How can I use a self directed IRA?
A self directed Individual Retirement Account, IRA, allows the investor to diversify from traditional investments (i.e. stocks, bonds and mutual funds) to more non-traditional assets that include, real estate, deeds of trust, notes tax liens and other private placements.
Can I invest in a mortgage from a self directed IRA?
Yes, but only with a Non-Recourse loan. Typical down payment for purchases made with a Non-Recourse loan is 30-to-40% and maintain 3-to-5% liquidity for reserves.
What is a Non-Recourse loan?
A Non-Recourse loan is secured to combine funds from IRA to purchase real estate. The purchased property becomes the collateral. Typical down payment for purchases made with a Non-Recourse loan is 30-to-40%. This loan can not be not be obtained by an individual. The lender can only use the property as collateral to secure the note.
If an IRA fails to make the loan payment(s), the only recourse the lender has is to seek to obtain the property that was purchased with the loan; the lender can not seek to recoup its loss from the IRA. A Non-Recourse loan in conjunction with an IRA is a great way to diversify.
(Please consult with tax adviser about any Unrelated Business Taxable Income (UBTI), and any taxes that might be due or assessed.)
Is this a new process for purchasing real estate?
No. Investments in real estate have been allowed since IRAs were created, over 30 years ago. There are two trillion dollars held in retirement accounts, however only 3% of retirement accounts are self directed and only 2% are invested in real estate. Most investors don’t know that the stock market is not the only investment choice for an IRA.
What types of investments can be made with self directed IRA?
The investments that were made outside of an IRA can now be made within an IRA, with very few exceptions. The investor has tremendous flexibility to make investments that are deemed suitable for specific needs.
What types of retirement accounts can be moved into Self-Directed accounts?
- Traditional IRAs
- Sep IRAs
- Roth IRAs
- 401(k)s
- 403(b)s
- Coverdell Education Savings (ESA)
- Qualified Annuities
- Profit Sharing Plans
- Money Purchase Plans
- Government Eligible Deferred Compensation Plans (457)
- Keoghs
Is this new?
No. There are two TRILLION dollars held in retirement accounts; however, only about 3% of retirement accounts are self-directed and only about 2% are invested in Real Estate. But what most people don't know is that the stock market isn't your only investment choice for your IRA. You have been able to invest in Real Estate since the day IRAs were created. That was over 30 years ago!
Are there downsides to making these conversions?
The only potential downside is there are certain prohibited transactions and restrictions (no self dealing and no current benefit) that you must be aware of. See Resources tab in IRS Publication 590 to find pertinent information regarding, if any, additional forms to file and bookkeeping requirements and/or contact AmeriTrust for assistance.
How are administrators different from each other?
The government allows certain institutions to handle the accounting and reporting of IRAs. Under the law, all custodians can allow you to invest your IRA in the same types of investments (stocks, bonds, real estate, notes, tax liens, etc.). However, the majority of administrators have made the decision to restrict the types of investments you can make. This is not based upon law, but it is based upon what the administrator wants to offer and what is most profitable. However, there are a handful of administrators, including AmeriTrust Retirement Services, who allow non-traditional investments.
Can an investor have complete control?
Obtaining a self directed IRA is one step toward obtaining complete control. To obtain a truly self directed retirement account a LLC, Limited Liability Corporation, must be established. This structure gives the investor checkbook control.
When an account is established with a self directed administrator, submission of basic documentation is required before making each investment. With a LLC structure documentation submittal is not required and investment can be made as soon as decision has been made.
What is checkbook control?
Checkbook control means the investor can make purchases without communicating with a plan administrator. Investor has full control of IRA. This control eliminates the investor having to go to the administrator to get approval for a purchase and then getting a check from administrator to make the purchase.
How do I know if real estate transaction is legal?
This is a question frequently asked by investors who never knew real estate investments are permissible like stocks and bonds. Investors have not been properly educated about other investment opportunities; contact AmeriTrust to learn about other investments and/or see Resources tab in IRS Publication 590 for information. That is why AmeriTrust believes educating investors is critical.
What is the IRS opinion on investing IRA in real estate?
The IRS website contains the following statement, “…because of administrative burdens, many IRA trustees do not allow IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”
Can my IRA purchase real estate I already own?
No. You can not purchase property which is currently owned by you or any other disqualified person through your IRA.
Why am I being told by my current broker that I can’t buy real estate with my IRA?
Because your current broker isn’t allowed to make real estate purchases. It is a limitation that your broker is imposing on your IRA, not the IRS. Just because your broker/brokerage firm doesn’t perform this service, doesn’t mean it can not be done.
What is the easiest way to buy real estate using my IRA?
As your administrator, AmeriTrust will simplify the process. We will act on client’s behalf to close the transaction quickly and proficiently. After property has been located for purchase and closing documents have been read and approved by investor, AmeriTrust will take it from there – this is one of the most beneficial aspects of having us administer your account.
If I buy an income producing rental property, what happens to the rent income?
The income goes back into your AmeriTrust self directed IRA account, or the LLC's account if you invested through an LLC.
I don't have enough money in my IRA to purchase a piece of property outright. Can I get a loan and use my IRA money as the down payment?
Yes you can use your IRA money as the down payment and then get a non-recourse loan for the balance. However, you will not be able to personally guarantee the loan. It must be a non-recourse type of loan which means that if your IRA fails to make payments, the only recourse the lender has is against the property itself. Further, there will be tax ramifications to doing so; UDFI (unrelated debt financed income) tax applies when a loan is obtained so you would want to confer with your tax professional about what forms would be necessary.
My IRA is small. Can I personally co-invest with my IRA?
It is not a prohibited transaction for you to co-invest with your IRA. However, there are certain formalities that need to be adhered to, and there are some situations where it isn't advised.
Can my IRA co-invest with friends?
Yes. IRAs may purchase an undivided (and proportionate) interest in Real Estate, Private Investments, etc.
Can I be the property manager of the Real Estate?
That depends. With just a self-directed IRA the answer is no. But with the LLC structure you have the ability to manage the property, collect the rent and pay the bills. Unlike the self-directed IRA , the LLC structure allows you to perform maintenance on the property, advertise for renters, collect and deposit the rent checks, pay the real estate bills, etc. This strategy saves your IRA a lot of time and money, but it makes the IRA holder 100% responsible for all IRS reporting.
May I use my IRA funds to make improvements or renovations?
Yes. In fact, you must use IRA funds to make the improvements and pay all expenses associated with the property. All expenses of the property are paid with IRA funds, and all profits made on the property are returned to the IRA.
Can I buy vacation property?
Yes. Doing so would not constitute a prohibited transaction. However, you cannot vacation there.
Can I buy my dream retirement home with my IRA and then live in it when I reach the age of retirement?
Yes. Your IRA would be the original owner. You would use your IRA money to make the purchase and maintain the property. Any rents generated would be returned to the IRA. However, upon reaching retirement age, the property could be distributed out to you. Of course, you would have to pay taxes at that point but without penalty.
What are the advantages to using the LLC structure when investing my IRA in Real Estate?
You can only receive true checkbook control with the LLC structure. With a self-directed administrator, you get more control than you get with a traditional custodian, but you still have to submit paperwork for each transaction you make. The turn- around time at AmeriTrust to fund a transaction is usually same day, to take advantage of time sensitive investments.
Can the LLC structure get a mortgage on a piece of property?
Yes. The mortgage would need to be a non-recourse type of loan, meaning that if your IRA fails to make the payments, the only recourse the lending institution has is the property itself. Also, be aware that if your IRA obtains a loan, unrelated debt financing income tax will apply.
Can my self-directed IRA make loans to other individuals who want to buy Real Estate?
Absolutely. And this is done frequently, and it is a great investment for your IRA because the loan can be secured by the property.
Can my Self Directed IRA make loans to a Real Estate developer?
Yes. Your IRA can loan money to a Real Estate developer to finance the purchase of property or the development of property. Developers often look for private financing so it is a great way to get your IRA involved in Real Estate development. And because developers often pay an above market interest rate, the loan can be a great investment for your IRA.
Can my Self Directed IRA make loans to businesses or companies?
Sure. Your IRA can make a loan to any type of business. However, be aware that there are some restrictions on loan money to any business that you or any other disqualified person has an ownership interest in.
Do taxes and penalties apply when I take money out to buy Real Estate?
No. You DO NOT take money out to purchase Real Estate or anything else you want to buy. It is just a purchase made by your self-directed IRA. There are no taxes or penalties. Instead of buying 1000 shares of Microsoft or any other typical stock, your IRA is just making a different type of investment. The method of doing so is different but the tax ramifications are the same.
Are the gains that my Self Directed IRA makes taxable?
Not in most cases. If an IRA buys a piece of property and then sells it at a profit, the gains stay within the IRA. If you have a traditional IRA, the gains are tax-deferred. If you have a Roth IRA, the gains are tax free. Note, you alter that result if you use leverage.
Are there any special taxes that apply when I use leverage?
Typically unrelated debt financing income tax (UDFI) would apply. Each plan type has its own specific rules that will determine the effects of UDFI on a leveraged acquisition.
Does it still make sense to use leverage?
It certainly can. Because of your increased buying power when you use leverage, the profits you make from the ability to use leverage can greatly outweigh the tax associated. Keep in mind that leverage can increase the risk of loss as well as the potential for profit, so proper use of leverage for your specific risk tolerance, and goals, needs, and resources is critical.
Can I invest outside of my state or outside the country?
Yes! Just as you have International Investments available in the form of Mutual Funds or Exchange Traded Funds, your IRA can invest outside of the U.S. States. There are many great investment opportunities in other countries.
What are Prohibited Transactions?
Understanding what constitutes a prohibited transaction is very important when it comes to making investments within your IRA. The IRS defines a prohibited transaction as follows:
Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members or your family (spouse, ancestor, linear descendant, and any spouse of linear descendant). IRS Publication 590
IRC 4975 is the section that lays out the rules on prohibited transactions. Prohibited transactions generally involve one of the following: (1) doing business with a disqualified person; (2) benefiting someone other than the IRA; (3) loaning money to a disqualified person; or (4) investing in a prohibited investment.
In plain English, prohibited transactions are those transactions that violate the basic intent of the IRA. Your IRA must benefit rather than benefiting you personally. In other words, there can be no “self dealing transactions. However, there are many ways in which you can invest your IRA and not be in violation of the prohibited transaction law. And when your IRA benefits, you benefit because it is for your retirement.
What are Prohibited Investments?
The Internal Revenue Code does not specifically authorize investments within an IRA; rather, the code outlines what types of investments are not allowed. The Prohibited Investments include:
- Artwork
- Rugs
- Antiques
- Metals
- Gems
- Stamps
- Coins
- Beverages
- Stock in a S-Corporation
- And certain other tangible personal property
Who is a disqualified person?
- the IRA holder and his or her spouse;
- the IRA holders ancestors, lineal descendants and their spouses;
- investment advisors and managers
- any corporation, partnership, trust or estate in which the IRA holder has a 50% or greater interest; and
- anyone providing services to the IRA such as a trustee or custodian.
How am I a disqualified person? It doesn't seem to make sense.
There is a clear distinction between your IRA and you individually. You and your IRA are not the same. Your IRA is a separate entity for your benefit when you retire.
What would be classified as Self Dealing?
Self dealing is using your IRA in transactions that in some way benefit you (or other disqualified persons) individually. The purpose of your IRA is to provide for your retirement. It is not intended to benefit you prior to retirement and distribution of the funds.
What are some types and examples of Prohibited Transactions and / or Self-Dealing Transactions?
- Self dealing with a family member (having your IRA purchase a home from your father).
- Self dealing with yourself (having your IRA purchase a home from yourself).
- Personal use of IRA property (buying a rental vacation home with IRA money and then staying in the home when on vacation).
- Receiving personal benefit from your IRA (paying yourself for work that you do on the property such as repairing the roof).
What are Exemptions?
Exemptions are permission to invest in something or in some way that is technically a prohibited transaction. For example, it is a prohibited transaction to rent property owned by your IRA to your child. An exemption would allow you to do so.
Can I buy a business with my Self Directed IRA?
Yes you can buy a business with your Self-Directed IRA. Please contact us for details.
Can I invest in an existing business?
Yes. This can be done as the purchase of stock or as a loan to the business.
What about S-Corporations?
S-Corporations do not allow IRAs as investors; they only allow individuals as investors. Therefore, it isn't so much that IRAs are prohibited from investing in S-Corporations rather that S-Corporations don't permit having an IRA as a shareholder. It is likely that the investment of the IRA would revoke the sub-s status of the corporation.
Can I buy Stocks, CDs, Bonds, Options, etc.?
With AmeriTrust the answer is Yes. You can invest in any IRS permitted investment. That includes publicly traded stocks, CDs, mutual funds, annuities, bonds, stock options, futures, etc. I
I have a 401K with an old employer. Can I move it into the Self Directed IRA?
Yes. You can move those 401K funds into a Self Directed IRA.
I have a 401K with my current employer. Can I move it into a Self Directed IRA?
Contact your Human Resources or Employee Benefits department to obtain applicable information about your plan’s allowance of outside diversification. If this information can not be provided within your company or organization, please contact AmeriTrust and we will help you navigate the process to make sure you have all the information you need to make the best decision.
I have several IRAs and old 401Ks. Can I combine them?
Yes. They can all be combined into a self-directed IRA. You can usually combine multiple retirement accounts into one account. Or in the event that they can't be combined, such as the case of a traditional IRA and a Roth IRA, they can still be invested into the same LLC structure so that you still have maximum buying power.
How can I get more information?
Email us at info@ameritrustretirement.com or call 877.KEYS.2IRA (877.539.7247).
