Self-Directed IRA FAQs

Browse topics below to find what you are looking for.

General

What are the benefits of a self-directed IRA? 

The main benefit of a self-directed IRA is investment freedom. A self-directed individual retirement account (SDIRA) gives you the flexibility and choice of exactly how to invest your retirement dollars. You can expand and diversify your investment opportunities beyond the stock market into a variety of assets, like real estate or private equity. By diversifying your investments, you increase the chance of protecting and enhancing your retirement.

How does a self-directed IRA (SDIRA) work? 

An SDIRA works like any other IRA, except you have all control over the investments. Once your account has been established at IRAR and you have enough funds to make an investment, then you tell IRAR what to invest in. IRAR will make the purchase on behalf of your IRA, but you make the decisions on when and how. Once your asset starts producing income, that income goes into the IRA. Any expenses come out of the IRA. You are in total control over buying and selling within your IRA.

How do I start investing with a self-directed IRA? 

You need to complete a new account application and let us know how you will fund the account. If you have an existing IRA or old 401(k), you can move it to a company like IRAR. This is the best way to fund your account. If you've never set up an IRA, you can start saving now with regularly scheduled contributions.

How much money can I put in a self-directed IRA? 

There is no limit to how much you can move from one retirement account to an SDIRA. If you have an existing IRA or old 401(k), you can move the funds to a company like IRAR. If you've never set up an IRA, you can start saving now with regularly scheduled contributions. There is a limit to how much you can contribute annually. Once your self-directed IRA has enough funds, you can make your first purchase.

Do I qualify for a self-directed IRA? 

Almost anyone can establish a self-directed IRA. To establish an account, you need to complete an application and submit it with a government-issued identification, such as a driver’s license.

Is a self-directed IRA a good idea? 

A self-directed IRA can be a great idea if you have expertise or knowledge about a certain asset or market. For example, if you're a real estate investor and already know the ins and outs of investing in real estate, then you'll probably benefit from the freedom to invest that SDIRAs provide. If you already hold an investment that's producing great returns outside of your IRA, why not invest in the same asset with your IRA? You have options.

How do I set up a self-directed IRA? 

To set up a self-directed IRA, you need to research custodians. Once you've found the right provider for you, you'll open an account with them. You'll need to complete their paperwork and provide some form of government-issued ID, like a driver's license or passport.

Do I need a custodian for a self-directed IRA? 

Yes. In order to have a self-directed IRA, you need a custodian. The IRS states that your retirement account must have a third party oversee your IRA for protection and oversight. Custodians are regulated, audited, and held to specific guidelines.

What's a self-directed IRA custodian? 

A self-directed IRA custodian is an entity or company that provides custody and administration of self-directed retirement plans. These companies are regulated by state and federal law and must comply with requirements set by the law. In order to become a custodian, the company must meet strict qualifications.

How do I choose a self-directed IRA custodian? 

Everyone has different requirements when choosing a self-directed IRA custodian. Here are some common things to look for when conducting due diligence:

  • Fees: Not all custodians charge the same. Read the fine print in fee disclosures to make sure you know what you're agreeing to pay for your IRA.
  • Industry knowledge: Not all custodians have knowledgeable teams. Make sure they are Certified IRA Services Professionals (CISPs).
  • Servicing times: You can miss out on a deal if your custodian has slow servicing times. Pay attention to their communication style when conducting due diligence.

Private Placement

Is having an LLC in my IRA permitted? 

Yes, it’s legal. The Internal Revenue Code doesn’t list the types of assets that you can invest in. It only states what you cannot invest in. The only two prohibited assets are life insurance and collectibles. Because an LLC is not a prohibited asset, it is a legal investment for your self-directed IRA.

I’ve heard the terms “checkbook control IRA” and “IRA LLC.” What are these? 

When you use an LLC in your IRA, you have checkbook control of your IRA funds. Checkbook control refers to your ability to have a checkbook in your hands that is linked to your retirement funds. When you identify an investment, you write the checks. You’re in total control.

Can I partner with friends and family in my LLC? 

Yes, but partnering with disqualified persons is allowed only at the moment when the IRA LLC is created. Partnering can be a great way to raise additional capital for the purchases you want to make. The percentage of ownership in an LLC is determined by the capital contribution. If your IRA puts $60,000 into the LLC and your spouse’s IRA contributes $40,000, it is a 60/40 split.

Can I pay myself a salary to manage my LLC? 

No, earning a salary is self-dealing. An IRA owner can’t benefit from the IRA’s investments until the assets are distributed. See IRC Code 4975, specifically the benefit rule, for more detailed information.

Can I roll over my current real estate LLC and its investments to IRA Resources? 

It depends. If your IRA currently owns your LLC, you can roll it over or transfer it to IRA Resources. If the LLC is currently held outside of your IRA, you must form a new LLC for your IRA. For a new LLC, you must create a specific operating agreement that meets the regulatory requirements to structure your retirement account this way.

Does an IRA LLC have the same tax advantages as holding an asset directly in my self-directed IRA? 

Using an LLC in your self-directed IRA does not change the tax advantages you receive. Your IRA invests in and owns the LLC. An IRA is a tax-deferred entity, so there is no taxable event in your IRA when investing directly or through the LLC.

Does IRA Resources handle the accounting of my LLC? 

No, the accounting for your LLC is the responsibility of the LLC manager or its advisors.

Does IRA Resources handle the legal work of incorporating an LLC? 

No, IRA Resources is the record keeper for the account. IRA Resources does not create LLCs or sell any type of investment. Most custodians or administrators require that you use a third party to create the IRA LLC.

Does IRA Resources need to review and approve investments I want to make with my LLC? 

No, when you have checkbook control of your IRA funds through an LLC, there is no need to involve IRA Resources in the purchases your LLC makes. You’re in control, and you’re responsible for knowing and following the rules. It’s very important that you educate yourself on the rules if you are considering using an LLC in your self-directed IRA.

What are the advantages of using an LLC versus just having my self-directed IRA purchase an asset? 

Advantages of using an LLC in your self-directed IRA include:

  • Control: You have a checkbook that is linked to a checking account set up in the name of your LLC under its own tax ID number. When you identify an investment that you want to purchase, you can just write a check. You don’t have to fill out paperwork, get approval from the administrator, or wait for someone else to fund the investment. You can take care of it yourself. This can be particularly helpful in investments that have a limited time period or are being auctioned.
  • Cost: Checkbook control can help you avoid transaction and check-writing fees that are typically associated with a self-directed IRA. If there are multiple investments in the LLC, IRA Resources only charges you for one asset, the LLC.

What happens if my LLC needs money for repairs or fees and everything is invested? 

If the LLC checking account is cash-poor, here are a couple of ways to get more money in the account:

  • Annual contribution: If you are eligible to make annual contributions and haven’t done it yet, make your contribution. You can direct IRA Resources to send the money in the name of the LLC to you as the manager and deposit it in the LLC’s checking account. This is applied as additional capital.
  • Partnering: If you can’t make a contribution, you can add partners (as long as the person is not disqualified to the LLC) or the LLC can get a non-recourse loan. The list of disqualified people includes you, your spouse, children, grandchildren, parents, grandparents, and all their spouses. It’s always a good idea to apply due diligence and refer to IRC Code 4975 to avoid a prohibited transaction.

Why can’t I have an LLC with the IRA that I have with my broker? 

Brokers sell stock market–based investments. Many brokers don’t understand self-direction and discourage their clients from engaging in it. Remember, your broker was trained to sell you stocks, mutual funds, CDs, and bonds.

LLC-Checkbook Control

What is an IRA LLC or Checkbook IRA? 

An IRA LLC or Checkbook IRA is a legal entity that can purchase assets outright, allowing you the freedom to self-direct your retirement funds. This is a popular strategy among real estate investors who often need quick access to cash for maintenance and repairs.

Is having an LLC in my IRA permitted? 

Yes, it’s legal. The Internal Revenue Code doesn’t list the types of assets that you can invest in. It only states what you cannot invest in. The only two prohibited assets are life insurance and collectibles. Because an LLC is not a prohibited asset, it is a viable investment for your self-directed IRA.

What are the advantages of using an LLC versus just having my self-directed IRA purchase an asset? 

Some advantages of using an LLC in your self-directed IRA include:

  • Control: You have a checkbook that is linked to a checking account that is set up in the name of your LLC under its own tax ID number. When you identify an investment that you want to purchase, you can just write a check. You don’t have to fill out paperwork, get approval from the administrator, or wait for someone else to fund the investment. You can take care of it yourself. This can be particularly helpful in investments that have a limited time period or are being auctioned.
  • Cost: Checkbook control can help you avoid transaction and check-writing fees that are typically associated with a self-directed IRA. If there are multiple investments in the LLC, IRAR only charges you for one asset, the LLC.

Why doesn’t my broker and current custodian allow an IRA LLC in my account? He said it's not allowed. 

Brokers sell stock market–based investments. Many brokers don’t understand self-direction and discourage their clients from engaging in it. Remember, your broker was trained to sell you stocks, mutual funds, CDs, and bonds.

Can the manager who manages the property use the funds to pay the earnest money and closing costs? 

Yes. If an IRA invests in an LLC, the cash that is under the LLC can be used to pay the earnest money in purchasing a property and pay closing costs as well.

Can an IRA-owned LLC invest in crowdfunded real estate deals (through RealCrowd, Fundrise, and so on)? 

Yes. IRA-funded LLCs can invest in crowdfunded investments as long as the investments comply with the prohibited transaction rules. An IRA does not have to invest in an LLC to invest in crowdfunding. It may invest directly.

If I have an SDIRA LLC and I am over 59 ½, can I withdraw funds from the IRA at any time for personal use, or do I need to dissolve the LLC before I can have access to these funds? 

Distributions from an IRA can be taken at any time even if it is invested in an LLC. The distribution will be taxed depending on the type of IRA the LLC is held under (e.g., Traditional versus Roth).

With regards to property management, can the manager of the LLC perform property management functions when that manager is the owner of the IRA? 

It is not advisable for the disqualified person (e.g., the IRA owner) to perform services on an investment held under their own IRA. Performing services is one of the functions listed under IRC 4975 that is considered a prohibited transaction.

How are assets and cash held for both the LLC and/or the actual self-directed IRA account? 

All are considered held under the IRA (i.e., both the LLC and checking account). The title of the checking account must be in the name of the LLC owned by the IRA. Any distributions to the IRA holder must be sent to IRAR for proper reporting to the IRS.

What is UBIT? 

UBIT (Unrelated Business Income Tax) is a tax on tax-exempt entities such as IRAs for income related to trade/business activities. Certain incomes are carved out from taxation (e.g., rental income, interest, dividends)

If I control 65 percent of my small business (an LLC), can I buy shares in the company with an IRA? 

Technically no, because you already own and control the LLC. Therefore, the LLC is a disqualified entity and any transaction with the LLC is prohibited.

Can I do a personal guarantee for the loan to the LLC owned by my IRA? 

Unfortunately, no, because a personal guarantee could be viewed as an extension of credit to the LLC.

If I purchase a condo through my IRA LLC, can I use the condo for personal purposes as well as investment purposes? 

Using a condo owned by your IRA would be a prohibited transaction.

Can my IRA LLC partner with my non-IRA LLC on a real estate purchase? 

According to industry practice, yes, but only at the initial purchase. Expenses and income must be allocated according to the percentage of ownership as well.

Can I purchase a property owned by my IRA LLC? 

If an IRA owns an investment, the IRA holder cannot purchase the investment from the IRA. The investment can, however, be distributed in kind and re-registered under the IRA holder’s name.

How does UBIT work? 

IRA-owned LLCs are typically subject to Unrelated Business Taxable Income (UBIT) if the LLC engages in a transaction that is considered a trade or business. However, there is certain income that is exempt from UBIT, such as rents and dividends (see IRS publication 598) which are not taxable for IRAs. If the IRA investment is leveraged (e.g., purchased using a non-recourse loan), the portion of income received in relation to the amount borrowed will be taxable even if typically exempt, such as with rents.

Can my IRA LLC get a loan to purchase real estate? 

Yes, a non-recourse loan. However, not all banks offer non-recourse loans. Contact us for a list of providers that our clients have used.

Does the IRA need to own all of the member shares of the LLC? 

No. The IRA can partner with anyone at the time of initial purchase on a newly created LLC. The ownership percentage will equal the capital contribution amount of each member. Once that initial investment has been made, the IRA cannot partner with a disqualified person as defined under IRS Code 4975.

Do the costs involved in forming the IRA LLC have to come from the IRA? 

Yes. The IRA needs to pay any amounts incurred to form the IRA LLC. Paying with personal funds may be considered a prohibited transaction.

Do I have to file taxes on the LLC that is in the IRA? 

It depends on the nature of the income received. If the income is from a trade or business, then yes.

Can the IRA LLC be based in a different state than your residence? 

Yes. Check with the state for entity-forming costs and ongoing registration and licensing fees.

What can my IRA LLC invest in? 

The IRS does not have a list of approved investments for retirement plans. However, it does list what is not allowed as an investment:

  • Collectibles: Art, antiques, gems, coins, or alcoholic beverages, and certain precious metals.
  • Life insurance (see IRC Section 408(a)(3))

Also, trusts that qualify as an IRA are not eligible to be shareholders of an S corporation (see Revenue Ruling 92-73).

Real Estate

How do I fund a real estate purchase with my IRA? 

1. Direct Purchase

Direct Purchase is when your IRA purchases the asset using only money in your self-directed IRA. Your IRA pays all cash for the investment. It is the simplest and quickest way to fund a purchase.

2. Partnering

Partnering is when you bring in other sources of cash to fund the purchase. You can partner with other people’s IRAs or with their personal funds. You divide the investment profits and expenses among investors based on ownership percentage.

3. Non-Recourse Loan/Leveraging

Leveraging is when your IRA takes out a loan, typically known as a non-recourse loan. This sort of credit is common in IRA real estate purchases but cannot be obtained by going through traditional means. We work with many non-recourse lenders. Contact us to learn more.

4. LLC/Checkbook Control

LLC/Checkbook Control is the process of establishing a limited liability company (LLC) with IRA funds and using the LLC to buy the asset. The investment is then held in the name of the LLC. These are called Checkbook IRAs because you have direct access to your IRA funds via a checking account that is owned by your IRA LLC. IRAR does not sell or create LLCs. To learn about how to form an LLC, visit the IRS website or your local SBA district office for more information.

How long does it take to make a typical real estate purchase? 

This depends on the complexity of the transaction. If the funds are available in your account, IRAR needs three days to process the transactions. A simple transaction, buying one piece of real property without underlying loans, may take five days. A complex transaction where there are multiple sellers and buyers may take 30 days or more.

Tip: It is highly recommended that you get the funds in your IRAR account as soon as possible to expedite the process. Transferring the funds from one custodian to another might take up to seven days. Also, make sure to title documents properly so that they are not rejected (see question #22).

Are there restrictions on the type of property I can purchase? Am I restricted to residential properties? 

No, you can purchase a variety of investment properties and real estate, such as commercial buildings, vacant land, condos, mobile homes, and apartment buildings. You can also invest internationally.

Tip: It is highly recommended that you use a title company when purchasing real estate to ensure that the deed is recorded in the name of your IRA. When investing internationally, find out if the land can be held in the name of the IRA. Sometimes an entity is required.

Do I need a property manager to manage the property within my IRA? 

It is not required but highly recommended. The Property Management Agreement is signed by IRAR for the benefit of the IRA at the direction of the IRA account owner. You can hire any third party who is not a disqualified person.

Some of our clients use a property manager for the purpose of consolidating the various expenses. Another advantage when partnering with others, is that your tenants do not have to write multiple rental checks to the various investors. Tenants write one check to the property manager, who then distributes the percentages accordingly.

Property managers send the IRA’s percentage to IRAR for deposit, along with the profit and loss statement. It is preferred that the profit and loss statement be sent monthly. If a property management company is not managing the property, the rental income should be sent to IRAR to be deposited directly to your IRA account, unless an LLC was used to make the real estate investment.

Tip: Do not engage in sweat equity. This means you are personally involved in hands-on work adding value, like doing repair work on the property. See IRC 4975.

Can I collect the rental income from tenants? 

Yes. IRAR does permit clients to receive the rental income for record-keeping. However, the checks must be payable to the IRA (not the IRA holder) and sent to IRAR for depositing to the client’s account. The IRA owner cannot deposit the rent in a non-IRAR account.

Can I sell the property to myself? 

No. Pursuant to IRS Code 4975 the IRA holder is a disqualified person, and the direct or indirect furnishing of goods, services, or facilities between an IRA and a disqualified person is prohibited.

Can I use my investment property as a second home? 

No, the property is for investment purposes only and not to be used personally.

I am buying property out of state. Can I bill my IRA for my travel expenses? 

No, you cannot. However, you can request a distribution to pay for the expenses. Your distribution might be subject to taxes depending on your age and the type of IRA you own.

Do expenses like utilities, repairs, taxes, and mortgage payments need to be paid from the IRA account? 

Any expenses for a property within your IRA must be paid by the IRA. You cannot use personal funds to pay for expenses incurred by the asset within your retirement account because it is prohibited by the IRS. See IRS Code 4975. When you have a bill, you simply instruct IRAR (use a PAL) to pay it on behalf of your IRA. If you use an IRA LLC/checkbook control, your IRA LLC will pay all the expenses.

Can I transfer rental property I own personally to my IRA? 

No, this is considered a prohibited transaction. Your IRA cannot buy property that you currently own. See IRS Code 4975 for information on prohibited transactions, disqualified persons, and self-dealing.

Can my kids live in the home that my IRA owns and pay my IRA rent? 

No, because they are disqualified persons. You cannot buy a house or vacation property for you, your spouse, or your lineal ascendants or descendants to use while your IRA owns it. Visit our website for information on prohibited transactions and disqualified people.

I am a contractor. Can I rehab the property that my IRA owns? 

No, you cannot rehab the property, whether it be at no charge or at the going rate. This is considered sweat equity, which is not allowed. Any rehabbing must be performed by a non-disqualified person.

If I submit a distribution request, can I distribute a percentage of the property, or do I have to distribute it all? 

Yes, you can distribute a percentage of the property. This is called an in-kind distribution. However, this does not mean that you can live in the property until it is fully distributed.

Am I required to rent the property, or can it be vacant? 

The property doesn’t have to be rented as long as the IRA has sufficient cash to pay for all the expenses related to the property. Remember that all income goes to the IRA and expenses come out of the IRA. If there are insufficient funds in the IRA to cover the expenses, the IRA holder has the option to rent the property, transfer funds from another IRA, make a contribution, or liquidate other IRA assets to pay for the expenses.

Who can my IRA partner with to purchase property? 

At the time of initial purchase, your IRA can partner with anyone, including a disqualified person. But after the transaction is closed, your IRA cannot buy, sell, or transfer to any disqualified person.

Can I get a personal loan on the property that my IRA owns? 

No, using an IRA asset to secure a personal loan is a prohibited transaction and referred to as self-dealing. Everything the IRA engages in must be for the exclusive benefit of the IRA. Self-dealing occurs when an IRA owner uses their IRA for their personal benefit, rather than to benefit the IRA.

Can my IRA borrow money to purchase the investment property? 

Yes, your IRA can obtain a non-recourse loan. The IRA is the borrower of the loan. The loan documents are signed by IRAR on behalf of the IRA at the direction of the IRA account owner.

What is a non-recourse loan? 

A non-recourse loan is a loan that is secured only with collateral, which is usually the property. If the borrower defaults, the lender can seize the collateral, but cannot seek out the borrower because the loan is not guaranteed personally by the account holder, even if the collateral does not cover the full value of the defaulted amount. In this situation, the borrower does not have personal liability for the loan. It is not typical to obtain a non-recourse loan from a bank. Borrowers usually have to find private lenders. The IRA account owner must do the research to obtain a non-recourse loan.

What is Unrelated Business Income Tax (UBIT)? 

Unrelated business taxable income is income received by a tax-exempt entity, like an IRA, that is earned by a business or trade. For example, when an IRA owns a business entity, such as a limited partnership (LP) or limited liability company (LLC), the income produced by the LP or LLC is passed onto the IRA. The LP or LLC could be in any business or trade, from a printing press or a bakery to a daycare center. With some exceptions, the income is likely to be UBIT.

Income that is exempt from UBIT includes rental income, dividends, and royalties, among others. For example, if an IRA owned an apartment building, the rent would not be UBIT. See Publication 598 for information on UBIT.

I am going to an auction to bid on property. I need a cashier’s check issued in my name. What do I need to do? 

Cashier checks cannot be issued in the IRA account owner’s name because this constitutes a distribution. Cashier checks must be payable to the auctioneer, county, or third party who is not a disqualified person to the IRA. To fund an auction purchase, you need to complete an Auction Buy Direction Letter.

What is the difference between the IRA purchasing the property directly and having an IRA-owned LLC or LP purchase the property? 

The key difference is that when an IRA purchases the property, the IRA holds the title; if the LLC or LP purchases the property, it holds the title. Utilizing an LLC or LP to purchase the property also affords greater control (with more responsibility) to the investor, enabling them to sign the closing documents for the purchase and allowing for check-writing privileges. This provides immediate access to funds and diminishes IRAR transaction fees.

What if I already have a contract in my name and I want the IRA to purchase the property? 

The contract must be vested in the name of the IRA, because the IRA and the IRA holder are two separate entities. The IRA account owner (or any disqualified person) should not assign their interest to the IRA because it might be a prohibited transaction. The proper way to handle this is to start a new contract with vesting as follows:

IRAR Trust FBO [account owner’s legal name or plan name], account # [account number].

If there is an error in the vesting, you may be able to provide an assignment or amendment to the contract by changing the vesting as indicated above.

Where should income be sent and how do I pay for expenses? 

All income and expenses are sent to IRAR’s office for processing. Rental checks must be made out to:

IRAR Trust FBO [account owner’s legal name ], account # [account number].

For expenses, complete IRAR’s Payment Authorization Letter and send it, along with a copy of the invoice or bill, to our office.

Can I personally pay for an expense and get reimbursed by the IRA? 

All real estate expenses, such as mortgage payments, property taxes, insurance, HOA dues, and repairs and maintenance, must be paid directly from the IRA. If these expenses are paid with personal funds, it could be considered a prohibited transaction.

What does IRAR require to fund a real estate transaction? 

See our forms page for documentation needed to fund a real estate transaction. Initially, we require a Real Estate Purchase Offer Review Form. Please make sure that your account has sufficient funds before engaging in a transaction.

How long does it take for my transaction to be processed after receiving the closing documents? 

Closing documents are reviewed within three business days. If no corrections are needed, IRAR funds within the following two business days. For an expedited review request, a special handling fee applies. The expedited review time doesn’t guarantee the funding of the transaction if the paperwork is incomplete or changes are required.

I want to put my living trust on title for the investment property that my IRA will be purchasing. Is that possible? 

No, a living trust is not permitted to hold title on the property. However, you can name the trust as the beneficiary IRA.

Can I represent myself as the agent for the transaction? 

Yes, but you cannot receive commission for the transaction. That would be considered a prohibited transaction.

What due diligence should be performed prior to making a real estate purchase? 

Consult with your real estate professional to assist you with performing the necessary due diligence on the property to fit your individual needs.

Here are a few tips:

  • Verify that the title can be held in the name of an IRA.
  • Verify that the title company is familiar with self-directed IRA transactions.
  • Set a realistic timetable for the transaction.
  • Decide on how the property is best acquired: direct real estate purchase, leveraging a non-recourse loan, or through an LLC.
  • Find someone local to handle property management.

Can the property insurance policy be in my name? 

No. The policy should be in the name of the IRA. IRAR must sign the agreement on behalf of the IRA.