FAQS

Frequently Asked Questions

SELF-DIRECTED IRA BASICS

What is a self-directed IRA?

A self-directed IRA gives account owners the ability to use their own knowledge and expertise in choosing their own investments from a large variety of alternative assets that can potentially build tax-free or tax-deferred wealth faster pace than traditional investment methods.

Why haven’t I heard of self-directed IRAs before?

Most banks and brokerage firms use traditional investments that they sell, such as stocks, bonds, and mutual funds, when choosing assets for your IRA. Your current financial professional may not even be aware of the variety of additional options available to you as a consumer. Self-directed IRAs allow you to choose alternative investments that exist outside the Wall Street norm to build retirement wealth.

If my self-directed IRA doesn’t have enough funds to buy an investment, can I partner my IRA with my personal funds or with anyone else?

There are several options for partnering funds:

  1. Your IRA can partner with your personal funds. With this option, your IRA would own a designated percentage it can afford, and you would personally own a percentage.
  2. You can partner your IRA with funds that you personally guarantee, such as a home equity line of credit.
  3. Your IRA can partner funds with someone else’s IRA or their personal funds. It is permissible to partner with your spouse, parent, or child. Since you are not transacting with the individual, the disqualified persons rule may not apply in this situation. Check with a professional to be sure to avoid a prohibited transaction.
How are income and expenses handled in my IRA?

Income flows directly into the IRA and expenses must be paid with funds from the IRA. You are not allowed to pay expenses personally and reimburse yourself.

If you partnered your IRA funds to invest, income and expenses are received and paid based on the percentage of ownership the account holds.

SELF-DIRECTED IRA PLANS

Can other plans be self-directed besides a traditional IRA?

Yes. Traditional, Roth, SEP and SIMPLE IRAs can be self-directed, along with individual 401(k) plans, and also health and education savings plans. Visit our Self-Directed Plans page to view details of each of these accounts.

How do I know which plan is the best for me?

There are many factors to consider when choosing the right plan for you. Age, contribution and deferral capability, company status (sole proprietor or owner), tax position, age you wish to retire, and whether or not you have common-law employees are all considerations when choosing the right plan. Regardless of which plan you choose, Advanta IRA clients can invest in numerous options beyond traditional stocks, bonds, and mutual funds. You can invest in alternative assets that you know and understand in order to fully maximize your earning potential.

Because of the complexity of many investment options, you should consult a financial expert when investing in areas beyond your own expertise. It is important to be familiar and comfortable with the investments you choose before making decisions.

Can I self-direct my SEP IRA?

Yes. Traditional, Roth, SEP and SIMPLE IRA’s as well as Individual 401(k) plans can be self-directed.

What is a health savings account?

Health savings accounts (HSAs) offer individuals and families the ability to save tax-free funds for qualified medical expenses. HSAs are available for those who have high-deductible health care plans. Unused money at the end of the year continues to grow tax-deferred, year after year.

You can invest in alternative assets to build tax-sheltered wealth within HSAs just as you can with self-directed IRAs. Alternative investments such as real estate, partnerships, or notes, allow you to potentially build wealth faster than you might otherwise through traditional assets.

Can I self-direct my health savings account?

Yes, you can acquire assets within HSAs in the same manner as a self-directed IRA. By self-directing the funds in an HSA into alternative investments such as real estate, notes, and partnerships, you may potentially build wealth in the account at a faster pace than through traditional investments.

What is a Coverdell Education Account?

This is an education savings account (ESA) that allows tax-advantaged earnings and withdrawals to pay for the education of the beneficiary of the account. All funds must be used for educational expenses for the designated beneficiary.

Earned income is not necessary in order to contribute to an ESA, and annual contributions are not required. Anyone, including the designated beneficiary, can contribute to the account.

With a self-directed ESA from Advanta IRA, you have the potential to increase your savings and gain tax-free wealth for your child’s educational needs by investing in assets that you understand such as real estate, partnerships, notes, and more. Investing in alternative assets allows parents or grandparents to put their expertise to work for the benefit of their children’s (or grandchildren’s) education savings.

Can my education savings account be self-directed?

A self-directed Coverdell Education Savings Account (ESA) from Advanta IRA provides you the ability to grow money and gain wealth on a tax free basis for your child’s education. By self-directing the funds in an educational IRA into non-traditional investments that you know, such as real estate, notes, and partnerships, you may grow the wealth in the account faster than through traditional investments.

What is a checkbook IRA and how does it work?

Although Advanta IRA does allow this type of investment, we always advise the investor to perform thorough research and to seek the advice of a tax attorney or financial professional prior to choosing to form and use a checkbook IRA. These investing structures are also known as single-member LLCs and checkbook control IRAs.

Your IRA forms an LLC and is the single member and only owner of the LLC. The IRA owner is designated as the LLC manager and opens a bank account in the name of the LLC, funding the account from money out of the IRA. The manager can sign all LLC documents and has the critical responsibility of keeping accurate records and maintenance of the account. The manager also has checkbook control of the account and can write checks to purchase investments and to pay expenses directly related to any asset owned by the account.

Although some financial institutions may declare their IRA-LLC has been approved by the IRS, the checkbook-control investment option has not been confirmed by the IRS as an acceptable arrangement under the terms outlined IRC Section 4975. It is questionable whether the IRA owner and acting manager of an LLC, owned by the IRA, constitutes a prohibited transaction, and, to date, the IRS has not completely resolved this issue. Advanta IRA does allow an individual to invest using a checkbook IRA/single-member LLC, but requires the IRA owner to sign an indemnity agreement before the transaction is made.

ABOUT ADVANTA IRA

Why should I choose Advanta IRA?

Advanta IRA values our clients and strives to provide unsurpassed personal and professional service in all that we do. With over 20 years in the financial industry, we provide exceptional administrative services and ensure the elements of your self-directed investment accounts comply with all IRS rules and regulations.

Our team offers cutting-edge educational curriculum for investors with the goal of helping them understand how self-directed accounts can build wealth at a potentially faster pace than traditional investment methods allow. Although we offer no specific investment advice or opinions, Advanta IRA does offer our clients the freedom to choose their own investments to earn retirement income.

What does Advanta IRA offer for my retirement plan?

Advanta IRA is considered an agent for custodial banks. We provide record keeping as well as tax reporting for non-traditional assets in self-directed accounts. For plans which are deemed qualified under the IRS code such as the individual 401(k), we provide the plan documents as well as record-keeping services for the assets you choose. In addition, we offer a “Do Your Own” plan. We provide you the IRS-approved plan documents, and you do the record-keeping.

How often do I receive statements from Advanta IRA?

Advanta IRA sends paper statements annually, but you can check your statements online at any time, day or night.

How are my funds protected?

The FDIC insures all un-invested funds up to $250,000. By always placing your funds in FDIC insured institutions, Advanta IRA ensures the safety of your funds.

OPENING AN ACCOUNT

FUNDING AN ACCOUNT

ALTERNATIVE INVESTMENTS

Do I have to invest my self-directed IRA in the stock market?

No. The point of self-direction is that you can buy real estate, including rental properties, mortgages and notes, private stock, foreign exchange, precious metals, and a myriad of other alternative investments that extend far beyond the limitations of the stock market.

What are alternative investments?

Alternative investments are those that are not the typical stock, bond, or mutual fund offered by mainstream brokerages or banks. Every administrator chooses which types of investments they allow. Advanta IRA, as a self-directed plan custodian, allows clients to use alternative assets they are familiar with to build wealth for retirement.

Alternative investments include:    

  • Real estate (residential, commercial, raw land, rentals, rehabs, private lending, tax liens/deeds)
  • Precious metals (gold, silver, platinum, palladium)
  • Trust deeds (like and unlike exchanges, building bonds, contract options)
  • LPs and LLCs
  • Private placements and private stock (certificates of deposit, foreign stock, tangible asset deeds, accounts receivable)                                                      
  • Commercial paper (futures, commodity and option exchanges)

**This list is not comprehensive. There are many diverse investments permissible in self-directed plans. Advanta IRA does not promote any particular investment products. Please consult an accountant or other financial professional for information regarding your own permissible investment opportunities.

What types of investments are not permissible in my self-directed IRA?

Life insurance and collectibles are restricted items pursuant to IRS Code 4975. Collectibles include:  antiques, works of art, metals (with the exception of gold, silver and palladium bullion), rugs, gems, stamps, coins, alcoholic beverages, and other tangible items of personal property as defined by the Secretary of Treasury.

IRC 4975 also defines disqualified persons as those persons and entities are prohibited from doing business with your IRA.

What types of investments are restricted in my self-directed IRA?

Pursuant to Internal Revenue Code 4975, life insurance and collectibles are prohibited items to purchase within your IRA.  Collectibles include works of art, rugs, antiques, metals (other than gold, silver and palladium bullion), gems, stamps, coins, alcoholic beverages and other tangible personal property as may be defined by the Secretary of Treasury.

The same code section also defines disqualified persons – certain people and entities that are deemed disqualified in terms of doing business with your IRA.

Can I use IRA funds to invest in a private or start-up company?

Yes, this is permissible but can be a little tricky. IRS rules regarding companies taxed as an S-Corporation are forbidden from having IRAs as owners. Investments into C-Corporations are certainly possible, as well as investments into companies taxed as a partnership. However, if you or a disqualified person for your IRA (your spouse, lineal ascendants and descendants) are involved in the management of that private or start-up company, then there could be other prohibitions as well.

To get more information on investing in private or start-up company, please call us for additional information. You are also encouraged to consult a financial professional (like an accountant or CPA) or see IRS Code 4975.

INVESTING WITH REAL ESTATE

Where can I learn about real estate investing with my IRA?

Advanta IRA provides investors complimentary and empowering educational programs (live in class seminars and online webinars) designed to help you understand real estate investing and the wealth-building potential these assets present. Visit our event calendar to find webinars, workshops, and other events where you can learn about acquiring real estate in your IRA. Our Advanta OnDemand page has many short videos and recorded webinars that cover all aspects of self-direction.

The information we provide shows how a self-directed IRA, or real estate IRA, offers you the freedom to invest in real estate related entities such as commercial property, rental properties (single-family and multi-unit), mortgage notes, tax liens, and much more. Real estate continues to be an attractive investment option; it is familiar, fairly easy to navigate, and secure.

Can I invest in real estate with an old 401(k)?

As long as you are able to move your 401(k) into an IRA, you can use those funds to invest in real estate. To ensure that your 401(k) funds (or any other employer-sponsored plan) can be rolled over into an IRA, you should contact your plan’s administrator.

How are rental income and expenses handled in a real estate IRA?

All expenses and income flow through your self-directed IRA. For example, your tenant makes rent checks payable to your IRA and sends them directly to Advanta IRA to deposit into your account. To pay expenses associated to your assets, contact Advanta IRA and we cut checks from your IRA to pay them.

What happens if my real estate IRA does not have adequate funds to pay for unexpected expenses?

You have a few options if your IRA does not have enough money to pay unexpected expenses.

  1. If eligible, you can make an annual contribution to your IRA to make up any shortfall.
  2. Your IRA can take out a non-recourse loan from a bank or private third party, although unrelated debt-financed income (UDFI) tax may apply. 
  3. Find someone to partner funds with who is not a disqualified person.
Can I buy a second home with my self-directed IRA?

No. Unfortunately, you and most family members are prohibited from using assets owned by your IRA. Per IRS Section 4975, this must be a passive investment.

Can I personally perform repairs on property owned by my IRA?

No. You are required to use funds from the IRA to pay a third party to perform repairs. You, along with other disqualified persons or entities, are prohibited from receiving any personal income or benefit from an asset in the IRA. Making repairs yourself for no pay is considered “sweat equity.” Difficult to quantify, sweat equity is prohibited because all contributions to an IRA must be in cash.

If my self-directed IRA can’t buy the property or other investment outright, can I partner my IRA with my personal funds? Who else can I partner with?

If your IRA cannot afford the investment asset you are interested in, you have several options:

1. Partner your IRA’s funds with your personal funds. For example, your IRA can own 50 percent and you personally can own 50 percent, which would make you tenants in common.

2. Partner IRA funds with funds you personally guarantee, like a home equity line of credit.

3. Your IRA may also partner with someone else’s personal or IRA funds.  Please note: The disqualified persons rule may not apply here since you are not transacting with the individual.  Therefore, it is possible to partner with your spouse, parent, or child.

INVESTING WITH LIMITED FUNDS IN AN IRA

How can my IRA buy an investment if I do not have enough money in my IRA account?

Typically, your IRA can purchase investments in three different ways:

  1. By paying for the asset with cash from the account
  2. By partnering funds with your personal funds, or with funds from another person or entity
  3. Taking a non-recourse loan (i.e., from a typical lending institution)
What is a non-recourse loan?

Non-recourse loans are extended to the IRA, not you personally, and are secured by the asset purchased with the loan, such as a piece of property. Note: Per IRS Pub-598, unrelated business income tax (UBIT) may apply.

What is a non-recourse mortgage?

With this type of mortgage the loan is secured by the investment property, not by you personally. Note: Per IRS Pub-598, UBIT/UDFI tax may apply.

What are UBIT and UDFI taxes?

Unrelated business income tax (UBIT) applies to the operating (or business) income received from IRA-owned companies. Unrelated debt-financed income (UDFI) tax applies only to the portion of the property debt-financed in an IRA. Note: Qualified plans, like the Individual 401(k) plan, are not subject to pay either UBIT or UDFI (in cases of acquisition indebtedness).

IRS RULES AND REGULATIONS

What is a disqualified person or entity?

A disqualified person or entity is prohibited from doing business with the plan depending on their relationship with the plan owner. The following are a few examples of disqualified persons, including the plan owner:

  • A fiduciary of the plan (includes the owner)
  • Certain family members of the plan’s owner (owner’s spouse, lineal ascendants and descendants, and spouse of any lineal descendant)
  • Any employer of employees who are covered by the plan
  • Any employee organization where members are covered by the plan
  • Anyone who provides services to the plan
  • Any corporation, partnership, trust, or estate in which disqualified persons have a 50 percent or greater interest

Note: Siblings are not on the list of disqualified persons, and this list is incomplete. Please seek the advice of a financial professional for advice regarding disqualified persons and entities.

Can I take a loan from my IRA?

No. Taking a loan from your IRA is prohibited by the IRS. However, taking a loan from another qualified plan, such as a 401(k) is allowed.

CONTRIBUTION LIMITS

Is there a maximum amount I can contribute each year?

Yes. The IRS places a limit on the amount that can be contributed annually to each plan, and the limits vary from plan to plan and are subject to change every year. Visit our Contribution Limits page to find the current amount you can deposit into your plan annually.

DISTRIBUTIONS

What are required minimum distributions?

Within the year a plan owner turns 70 ½ years of age, s/he is required to start taking required minimum distributions (RMDs) annually from their plan UNLESS they retire after reaching that age. If plan owners retire after this age, they can wait to take RMDs during the year they retire. Failing to take distributions on time can cause severe penalties by the IRS.

** Roth IRA owners are not required to take RMDs.

Experience. Security. Trust.

Ready to start taking advantage of tax-deferred or tax-free investment opportunities?