Published on: 03/15/2016
Self-Directed IRAs – Avoid the Tax Landmines
Every year, we get questions from clients about Self-Directing their IRAs – Basically owning non-publically tradable assets in their IRAs. There are many promoters out there touting that you can even own your lake house in your IRA. Before you go down that path, I have created the attached piece that discusses the income tax benefits of Self-Directed IRAs and possible landmines to consider before you move forward.
Bottom line, a self-directed IRA isn’t a different type of IRA, but rather it refers to an IRA that you direct the investments of your IRA Assets into non-traditional investments. Although many of the benefits sound attractive, especially for those of you that have most of your money in IRAs, there are a lot of costly tax mistakes that can be made when establishing a self-directed IRA. If you fail to follow the rules (both tax rules and the chosen IRA custodian’s rules), the IRS can disqualify the IRA and deem it a distribution subject to taxes and possible penalties.
The linked article on Self-Directed IRAs walks you through the process. Bottom line:
- Do your due diligence as to the investment and the custodian to make sure that the investment is prudent (not a prohibited transaction) and that the IRA Custodian is OK with the investment. At Avidian Wealth, we typically recommend Millennium Trust for these types of transactions.
- Understand that even appropriate investments may have some adverse tax consequences such as the UBIT/UBTI tax on unrelated business income.
- The self-directed IRA may have additional custodial fees and/or needs to have the assets appraised each year (it can be expensive).
- Discuss this with your financial team, including your CFP®, CPA and Attorney to make sure that you are not setting yourself up for a big tax problem.
Bottom line, Self-Directed IRAs are completely legal and may be a good deal for you – if you know and follow the rules.
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