In the past few years, we’ve seen rapid growth in the practice of savvy IRA owners (including those holding conventional Individual Retirement Accounts, Roth, SEP-IRA and 401-k plans) who are assuming control and investing their retirement benefits into their own truly Self Directed IRA. They began to use this form of account to purchase untraditional IRA investments. These investments include real property, mortgages and deeds of trust, tax liens, private partnerships, limited liability companies (LLC’s), commercial enterprise opportunities. They also include dabbling into Forex and other trading and investing outlets.
Why is a self directed IRA such a powerful tool for creating wealth? Imagine what investment returns in a tax free environment could do for your financial portfolio. In addition to tax-exempt benefits, self directed IRAs allow for asset protection and estate planning benefits.
A self-directed IRA is unusual because of the accessible investing alternatives. Most custodians just allow for authorized stocks, bonds, mutual funds and CDs. A genuinely independent IRA custodian allows for those types of investments as well as real property, notes, private placements, and others. They offer extraordinary benefits (tax-exempt benefits, asset shelter and estate planning). You can also invest tax-exempt in investment funds that you recognize and understand. This, by the magnate of compounding interest, will produce true wealth.
IRS IRA REGULATIONS
You must pay close attention to the rules and regulations of the IRS. A prohibited transaction could call into question the tax-deferred state of your account. This in turn could possibly result in steep tax penalties.
The IRS specifies 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 of your family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant).”
–Source IRS Publication 590
IRS rules demand that either a qualified trustee, or custodian hold the assets on behalf of the individual retirement account owner. By and large the custodian or trustee will:
- Keep up the assets and all dealings and additional registers concerning them
- Register compulsory IRS articles
- Effect customer statements
- Aid in assisting customers realize the rules/ordinances concerning certain banned dealings
- Execute additional administrative responsibilities on behalf of the independent individual retirement account owner for the lifespan of the account.
Self-directed IRA accounts are generally not constricted to a certain grouping of assets (e.g., stocks, bonds, and mutual funds).