Brought to you by IRA PLUS SOUTHWEST- The IRA Experts
The following questions and answers are intended for information and educational purposes only and should not be construed as legal or investment advice.
1. What is a Self-Directed IRA?
The term Self-Directed IRA is commonly used to refer to an IRA can be invested in non-traditional investments, such as real estate, rather than being limited to traditional investments such as stocks, bonds or mutual funds. Click herefor more information on self direction and alternative investments.
2. Why would I want to open a Self-Directed IRA?
If your investment philosophy includes alternative investments, doesn't it make sense to invest your retirement plan money accordingly?
3. Are there restrictions on the investments that can be made in my Self-Directed IRA?
Yes, but there are only a few. Your IRA cannot invest in life insurance contracts or collectibles, such as art, rugs, coins, stamps, etc. Although an IRA may invest in entities, such as corporations, limited partnership and limited liability companies, an IRA cannot invest in an S-Corporation.
4. Why don't more people know about this? Even my CPA and otheradvisors thought IRAs could only invest in traditional things like stocks, bonds and mutual funds.
The retirement industry is a highly specialized area, so even professionals like CPAs or attorneys are often unaware of the options available to IRA account holders. Because the vast majority of IRAs are held by large transaction-driven custodians that allow only "traditional" assets, most people conclude that these are the only assets that are allowed in an IRA. The IRS has never published a list of legal investments; however, they do state explicitly that real estate is a permissible investment in an IRA (click hereto view site).
5. What happens to the profits that my Self-Directed IRA makes? Are they paid to me or to my IRA?
All the profits from your investments will be paid to your IRA.
6. How much can I contribute to my Self-Directed IRA?
No. The limits are the same as for Traditional IRAs; however, not everyone is eligible to make a Roth contribution. See Internal Revenue Service Publication 590.
8. What is the contribution limit if I have two Traditional IRAs or if I have both a Traditional IRA and a Roth IRA?
The contribution limit is the total amount that an individual may contribute to all IRAs, whether Traditional or Roth. For example, if you are under age 50 and have both a Traditional IRA and a Roth IRA and are eligible to contribute to your Roth, the maximum you can contribute overall is $5,000 for 2009. You can contribute the full $5,000 to either your Traditional IRA or your Roth IRA; or, you can split the $5,000 contribution between the two, perhaps $2,500 to the Traditional and $2,500 to the Roth.
9. Can I transfer my current IRA to IRA Plus Southwest?
Yes. I if you are opening a new account, our application kits contain forms that will assist you in transferring or rolling over your funds to us.
10. What is the difference between a Transfer and a Rollover?
A Transfer occurs when money is moved directly from one IRA Custodian to another without distribution to the IRA accountholder. No tax forms are generated by the sending custodian or by the receiving custodian. In a transfer, checks from the sending custodian will be made payable to the new custodian.
A Rollover occurs when an individual receives a distribution from an eligible retirement plan and makes a contribution to an IRA (or company sponsored retirement plan) within sixty days of receiving the distribution. The individual may roll over all or any part of the actual amount received and, if the distribution was from an employer sponsored retirement plan or 403(a) or (b) annuity (thus subject to the 20% federal income tax withholding), he/she may roll over up to 100% of the distribution by making up the 20% difference that was previously withheld.
11. I have a 401(k) account with my former employer. Can I transfer the funds to a Self-Directed IRA with IRA Plus Southwest?
Yes. You should first open an account with us and then contact the administrator of your former employer's plan. They will probably require you to complete some distribution election forms. There will be an option on the forms to elect to do a direct rollover of your account to an IRA.
12. What is a Direct Rollover?
A Direct Rollover occurs when an individual elects to have the plan administrator of an employer sponsored retirement plan (such as profit sharing, money purchase, defined benefit, etc.) move part or all of his/her account in directly to an IRA.. A Direct Rollover can also be made from a 403(a) or (b) annuity.
13. I rolled over my 401(k) plan to an IRA. Is my account still considered a401(k) account?
No. Once your account has been transferred to an IRA, it becomes an IRA.
14. I have a 401(k) plan with my current employer. Can I self-direct the funds?
It is possible, but self-direction that includes the ability to invest in alternative investments is not common in employer sponsored plans, such as 401(k) plans. You should contact the plan administrator for the answer.
15. Can I Self-Direct my 403(b) account?
No. The investment options in 403(b) plans are limited to annuities and mutual funds.
16. Can I Self-Direct a 529 plan?
No. 529 plans are sponsored by states and the investments are made by fund managers chosen by them.
17. My company's 401(k) plan allows me to borrow against my account. Can I borrow money from my IRA?
No. You may not borrow funds from your IRA under any circumstances.
18. Can I use my IRA as security for a loan?
This would be considered a distribution from your IRA.
19. What are Prohibited Transactions?
Prohibited Transactions are commonly referred to as self dealing. An IRA cannot engage in transactions with disqualified persons. The most obvious disqualified persons include, but are not limited to, the account holder, his/her ancestors, and his/her descendants and their spouses. The rules regarding prohibited transactions are quite complicated. You should seek legal advice if you are considering a transaction that could be prohibited.
20. What are the consequences of a Prohibited Transaction within IRA
The consequences are very severe if the account holder or beneficiary causes the IRA to enter into a prohibited transaction. The IRA is no longer considered an IRA and the entire IRA is deemed distributed as of January 1 of the year that the IRA entered into the prohibited transaction.
21. Can my IRA borrow money to make an investment? For example, can my IRA make a down payment on some rental property and obtain a mortgage for the balance of the purchase price?
Yes. However, the loan must be a non-recourse loan. You cannot guarantee the loan and you cannot secure the loan with other IRA assets. Non-recourse lenders generally will only make loans for income producing property and also require a substantial down payment.
22. Can I receive commissions if I am the broker involved in the sale of an investment to my IRA? How about my wife or other family members?
No. Neither you nor your family members (spouse, ancestors, descendants and their spouses) may benefit personally from a transaction involving your IRA.
23. My company granted me some stock options. Can I put these options in my IRA?
No, since the options were granted to you not to your IRA.
Self-Direction and Alternative Investments
There is a lot of confusion about the term "Self-Directed IRA". "Self-Directed" is usually associated with the ability to invest in alternative investments, such as real estate or limited partnerships. While a Self-Directed IRA could certainly be invested in alternative investments, it could also be invested in traditional investments, like mutual funds. It is not the nature of the investments that makes an IRA Self-Directed. In fact, an IRA that only allows investments in traditional investments like publicly traded stocks, bonds and mutual funds can correctly be referred to as a Self-Directed IRA. It is Self-Directed because all the investment decisions are made by the IRA accountholder, rather than by a third party, such as a trustee. So, in reality, almost every IRA is Self-Directed.
So, how is an IRA with IRA Plus Southwest different from any other IRA? The answer is simple. An IRA with IRA Plus Southwest may invest in any type of investment that is not prohibited by the Internal Revenue Code.
The only investments not allowed in IRAs are:Collectibles [IRS Code §408(m)]Life Insurance [IRS Code §408(a)(3)]S-Corporation stock (Only individuals may own stock in a Subchapter S corporation)Since the introduction of IRAs in 1975, Congress expected that IRAs would not only be Self-Directed but that they would be invested in alternative investments, such as real estate. In fact, the IRS explicitly states that real estate is a permissible IRA investment in the section of their website entitled "Retirement Plans FAQs regarding IRAs"
One of last questions posed is
Are there any restrictions on the things an IRA can be invested in?
The law does not permit IRA funds to be invested in collectibles.
If an IRA invests in collectibles, the amount invested is considered distributed in the year invested. The account owner may have to pay a 10% additional tax on early distributions.
Here are some examples of collectibles:Artwork, Rugs, Antiques, Metals - there are exceptions for certain kinds of bullion, Gems, Stamps, Coins - there are exceptions for certain coins minted by the U.S. Treasury, Alcoholic beverages, and Certain other tangible personal property.
Check Publication 590, Individual Retirement Arrangements (IRAs), for more information on collectibles.
Finally, IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option (emphasis added).
At IRA Plus Southwest, we let you go back to the basics. Invest your IRA the way you want, without the arbitrary restrictions.
Traditional IRA
A Traditional IRA is the oldest and most common type of Individual Retirement Account. A Traditional IRA grows on a tax-deferred basis and contributions may be fully deductible, partially deductible or non-deductible. If you have earned income, you can contribute to traditional IRA until you are 70½ years of age. Reasons to consider a Traditional IRA:· You anticipate your tax rate at retirement to be lower than your current tax rate. · You are not eligible to make a Roth IRA contribution because your income exceeds the limitation (See More Information about Roth IRAs). · You need a tax deduction to lower your current tax bill and qualify to make a deductible IRA contribution. · You have a 401(k) or other account in a former employer's plan and you want to self-direct the funds through a Self-Directed IRA.If you are eligible to contribute to an IRA, the amount you can deduct from your taxes will depend on whether you (or, in some cases, your spouse) are an active participant in a retirement plan at work. (See Internal Revenue Service Publication 590 for more information.)
Roth IRA
Roth IRA
The Roth IRA is similar to the Traditional IRA in many ways, but there are some significant differences in the tax treatment of contributions and distributions. Contributions to a Roth IRA are not tax deductible, but qualified distributions from a Roth IRA are not taxed at all.
The table below provides a quick reference to IRA contribution limits. Use the "More Information" links to learn more about the different types of IRAs.
YearTraditional/RothTraditional/Roth with Catch Up
2009 5,000 6,000 2010 5,000 6,000
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