Self-Directed IRAs
Self-directed IRAs present a number of significant opportunities and the potential to save quite a bit in taxes.
The self-directed IRA allows the account owner to invest in alternative assets, such as real estate, promissory notes, and tax liens. If properly structured, these investments can produce significantly higher investment returns than possible through the investments that are available in traditional IRAs.
The SD IRA Rules are Complex
The self-directed IRA rules are complex. This complexity stems from the self-directed aspect of IRAs.
The account owner must not engage in prohibited transactions, which generally involves avoiding any self-dealing or even perceived self-dealing.
To the extent the IRA assets are subject to the unrelated business income tax or UBIT (such as when there is income from debt-financed real estate or an operating business), the account owner may need to file an income tax return for the IRA.
Also, if the self-directed IRA owns a limited liability company or other legal entity, the account owner may need to ensure that the entity documents are prepared and timely filed.
The IRS’s Approach to Self-Directed IRAs
The IRS has been auditing self-directed IRAs and this will no doubt continue.
These audits can result in significant tax adjustments and penalties. These adjustments can be very large and negate the very benefits of the self-directed IRA.
Recordkeeping is imperative–particularly with self-directed IRAs structured to have “checkbook control.”
The recent court cases are evidence of this. Here are a few examples:
- LLC Owned by Self-Directed IRA Cannot Pay Wages
- Self-Directed IRA Purchase of Real Estate is Taxable
- Self-Directed IRA Can Flip Houses & Share Ownership of Property
- Promissory Notes Owned by Self-Directed IRA Were Not Worthless
- Personal Guarantees for Company Owned by Self-Directed IRAs were Prohibited Transactions
- Self-Directed IRA Owners Cannot Hold Gold Owned by the IRA
We know these cases well.
We Help With Self-Directed IRAs
We help clients plan for and defend self-directed IRAs. We advise clients on self-directed IRA questions, structuring, and audits and appeals.
We have advised hundreds of clients on these issues.
Call us today at (713) 909-4906 or schedule an appointment to discuss your self-directed IRA questions.
Articles About Self-Directed IRAs
- Is Military Pension Taxable (Answered)
There are a number of tax breaks afforded to those in the military. This includes collection holds on unpaid taxes owed by members of the military to laws that exempt certain income from tax altogether. The exemption from paying tax… Continue reading Is Military Pension Taxable (Answered) - Can a Self-Directed IRA Hold Gold Coins?
Precious metals IRAs are popular. This includes silver IRAs, gold Roth IRAs, and even gold-backed IRAs. These accounts allow investors to invest in these alternative assets. This in turn allows the investors to diversify their exposure to stocks and bonds.… Continue reading Can a Self-Directed IRA Hold Gold Coins? - Fixing Self-Directed IRA Errors
There are ways to structure transactions to avoid income taxes. Creative taxpayers and tax attorneys have used qualified retirement accounts for this purpose (the tax savings from ESOPs is an example). One has to be careful when structuring transactions involving… Continue reading Fixing Self-Directed IRA Errors
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