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It is required that every IRA be held by a custodial entity. If you wish to make alternative asset investments, you need a special custodian that allows for such investments.
The Self-Directed IRA structure is a solution that allows one to use his or her retirement funds to make real estate and other alternative investments without tax. Unknown to most, not all Self-Directed IRAs are the same.
Although most Self-Directed IRAs are not subject to tax, there are certain instances where you may owe taxes, specifically UBTI and if you convert to a Roth IRA.
When establishing a Self-Directed IRA, there are a number of important rules to be aware of, such as contribution limits, tax treatment of distributions, prohibited transactions, and Unrelated Business Taxable Income (UBTI).
A Self-Directed Roth IRA is an after-tax account that allows the Roth IRA holder to benefit from tax-free investment growth, so long as a Roth IRA distribution is not taken prior to a five year holding period and the Roth IRA holder is not under the age of 59 1/2.
There are two types of Self-Directed IRAs that will allow you to make IRS-approved alternative asset investments without tax – the custodian controlled Self-Directed IRA and the checkbook control Self-Directed IRA LLC.
Gaining the ability to invest in a hard asset, which can effectively diversify one’s retirement portfolio while also generating tax-deferred rental income, is why real estate is the most popular investment for Self-Directed IRA investors.
A Self-Directed IRA can help you invest in what you know and understand quickly and with no transaction fees. Real estate, investment funds, private businesses, Bitcoin, gold and hard money loans are some of the most popular types of Self-Directed IRA investments you can make.
The Internal Revenue Code does not describe what a Self-Directed IRA can invest in, only what it cannot invest in. Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain types of transactions.
Most Self-Directed IRA investments are exempt from the Unrelated Business Taxable Income (UBTI) tax. Some examples of exempt types of income include: interest and rental income. However, the following types of income could subject a Self-Directed IRA to the UBTI tax: using a nonrecourse loan to purchase real estate and business generated from a passthrough entity, such as an LLC.