When you first started driving you had to learn the rules. When you got your first real job, you quickly learned (and sometimes in very imaginative ways) the rules of your new office. When you get a Self-Directed IRA, well… you just have to know the Self-Directed IRA rules. Here’s a quick recap that can give you a picture of how it all works with a Self-Directed retirement plan.
Self-Directed IRA Rule #1 – The Prohibited Transaction Rule
This rule is the one which causes the most confusion, so let’s address it first. Prohibited Transactions are simply transactions that your Self-Directed IRA is not allowed to make. There are two parts to each of these transactions: the who and the what. The who is the investor and any linear relative like a child or parent. The what is giving or getting benefit to the account. Here’s two easy examples:
Your father may not make a donation, cash or work related, to your Self-Directed IRA, or personally benefit.
You can not take a salary for managing your Self-Directed IRA.
Self-Directed IRA Rule #2 – Contributions and RMDs
In a Self-Directed IRA, all contributions and Required Minimum Distributions must be made to the IRA itself, and not to the IRA’s checking account. Other than that, the rules for the Self-Directed IRA are similar to those of a standard IRA. With either type of IRA, the investor may start taking distributions at 59 ½, must start taking distributions at 72, and can contribute up to $5,500 a year. (If the investor is 50 or older, then the contribution limit is $6,500.)
Self-Directed IRA Rule #3 – Taxes
A Self-Directed IRA is a tax deferred instrument, and thus no taxes are due until distributions are made. There are two exceptional cases, though, 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.)
Self-Directed IRA Rule #4 – Reporting
There are three filings which may be required from your Self-Directed IRA:
Form 5948 – This reports the value of the IRA and any of the past year’s contributions. Download from the IRS.
Form 1099R – This reports any distributions from the IRA.
Form 990T – This is used for filing any potential UBIT or UDFI.
Self-Directed IRA Rule #5 – No Credit Cards
This is actually a Prohibited Transaction. Your Self-Directed IRA may not apply for a credit card, as the process entails giving a personal guarantee to the card. However, if is important that you possess a bankable piece of plastic for your IRA LLC’s checking account, you may apply for a debit card.
So there you have it: the top 5 Self-Directed IRA rules. When you actually put the rules into practice, you most probably will come up with some questions of your own.