When it comes to managing an IRA that's Self-Directed, it's important to understand the rules from the IRS. Since this type of account allows you to invest in alternative assets that a standard IRA doesn't, many initially believe that self-managed IRA rules are different.
However, this isn't the case. The IRS rules and regulations for a Self-Directed IRA are the same as those for a standard IRA: The IRS doesn't draw any distinctions between the two platforms, as they both function in the same way. Both are tax-advantaged accounts available to American taxpayers looking to save for retirement and are therefore subject to the same IRS IRA rules
That being said, it is worth it to review some of the more pertinent Self-Directed IRA rules.
The IRS requires three basic forms of annual maintenance for a self-directed IRA: contributions, valuation, and reporting.
There are two exceptional cases when taxes could become due in the present tax year under the current Self-Directed IRA tax rules. One is UBIT, Unrelated Business Income Tax, which is a tax that is applied if the IRA owns an active business.
The second is UDFI, Unrelated Debt-Financed Income, which is a tax levied on the portion of profits that can be attributed to leverage. (If no leverage or borrowing occurred, then this doesn't apply.)
The Self-Directed IRA withdrawal rules aren't the same for everyone: Distributions from a Self-Directed IRA can have different consequences depending on the age of the investor when the distribution is made. If the investor is younger than 59 ½ when they take a Self-Directed IRA distribution, the rules state that the funds will be subject to a 10% penalty plus any applicable taxes. If the investor is between 59 ½ and 72, there are no penalties but taxes must be paid.
After age 72, if the investor has a Traditional Self-Directed IRA, they must start taking required minimum distributions (RMDs) and pay applicable taxes. The amount of the RMD varies depending on the individual's circumstances, and a knowledgeable accountant should be consulted to obtain the proper value.
Self-Directed IRAs have an advantage in that they can invest in all kinds of alternative assets. However, with this advantage comes a corresponding need for greater cognizance of the IRS IRA rules.
The IRS prohibits the investor, the investor's linear family, and certain other individuals who have a relationship with the investment asset from taking or giving any benefit to the asset. This is one of the most important standard and Self-Directed IRA rules to understand. These people are known collectively as disqualified persons. When a disqualified person interacts improperly with the IRA or its assets, it is known as a prohibited transaction.
Whether you have a standard or Self-Directed IRA, the rules are the same. They're not overly complicated, and it pays for an investor to get acquainted with the rules to make sure that their Self-Directed IRA is fully compliant.
Schedule a call with one of our Self-Directed Specialists today to get answers to your questions and find the investment vehicle that's right for you.SCHEDULE A CALL
One Paragon Drive
Montvale, NJ 07645
Phone: (800) 395-5200
Mondays – Thursdays: 8:00 am – 6:00 pm EST
Fridays – 10:00 am – 4:00 pm EST