SELF DIRECTED IRA FAQS
Frequently Asked Questions
SELF-DIRECTED IRA BASICS
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.
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.
There are several options for partnering funds:
- 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.
- You can partner your IRA with funds that you personally guarantee, such as a home equity line of credit.
- 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.
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
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.
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.
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.
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.
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
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.
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.
Advanta IRA sends paper statements annually, but you can check your statements online at any time, day or night.
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
First, find our office location convenient for you. Advanta IRA has physical locations in Atlanta, GA and Tampa, FL, but we serve clients across the nation. You can call one of our offices to open an account or simply download an application from the forms page of the office of your choice and return the completed form along with any supplemental documentation to the location you want to work with.
Once we receive the completed forms, your account often opens the same day. When we receive your forms, an Advanta IRA representative contacts you as soon as possible to assist you in getting the proper forms completed and executed. Then, you’re able to fund it and begin investing right away.
You can get started in 4 easy steps:
- Open an account with Advanta IRA.
- Fund your account.
- Identify which investment(s) you want to purchase.
- Contact your Advanta IRA representative and we make the purchase on behalf of your account.
FUNDING AN ACCOUNT
There are three different ways to fund your account:
- Make an IRA-to-IRA transfer
- Roll funds over from your 401(k) or another employer-sponsored plan
- By annual contribution
Transfers can take two weeks complete. The process may take more or less time depending on the funds requested, how the transfer is submitted, and the custodian involved.
A rollover involves the movement of funds from an employer-sponsored plan to an IRA account and is initiated by the client personally (i.e., moving funds from an old 401(k) to an IRA.) Rollovers can be done from 401(k), 403(b), and 457 plans, Thrift Savings Plans, and pension plans.
A transfer involves moving funds directly from one IRA (or account) to another whereby the receiving trustee sends the request to the resigning custodian. For someone starting an Advanta IRA account, Advanta would submit a transfer request on your behalf to your current custodian.
Both transferring funds and rolling over funds into a new Advanta IRA do not result in any tax consequences.
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.
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.
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
Advanta IRA provides investors complimentary and empowering educational programs (live 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.
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.
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.
You have a few options if your IRA does not have enough money to pay unexpected expenses.
- If eligible, you can make an annual contribution to your IRA to make up any shortfall.
- 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.
- Find someone to partner funds with who is not a disqualified person.
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.
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.
INVESTING WITH LIMITED FUNDS IN AN IRA
Typically, your IRA can purchase investments in three different ways:
- By paying for the asset with cash from the account
- By partnering funds with your personal funds, or with funds from another person or entity
- Taking a non-recourse loan (i.e., from a typical lending institution)
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.
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.
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
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.
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.
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.
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.
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