction, the IRS can declare that the account ceased to be an IRA as of the first day of that year and the IRA is treated as distributing all assets to the IRA owner at FMV. The account owner would be subject to income taxes and penalties as applicable.

Self-Direct IRA and UBIT: Is a SIDRA Subject to Unrelated Business Income Taxes?

There are some situations where the SDIRA may be annually subject to unrelated business income tax (UBIT). There are two principal situations where UBIT would apply:

  • The SDIRA invests in a business, either directly or through a partnership or LLC, that generates trade or business income
  • The SDIRA invests in a debt-financed investment property. The investment income included in UBIT is proportionate to the debt on the property

If one of these situations arises, the account will need to file an IRS Form 990-T and any applicable state tax return(s) to remit taxes due on the income. If either of these circumstances apply to your SDIRA, Freed Maxick could be engaged to identify and meet any income tax filing requirements. The implication of any required tax filings and taxes due on the SDIRA transactions is a very important preliminary consideration.

Freed Maxick Can Help

Contact Freed MaxickThe increased flexibility and benefits of a SDIRA may be a great option for your retirement investing needs. However, creating an SDIRA also leads to increased responsibility and risk for the account owner.

To learn more about the potential benefits of an SDIRA and the process of creating and maintaining one, please contact Freed Maxick at 716.847.2651, or click on the button for a contact form.

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