Ways to Benefit From a Well Diversifed Retirement

Meeting with account custodian.

Meeting with account custodian.

Planning For Retirement Is Not Difficult But Does Require Vigilance.

IRAs that allows account owners to make their own investment decisions for their personal retirement portfolio are known as a self directed retirement account.

This offers a huge difference from more common IRAs because it allows someone with good investing skills, find new opportunities to increase their retirement funds.

The owner of the self managed account now has the freedom to invest in a wide variety of options that were not permissible under a traditional plans. For instance, the self-directed Roth owner may look for investment deals in financial and property markets. Finding great investments is a way to rapidly increase funds for retirement.

However, to fully benefit from the added investment freedom associated, the account owner can use the power of checkbook control.

In other words, while this type of account offers immense value, account owners have to be aware of the role of the custodian and the caveats associated with IRS restrictions to operate this account effectively.

A Qualified Plan Custodian Is Still Necessary

Although the account is self directed, the IRS still requires that a custodian, or qualified trustee, hold the account for the plan owner. The role of the custodian is to keep track of the assets, the investment transactions, and all other record keeping functions. In this way, the custodian can file an IRS report at tax time on behalf of the account owner. Another function of the custodian is to inform the client about the regulations related to prohibited transactions. In addition, the custodian performs administrative functions associated with the account.

The difference between custodians for a traditional IRS approved plan and a self-directed one, however, is immense. With earlier IRAs, the custodian entangles the account owner in a lot of red tape. For instance, the account owner is restricted on asset classes he or she can invest in and must also ask permission to make any investments. In addition, there is a fee for everything associated with the account, which can compromise the amount of money set aside for retirement.

Prohibited or Non-Allowable Asset Types

Although the range of permissible investments for is broader, and includes assets like stocks, bonds, and mutual funds, as well as real estate and precious metals, the IRS does place limits on what can be purchased.

For instance, the IRS does not permit investments in the following asset classes:

• Insurance coverage

• Collectibles like artwork, rugs, antiques, metals, gems, stamps, coins alcoholic beverages, and certain other tangible personal property (However, there are exceptions when it comes to metals, as well as many coins minted by the U.S. Treasury.)

Disqualified Persons or Business Entities

The main concern the IRS has is self-dealing. This is why there is a long list of disqualified persons.

Here are some examples of disqualified persons:

• The account owner

• The account owner’s beneficiary

• The account owner’s family members like spouse, children, parents, and relatives

• Those associated with the IRAs origination company, such as the financial planners, a CPAs, or the custodians.

• Any business—for instance, a corporation, partnership, limited liability companies, trusts or estate — of which 50% or more is owned directly or indirectly by the account owner. The account owner cannot borrow money from it, sell property to it, receive unreasonable compensation for managing it, use it as security for a financial loan, or buy property for individual use (present or future) with retirement funds.

What Exactly Is Self Dealing?

The best way to understand self dealing is to look at a few examples. Structured retirement account owners are considered self-dealing if:

1. They use their account to buy real estate property that they either own or use.

2. They issue a mortgage on a relative’s (of lineal descent) new residence, a residence that is purchased by a family member who fits into the list of disqualified persons.

3. They grant a new home owner a mortgage and accept a down payment on their first home.

4. They buy stock in the account owner’s own business or permit a disqualified person to buy the stock on their behalf.

5. They purchase stock in a private corporation where the account owner holds a controlling equity position.

6. They purchase stock in a private corporation where a disqualified person holds a controlling equity position.

7. They use another Limited Liability Company to reduce all costs associated with their Retirement LLC costs, such as investment fees, paperwork, or administrative costs.

Penalties for Prohibited Transactions

The IRS has some heavy penalties for violating their rules on self-dealing. For one thing, the tax free status is jeopardized. This status goes beyond the prohibited transaction and covers the total account from the start of the year when the prohibited transaction occurred. In addition, an early withdrawal penalty of 10% might be applied.

Final Thoughts

A self-directed Individual Retirement Account may be a tremendous boon for someone who enjoys making investment decisions based on their years of managing their own money. By following a few simple guidelines and rules, respecting the role of the custodian and avoiding any potential investments that could be considered a prohibited transaction, an account owner can take full advantage of the many benefits of being self directed.

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