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Self-Directed IRAsEmpowering Individuals to Unlock Their Portfolio Options

This Research Document is provided by Provident Trust Group LLC, a Self-Directed IRA custodian and administrator located in Las Vegas, Nevada.

Empowering Individuals to Unlock Their Portfolio Options | (888) 855.9856 | trustprovident.com2

Every day thousands of Americans are turning to Self-Directed IRAs so they can take control of their financial future. With a Self-Directed IRA you are able to create a diversified investment portfolio to specifically match your goals, desires, and comfort zone.

-Theresa Fette | CEO, Provident Trust Group


DisclosureA History of Wealth AccumulationFactors Potentially Influencing IRA Market GrowthWhy are IRA Rollovers Important?Many Investors Are Confused about the Value of Their IRAIRA Owners Need Options TodaySelf-Directed IRAs Becoming Increasingly PopularWhy Consider Self-Directed IRAsAn Efficient Alternative May Be the Self-Directed IRAWhat is a Self-Directed IRA?The Self-Directed IRA AlternativeNew Legislation—or the Best Kept Secret?Necessity of a Trustee or CustodianPossible Problems IRA & Retirement Plan Owners FaceYour Self-Directed IRA TeamSelf-Directed IRA Guideline SummaryThe Self-Directed IRA ProcessUnrelated Business Taxable Income (UBTI)Hypothetical Self-Directed Investment Scenario 1Hypothetical Self-Directed Investment Scenario 2Hypothetical Self-Directed Investment Scenario 3Hypothetical Self-Directed Investment Scenario 4Self-Directed IRA Practices to AvoidSelf-Directed IRA Rules & RestrictionsIRA Rules & IRS Publication 590Section 1 - IRA Rules & IRS Publication 590Section 2 - IRA Rules & IRS Publication 590Section 3 - IRA Rules & IRS Publication 590Section 4 - IRA Rules & IRS Publication 590Section 5 - IRA Rules & IRS Publication 590Section 6 - IRA Rules & IRS Publication 590Section 7 - IRA Rules & IRS Publication 590Section 8 - IRA Rules & IRS Publication 590Section 9 - IRA Rules & IRS Publication 590Section 10 - IRA Rules & IRS Publication 590Common Questions about Self-Directed IRAs

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Table of Contents


All of the information in this document is provided and intended to be used for general educational and informational purposes only and is not intended as a solicitation for you to buy or sell securities. Nothing contained in this report shall be construed or interpreted by any party as a commitment or intent to purchase or sell any products or services; to initiate discussions; or to engage in any business relationship, contract, or future dealing with the other party.

Hypothetical return rates used in the examples are used to help explain the educational concepts more thoroughly, and for illustrative purposes only and are not guaranteed; past performance is not a guarantee of future results. Net return rates used in all examples represent an estimation of performance results after deduction for all investment fees and expenses.

None of the material in this report is intended to give you specific tax, investment, real estate, legal, estate, or financial advice, but rather to serve as an educational platform to deliver information; nor is it intended to show you how the strategies presented can specifically apply to your own tax, investment, estate, or financial position, but rather to offer an idea of how these principles generally may apply. This data is furnished with the understanding that the authors and publishers are not engaged in rendering legal, real estate, accounting, estate, investment, tax, financial, or other professional advice or services. Before taking any steps to invest funds through a Self-Directed IRA, or any other method, you should seek the advice of a qualified tax professional or financial planning advisor regarding your own financial situation.

Investing your retirement funds through a Self-Directed IRA carries some of the same potential risks and benefits associated with investing your funds outside a Self-Directed IRA, with additional Self-

Directed IRA specific risks. There is no guarantee that Self-Directed IRA net income will flow to an investor as originally projected, and there is no guarantee that a Self-Directed IRA account will appreciate in value, or depreciate in value for that matter. Self-Directed IRA investments may include illiquid assets where there is currently no established secondary market.

If a Self-Directed IRA is funded with standard IRA assets (non-Roth IRA assets), distributions will usually be taxable. If a Self-Directed IRA does perform successfully, with growth of assets, it is very important to understand that the growth will most likely be subjected to taxation at ordinary income tax rates. So while it is true that assets in the Self- Directed IRA can grow on a tax-deferred basis, taxation occurs upon distribution to the IRA owner or his/her beneficiaries. It is also important to understand that the value of any IRA, including a Self-Directed IRA, can potentially be included in the taxable estate value of an individual. This could potentially subject the IRA value to estate taxes in addition to income taxes.

Investing in certain assets inside an IRA can create an additional tax from Unrelated Business Taxable Income (UBTI). UBTI is a very complex subject and should be discussed thoroughly with your tax and legal Advisors.

Self-Directed IRAs are not appropriate for all individuals or all situations. For an individual who wants to invest all their IRA funds in a traditional manner such as a bank account, mutual fund, or annuity, the flexibility of a Self-Directed IRA will probably not provide much benefit.

Please review the section of this report titled “IRA Rules, Regulations, Restrictions, & Recommendations” for an introduction to IRS requirements.

Disclosure


For more than 35 years, Individual Retirement Accounts, IRAs, have provided Americans the opportunity to accumulate and manage their retirement wealth in a tax-deferred environment. IRAs can be funded with contributions from an investor or can be established with a ‘rollover” from another retirement plan. There are different classes of IRAs such as a Traditional IRA, a Roth IRA, and SIMPLE IRA.

IRAs were created with the enactment of the Employee Retirement Income Security Act (ERISA) in 1974. IRAs were originally conceived as accounts Americans could voluntarily contribute funds to, on an annual basis.

Congress wanted Americans to increase their annual savings for retirement.

IRAs are also able to accept rollovers from qualified retirement plans such as Keogh, 401k, 457, and 403(b) accounts. Rollover IRAs traditionally make up the largest dollar volume of IRA accounts simply because qualified retirement plans have typically allowed higher annual contributions than traditional IRAs.

On 9/23/08 the Employee Benefit Research Institute reported there was approximately $4.75 trillion in IRAs. The value of IRA accounts is truly amazing when compared to the value of all Defined Benefit Plans ($2.3 trillion), and the value of all Defined Contribution Plans ($3.49 trillion), also reported by the Employee Benefit Research Institute on 9/23/08. For more information visit www.ebri.org.

Investors collectively held $4.87 trillion in IRA accounts in 2011, compared to $3.88 trillion in private-sector defined contribution plans like 401(k)s, according to Federal Reserve data.

Introduction to Individual Retirement Accounts (IRA)

A History of Wealth Accumulation


The major factor that continues to drive the asset growth of IRAs is rollovers from other qualified plans, as opposed to new contributions. As more workers are participating in defined contribution plans, typically 401(k) plans which are in defined benefit plans that allow a lump-sum distribution, an increasing number of them are faced with making decisions about what to do with the assets they have earned in these plans when they voluntarily change jobs, are laid off, or retire.

After leaving employment, a worker with a retirement plan balance that is eligible for IRA rollover, typically has three choices for his or her retirement account:

1. Leave the money in the current plan. Some employers require that retirement account balances be transferred from the employer plan within a certain time period. Other plans allow an employee to leave the funds in the employer sponsored retirement plan indefinitely. This option will usually not cause any taxation to the employee.

2. Cash it out. This simply means to receive the retirement plan balance as a taxable and possibly penalized transaction. This option will allow an employee to do anything they want with the proceeds but will typically come at a very high price. In most cases the distribution will be fully taxable for federal and state income taxes, as well as subject to a 10% federal penalty and any applicable state penalties. We have seen taxes and penalties amount up to almost 50% of the retirement plan distribution. Typically, Financial and Tax Advisors will recommend that investors do everything possible to NOT cash out their retirement plan.

3. Roll it over. Funds can be rolled over to another tax-qualified savings vehicle such as an IRA or another employment-based plan. This simply means that an employee with an employer sponsored retirement plan can transfer the retirement account balance to an IRA or other retirement plan of their choice. This option will also usually not cause any taxation to the employee. An employee can roll their funds into a standard IRA or can choose to utilize the Self-Directed IRA structure for maximum investment flexibility.

For additional information on IRAs please see the section of this report titled “IRA Rules, Regulations, Restrictions, & Recommendations.” In addition, please discuss your options with your tax, legal, and financial advisors.

Factors Potentially Influencing IRA Market Growth


An estimated $324 billion was moved out of 401(k)s and into Individual Retirement Accounts in 2013, and that’s expected to grow to $500 billion by 2019 as that retirement wave intensifies, according to Cerulli Associates, a Boston-based research firm.

Why are IRA Rollovers Important?

Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, American Council of Life Insurers,

and Internal Revenue Service Statistics of Income Division* Amounts are approximate

Total IRA Assets* (in Trillions)

Secondly, it gives the individual account holder the option to manage and take control of his/her retirement portfolio and destiny.

Where can IRA rollover assets come from? Typically funds for an IRA rollover account come from a qualified employer retirement plan or an IRA an individual had previously established for himself/herself. Here are a few potential examples:

• Transfer from previous employer 401(k) plan at employment termination or retirement

• In-service distribution and subsequent transfer from an employer 401(k) plan

• Transfer from a defined benefit (DB) or profit sharing plan• Rollover from existing IRA accounts• Transfer from an Individual 401(k) account• Transfer from a 403(b) account• Transfer from a 457 account• Transfer from a SEP IRA account• Transfer from another eligible account

If you have any of the above named retirement plans, or have any other retirement accounts, please check with your tax, financial, and legal advisors as to the opportunity for you to transfer these funds at the appropriate time to an IRA rollover account.

IRA rollover accounts are important for a number of reasons including the sheer size of the accumulated values of these accounts.


We feel that one of the most important things you can do to manage your IRA efficiently and with potential for success is to have as much flexibility and as many investment options as possible.

The fragile world economies, the volatile real estate market, combined with the major credit crunch and severe losses in global stock markets, have created complex planning issues for almost anyone who owns an IRA. Retirement plan losses have been staggering. As reported by the Associated Press via MSNBC, 10/7/2008, American retirement plans have lost more than $2 trillion.

With the weakening Social Security system, the elimination of the standard pension type plan by many employers, many Americans are depending on their IRA accounts to provide them with the funds they will need to retire comfortably.

One of the big problems facing Baby Boomers is that they are getting older, with many either in retirement or approaching retirement. Baby Boomers will most likely be the Americans most affected by the recent financial market turmoil because they do not have time on their side.

In most financial matters, asset ownership, especially in troubling times, creates more planning challenges, and IRA investing is no different. Because many people have accumulated a significant net worth in their IRA, evaluation, education, constant review, and decision-making are important to help nurture and protect such wealth. We feel that one of the most important things you can do to manage your IRA efficiently and with potential for success is to have as much flexibility and as many investment options as possible.

Over the last few years, we have talked with many IRA owners who have lost between 20 – 60%, and even more in their IRA values.

Many Investors Are Confused About the Value of Their IRA


Many people saving for retirement have used a standard IRA structure to hold and invest their funds for the future, but today, IRA owners need alternatives to the Standard IRA and traditional investments

Based on the magnitude of the recent financial crisis, we have found that many IRA owners may be:

• Reluctant to modify their current IRA portfolio.

• Feeling that traditional investments are the only investments available for their IRA.

• Resistant to IRA investment options they see as the “same old ideas.”

• Unwilling to face the fact that their IRA account has substantially decreased in value.

• Afraid to even look at their IRA account statements.

• Unaware of the IRA investment opportunities the current financial climate provides.

What all the above statements point to is hesitancy by many IRA owners to do anything with their IRA accounts. This hesitancy may cause some IRA owners to overlook potential opportunities that could allow them to resurrect their IRAs that they have left for dead.

The vast majority of IRA and retirement plan owners have lost money in their accounts over the last 18 months. We feel it is certainly not the time to do nothing and assume everything will be fine with the accounts. Simply by letting their accounts sit idle and not paying any attention to the decreased values does not necessarily provide the potential for long-term desired results. Actions may be required to, both, protect and grow IRA and other retirement plan values.

IRA Owners Need Options Today

It is for this purpose, and the fact that there is little formal Self-Directed IRA guidance to rely upon, that IRA owners should seek the advice and counsel of trusted professionals.


A Self-Directed IRA is a Standard IRA that is administered by a custodian that allows complete flexibility under Internal Revenue Service rules in regards to your IRA investments. All IRAs are governed primarily by Internal Revenue Code Section 408, and secondarily by other various code sections. Characteristics of a typical Self-Directed IRA:

• Account is established with a Self-Directed IRA custodian.

• Potential for IRA growth.

• Opportunity to feel more comfortable investing in what investors are familiar with.

• Opportunity for a diversified investment menu.

• Proprietary investment products and platforms are not mandatory.

• Not limited to traditional investments.

• Premature distribution, with income taxes or penalties, not necessary to invest in preferred assets.

• Certain assets can create unrelated business taxable income and associated tax.

• Tax-deferred asset growth continues until distribution.

• Opportunity to reposition current assets to take advantage of current financial markets.

• IRA funds can be invested to help balance out investment losses outside their IRA and/or retirement plan.

• Additional fees will be levied.

• IRA assets can be invested to potentially meet financial goals such as increasing net income.

• Create a truly diversified portfolio with assets not correlated to traditional investments.

• The diversified investment menu may include, but is not limited to:

○ Real Estate Investment Trusts (REITs) – both public and private

○ Private Placement investments & Direct investments:

Real estate, oil & gas, leasing, mortgages, notes,& deeds of trust, tax liens and tax deeds, loans and notes, equipment leasing, Delaware Statutory Trusts (DST), businesses and franchises, private and publicly listed stock, Limited Liability Companies (LLCs), Limited Partnerships (LPs), individually owned or jointly owned real estate, foreclosures, short sales, residential, single family, multi-family, commercial, developed, undeveloped—raw land, and options on real estate.

Self-Directed IRAs can potentially provide solutions for an IRA investor to solve some of the problems they face in retirement or as they are approaching retirement. The real key is allowing you to invest in what you want, when you want, how you want, and where you want.

Self-Directed IRAs Becoming Increasingly Popular


Self-Directed IRAs could provide potential benefits for IRA owners who want to take control of their retirement savings or who desire complete flexibility with their IRA investments.

As previously discussed, many Americans have recently lost a large percentage of their IRA values. And with these large losses, comes a considerable amount of uncertainty. Many IRA investors want to explore their investment options beyond what has long been thought of as the traditional IRA investments.

A Self-Directed IRA account can potentially provide an IRA owner and his/her family with a number of possible advantages:

Income is Tax-DeferredThe income of an IRA account that is established correctly, managed correctly, and does not violate IRS guidelines, is allowed to grow tax-deferred. For example, the interest on a note secured by real estate could potentially grow tax-deferred in a Self-Directed IRA account.

Appreciation/Growth is Tax–DeferredThe appreciation/growth of an IRA account that is established correctly, managed correctly, and does not violate IRS guidelines, is allowed to grow tax-deferred. For example, the increase in value of real estate could potentially grow tax-deferred in a Self-Directed IRA account.

Gain on Asset Sales are Tax-DeferredThe gain on the sale of an asset in an IRA account that is established correctly, managed correctly, and does not violate IRS guidelines, is tax-deferred. For example, the gain on the sale of a commercial real estate property could potentially grow tax-deferred in a Self-Directed IRA account.

Allows for Direct Real Estate OwnershipInvestment real estate is a viable option including residential rentals, commercial, industrial, retail, land, etc. Having access to IRA balances to purchase investment real estate potentially provides an opportunity for growth and diversification.

Notwithstanding these features, it is imperative to understand that investing funds through a Self-Directed IRA carries many of the same risks as investing in assets outside the IRA. There are a number of related risks and regulations that must be considered prior to investing. These investment risks are set forth in the IRA Rules, Regulations, Restrictions, & Recommendations section of this report.

Why Consider Self-Directed IRAs


Opportunity for Investors to Feel Comfortable Investing in what they knowInvestors tend to gravitate to what they like, have done in the past, and have been successful with. If an investor has accumulated their wealth through investing in small businesses, they will tend to feel comfortable with this type of investment. On the other hand, if an investor has made money investing in first mortgages, they will typically tend to feel comfortable with lending money based on a secured note. A Self-Directed IRA allows IRA owners to invest in what they feel most comfortable with.

Almost Unlimited Investment Option MenuWith a few specific limitations, an IRA owner has a virtually limitless number of investments he/she can choose. As long as the specific investment is not prohibited, and as long as the IRA account has proper administration, complete flexibility is available.

Not Limited to Traditional InvestmentsSome investors believe that all they can invest their IRA funds in are traditional investments. While it is true that traditional investments can be included in a Self-Directed IRA account, many other types of alternative assets are also allowed.

No Need to Withdraw IRA/Retirement Funds for Investment FlexibilityMany IRA and retirement plan owners have taken taxable distributions from their IRA and/or retirement accounts to invest in non-traditional assets. Many of these distributions were subjected to penalties as well. In is conceivable that up to 50% of the IRA and/or retirement accounts could be lost to income taxes and penalties in a premature distribution. A Self-Directed IRA account can help to reduce, and in some cases possibly eliminate, the taxes and penalties associated with a premature distribution by eliminating the need to take such a distribution.

The Opportunity to “Time” Your Income Tax BillAll IRAs, other than Roth IRAs, are subjected to income taxation when funds are distributed. Funds in an IRA are allowed to grow tax-deferred until mandatory distribution age, usually April 1st of the year following the year the IRA owner turns age 70 ½. An IRA owner can take out as much as he/she wants from the IRA from age 59 ½, and can take distributions at any age if specific and very strict rules are followed. Based on this data, an IRA owner can take funds from his/her IRA in the years when taxable income from other sources is low.

Alternative investments allow account owners to maximize investment returns by investing in areas of expertise and private assets. As with all IRA investments, taxes on investment returns are deferred until funds are withdrawn from the account.

Why Consider Self-Directed IRAs (Continued)


Please also note that consideration of all alternatives and options are needed to make a sound and informed decision regarding any investment.

Reduction of ManagementIt is possible to have the assets in the IRA, such as real estate, managed by a professional team with experience and acceptable track records in all phases of owning, managing and operating.

TimingThe purchase of a Beneficial Ownership Interest of a DST real-estate investment can potentially take place within days of identification by eliminating the purchase negotiation process, the loan origination process, and appraisal work. A DST investment can be reserved for a period after the end of the 45-day identification period; and thus the potential for paying capital gains tax due to a collapsed deal is decreased.

Diversification and Risk ReductionAssets can be obtained in the Self-Directed IRA to help diversify the entire net-worth of an IRA owner.

According to Jason Helquist, MA, LL.M, and President of Provident Trust Group:

“An additional potential characteristic of a Self-Directed IRA, and all other IRAs, is that for federal purposes, IRA assets of an IRA owner who files Chapter 7 bankruptcy might be protected in bankruptcy. The current rules, established in 2005, can protect IRA values up to $1 million. Rollover IRAs may benefit from an unlimited protection amount. Individual states may treat each bankruptcy and situation differently. If you plan to file bankruptcy, or find yourself in the middle of filing bankruptcy, it is vitally important that you consult with tax, legal, and financial professionals who are very knowledgeable in the treatment of IRAs in bankruptcy proceedings for both federal and state purposes.

Why Consider Self-Directed IRAs (Continued)


While a Self-Directed IRA sounds new and different, it is just like a basic IRA. The difference is that a Self- Directed IRA allows you, as the owner, to decide that you want as much control over, and flexibility with, your IRA investments as permitted by law. We will say it again:

A Self-Directed IRA gives you tremendous control over, and almost unlimited investment flexibility with your IRA investments.

For educational purposes, and to make our explanation easier to understand, we are calling the typical type of IRA that utilizes a traditional investment platform a Standard IRA.

A Self-Directed IRA, just like a Standard IRA, is governed, for the most part, by Internal Revenue Code Section 408. Tax law does not differentiate between what we are calling a Standard IRA and a Self-Directed IRA.

The same exact rules apply regarding funding, investments, distributions, transfers, rollovers, distributions, taxation, beneficiaries, penalties, required mandatory distributions, and basically all other rules and laws.

Here are the differences:

• The difference between what we are calling a Standard IRA and a Self-Directed IRA lies simply in the Custodian you choose to handle the administration of your IRA account.

• A Standard IRA limits your IRA investments to the options the Custodian and/or Investment Advisor sets for your plan.

• A Self-Directed IRA only excludes IRA investment opportunities not allowed by the Internal Revenue Service.

An Efficient Alternative May be the Self-Directed IRA

What is a Self-Directed IRA?

When it comes to making decisions regarding an IRA, it can be a daunting task to make these types of difficult decisions by yourself. You should always consult a team of professionals working for your benefit.


An efficient alternative to a Standard IRA may be the Self-Directed IRA. A Self-Directed IRA allows an IRA owner to invest his/her funds in any investment that is not expressly prohibited by the IRS. Instead of being limited to traditional investments, an IRA owner literally has a world of possibilities. Investments in the United States, as well as outside the United States are possible.

A Self-Directed IRA is an IRA that has been placed with a custodian who allows you to take full advantage of the flexibility the IRS has built into IRA investing. In most cases, it has not been the IRS that has limited the investment choices of IRA owners; it has been the custodians and financial advisors. You are allowed to invest in almost anything you desire with just a few exceptions.

Self-Directed IRAs can potentially provide solutions for an IRA investor to solve some of the problems they face in retirement, or as they are approaching retirement. The real key is allowing you to invest in what you want, when you want, how you want, and where you want.

As stated previously, Self-Directed IRAs are governed under Internal Revenue Code Section 408 just like all IRAs. You must follow all of the same exact rules, laws, and regulations, but you get to invest your IRA funds the way YOU want to invest.

• If you want to invest in a business—YOU CAN

• If you want to invest in a promissory note—YOU CAN

• If you want to invest in alternative investments—YOU CAN

• If you want to invest in real estate—YOU CAN

• If you want to invest in many other non-traditional investments—YOU CAN

You can establish your Self-Directed IRA account simply by:

1. Transferring your current IRA balance to a Self-Directed IRA custodian

2. Transferring your current employer retirement plan to a Self-Directed IRA custodian

And/Or

3. Funding your current IRA contribution to a Self-Directed IRA custodian

While this process is fairly easy to complete, you must make sure to follow all rules, regulations, and laws regarding transferring your current IRA, transferring your current retirement plan, and/or investing your current IRA contributions.

The Self-Directed IRA Alternative


According to the Investment Company Institute Study reported on 1/2008, more than 46 million households have an IRA.

Employee Benefit Research Institute (EBRI) in Washington, the author of Individual Retirement Account Balances, Contributions, and Rollovers, 2010: The EBRI IRA Database, stated in 2010 that there were nearly 15 million IRA accounts held by more than 11 million people with total assets of just over $1 trillion.

One of the most widely utilized financial instruments for retirement savings in the United States is the IRA. There is a high probability that most people saving for retirement, and most financial professionals, have heard about the use and benefits of an IRA. The Investment Company Institute reported in January 2008 that more than 46 million households have an IRA. And yet while the term IRA has become a household name for most people saving for retirement, we have found that a fairly large number of investors and financial professionals have either never heard of a Self-Directed IRA or have limited knowledge on the subject.

Many people think that the Self-Directed IRA concept must have been created with new legislation in recent years, but the information, rules and regulations contained in the Internal Revenue Code, Section 408 is the exact same for both Standard and Self-Directed IRAs. There is no new legislation that “allows” for a Self- Directed IRA. Simply put, a Self-Directed IRA is an IRA that provides the individual investor a great deal more flexibility and control than what most people believe an IRA can provide. Self-Directed IRAs have been one of the best kept financial secrets.

New Legislation—or the Best Kept Secret?

A fairly large number of investors and financial professionals have either never heard of a Self-Directed IRA or have limited knowledge on the subject.


Most investors do not understand why they can’t manage, invest, transfer, and hold their IRA funds any way they want. After all, the money in the IRA is owned by the IRA owner isn’t it? The answer is yes and no. An IRA will be held by a financial institution for the benefit of the IRA owner. The IRA is not really held in the name of the IRA owner, but rather for the benefit of the IRA owner. It sounds like semantics but the rules are the rules.

One reason for this process is to provide a system that potentially reduces the chance that an IRA owner will do something improper with his/her IRA and subject themselves to unnecessary income taxes and possible penalties. Another potential reason for this lies in the potential taxation of the IRA proceeds. Upon any distribution, the taxable IRA investor will receive a portion of the liquidated funds, and then pay a portion of the funds to the IRS.

IRA accounts, whether Standard IRAs or Self-Directed IRAs, must be held and administered by a custodian. IRA accounts can be held for the benefit of the IRA owner but the assets in the IRA must be held by the custodian and titled properly.


All IRA assets are required to be held by a custodian/trustee, which is normally a bank, trust company, credit union, or a custodian that has been approved by the IRS. Unlike a qualified plan with an employer in which the owner/employee can serve as plan trustee, the IRA owner cannot hold title to the assets in the IRA. Accordingly, when investing in alternative asset classes, the IRA owner should direct the custodian to purchase and hold the investment in the name of the account (e.g., Name of Custodian, for the benefit of John Smith’s IRA).

The IRS has issued Forms 5305 and 5305-A as model IRA agreements, which are used by many trustees and custodians. Form 5305-A provides that the IRA owner may direct investments and retain most ‘traditional’ powers that would otherwise create a passive trust, and that such powers do not cause the IRA’s assets to be owned by the IRA owner. Any alterations to the Model IRA agreements must be submitted for IRS approval.

Necessity of a Trustee or Custodian

The role of the custodian in a Self-Directed IRA is critical in determining its liability for any potential prohibited transactions.


The Internal Revenue Code expressly holds that IRA custodial accounts are treated as IRA trusts as long as the assets are held by a bank, trust company, or other approved entity, and that the IRA custodian is treated as the trustee for all statutory purposes. Since the owner of an IRA is the sole participant, the IRA is not a plan governed by ERISA. This is critical, as it means ERISA’s preemption of state law is not applicable. ERISA’s fiduciary rules regarding reasonable prudence and diversification do not apply to IRAs. However, the Internal Revenue Code does require that the IRA be for the exclusive benefit of the owner or his beneficiaries.

A Self-Directed IRA custodian will typically provide the following services:

• Establish your Self-Directed IRA account

• Communicate with previous plan custodian to enact transfer of funds to Self-Directed IRA

• Receive, document, and report all deposits into Self-Directed IRA account

• Distribute, document, and report all disbursements from Self-Directed IRA account

• Distribute all required minimum distributions – RMDs

• Review suitability and paperwork for proposed investments

• Send funds to invest in specific investments

• Receive income from investments

• Report account values

• Provide governmental filings – federal, state, local, etc.

• Offer miscellaneous services

Mr. Helquist adds this data regarding the role of the custodian:

As mentioned above, the Internal Revenue Code requires a bank to serve as an IRA custodian or trustee. Among the institutions defined as banks are trust companies, credit unions, banks, corporations governed by a state agency which regulates state banking institutions, or an IRS approved company. The IRA owner cannot act as the trustee or custodian. Typically, a custodian of a Self-Directed IRA will act only at the direction of the IRA owner. The custodian retains no discretionary authority and generally will have the IRA owner acknowledge the non-discretionary nature of its role. The acknowledgments will typically include waivers of liability.

Some IRA and retirement plan owners may need an alternative to continue to defer income taxes on their IRAs and retirement plans, help increase the potential for income and appreciation, open doors for unique investment opportunities, to feel comfortable with their investments, and to potentially provide increased protection.

Necessity of a Trustee or Custodian (Continued)


Recently we have seen investors who face many of the above problems. We feel that the more of these problems investors face, the higher the potential they will not achieve their retirement goals.

It may seem that owning an IRA, and/or being a participant in a retirement plan, is too confusing and that the success of the IRA, and/or retirement plan, ultimately is completely reliant on luck. Much of the confusion may come from a lack of information regarding the investment options and alternatives an IRA, and/or retirement plan the owner actually has.

Many IRA, and/or retirement plan owners have worked very hard to accumulate as much wealth as possible in their accounts. With the recent financial markets chaos, there are undoubtedly many planning obstacles to deal with to try and maneuver the retirement funds for ultimate success. Some of the problems investors could possibly face include:

• Account values have decreased substantially• Unsure what to do next with assets• Investment options may be limited at their current custodian• Asset classes and types may be limited at their current custodian• Do not feel comfortable with traditional investments• Do not feel comfortable with traditional investments that could potentially lose

value/income if interest rates/inflation increase• Feel that they may have to pay tax and possible penalties to invest in assets they prefer• Income taxes and penalties could take up to 50% of a distribution• Current assets might not allow for growth opportunities needed for retirement

success• Assets outside their IRA and/or retirement plan have also decreased• Not having funds available outside their IRA and/or retirement plan for

investment opportunities• Net income after all expenses of IRA could be low• Appreciation opportunities with current IRA might look bleak• Current portfolio might need assets that are not correlated to traditional

investments• Current IRA and/or retirement plan does not allow investments in:

Individually owned or jointly owned investment real estate, Real Estate Investment Trusts (REITs)—both public and private, Private Placement investments & direct investments , Delaware Statutory Trusts (DSTs), businesses and franchises, private and publicly listed stock, Limited Liability Companies (LLCs), Limited Partnerships (LPs)

An IRA and/or retirement plan owner may face the problems listed above. Just one of the problems could be enough to limit the success of their retirement accounts.

Possible Problems IRA & Retirement Plan Owners Face


When in a position to make a difficult decision, we often rely upon others for guidance and direction. In many cases we may ask advice from a family member, friend, or respected professional. Getting outside input helps us to align our thoughts because we have been able to look at the decision from multiple angles.

All or various members of the team below can help you to make a knowledgeable decision about your Self-Directed IRA. You will not have to act alone in making the best decisions to help you meet your financial goals.

The Investor (You)It is important to remember that it is your money that is being invested. You will be the one who decides to move forward with a specific investment inside your Self-Directed IRA. While you will receive advice from some very qualified professionals, it is ultimately your final decision.

The Investment Advisor RepresentativeThis is the licensed securities professional who you use to provide you financial guidance, guide you through the entire Self-Directed IRA process. The Investment Representative will act as your advisor throughout an entire transaction, working with all parties involved and coordinating the majority of the work that must be done to help you accomplish your goals. The most important responsibility of your Investment Advisor Representative is to help you make an informed decision that is consistent with your financial objectives.

The Self-Directed IRA CustodianThis is the firm responsible for the implementation, administration, and reporting of your IRA. Typically the custodian will establish your account, receive funds, make investments, distribute funds, review proposed investments, report values, provide governmental filings, and perform other services associated with the Self-Directed IRA account. Provident Trust Group is a custodian.

The AccountantYour accountant can provide valuable insights as to the income tax aspects of your Self-Directed IRA. Your accountant can work hand-in-hand with your financial advisor. In many cases the financial advisor will help educate your accountant on Self-Directed IRAs.

The AttorneyYour attorney can also provide valuable recommendations as to the legal aspects of your Self-Directed IRA. Your attorney can work hand-in-hand with your accountant and Custodian. As with your accountant, your financial advisor can typically help educate your attorney on the specifics about potential Self-Directed IRA investments.

Once you determined you need the investment flexibility of a Self-Directed IRA, you should assemble your team of specialists to help you achieve your goals.

Your Self-Directed IRA Team


This section will provide a very basic introduction to the rules and restrictions you should be aware of and discuss with your tax advisor ways to try and reduce unnecessary income taxes and penalties regarding your IRA accounts. For a more thorough explanation of these rules and restrictions please carefully read the section of this report titled IRA Rules, Regulations, Restrictions, & Recommendations.

We feel that it is very important to first understand what can cause an IRA owner to pay unnecessary income taxes and penalties. In IRS Publication 590, it is stated:

What Acts Result in Penalties or Additional Taxes?The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities: Investing in collectibles, making excess contributions, taking early distributions, and allowing excess amounts to accumulate (failing to take required distributions).

The list for possible Self-Directed IRA investments is virtually limitless. Instead of stating what an IRA owner can invest in, the Internal Revenue Service tells us specifically what an IRA owner cannot invest in. Investments that are NOT allowed in an IRA include:

Prohibited Transactions:• Life Insurance on yourself or related party

• Sub-Chapter S Corporations

• Investment in Collectibles. The following information is from IRS Publication 590:

If your Traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions. Collectibles include: artworks, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property.

ExceptionYour IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.

Self-Directed IRA Guideline Summary

It is of the utmost importance for you to seek and receive advice from qualified tax, legal, and financial advisors regarding any questions you have, or actions you plan to take, regarding your Self-Directed IRA.



The Internal Revenue Code does not tell IRA investors which asset classes are appropriate. It only identifies those assets in which IRA investors cannot invest, such as collectibles (rare coins, artwork, antiques, rugs, alcoholic beverages, metals, gems or stamps) or life insurance on the life of the IRA owner. Thus, opening a plethora of opportunities, available to IRA owners.

Relatively few financial institutions permit IRA owners to direct IRA monies to non-traditional asset classes. The institutions providing such a service typically will act only at the direction of the IRA owner. Most will not provide advice or direction regarding the prudence of the IRA owners’ actions. Indeed, as an additional measure, the institutions generally cause the IRA owners to acknowledge that there is no assumption of liability when an institution acts at the direction of an IRA owner. Thus, when a Self-Directed IRA asset underperforms or becomes worthless, the institution assumes no liability for the loss.

Periodic Table of AssetsTM

Self-Directed IRA Guideline Summary (Continued)


A good Self-Directed IRA custodian can help streamline the process and reduce the involvement, time, and stress for an IRA owner.

The structure of the Self-Directed IRA can provide tremendous flexibility for an IRA owner. The actual rules, regulations, and laws that are utilized to establish, maintain, and manage a Self-Directed IRA are indeed fairly complex. Because of these rules, some people not very familiar with the Self-Directed IRA concept might assume that the process of setting up the Self-Directed IRA account could be very difficult, confusing, and time consuming.

The good news is that setting up and managing a Self-Directed IRA can be a very simple process. While there are many administration steps that are handled by the Self-Directed IRA custodian, typically an IRA owner will be required to participate in these steps:

1. Complete paperwork to establish a Self-Directed IRA account.

2. Send the paperwork to the Self-Directed IRA Custodian.

3. Fund the Self-Directed IRA account by:

a. Completing paperwork to transfer a current IRA account to the Self-Directed IRA account. And/or

b. Complete paperwork to transfer a current employer sponsored retirement plan to the Self-Directed IRA account. And/or

c. Complete paperwork and send a current year IRA contribution to the Self-Directed IRA account.

4. Wait for confirmation that funds have been received by the Self-Directed IRA account.

5. Direct the Self-Directed IRA custodian to invest the funds into the preferred investment option. The Self-Directed IRA custodian will typically provide guidance as to their opinion of the suitability and acceptability of the investment choice according to their interpretation of Internal Revenue Service rules.

6. Additional deposits can be made into the same Self-Directed IRA account by following the steps in #3 above.

7. Withdrawals can be made by sending a written request to the Self-Directed IRA Custodian.

8. Assets in the Self-Directed IRA can be sold by sending a written request to the Self-Directed IRA Custodian.

9. Sales proceeds from #8 can be reinvested in new assets by repeating step #5 above.

By following these simple steps an IRA owner can have increased investment flexibility.

The Self-Directed IRA Process


One of the most powerful advantages of an IRA is tax deferral of income and appreciation prior to distribution. This allows an IRA value to grow undisturbed by income taxes. Any disturbance to the tax-deferred growth could decrease the future value of the IRA value. One tax area that could decrease the value of an IRA is called Unrelated Business Taxable Income, or commonly called UBTI. UBTI is a fairly complicated section of the tax code. The short version is that an additional tax will be levied on income earned in an IRA caused by UBTI.

We sought the help of Jason Helquist, MA, LL.M, and President of Provident Trust Group to help explain UBTI:

The tax advantage of an IRA is that income is not taxed until distribution. However, to prevent tax- exempt entities from competing unfairly with taxable entities, Congress has made tax-exempt entities subject to unrelated business taxable income (UBTI). UBTI is defined as “gross income derived by any organization from any unrelated trade or business regularly carried on by it,” reduced by deductions directly connected with the entity; and occurs when a tax-exempt entity’s income is derived from any trade or business that is unrelated to its tax-exempt status. So, this becomes applicable if your IRA has ownership in an LLC or other entity. Although there is little formal guidance on UBTI implications specific to Self-Directed real-estate IRAs, there is considerable guidance in the traditional tax-exempt context. The fact that UBTI occurs should probably not negate the use of any given asset class within an IRA. It should simply act as a one of many factors IRA owners should consider prior to investing.

UBTI also applies to unrelated debt-financed income (UDFI). ‘Debt-financed property’ refers to leveraged assets or assets that a tax-exempt owner has purchased with borrowed money. In such cases, only the income attributable to the financed portion of the property is taxed. There are some important exceptions from UBTI, which have additional importance where a Self-Directed IRA holds debt-financed real-estate assets. If the IRA borrows money to finance the purchase of real estate, the portion of the rental income attributable to that debt will be taxable as UBTI.

Unrelated Business Taxable Income (UBTI)

It is of utmost importance for you to seek and receive advice from qualified tax, legal, and financial advisors regarding any questions you have, or actions you plan to take, regarding how specific investments you plan to make inside your Self-Directed IRA can create UBTI and subject your IRA to additional income taxes.


For example, if the IRA purchases real estate for $200,000 with a $50,000 mortgage, then 25% of the rental income will be subject to UBTI. The UBTI must be paid by the IRA, not the IRA owner.

it is important to ensure that there is sufficient liquidity in the IRA or cash-flows generated from the real estate to pay the tax. An IRA with $1,000 or more of gross UBTI must file a Form 990-T. An IRA owner must aggregate all of his or her individual accounts to determine if the $1,000 threshold is met. The IRA owner cannot avoid the UBTI by purchasing property that is already subject to an existing debt and assuming that debt.

It is important to note that the mere recognition of UBTI or UDFI does not compromise the overall tax exempt status of the IRA.

As shown above, only the transactions generating the UBTI or UDFI trigger a tax. All other transactions or income generation by the IRA assets preserve the tax-deferred status. It is also very important to remember that just because an IRA is subjected to UBTI, the overall income taxes caused by the UBTI could be insignificant. “I always advise IRA owners to verify the unknown or projected income taxes from UBTI with their tax professional prior to investing,” says Jason Helquist, MA, LL.M, and President of Provident Trust Group.

Rental Property

Rental Income

Asset Purchase

Self-Directed IRA Mortgage

UBTI Payment

Unrelated Business Taxable Income (Continued)


Let’s look at an example of hypothetical investors, Stan and Julie, both age 55. Julie has an IRA that had a balance of $750,000 two years ago. Due to problems in the market, the current value of Julie’s IRA is $375,000. Her IRA is currently invested in traditional investments. They have always held traditional investments because this is what their tax, legal, and financial advisors have always recommended.

Recently, they have learned about the potential benefits of a Self-Directed IRA. After researching Self-Directed IRAs, Stan and Julie decided that they would invest in real estate through their new Self-Directed IRA account. They would like to find an investment that provides them an opportunity for both income and appreciation. In this hypothetical example, they found a four-unit rental property in an acceptable location for the sale of $750,000. They plan to put $375,000 down on the property and finance the remaining amount.

Hypothetical Self-Directed IRA Scenario 1

This hypothetical scenario is presented to show the potential economic opportunities of a Self-Directed IRA. Always consult a tax, legal, and/or financial advisor prior to making any financial decision.

This investment scenario is not based upon any particular individual(s), Self-Directed IRA, individual IRA owner, or investment. Your actual investment results will vary.

Non-Recourse Loan$375,000 (50%)

Rental Property Lender

RentalIncome

Self-Directed IRA

Investment Amount$375,000 (50%)

Investment Scenario #1 - Flow of Funds


Hypothetical Analysis:

The IRA would also have the potential opportunity for appreciation. Stan and Julie can let the net income build in their IRA until they retire. They could let the net income accumulate in a cash account and look for additional real estate purchase opportunities in the future or they could invest the net income back in traditional investments each month using a dollar-cost-averaging technique.

It is important to understand that the income is not guaranteed from their Self-Directed IRA account. It is also important to understand that their original $375,000 investment is not guaranteed either.

The hypothetical illustration above is for educational purposes only and is not indicative of any particular Self- Directed IRA investment. Actual results may vary from the illustration shown above. Investments in Self-Directed IRAs are subject to costs and expenses including commissions, offering and organizational costs, due diligence, and management fees. The income, expense, and tax projections above are not guaranteed, as your results will vary.

Purchase price of four-unit property

Less down payment from Self-Directed IRA

Net amount financed with non-recourse loan

$750,000

-($375,000)$375,000

Net Income$18,000

Total UBTI Tax Due (18%)$1,440

Gross rental income ($1,250 x 4 x 12/months)

Less mortgage payment

Less taxes & insurance

Less miscellaneous expenses

$60,000

-($25,000)

-($10,000)

-($7,000)

Net Income from Property

Debt Financed Income (50%)

Less specific deduction

UBTI

$18,000$9,000

-($1,000)$8,000

RESULT: This hypothetical example of a Self-Directed IRA would have a net annual income after UBTI of $16,560 ($18,000 less $1,440).

Benefits:• Potential opportunity

for appreciation

• Net income builds in their IRA (tax deferred or tax-free)

• Potential to invest the net income back in traditional investments each month using a dollar-cost-averaging technique


Let’s look at another example, using the same facts as in the hypothetical Self-Directed IRA Scenario #1, with the hypothetical investors Stan and Julie, with one simple change.

In this example, let’s assume that Julie has not had any problems in the market and the current value of Julie’s IRA has remained at $750,000.

Stan and Julie are still looking for an opportunity outside of the traditional asset types they’re currently invested into. They would like to find another investment option available to them that provides an opportunity for both income and appreciation.

While doing research, they found the same four-unit rental property in an acceptable location for the sale of $750,000.

In this hypothetical scenario, they will be able to buy the real estate entirely through their Self-Directed IRA without having to obtain a loan.




Rental Property

Rental Income

Self-Directed IRA

Investment Amount$750,000



In this example there is no debt on the real estate so there is neither Unrelated Business Taxable Income nor associated tax. The Self-Directed IRA would have a net projected annual income of $43,000. Just like in Scenario #1, the IRA would also have the opportunity for appreciation. Stan and Julie can let the net income build in their IRA until they retire. They could let the net income accumulate in a cash account and look for additional real estate purchase opportunities in the future or they could invest the net income back in traditional investments each month using a dollar-cost-averaging technique.

It is important to understand that the income is not guaranteed from their Self-Directed IRA account. It is also important to understand that their original $750,000 investment is not guaranteed either.


Benefits:• Potential opportunity

for appreciation

• Net income builds in their IRA (tax deferred or tax-free)

• Potential to invest the net income back in traditional investments each month using a dollar-cost-averaging technique

PLUS• There is no debt on

the real estate so there is neither UBTI nor associated tax

RESULT: This hypothetical example of a Self-Directed IRA would have a net annual income of $43,000.

Hypothetical Analysis:Purchase price of four-unit property

Less down payment from Self-Directed IRA

Net amount financed with non-recourse loan

$750,000

-($750,000)$0

Net Income$43,000

Gross rental income ($1,250 x 4 x 12/months)

Less mortgage payment

Less taxes & insurance

Less miscellaneous expenses

$60,000

-($0)

-($10,000)

-($7,000)


Let’s look at an example of Mary, a hypothetical investor, age 62, who has a current Roth IRA balance of $420,000. Mary is currently earning 2.5% on her IRA. Her funds are invested in a bank. She is currently receiving $10,500 per year, or $875 per month, from the IRA. Mary feels she needs to increase the income on her IRA to at least $2,500 per month.

Mary does not feel comfortable with traditional investments at this time. She is also worried because if she increases distributions from her current IRA account, there is a high probability it will run out while she is still living. Years ago, Mary lent money to other individuals who wanted to buy real estate. She received a promissory note which was secured by a deed of trust. Mary is confident she can receive an interest rate significantly higher than her current bank rate and her funds will be secured by the underlying real estate.

With the help of her financial advisor, CPA, and attorney, Mary loaned $420,000 in the form of a first mortgage from her Roth IRA to an individual buying a property for $700,000. The loan Mary made was secured by a deed of trust on the property. The loan Mary issued was an interest-only loan at 9.0%. The loan of $420,000 is a 60% loan as compared to the current property value. This means that at the time Mary makes the loan, there is an additional 40% of equity in the property protecting her investment. The interest was due each month and the loan was due and payable in 10 years.





Self-Directed IRA Borrower Property

SecuredDeed of Trust

First Mortgage Loan$420,000

Loan Payments

Property Purchase$700,000


Mary has increased her monthly income by $2,275 ($3,150 less $875). Mary now has the monthly income from her IRA she felt was needed to supplement her other retirement income to live comfortably. Mary is also very comfortable with her new investment being secured by the real estate for which she made the loan. If the borrower is unable to make payments in the future, Mary understands that she has the legal option to foreclose on the real estate to enforce her rights.

It is important to understand that the income is not guaranteed from her Self-Directed IRA account. It is also important to understand that her original $420,000 investment is not guaranteed either.

For a discussion of the risks and an introduction to the tax rules associated with Self- Directed IRAs please see the section of this report titled IRA Rules, Regulations, Restrictions, & Recommendations.

RESULT: Each month, Mary can take tax-free income distributions of $3,150 from her Roth IRA account.


Hypothetical Analysis:Loan Amount

Times Interest Rate

$420,000

9%

Monthly Income$3,150

Annual Interest$37,800


Let’s look at an example of Bob, a hypothetical consumer, age 52, who has a current IRA balance of $500,000. One of Bob’s best friends, Greg, approached Bob about investing in Greg’s company. Greg has been in business for five years and is doing well. Greg is planning to expand his business which has shown growth every year. At this time it is very difficult to borrow money from the bank, even for Greg who shows a large profit for the last year. This is Greg’s third business; he has sold the previous two and has made a considerable amount of money from the sales. Bob feels he has enough time before retirement to let Greg do his magic. Let’s take a look at two different investment options available to Bob:




Hypothetical Analysis:

IRA Distribution

Less Federal Income Tax (assume 25%)

Less State Income Tax (assume 7.5%)

Less Federal Penalty (assume 10%)

Less State Penalty (assume 2.5%)

$500,000

-($125,000)

-($37,000)

-($50,000)

-($12,500)

Net Distribution after Taxes & Penalties$275,000

Investment Scenario #4—Flow of Funds (Lump Sum Distribution)

Self-Directed IRA Greg’s Company

Asset Purchase $275,000

Income Taxes & Penalties

Bob’s first option is to take a lump sum distribution from his IRA. While it is possible to take this route, Bob could lose nearly half of his distribution amount in income taxes and penalties.


Bob now has several options available to him to make his investment. Two of which are:

1. Transfer his $500,000 into a Self-Directed IRA. Bob can invest the full $500,000 into Greg’s company. This means that Bob can invest nearly twice as much into Greg’s company simply because Bob was not required to pay taxes by utilizing a Self-Directed IRA.

OR

2. Bob would be able to leave $225,000 in his current IRA and invest the exact same $275,000 utilizing a Self-Directed IRA. Additionally, Bob would have the remaining $225,000 in income taxes and penalties he would have paid while taking a distribution, available to make other investments should he choose to do so.

It is important to understand that the income is not guaranteed from his Self-Directed IRA account. It is also important to understand that his original $500,000 investment is not guaranteed either.


For a discussion of the risks and an introduction to the tax rules associated with Self-Directed IRAs please see the section of this report titled IRA Rules, Regulations, Restrictions, & Recommendations.

Investment Scenario #4—Flow of Funds (Self-Directed IRA)

Self-Directed IRA Greg’s Company

Asset Purchase Up to $500,000

Returns on Investment

After discussing this opportunity with his CPA, Bob decided he would use a Self-Directed IRA to provide himself investment flexibility to make the investment in Greg’s company.


While it is impossible to list out all of the prohibited IRA practices to avoid, we feel it may be very helpful to you to discuss a few of the common mistakes we have seen IRA owners make that could result in significant income taxes and penalties that could have been avoided.

The following situations provide some examples of common self-directed IRA mistakes IRA owners have made:

1. IRA’s Purchase of a Personal Residence—The use of an IRA to purchase a house for the personal use by the IRA owner or another person disqualified as to the IRA is prohibited. Although the DOL has given numerous individual exemptions for transactions involving the sale of real estate between a plan and a party in interest, these typically require an independent fiduciary to approve of the transaction. A transfer of encumbered property by a disqualified person to an IRA is also considered a sale/exchange for purposes of the prohibited transaction rules. Thus, a sale of property subject to a mortgage or deed of trust, which the IRA assumes is prohibited.

2. Loans between the IRA and a Disqualified Person—The IRA owner cannot borrow from the IRA. The IRA owner may lend IRA assets to a corporation or person who is not a disqualified person or a corporation or person in which the IRA owner does not have an interest. This would include all classes of loans, including traditional extensions of credit, seller financing arrangement, secured and unsecured lending.

3. Use of a House/Apartment that is Owned by the IRA—The use by an IRA owner or other disqualified person of a house, apartment, condo, recreational property, etc. would be a prohibited transaction because it would violate the basic rule that the IRA assets cannot inure to the personal benefit of the IRA owner or other disqualified person.

4. Owner’s Pledge or Assignment of the IRA Assets—Neither an IRA nor its assets may be assigned, pledged, or otherwise used as collateral by the IRA owner. Such assignment or pledge might not be deemed to be a disqualified transaction; however, it would be treated as a distribution with respect to the assets assigned or pledged.

5. IRA’s Purchase of Life Insurance—An IRA may not be invested in life insurance. Thus, a life insurance contract distribution from a qualified plan may not be rolled over into an IRA. In IRS’s private letter rulings, the IRS has prohibited the IRA trustee from using its corporate funds to purchase life insurance on behalf of taxpayers who have established an IRA with that trustee.

6. IRA’s Investment in an Affiliated Corporation/Partnership—Examples of this include the IRA owner either as a current owner, co-investor, employee, creditor, director or officer.

Self-Directed IRA Practices to Avoid

IRS prohibits “self-dealing,” which are investments in which you or your family members of lineal descent have prior ownership.


A properly structured Self-Directed IRA is considered the by IRS to be no different from what most of us think of as a “Standard IRA.” The IRS does not distinguish between a Self-Directed IRA and a “Standard IRA,” but instead provides guidelines and enforces rules on all IRAs. The main difference between a Self-Directed IRA and a “Standard IRA” is the investment flexibility provided by the Self-Directed IRA as compared to the typically limited investment options in the “Standard IRA.”

Please remember that a Self-Directed IRA is actually just an IRA, so the risks will generally be the same for both IRA structures. Each investment in each IRA carries its own benefits and risks. Some of the risks associated with Self-Directed IRAs include but are not limited to:

Prohibited TransactionsIt is very important to avoid prohibited IRA transactions. This can lead to unnecessary taxation and potential penalties. Examples include borrowing money from the IRA, selling property to the IRA, receiving unreasonable compensation for managing the IRA, using the IRA as security for a loan, and, buying property for personal use (present or future) with IRA funds.

Investing in CollectiblesIRA funds cannot be invested in collectibles such as artwork, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property.

An IRA cannot buy life insurance. Life insurance cannot be purchased or held in an IRA.

No S-CorporationsS-Corporations cannot be held in an IRA. Other asset ownership forms are acceptable.

Making Excess ContributionsAn individual may not make excess contributions to an IRA account.

Taking Early DistributionsUnless strict rules are followed and/or unless specific events occur, premature distributions will be taxed and potentially penalized.

Allowing Excess Amounts to Accumulate (failing to take required distributions)One of the potentially largest penalties an IRA owner faces is caused by not adhering to the minimum IRA distribution rules as set forth by the IRS. Such excess accumulations can be subject to a 50% federal excise tax.

Self-Directed IRA Rules & Restrictions

If the account owner or beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to the IRA holder at their fair market values on the first day of the year in which the transaction occurred.


Lack of LiquidityInvestments in an IRA might be partially or fully illiquid because there is no established secondary market for reselling the asset. These types of assets in an IRA should be viewed as long-term investments.

Timing of Real Estate Investment Exit is UnknownBecause there is no set date, nor preset sales price, to sell a real estate investment, there is uncertainty to when an asset will be sold and how much the asset will ultimately be sold for. IRA assets are primarily used for retirement savings. If an asset in an IRA is not liquidated at the time the asset, or income from the asset is needed, retirement goals might not be achieved.

Capital ExpendituresReal estate or other types of assets purchased in the IRA could require additional cash in the future for capital expenditures, repairs, legal costs, and other miscellaneous costs. The IRA cannot pay these costs, the IRA must pay the costs. If the IRA does not have sufficient funds to pay these expenses, additional deposits or transfers might have to be made into the Self-Directed IRA account. IRA owners must make sure to avoid making excess contributions.

Cash DistributionsCash distributed from IRAs, other than from Roth IRAs qualifying for tax-free status, will be taxed fully for ordinary income tax purposes

Lack of Exposure among ProfessionalsMany professionals from the financial, real estate, accounting and legal industries may not fully understand the potential tax and investment risks of Self-Directed IRA accounts.

Projected Cash Flow May Not Flow as PlannedThe net cash flow from the assets in an IRA can be affected by many things. Therefore, current and future cash flow from the assets can fluctuate tremendously and can be lower than what was originally anticipated. For example, if real estate is the asset in the IRA, net rental cash flow issues can be attributable to many things such as:

• Tenants being delinquent with lease payments

• Tenants moving out and having to make concessions, pay costs to acquire new tenants

• Extra expenses not planned for

• Soft leasing market

Self-Directed IRA Rules & Restrictions (Continued)

While Self-Directed IRAs can potentially provide an IRA owner with significant economic benefits, it is very important to understand the limitations and risks of Self-Directed IRAs.


Projected Appreciation May Not Occur as PlannedEvery IRA owner wants his/her IRA to increase in value. It is important to understand that typically there is no guarantee that the IRA assets will appreciate in value, nor that the IRA assets will provide a better rate of return than other non-IRA investments, nor that the IRA won’t ultimately decrease in value. There is no guarantee that the IRA will make any money at all.

Co-OwnersIf IRA assets are invested in an asset that has multiple, or co-owners, the IRA owner is locked into a long-term relationship with other people, who may not have known each other previously.

Income Tax RisksEvery IRA has the potential to be affected by a tremendous number of income tax risks. In addition to non-compliance with IRS rules, a major income tax risk is higher tax rates when IRA distributions are made to the IRA owner as compared to the income tax rates at the time the IRA contribution was made.

The IRS Could Change the Laws Regarding IRAsThe IRS has provided significant technical guidance in regards to IRAs. But at any time the rules for IRAs can be changed.

Costs and FeesTypically there are costs and fees involved with investing in any IRA asset. Some of these fees include sales commissions and compensation to the registered representative and syndication fees paid to the sponsor and others involved in the acquisition, packaging, distribution and sales process. Additionally, these fees include offering and organizational fees incurred by the sponsor to establish and promote the asset to the public. These fees ultimately decrease the net realized rate of return for the IRA assets.

Estate TaxesAssets remaining in an IRA at the time of an IRA owner’s death will typically be included in the deceased IRA owner’s estate, and thus subject to potential estate taxation. This is true for all types of IRAs including Roth IRAs. This statement might confuse many Roth IRA owners because Roth IRAs can provide income that is tax- free for income tax purposes. But ALL IRAs are included in the estate, including Roth IRAs.


With a Self-Directed IRA you can create a diversified investment portfolio to specifically match your goals, desires, and comfort zone.


No Basis Step-upIRAs, other than Roth IRAs and the non-deductible portion of traditional IRAs, have an effective tax cost basis equal to $0. This simply means that every dollar distributed will be subjected to ordinary income taxation. Many assets that are held outside of IRAs receive a stepped-up basis when the owner passes away which effectively eliminates any taxable capital gain and accompanying income taxes. IRA assets do not afford this same benefit. $500,000 in a taxable IRA account will remain as a fully taxable $500,000 account for beneficiaries.

Another Significant Consideration Is The Management Of The AssetsBy definition a Self-Directed IRA will require management participation of the IRA owner. When to buy assets, when to sell assets, day-to-day management, and basically all decisions will be a responsibility of the IRA owner.

Long-Term CommitmentMore than any other structure, IRA assets typically require the mindset of “long-term commitment”. IRAs are meant for retirement which is long-term. IRAs are typically taxable so lump-sum distributions are infrequent which also points to long-term.

Current LiquidityIt is imperative to retain enough liquidity in an IRA, especially a Self-Directed IRA, to meet the ongoing expenses associated with an investment (e.g., taxes, mortgage payments, minimum distribution payouts, capital calls, etc.). A lack of liquidity could cause an IRA owner to sell off holdings in order to meet obligations. The prospect of liquidating IRA holdings in order to satisfy cash flow demands could lead to highly unfavorable investment decisions.

Unrelated Business Taxable IncomeIncome in an IRA might create Unrelated Business Taxable Income, causing taxation in an otherwise tax-deferred account. Please see the section titled Unrelated Business Taxable Income (UBTI) for more details.



The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities:

• Investing in collectibles

• Making excess contributions

• Taking early distributions

• Allowing excess amounts to accumulate (failing to take required distributions)

There are penalties for overstating the amount of nondeductible contributions and for failure to file Form 8606, if required.

This chapter discusses those acts that you should avoid and the additional taxes and other costs, including loss of IRA status, that apply if you do not avoid those acts.

This section is stating that to avoid additional income taxes or penalties, you should avoid prohibited transactions, investing in collectibles, making excess contributions, taking early distributions, and allowing excess amounts to accumulate.

It is of utmost importance for you to seek and receive advice from qualified tax, legal, and financial advisors regarding any questions you have, or actions you plan to take, regarding your Self-Directed IRA.

IRA Rules & IRS Publication 590

Section 1—IRA Rules & IRS Publication 590

The following contains information from IRS Publication 590 that has been summarized by Jason Helquist, MA, LL.M, and President of Provident Trust Group:

It is very important to understand the rules and regulations of IRA accounts. One benefit of this understanding could be to possibly reduce taxable events you could face regarding your IRA account, caused by not following the rules properly. We will intentionally limit the scope of this section to specific areas we believe to be most beneficial to your understanding of Self-Directed IRA accounts. This section in no way tries to provide you with a complete education on the rules and regulations of IRA accounts, but instead attempts to provide you some basic information to help you start to form frameworks and reference points in your ultimate understanding of your IRA.


Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are examples of prohibited transactions with a traditional IRA:

• Borrowing money from it

• Selling property to it

• Receiving unreasonable compensation for managing it

• Using it as security for a loan

• Buying property for personal use (present or future) with IRA funds

FiduciaryFor these purposes, a fiduciary includes anyone who does any of the following.

• Exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets

• Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so

• Has any discretionary authority or discretionary responsibility in administering your IRA

Effect on an IRA accountGenerally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year.

Effect on You or Your BeneficiaryIf your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is included in your income. The distribution may be subject to additional taxes or penalties.

Borrowing on an Annuity ContractIf you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early distributions, discussed later.

Pledging an Account as SecurityIf you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions, discussed later.


Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.


Taxes on Prohibited TransactionsIf someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected.

Loss of IRA statusIf the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary are not liable for these excise taxes. However, you or your beneficiary may have to pay other taxes as discussed under Effect on You or Your Beneficiary, earlier. Investment in collectibles. If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later. Collectibles which include:

• Artworks• Rugs• Antiques• Metals• Gems• Stamps• Coins• Alcoholic beverages• Certain other tangible personal property

ExceptionYour IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.

Excess ContributionsContributions for the year you reach age 70½ and any later year are also excess contributions. An excess contribution could be the result of your contribution, your spouse's contribution, your employer's contribution, or an improper rollover contribution. If your employer makes contributions on your behalf to a SEP IRA, see Publication 560.

Tax on Excess ContributionsIn general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year. The additional tax is figured on Form 5329.



Excess Contributions Withdrawn by Due Date of ReturnYou will not have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.

Use the following formula to calculate the net income attributable to the excess contribution.


On May 1, 2011, when her IRA was worth $4,800, Jean made a $1,600 regular contribution to her Traditional IRA. No additional contributions were made. Jean then requests that $400 of the May 1, 2011, contribution be returned to her as an excess contribution. On February 1, 2012, when the IRA is worth $7,600, the IRA trustee distributes to Jean the $400 plus net income attributable. No other distributions were made. The Account Closing Balance is $7,600, and the Account Opening Balance is $6,400 ($4,800 + $1,600). Using the formula above, let’s find out how much will need to be distributed.

RESULT: The total to be distributed on February 1, 2012 is $475 ($400 excess contribution + $75 NIA).

Hypothetical Example:

=

-xNet Income

Attributable (NIA)

ExcessContribution

Adjusted ClosingBalance

Adjusted OpeningBalance

Adjusted OpeningBalance

=-x

$75 Net IncomeAttributable (NIA)

$400 $7,600 $6,400

$6,400


Early DistributionsYou must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax, as discussed later.

Early Distributions DefinedEarly distributions generally are amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age 59½.

Age 59½ Rule• Generally, if you are under age 59½, you must pay a 10% additional tax on the

distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59½ are called early distributions.

• The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.

You may have to pay a 25%, rather than a 10%, additional tax if you receive distributions from a SIMPLE IRA before you are age 59½. After you reach age 59½, you can receive distributions without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 59½, distributions are not required until you reach age 70½.

ExceptionsThere are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations:

• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

• The distributions are not more than the cost of your medical insurance.

• You are disabled.

• You are the beneficiary of a deceased IRA owner.

• You are receiving distributions in the form of an annuity.

• The distributions are not more than your qualified higher education expenses.

• You use the distributions to buy, build, or rebuild a first home.

• The distribution is due to an IRS levy of the qualified plan.

• The distribution is a qualified reservist distribution.

Most of these exceptions are explained in the next section.

Distributions that are timely and properly rolled over, are not subject to either regular income tax or the 10% additional tax.



Unreimbursed Medical ExpensesEven if you are under age 59½, you do not have to pay the 10% additional tax on distributions that are not more than:

• The amount you paid for unreimbursed medical expenses during the year of the distribution, minus 7.5% of your adjusted gross income (defined later) for the year of the distribution.

You can only take into account unreimbursed medical expenses that you would be able to include in figuring a deduction for medical expenses on Schedule A, Form 1040.You do not have to itemize your deductions to take advantage of this exception to the 10% additional tax.

Adjusted Gross IncomeThis is the amount on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 36.

• Medical Insurance. Even if you are under age 59½, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply:

○ You lost your job.

○ You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.

○ You receive the distributions during either the year you received the unemployment compensation or the following year.

○ You receive the distributions no later than 60 days after you have been reemployed.

DisabledIf you become disabled before you reach age 59½, any distributions from your traditional IRA because of your disability are not subject to the 10% additional tax. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.

BeneficiaryIf you die before reaching age 59½, the assets in your traditional IRA can be distributed to your beneficiary or to your estate without either having to pay the 10% additional tax.

However, if you inherit a traditional IRA from your deceased spouse and elect to treat it as your own, any distribution you later receive before you reach age 59½ may be subject to the 10% additional tax.



AnnuityYou can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59½. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The required minimum distribution method, when used for this purpose, results in the exact amount required to be distributed, not the minimum amount.

There are two other IRS-approved distribution methods that you can use. They are generally referred to as the fixed amortization method and the fixed annuitization method. These two methods are not discussed in this publication because they are more complex and generally require professional assistance.

Recapture tax for changes in distribution method under equal payment exception. You may have to pay an early distribution recapture tax if, before you reach age 59½, the distribution method under the equal periodic payment exception changes (for reasons other than your death or disability). The tax applies if the method changes from the method requiring equal payments to a method that would not have qualified for the exception to the tax.

The recapture tax applies to the first tax year to which the change applies. The amount of tax is the amount that would have been imposed had the exception not applied, plus interest for the deferral period. You may have to pay the recapture tax if you do not receive the payments for at least five years under a method that qualifies for the exception. You may have to pay it even if you modify your method of distribution after you reach age 59½. In that case, the tax applies only to payments distributed before you reach age 59½.

One-time SwitchIf you are receiving a series of substantially equal periodic payments, you can make a one-time switch to the required minimum distribution method at any time without incurring the additional tax. Once a change is made, you must follow the required minimum distribution method in all subsequent years.

Higher Education ExpensesEven if you are under age 59½, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax is generally the amount that is not more than the qualified higher education expenses (defined later) for the year for education furnished at an eligible educational institution (defined later). The education must be for you, your spouse, or the children or grandchildren of you or your spouse.


For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at www.irs.gov/pub/irs-irbs/irb02-42.pdf


When determining the amount of the distribution that is not subject to the 10% additional tax, include qualified higher-education expenses paid with any of the following funds:

• Payment for services, such as wages

• A loan

• A gift

• An inheritance given to either the student or the individual making the withdrawal

• A withdrawal from personal savings (including savings from a qualified tuition program)

Do not include expenses paid with any of the following funds:

• Tax-free distributions from a Coverdell education savings account

• Tax-free part of scholarships and fellowships

• Pell grants

• Employer-provided educational assistance

• Veterans' educational assistance

• Any other tax-free payment (other than a gift or inheritance) received as educational assistance

Qualified Higher Education ExpensesQualified higher-education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher-education expenses.

Eligible Educational InstitutionThis is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.



First HomeEven if you are under age 59½, you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time home-buyer distribution, the distribution must meet all the following requirements.

1. It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.

2. It must be used to pay qualified acquisition costs for the main home of a first-time home-buyer (defined later) who is any of the following.

a. Yourself

b. Your spouse

c. Your or your spouse's child

d. Your or your spouse's grandchild.

e. Your or your spouse's parent or other ancestor.

3. When added to all your prior qualified first-time home-buyer distributions, if any, total qualifying distributions cannot be more than $10,000.

If both you and your spouse are first-time home-buyers, each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified Acquisition CostsQualified acquisition costs include the following:

• Costs of buying, building, or rebuilding a home.

• Any usual or reasonable settlement, financing, or other closing costs.

First-time Home-buyerGenerally, you are a first-time home-buyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.



Additional 10% TaxThe additional tax on early distributions is 10% of the amount of the early distribution that you must include in your gross income. This tax is in addition to any regular income tax resulting from including the distribution in income.

Hypothetical Example.Tom Jones, who is 35 years old, receives a $3,000 distribution from his traditional IRA account. Tom does not meet any of the exceptions to the 10% additional tax, so the $3,000 is an early distribution. Tom never made any nondeductible contributions to his IRA. He must include the $3,000 in his gross income for the year of the distribution and pay income tax on it. Tom must also pay an additional tax of $300 (10% × $3,000). He files Form 5329. See the filled-in Form 5329 at www.irs.gov.

Early distributions of funds from a SIMPLE retirement account made within two years of beginning participation in the SIMPLE are subject to a 25%, rather than a 10%, early distributions tax.

Nondeductible contributions. The tax on early distributions does not apply to the part of a distribution that represents a return of your nondeductible contributions (basis).

Excess Accumulations (Insufficient Distributions)You cannot keep amounts in your traditional IRA indefinitely. Generally, you must begin receiving distributions by April 1 of the year following the year in which you reach age 70½. The required minimum distribution for any year after the year in which you reach age 70½ must be made by December 31 of that later year.

Temporary Waiver for 2009No minimum distribution is required from your IRA for 2009.

Tax on ExcessIf distributions are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required.

If you rolled over part or all of a distribution from a qualified retirement plan, the part rolled over is not subject to the tax on early distributions.

Section 10—IRA Rules & Publication 590


Why haven’t I heard of Self-Directed IRAs before?The “Good ol’ Boys Network”—Advisors, custodians, and investment companies only allowing account holders to hold investments their firm offers. Market Share—Traditional investment community has had control of over 97% of retirement accounts. Lack of Knowledge—Some traditional custodians/brokers are not aware of, and educated, about the potential benefits Self-Directed IRAs can provide.

What types of accounts can I put in a Self-Directed IRA?You can place the following accounts in a Self-Directed IRA:

• Traditional IRA• Roth IRA• SEP IRA• SIMPLE IRA• Coverdell Education Savings Account (ESA)• Individual (k)• Health Savings Account (HSA)• Rollovers and transfers from retirement account

How can I use a Self-Directed IRA?Self-Directed IRA allows you to diversify from traditional investments to “non-traditional investments.” This can be real estate, deeds of trust, notes, tax liens and other asset types. You can use your investment knowledge and proficiency to help you prepare for your retirement.

How do I invest in real estate with a Self-Directed IRA?First you must transfer your IRA, 401k, or other qualified funds to a Self-directed IRA custodian. Your Self- Directed IRA will allow you to buy almost any asset, including real estate. Next, find an asset to invest in. Be certain to investigate and perform your due diligence on any investment. Title to the asset is ABC Trust FBO Your Trust.

Can I purchase real estate that I already own with my Self-Directed IRA?No. This is a prohibited transaction per IRC 4975. You may not purchase a property or an interest in a property that is currently owned by any disqualified person. Per IRS Publication 590: Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

Common Questions about Self-Directed IRAs


Can I get a mortgage to invest in a Self-Directed IRA?Yes, you may, but only with a non-recourse loan.

What is a non-recourse loan?With a non-recourse loan, the note can only be secured by the property itself. It cannot be personally secured. The lender can only use the property as collateral to secure the note. If your IRA fails to make the loan payments, the only collateral the lending institution can come after is the property itself, and not the IRA. Non-recourse loans with your Self-Directed IRA are a great way to help you to be able to diversify.

Can I invest with my spouse or use my own funds not in a Self-Directed IRA too?Yes, you can form an LLC with other Self-Directed IRAs and your own funds and/or other investor's funds as long as the other owners are not disqualified persons. This is a valuable resource for large investments.

Is there a minimum investment amount to establish a Self-Directed IRA account?No.

Are there specific investments I cannot put in my IRA?Life insurance, Sub-Chapter S Corporations, and Collectibles.

Can I buy a personal residence inside my IRA?No.

If I die, what happens to my Self-Directed IRA?Upon your death, IRA assets would be distributed to the beneficiaries you have appointed to your account. This step is critical to ensure assets are distributed according to your best wishes rather than being tied up in a drawn out probate process.

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