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IRS Rules and Regulations

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 exact same way. Both are tax deferred accounts available to American workers looking to save for retirement.

That being said, it is worth it to review some of the more pertinent IRS rules pertaining to IRAs as most people are not well versed in these areas.

IRS Rules on Maintenance for a Self-Directed IRA

The IRS requires three basic forms of annual maintenance for a self-directed IRA: contributions, valuation, and reporting.

  • Contributions – An investor does not have to make contributions during any given year, but if contributions are made, they must be deposited by April 15 of the following year.
  • Valuation – Self-directed IRAs require a valuation as to their current assets. This is done on a standard form which you should be able to get from your facilitator.
  • Reporting – The three most commonly required tax forms are Form 5498, Form 1099R, and Form 990T. Form 5498 is filed by the custodian and reports the value of the IRA, as well as any contributions that were made the previous year. Form 1099R is also filed by the custodian, and reports any distributions. Form 990T applies when there is UBIT or UDFI to be declared, and may involve a payment.

There are two exceptional cases when taxes could become due in the present tax year. 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. (Obviously, if no leverage or borrowing occurred, then this doesn’t apply.)

Find out more about Annual Maintenance.

IRS Rules on Distributions for a Self-Directed IRA

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 59½, the funds are subject to a 10% penalty plus any applicable taxes. If the investor is between 59½ and 72, there are no penalties but taxes must be paid. After age 72 the investor must start taking distributions (RMDs), and pay applicable taxes. The amount of the RMD varies as to circumstance, and a knowledgeable accountant should be consulted to obtain the proper value.

IRS Rules on Prohibited Transactions in a Self-Directed IRA

Self-directed IRAs have an advantage in that they can invest in all kinds of alternative assets. However, with this advantage come a corresponding need for greater cognizance of the investment 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. 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.

The rules governing Prohibited Transactions are not overly complicated, and it pays for an investor to get acquainted with the rules so as to keep his/her self-directed IRA fully compliant.

Find out more about Prohibited Transactions.

Some prohibited transactions include applying for credit cards, and investing in collectibles and life insurance contracts.

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