Self-Directed IRA FAQs
Explore our FAQs to find answers to the most common questions about self-directed IRAs and alternative investments. If don’t find your answer here or you’d like your questions personally answered, please contact us today. You can also access short but informative videos and recorded webinars, podcasts, blogs and more in our resources center.
- Self-Directed IRA Basics
- Opening & Funding an Account
- Alternative Investment Options
- Investing in Real Estate
- Investing with Limited Funds in an IRA
- IRS Rules & Regulations
Self-Directed IRA Basics
A self-directed IRA is just like a regular IRA but it gives account owners the ability to use their own knowledge and expertise to invest in alternative assets instead of just stocks, bonds, and mutual funds. LEARN MORE>>
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. LEARN MORE>>
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.
Traditional, Roth, SEP, SIMPLE IRAs, individual 401(k), health and education savings plans can all be self-directed. Visit our Self-Directed Plans page to view details of each of these accounts.
Checkbook IRAs are unique investing accounts where you form a single-member LLC of which your IRA is the only member. You open a bank account in the name of the LLC and fund it with cash from your self-directed IRA. As the plan owner, you can appoint yourself as the manager of the LLC and are able to write checks directly from the bank account to acquire investments on a timely basis. You can also pay expenses from the account.
Advanta IRA sends paper statements annually, but you can check your statements online at any time, day or night.
Cash deposits you make into your account are fully insured by the Federal Deposit Insurance Corporation (FDIC).
Opening & Funding an Account
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. Return the completed form along with any supplemental documentation to the location you want to work with.
You need to complete our General Application, and the form specific to your plan. You also need to provide a legible copy of your driver’s license. Find our forms here.
We can often open your account the same day we receive your completed forms. Once your account is open, you’re able to fund the account and begin investing right away. The same account manager works with you throughout your relationship with us.
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 to 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 you requesting the custodian of your employer-sponsored plan into an IRA. A transfer involves moving funds directly from one IRA (or account) to another whereby the receiving trustee sends the request to the resigning custodian.
Moving funds correctly is crucial. Visit our Transfers & Rollovers page for detailed information, and seek proper counsel before performing either transaction.
Alternative Investment Options
No. While you can invest in the stock market, alternative investments are the biggest draw for self-directed plan owners. You can invest in anything from real estate to oil and gas options, private equity, precious metals, and so much more. LEARN MORE>>
These are assets that extend beyond stocks, bonds, CDs, and mutual funds. Alternative investments include just about anything you can imagine—a business, real estate, Bitcoin, private lending, and more.
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, your IRA can invest in these entities, but they can be complex and there are certain rules you must adhere to. Please consult with an appropriate professional before you invest.
Investing in Real Estate
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 with your assets, contact Advanta IRA and we cut checks from your IRA to pay them.
All assets purchased with IRA funds are titled in the name of the custodian or administrator of the account. The IRA, not you, owns the investment. Here is an example: Advanta IRA FBO John Doe IRA #12345.
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.
Per IRS Section 4975, investments with IRAs must be passive investments. You and most family members are prohibited from using assets owned by your IRA.
Making repairs yourself is considered “sweat equity.” While difficult to quantify, sweat equity is prohibited because all contributions to an IRA must be in cash. 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.
The IRA owner can handle property management, but you must not perform ‘sweat equity’ or pay for expenses out of your own pocket. You can hire a third-party property manager, but their compensation must be paid with funds from the IRA.
All gains from sales of property your IRA owns are deposited into that account on a tax-free or tax-deferred basis. You can use that income to reinvest in your IRA to maximize its earning potential. Because the IRA owns the asset and not you personally, you face no tax implication whatsoever until you retire—at which time you may be taxed on distributions depending on the type of account you have.
If part of the real estate was debt-financed, your IRA may owe unrelated debt-finance income tax (UDFI) on the portion of the income that was financed. Consult with your tax professional to determine what that may be.
Yes. These accounts are known as single-member LLCs or checkbook IRAs. This arrangement gives the self-directed IRA owner what is commonly referred to as “checkbook control.” This allows you to make investments quickly and also to pay bills related to the assets held in your IRA.
You must establish a single-member LLC, of which your IRA is the sole member. These structures are also known as checkbook IRAs. As the IRA owner, you are the LLC manager and can open a bank account in the name of the LLC. The account is funded from money out of the IRA. This gives you checkbook control of the account and you can write checks to purchase investments and to pay expenses directly related to any asset owned by the account.
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.
Rentals, commercial properties, multifamily, rehab and flips, and raw land are some of the most common real estate holdings. Many Advanta IRA customers also use their IRA to extend private mortgages and loans, often collateralized by a piece of real estate. In these transactions, your IRA acts as the bank and lends money to individuals or entities that you personally vet.
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
Your IRA can partner fund with your personal funds, with another IRA, entity, or person (including a disqualified person or entity).
Ownership is assigned by the percentage of funds each partner contributed to the purchase price. For example, if your IRA purchased 60 percent of the investment and a partner contributed 40 percent, your IRA receives 60 percent of all income and is responsible for 60 percent of the expenses. The partner’s income and expenses are based on their 40 percent stake in the investment.
Your IRA may owe unrelated business income tax (UBIT) if it earns either unrelated debt-financed income (UDFI) or unrelated business taxable income (UBTI) from asset/s it owns. If your IRA borrowed funds to invest and earns income on the investment, UDFI is calculated based on the percentage of the asset that was debt-financed. UBTI is earned via operating or business income received from IRA-owned companies that aren’t C corporations.
Note: Qualified plans, like the individual 401(k) plan, do not pay UBIT on UDFI.
IRS Rules & Regulations
You are unable to invest in antiques, collectibles, or life insurance contracts. IRC 4975 outlines these items, along with prohibited transactions and disqualified persons with whom your IRA may not conduct business.
A disqualified person or entity is prohibited from doing business with the plan depending on their relationship with the plan owner. If your IRA does business with a disqualified person, you run the risk of losing its tax-sheltered status.
Disqualified persons include the plan owner, his or her spouse, lineal ascendants and descendants, and the spouse of any lineal descendant. Additionally any employer of employees who are covered by the plan are considered disqualified persons. For a full list visit our IRS Rules & Regulations page.
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.
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.