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Self Directed IRA FAQs

Top Self Directed IRA Frequently Asked Questions Now Answered

Investing is a team sport! Set up your due diligence investment team and invest time to learn the rules of investing with an IRA plan. If you are interested in starting a self directed IRA account, or you have specific inquiries about originating or rolling over a retirement account to Sunwest Trust, reach out and request assistance from one of our friendly, knowledge IRA specialists. Help others by sharing this content on your favorite social platform.

Top 5 Questions Answered Prior To Setting Up A Self Directed IRA Account

This Q & A is related to questions we have received through our “Ask The Expert” series. This content is solely offered for educational purposes and should NOT be construed as either financial or investment advice.

If this is a Traditional IRA, the distribution will likely be taxable. You will need to discuss with your personal tax counsel as to what the taxable amount is because it is based on your personal income level and whether or not the IRA contributions were deductible. If you have not yet attained age 59½, the taxable portion of the distribution will be assessed an additional IRS penalty of 10%. If this is a Roth IRA, only the earnings may be taxed. Most IRA Custodians/Trustees have required forms to request the distribution. You will need to discuss your operational questions directly with their personnel.

It sounds like you are asking about taking a distribution from your Roth IRA and use it for a personal investment. There is no way to avoid a reportable distribution for that personal purpose. Rollovers only apply when funds go from one IRA to another AND within 60 days.

However, if this is a Roth IRA, you are allowed to take a distribution of your total, net contributions (basis/principal) without any IRS tax or penalty. Roth IRA contributions were nondeductible so they are not taxed or penalized when they are removed UNLESS the contributions were an IRA Conversion. Then the converted amount must stay in the Roth IRA for five tax years or be penalized by the IRS, but not taxed, regardless of age.

If you take a distribution from your Roth IRA in this manner, remember you have only 60 days to roll it over back into a Roth IRA. If that is not done within that time frame, the funds are out of the IRA for good.

Also, we are talking here about IRS taxes and penalties. Investment penalties are up to the administrator of the investment ad state taxes may apply.

While the end result is the same, money from your employer’s 401k can only be “rolled over” or “directly rolled over” to an IRA, NOT “transferred.” Basically, it’s just a difference in terminology and procedure. The employer plan usually has specific procedures that must be followed, if it is allowed at all, and most do allow such transactions.

In addition, IRA Custodians/Trustees also usually have their own procedures and documentation to complete.

So, the first place to start is with your employer’s plan administrator to see if or how a (direct) rollover is allowed or possible. Then a discussion with your IRA Custodian/Trustee is the next step. Your IRA Custodian/Trustee should be informed BEFORE any funds are rolled over.

The transaction that you are talking about appears to be simply the IRA selling the IRA asset. All of the proceeds from the sale of the IRA asset must go into the IRA that held that asset. It’s basically like any other investment account. Assets are purchased and sold through the IRA account. All the funds for the purchase must come solely from the IRA and all funds from the sale must go back into the same IRA account. The IRA is making the purchase and/or the sale.

Whether it can be rolled over to a Traditional IRA depends on what type of IRA it is. If the real estate was in a traditional IRA, the funds could be rolled over or transferred to another Traditional IRA. If the property was in a Roth IRA, it likely cannot be rolled over to a traditional IRA. Of course, the purchaser of the IRA asset must not be directly or indirectly related to you, personally or professionally.

The IRA Owner’s age has no effect on this. There is no taxable event until the IRA Owner takes a distribution from the IRA. All you are doing here is changing real estate into cash within the IRA.

A Roth IRA can NOT be a SEP IRA. ALL SEP contributions must be made directly to a Traditional or SEP IRA. Once those funds are in a Traditional/SEP IRA they can be converted to a Roth IRA, a taxable event, but then it is a regular Roth IRA. All future SEP contributions must be made to a Traditional/SEP IRA.

If you have made SEP contributions directly to a Roth IRA you very likely have an excess contribution problem and likely tax consequences. If that is the situation, you should review this with your legal and tax counsel immediately.

All investments by IRAs, including LLCs, must be titled in the following manner: “(Your IRA Custodian) as custodian for (your name)’s (Traditional, SEP, SIMPLE or Roth IRA).” In this case, the LLC Member is the IRA and must be titled in this manner. The LLC itself can be named in any manner.

IRA-to-IRA transfers are unlimited as to amount and frequency, unlike IRA-to-IRA rollovers, which are limited to one per year. Therefore transfers to another SEP or Traditional IRA from your SEP IRA could be made on an “as needed basis.”

IRAs and LLCs are different, separate entities requiring separate agreements. If the IRA-Owned LLC is purchasing property, it must be solely titled in the name of the LLC, like any other owner. If the LLC is doing the purchasing, the IRA is NOT the named owner. The IRA is the owner of the LLC and the LLC is the owner of the property. The “bank account” would need to be in the name of the LLC, NOT the IRA.

The IRA-Owned LLC must abide by all IRA rules, so you cannot commingle personal funds, other personal IRAs, other LLCs or IRAs,  or personal funds of related, disqualified individuals, of which your spouse is one.

I’m not sure what you mean by a “non-related vendor,” but it is possible for the LLC to borrow funds, but it must abide by IRA rules, meaning no direct OR indirect connection with you or disqualified individuals, including the IRA Custodian/Trustee and it must be without any direct or indirect recourse.

If you set up the LLC account correctly, you would have control over the account for complying renovations, which all must come from/through the IRA-Owned LLC. Personal funds cannot be used. And the LLC funds cannot be used for personal expenses.

Here are some basic suggestions that must be followed. Any property purchased by an IRA must be titled properly in the name of the Custodian for your IRA. All paperwork must be signed by a representative of your IRA Custodian/Trustee. You cannot sign on behalf of the IRA Custodian. All monies must come from and through the IRA. And of course, it must be a complying, arms-length transaction. Transactions should be reviewed with your IRA Custodian to make sure you follow all of their requirements.

Here are some basic suggestions that must be followed. Any property purchased by an IRA must be titled properly in the name of the Custodian for your IRA. All paperwork must be signed by a representative of your IRA Custodian/Trustee. You cannot sign on behalf of the IRA Custodian. All monies must come from and through the IRA. And of course, it must be a complying, arms-length transaction. Transactions should be reviewed with your IRA Custodian to make sure you follow all of their requirements.

As with many of the questions about IRA/LLCs, there is NOT any Code or Regulation citing this particular situation. You must rely on your legal counsel as to whether or not the LLC is set up correctly to allow additional capital contributions from the IRA to the LLC, AND that the IRA rules, regulations, and procedures also allow such a transaction. The IRA must do only that which the LLC allows AND the IRA rules allow.

This is an excellent question. However, you will need to watch this website for future updates because the US Supreme Court has just heard arguments on this issue. It appears they are very close to announcing their decision. So far, the experts on both sides of the issue believe their position will win out.

Your firm’s fees that are directly related to the establishment and administration of the IRAs and IRA-Owned LLCs can be paid with IRA funds after they have been rolled over from the 401ks. Of course, the IRA/LLC must be billed directly. The individuals cannot be billed with the IRA/LLC reimbursing them.

As long as the LLC Business is completely separate from your other jobs and is a valid business, a 401k plan, and contribution is possible. However, the contribution and catchup are based on a percent of income and the limits are the maximum contribution possible IF you have the income to support it. You cannot contribute more than the allowable percentage of allowable income. As many think, and are confused, the “catch-up” contribution is really misnamed. It is an additional amount added to the statutory limits. It is NOT just an additional amount that can be contributed above the allowed percentage limitations. We recommend you discuss this with your tax advisor.

The transaction you describe is a Rollover. IRA Owners are allowed one rollover per year, meaning 365/366 days, not calendar year. An IRA Owner may take one distribution from their IRA and return it to the same type of IRA within 60 calendar days. If accomplished correctly and timely there would be no IRS tax or penalty. However, they may only do that once every 365/366 days per IRA.

Per the Internal Revenue Code §4975 your IRA is NOT allowed to directly or indirectly (like through an LLC) purchase from or sell to you, your IRA or a related party, regardless of the percent of ownership. The IRS has ruled on this many, many times over the years and has ALWAYS ruled against any such transaction, regardless of how the asset in Question: is valued or prorated. So, there is no way an IRA or IRA/LLC of yours could purchase the asset in question.

Usually it is set up so that the sole member of the LLC is your IRA, titled Your IRA Custodian as custodian for your IRA. Any investment, like a brokerage account or any other investment within the LLC, is titled in the name of the LLC. If you want to do the managing of the money, it cannot be titled in the name of the IRA because you cannot sign on behalf of your IRA Custodian.

It is possible for an IRA to be a part owner of a property, just NOT a part owner of a property you have any personal interest in. Your personal funds and your IRA funds could not invest in the same property. The Internal Revenue Code states that your IRA cannot gain from personal funds/investments AND your personal funds/investments cannot gain from your IRA investments, directly or indirectly.

You cannot pay yourself anything for managing your IRA LLC. This would be considered a prohibited transaction because you’re not allowed to use your IRA money to benefit yourself.

When using an IRA LLC, you want to keep everything at an arm’s length distance from yourself. How hands-on you can be with your IRA LLC is a definite gray area. You could probably speak to five different CPAs and get five different answers on what is acceptable. It’s always best to be very cautious. I recommend using a property manager to handle any properties held in an IRA LLC. This way there is no question that you are not committing a prohibited transaction in your IRA.

IRA Consultants and Trustees must report the Fair Market Values for December 31 for each year for all IRAs on an annual basis. There are no exceptions! It is a custodial responsibility as per the IRS rules, regulations and procedures.

That means an independent valuation must be obtained each year. Easy appraisal methods include the use of generally accepted market listings like the ones for stocks, bonds, mutual funds, etc. The more difficult valuations include those for real estate, privately held assets like LLCs, partnerships, private stocks, etc. However, the valuations must be obtained for the purposes of reporting.

As with many of the questions about IRA/LLCs, there is NOT any Code or Regulation citing this particular situation. You must rely on your legal counsel as to whether or not the LLC is setup correctly to allow additional capital contributions from the IRA to the LLC, AND that the IRA rules, regulations, and procedures also allow such a transaction. The IRA must do only that which the LLC allows AND the IRA rules allow.

Ordinary, necessary and reasonable expenses to collect an IRA asset must be paid by the IRA, not by the IRA Owner. However, care must be taken to make sure it is NOT an attempt to hide the personal use of IRA assets or personal expenses. The IRS would likely judge the compliance of that in the same manner as deducting travel expenses as business expenses versus personal expenses. The burden of proof would be on you, the IRA Owner, to prove that IRA funds were ONLY used for ordinary, necessary and reasonable IRA expenses. You will need to rely on your own tax counsel for that determination. The IRS would take a dim view if IRA funds are misused.

ll Roth IRA annual contributions are available for distribution at any time, regardless of age or reason. The only Roth IRA distributions that are taxed or penalized are those that come from earnings. The basis is NOT taxed or penalized.

As far as education expenses go, Roth IRA funds can be used for any purpose. However, a Qualified distribution is only after 5 years AND age 59½ or tax and penalty apply, again to the earnings being distributed.

First, as our disclaimer states, we do not give tax advice. Consequently, you will need to address the loss for/within the LLC with your personal tax advisor.

However, as your situation pertains to IRAs, losses within IRAs cannot be deducted personally unless there is a net loss within all of your IRAs AND all of your IRAs are liquidated. Losses within IRAs do reduce the reportable Fair Market Value of that particular IRA.

There is no type of IRA transaction allowed that can involve any of your personal assets. So a trade, sale, exchange, rental, or purchase, etc. of your personal residence would be a Prohibited Transaction and cannot be accomplished.

There are NO IRS restrictions on how much eligible funds/assets can be rolled over to an IRA from a 401k. The 401k participant is free to roll over as much or as little as they want and is free to have multiple rollovers. So, rolling over $60,000 of your $100,000 is allowed.

It sounds like you are asking about taking a distribution from your Roth IRA and using it for a personal investment. There is no way to avoid a reportable distribution for that personal use purpose. Rollovers only apply when funds go from one IRA to another, or back to the same IRA AND within 60 days. All taxes and penalties would apply in your situation.

The transaction that you are talking about is simply the IRA selling the IRA asset. All of the proceeds from the sale of the IRA asset must go into the IRA that held that asset. It’s basically like any other investment account. In this case, assets are purchased and sold through the IRA account, by and through the IRA Custodian/Trustee. All the funds for the purchase must come solely from the IRA and all funds from the sale must go back into the same IRA account. The IRA is making the purchase and/or the sale. Then it is just a matter of completing the rollover.

The transaction you describe is a Rollover. IRA Owners are allowed one rollover per year, meaning 365/366 days, not calendar year. An IRA Owner may take one distribution from their IRA and return it to the same type of IRA within 60-calendar days. If accomplished correctly and timely there would be no IRS tax or penalty. However, they may only do that once every 365/366 days per IRA.

That means an independent valuation must be obtained each year. Easy appraisal methods include the use of generally accepted market listings like the ones for stocks, bonds, mutual funds, etc. The more difficult valuations include those for real estate, privately held assets like LLCs, partnerships, private stocks, etc. However, the valuations must be obtained for the purposes of reporting.

Usually, both the IRA Custodian as well as the 401k Plan Administrator have documentation procedures and requirements that must be followed. Usually, they consist of a formal, written request for the plan administrator and a signed acceptance from the IRA Custodian. You need to discuss your operational questions directly with them because every plan and IRA Custodian has their own procedures, and both must be executed correctly. Also, you will want to look into using the Direct Rollover Method and have your 401k plan administrator make the check out directly to the IRA Custodian/Trustee.

Your logic is understandable, but it does not fly with the IRS. Internal Revenue Code Section 4975 states that a disqualified individual and your son-in-law is so described in the Code, cannot “directly or indirectly” gain from your IRA. In fact, I do not think it would fly if he refused his commission because the sale would still go to his credit. The IRS interprets this section very strictly.

Rollovers from complying 401ks are always allowed as part of the IRA rules. If a rollover is accomplished within the complying rules, there are never any tax or penalty on the rolled over funds, regardless of age. Rollovers are NOT age-relevant. As long as the 401k participant has access to the 401k funds, a rollover is possible regardless of their age.

An EIN is required for the 401k plan. However, it takes more than just an obtaining an EIN. The plan must be established using an approved plan document purchased through an organization called a plan sponsor that has an IRS-approved qualified plan. You could establish your own plan but the legal costs would likely be quite high. You cannot just get an EIN and name it a solo 401k. In addition, you must have qualified earned income, meaning you need to be deemed to be in business and have net earned income. Your tax professional can help you make this determination.

Regardless of age or type of IRA, the IRA Assets can NOT ever be used as collateral for a personal loan, per Internal Revenue Code (IRC) §4975.

My issue is that I made small a contribution to my IRA to cover account fees. However, when I did my tax return, I found that because I had no qualified income, as the IRS defines it, it was an excess contribution and I would have to pay a 6% penalty annually on the contribution until it was removed.I did not report the contribution because, at the time, I did not have the Form 5498 for the original tax year. My intention was to amend my tax return when I had the 5498. I do have that now and would like to move forward on this. When I initiated a discussion of this with my IRA Custodian and read the rules regarding the removal of this excess, I discovered that I had only until October 15th, to correct the excess and file the amended return or pay the penalty.Other facts of my situation are that I live abroad (maybe I have more time to file the amended return), and that overall the value of my IRA has declined from the time I made the excess contribution until now, so I shouldn’t have to remove earnings or pay taxes or penalties in that regard.The approach I suggested in order to keep things simple, was not to worry about the difference in IRA value, which would probably allow me to retain a little of the excess within the IRA, but to remove the entire contribution (only $225). I would like to amend my tax return to avoid the penalty (only $14), however, my IRA Custodian informed me that the 1099R for the withdrawal would not be issued until early next year for 2014. How can this be resolved most favorably for me?

It appears that this is a simple case of an excess contribution that must have been corrected by October 15 or be penalized. This problem could have been avoided if the fees that were covered with the contribution had been billed directly to you and paid personally, NOT through the IRA. But it is too late to change now, but it is something to address for futures fees.

Unfortunately, there is a specific IRS Formula that MUST be used to calculate what earnings must be removed or what prorated loss experienced can be deducted from the excess amount to be removed.

Once that is calculated then you as the IRA Owner must request the distribution from your IRA Custodian correcting the excess. Transactions can NOT be back-dated or changed once they occur. The deadline for this transaction is long past. A 6% penalty is due, payable through your personal tax return, NOT through the IRA.

In addition, the only way to now correct the excess is to remove the excess without any earnings calculation. Excesses corrected after the October 15 deadline are removed without regard to any earnings.

But again, it is a specific formula and procedure required by the IRS. There are no special provisions or exceptions. Consequently, your “suggestions” are not within the IRS procedures and can NOT be followed by the IRA Custodian.

IRA assets can NOT be used, directly or indirectly, for a personal business or for personal use of any type. The Internal Revenue Code is very clear on this issue.

All valid and complying IRA income from IRA owned property must be shown and recorded as income NOT contributions. Income should not be reported as contributions. In fact, all rent checks must be made out to the IRA.

Since the FMV, not the cost, book value or other valuation, must be reported each year, FMVs must be obtained. If the ownership/partnership, etc., regardless of the type of investment, do not provide it, an expert in the field/industry could be one source. Non-affiliated agents selling/purchasing like-kind investments in the area could also provide a source for valuations. Whatever source used, must be independent and unrelated.