Frequently Asked Questions
Why haven’t I heard of a Self-Directed IRA before?
While the concept of investing in real estate and other assets in retirement plans has been around for more than 30 years, it hasn’t received a great deal of attention. Why? Most custodians that offer IRAs (banks and brokerage firms) focus on mutual funds and CDs. Because the majority of custodians focus on stocks and CDs there is a misperception that these are your only investment options for retirement plans. But this is not the case.
How can I be sure that my investment is allowable in an IRA?
IRS Publication 590 states what investments are prohibited in IRAs; these investments include artwork, stamps, rugs, antiques and gems. Most other investments, including stocks, bonds, mutual funds, real estate, promissory notes, and tax liens/deeds are acceptable as long as IRS rules governing retirement plans are followed.
Are there special rules for Self-Directed IRA investments?
Yes. To ensure compliance, you should be familiar with specific rules for IRAs, and in particular those dealing with “Prohibited Transactions”. There are certain types of transactions that you cannot perform through an IRA. Most importantly, the IRS prohibits “self-dealing,” investments in which you or family members of lineal descent have prior ownership or will benefit prior to retirement from the transaction.
Are my Self-Directed IRA investments FDIC Insured?
NO. It is important to understand that while the Bank will serve as the custodian of your Self-Directed IRA, Self-Directed IRA investments do not carry FDIC insurance or any other type of guarantee or protection from loss. Cash held in the IRA up to the FDIC limits will have FDIC coverage.
Are Self-Directed IRA’s for everyone?
Self-directed IRAs are not for everyone. They are for individuals who understand the risks associated with the type of assets they choose to invest their IRA funds into and are willing to take full responsibility for all risks. Also, anyone considering investing via a Self-Directed IRA is responsible for understanding and obeying all rules and regulations including, but not limited to, permissible investments, non-self-dealing.
Does the Bank make investment recommendations?
No! The Bank does not make investment recommendations or provide any type of investment advice. We are not qualified or trained to provide investment advice. The Bank serves as the custodian only. This means that we only provide the paperwork to establish and maintain a Self-Directed IRA.
If you do not follow the rules set forth for self-directed IRAs, you can risk the tax-deferred status of your account. This could lead to the disqualification of the IRA and severe tax consequences.
It is your sole responsibility to understand the rules, regulations and requirements now and in the future regarding Self-Directed IRA’s. Any violation of the rules and the related consequences will be your sole responsibility.
SPB takes no responsibility in providing guidance, information or resources regarding the rules, regulations and potential penalties of Self-Directed IRA’s. By opening a Self-Directed IRA and acting as custodian, SPB is not expressing any opinion about if the investment, the structure or any other component of the Self-Directed IRA complies with current or future rules and regulations.
Below is a general overview about Self-Directed IRA’s Rules. It is not meant to contain all of the current or future rules, requirements, tax implications, etc.
Self-Directed IRA Rules – Overview
- Prohibited Transactions and Investments – Investments you cannot make in your IRA under IRS guidelines.
- Self-Dealing Rule – Your IRA cannot purchase investments from certain parties.
- Indirect Benefits Rule – “Can you live in the vacation home your IRA owns?” No. Benefits of your IRA investments must go into your IRA, not to you personally.
- UBIT (unrelated business income tax) – How and when your IRA incurs tax because of leveraged investments or business income.
Prohibited Transactions and Investments
A prohibited transaction can bring into question the tax-deferred status of your account, potentially resulting in the disqualification of your IRA and severe tax consequences.
The IRS defines a “Prohibited Transaction” as follows:
Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The following are examples of prohibited transactions with a traditional IRA:
- Borrowing money from it.
- Selling property to it.
- Using it as security for a loan.
- Buying property for personal use (present or future) with IRA funds
If your IRA is invested in non-publicly traded assets or assets that you directly control, the risk of engaging in a prohibited transaction in connection with your account may be increased.”
-Source IRS Publication 590
Further Information – Section 4975 of the Internal Revenue Code – Internal revenue code referencing prohibited transactions with IRAs.
Legal Notice: This is a general overview and should not be construed as legal advice. Please consult IRS publications and codes or your tax advisor.
Self-Dealing must be avoided in Self-Directed IRA investments.
Your IRA may not buy an investment from or sell an investment to a disqualified person as defined by Internal Revenue Code Section 4975. To do so is known as “self-dealing.” Additionally investments made with Self-Directed IRAs must be at arms-length, which is most often defined as a willing buyer and willing seller coming together with no undue influence from outside sources.
A Disqualified Persons is defined as individuals or entities between whom or which an IRA is prohibited (absent a special exception) from engaging in any direct or indirect sale or exchange or leasing of any property; lending of money or other extension of credit; furnishing goods, services or facilities; or transferring to or permitting the use of IRA income or assets.
- Fiduciaries (which in the case of a self-directed IRA includes you, as the IRA owner);
- The following family members of the IRA owner:
- Grandparents and Great-Grandparents;
- Children (and their spouses);
- Grandchildren and Great-Grandchildren (and their spouses);
- Service providers of the IRA (e.g., IRA custodian, CPA, financial planner);
- An entity (such as a corporation, partnership, limited liability company, trust or estate) of which 50% or more is owned directly or indirectly or held by a fiduciary or service provider; also a 10% or more partner or joint venturer of such entity;
- Additionally, in the case of a SEP or SIMPLE IRA:
- The Employer;
- 50% or more owner of the Employer;
- Officers, directors, 10% or more shareholders, and highly compensated employees of the Employer;
- An entity 50% or more owned by the Employer;
- 10% or more partner or joint venturer of the Employer.
Indirect Benefits Rule
The purpose of the IRA is to provide for your retirement in the future. It is not intended to benefit you now. It is considered an “indirect benefit” and is not allowed if your IRA is engaged in transactions that, in some way, can benefit you personally.
Indirect Benefit Examples:
The following are just a few types of indirect benefit transactions that are NOT allowed in an IRA:
- Personally using IRA property —such as using real estate purchased through your IRA— as an office, personal residence, vacation home, retirement home, or office space.
Receiving personal benefits from your IRA —such as lending yourself money from your IRA or paying yourself, or a company that you own, to do work on a home purchased by your IRAUsing your IRA funds to buy a vacation home that you or your family will use
UBIT (Unrelated Business Income Tax)
If your IRA owns an asset or interest that produces unrelated business taxable income (UBIT), your IRA may be subject to an unrelated business income tax (UBIT) pursuant to Section 511 of the Internal Revenue Code.
UBIT applies if ALL of the following are true:
- Income is derived from “”trade or business”” activity (i.e., sale of goods and services).
- Business activity is not substantially related to exempt status.
- Business is regularly carried on by organization.
Generally, IRA investments that can generate UBIT include limited partnerships, limited liability companies, and any investment that incurs debt financing and/or is involved in an unrelated business.
Most passive investment income—including dividends, royalties, and rent—is exempt from UBIT. However, an investment that generates income with debt financing (e.g., purchasing real estate with a non-recourse loan in an IRA) is responsible for UBIT in direct proportion to the gain/income that’s debt financed.
Payment of UBIT
In most cases, IRAs that receive more than the current $1,000 UBIT exclusion must file Form 990T with the Internal Revenue Service on or before the April 15th deadline. Form 990T payments must be made from the IRA’s assets, and Sabal Palm Bank must receive direction to pay these taxes at least 10 days before the due date (plus any extensions).
IRAs that generate less than $1,000 of UBIT are not required to file Form 990T.
In most instances, UBIT is reported on Schedule K-1, which is prepared by the investment sponsor.
SPB is a passive custodian and does not provide tax, legal, or investment advice. Any information communicated by SPB is for educational purposes only, and it should not be construed as tax, legal, or investment advice. Whenever you make an investment decision, please consult with legal, tax, and accounting professionals.
Self-Directed IRA’s Resources
Below is a list of Self-Directed IRA’s Resources. It is not meant to contain all of the current or future resources available and might not be applicable to your circumstances.
Internal Revenue Code Resources
Below are relevant sections of the Internal Revenue Code regarding impermissible IRA investments and transactions, as well as transactions resulting in taxes, from the Internal Revenue Code and U.S. Treasury.
Section 4975 of the Internal Revenue Code – IRC provision referencing tax on prohibited transactions.
Section 408(a)(3) of the Internal Revenue Code – IRC provision prohibiting IRAs from investing in life insurance contracts.
Section 408(e)(2) of the Internal Revenue Code – IRC provision describing an IRA’s loss of tax-exempt status upon engaging in a prohibited transaction.
Section 408(e)(4) of the Internal Revenue Code – IRC provision describing effect of pledging an IRA or any IRA assets as security for a loan.
Section 408(m) of the Internal Revenue Code – IRC provision describing impermissible investment in collectibles.
U.S. Treasury Regulations Sections 1.408-1(c)(2), (3) and (4) 1.408-2(b)(3) – Treasury Regulations Sections discussing consequences of IRA engaging in prohibited transactions, being pledged as security for a loan, and prohibition on investment in life insurance contracts.
Unrelated Business Income Tax (UBIT)
Below are relevant sections of the Internal Revenue Code and U.S. Treasury concerning unrelated business income tax.
Section 512 of the Internal Revenue Code – IRC provision describing unrelated business taxable income
Section 511 of the Internal Revenue Code – IRC provision imposing tax on unrelated business income.
Section 513 of the Internal Revenue Code – IRC provision describing an unrelated trade or business.
Section 514 of the Internal Revenue Code – IRC provision describing unrelated debt-financed income.
Section 4965 of the Internal Revenue Code – IRC provision imposing excise tax with respect to prohibited tax shelter transactions.
Section 6011(g) of the Internal Revenue Code – IRC provision requiring disclosure of a reportable transaction to an IRA.
Section 6111 of the Internal Revenue Code – IRC provision pertaining to disclosure of reportable transactions.
Section 6707 of the Internal Revenue Code – IRC provision pertaining to failure to furnish information regarding reportable transactions.
Section 6707A of the Internal Revenue Code – IRC provision imposing penalty for failure to include reportable transaction information with return.
U.S. Treasury Regulation Sections 1.512(a)-1, 1.512(b)-1 and 1.512(c)-1 – Treasury Regulations Sections defining and describing unrelated business taxable income.
U.S. Treasury Regulation Section 1.513-1 – Treasury Regulations Section defining an unrelated trade or business.
U.S. Treasury Regulation Sections 1.514(a)-1, 1.514(b)-1, 1.514(c)-1 and 1-514(e)-1 – Treasury Regulations Sections discussing unrelated debt-financed income and property and acquisition indebtedness.
Legal Notice: This is a general overview and should not be construed as legal advice. Please consult IRS publications and codes or your tax adviser.
Sabal Palm Bank acts only as a passive custodian of self directed individual retirement accounts and does not provide tax, legal, or investment advice. Any information communicated by Sabal Palm Bank is for educational purposes only, and it should not be construed as tax, legal, or investment advice. Whenever you make an investment decision, please consult with your legal, tax, and investment professionals. All account transactions are directed by the IRA owner and the IRA owner accepts and assumes full responsibility for the suitability, evaluation, selection, success or failure of any investment. SDIRA Services does not sponsor, endorse or investigate any investment and is not affiliated with any investment product sponsor or issuer.