retirement planning 101 understanding the basics of self ... · the basics of self-directed iras...

UNDERSTANDING

THE BASICS OF

SELF-DIRECTED IRAs

www.azirarealestate.comArizona’s trusted

investment rollover specialist.

As part of our educational outreach efforts, Investment Resource of AZ, LLC, is pleased to share this

e-book to help you determine whether this investment strategy could help turbo-charge your portfolio.

Investment Resource of AZ, LLC is Arizona’s trusted investment rollover specialist, helping clients through the process of moving their retirement portfolios to a self-directed account after their own due diligence and consultation with their tax, financial and legal advisers. © Investment Resource of AZ, LLC. All rights reserved.

Retirement Planning 101

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Arizona’s trusted investment rollover specialist.


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TABLE OF CONTENTSINTRODUCTION...................................................4

Chapter 1: THE BASICS...................................6• What is a Self-Directed IRA?

• What Kind of Accounts Can Be Self-Directed?

• Is This a New Concept?

Chapter 2: BENEFITS & RISKS.....................7• What are the Advantages of a Self-Directed IRA?

• What are the Tax Implications?

• What are the Risks?

Chapter 3: THE PROCESS..............................9• Who Can Open a Self-Directed IRA?

• How Can I Fund My Self-Directed IRA?

• How Does it Work?

Chapter 4: CUSTODIANS, ADMINISTRATORS & FACILITATORS.....................................................11

• What is the Role of a Custodian?

• How Does a Custodian Differ From an Administrator or Facilitator?

• What Should I Look for in Choosing a Custodian?

• What Responsibilities Does the Account Holder Have?







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Chapter 5: ASSETS...........................................13• In What Assets Can My Self-Directed IRA Invest?

• What Assets are Not Allowed?

Chapter 6: FUNDING.......................................15• What if I Don’t Have Enough Funds in My Self-Directed IRA for a Particular Deal I am Contemplating?

• What is a Non-Recourse Loan?

• Can a Husband and Wife Combine Funds into a Single IRA?

Chapter 7: CHECKBOOK IRA........................17• What is Meant by ‘Checkbook IRA’?

• What is the Process to Set Up a Checkbook IRA?

Chapter 8: OTHER CONSIDERATIONS.....19• What is Meant by ‘Disqualified Person’?

• What are Prohibited Transactions?

Chapter 9: READY? SET? GO!......................21• How Do I Get Started?

• How We Can Help







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Are you confident in your ability to maintain your standard of living after you retire?

Earlier generations pretty much took it for granted. Back then, career paths were clearer and steadier. Many people worked for the same company their whole career. They were confident their contributions to Social Security and the company pension plan would guarantee a comfortable post-work lifestyle.

But the world has changed. It’s time to start looking out for yourself and planning for that well-deserved chance to enjoy life after retirement.

Many companies still have retirement savings programs, but more often than not, but they are no longer “automatic.” That is, while they may designate a preferred plan administrator, employers have shifted responsibility to the employee to choose which stocks or funds to contribute to, and at what percentage.

Why not take it a step further and take complete control of your financial future through a self-directed retirement account? Now you can invest in many additional assets other than just stocks and bonds. And the potential exists for a much bigger rate of return on your investment.

INTRODUCTION







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Perhaps you’ve heard of self-directed IRAs but really don’t know much about them.

In that case, this primer can introduce you to the concept and help you determine whether this investing strategy could be for you. Then you can work with your own financial, tax or legal adviser to evaluate your unique circumstances and create a plan to help you reach your long-term goals.

Once you decide that rolling over your retirement account is in your best interests, we can help. Investment Resource of AZ, LLC is your Arizona rollover specialist. Our team has successfully rolled over mil-lions of dollars in IRA funds for clients, educating them, streamlining the process and supervising each step of the way for them.







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What Is a self-DIrecteD Ira?Very simply, a

self-directed IRA is an individual retirement account in which the Custodian allows you to invest in any asset allowed by law. You are not limited to investing in only

stocks, bonds or mutual funds (as is the case with many traditional employer-sponsored retirement plans) but can also choose to invest in real estate and a variety of other assets. In most cases, the Custodian is free to determine which types of investments it will allow.

What KInD Of accOunts can Be self-DIrecteD?Any type of retirement account for employees or business owners

may be self-directed: traditional and Roth IRAs, SIMPLE and SEP IRAs, 401(k) plans and some health savings and Coverdell education accounts.

Is thIs a neW cOncept?Self-directed retirement plans have been around since the inception

of regular IRAs in the 1970s but have gained more market awareness and acceptance since the early 2000s, and especially since the housing crisis and Great Recession that began in 2007-‘08. More investors are taking advantage of this opportunity to diversify as well as to exert control over where their money is invested.

CHAPTER 1: THE BASICS







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What are the aDvantages Of a self-DIrecteD Ira?

Self-directed retirement plans offer account owners the freedom to invest in what they know rather than being limited to only the options offered by their employers or financial adviser. Self-directed IRAs are the only retirement accounts that allow for non-traditional alternative

investments, such as real estate and precious metals.

Further, the variety of assets allowed enables true portfolio diversification across different asset classes that move on different appreciation cycles. And there is potentially a greater return on investment than is currently being earned through the traditional stock market.

With a self-directed IRA, the profits from your real estate investments and income generated will benefit from compounded growth as long as those assets are held.

What are the tax ImplIcatIOns?

In the eyes of the Internal Revenue Service, self-directed IRAs are no different from conventional, or traditional, IRAs in that the contribution and distribution rules are the same, as are the tax advantages.

CHAPTER 2: BENEFITS & RISKS







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Traditional retirement accounts allow you a deduction for your contribution when calculating your income taxes. Distributions are required to be taken beginning at age 70½, after which time all distributions are added to your adjusted gross income.

With a Roth retirement account, you may not take a deduction at the time of contribution. However, it is tax-free upon distribution and there is no forced distribution at 70½. As long as you have held the account for five years, you can start taking Roth distributions tax-free at age 59½.

What are the rIsKs?No investment – whether stocks, bonds, real estate or any other

asset – is guaranteed. It is up to you and your choice of financial adviser or tax professional to evaluate your goals, your available capital

and the investment you are considering in determining the risks and rewards.

You also need to stay abreast of current regulations, since missteps (such as involving disqualified persons or engaging in prohibited transactions) can result in large tax penalties.







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WhO can Open a self-DIrecteD Ira?Anyone who has earned income can open a self-directed retirement

account. Also, an employed husband or wife can contribute on behalf of his or her non-working spouse if certain conditions are met. This is known as a “spousal IRA contribution.” In addition, if you have an eligible existing IRA or other retirement account, you can transfer, or “roll over” that money to a self-directed IRA. However, many employer-sponsored retirement accounts do not allow you to roll over those assets while you are actively working for that company. Check with your employer’s benefits coordinator for clarification.

hOW can I funD my self-DIrecteD Ira?You can start a self-directed IRA with just an initial contribution or

you can roll over funds from another retirement investment account. A self-directed IRA is the same as any other retirement plan. As long as

CHAPTER 3: THE PROCESS







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the IRS is notified within 60 days of the rollover, there are no taxes or penalties.

You may transfer unlimited qualified funds—those already held in an established IRA or a 401(k) left with a former employer. Or if qualified funds are unavailable, an individual under age 50 can contribute up to $5,500 annually (or $6,500 annually for those older than 50).

hOW DOes It WOrK?With self-direction, you as the account holder make all your own

investment decisions. The assets are held in the name of the IRA and typically are executed by an administrator/custodian that provides account administration and transaction support. A facilitator may help you with the process of rolling over your investment account to a self-directed IRA.

In the case of a “checkbook IRA,” the investments are held in the name of an LLC (limited liability company) and administered by you through the LLC. Keep in mind that it is not the responsibility of the custodian or administrator to advise you whether a deal is a good one.

Due diligence is up to you.These neutral, third-

party administrators are not financial advisers. Rather, they understand and stay abreast of the IRS regulations regarding self-direction and manage all the necessary reporting, filing and paperwork associated with these accounts.







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What Is the rOle Of a custODIan?By law, any IRA must be officially held by a Custodian. The Custodian

may be approved and directly regulated by the IRS or affiliated with a bank or trust company. In that case, the Custodian is regulated by the state Banking Commissioner and/or Comptroller of the Currency and FDIC.

The role of an IRS-approved Custodian is to take direction from you, the owner of the self-directed IRA, and execute investments on your behalf. The Custodian may handle formation and maintenance paperwork as well as your money. A Custodian will act upon your wishes as long as those requests are legal and administratively feasible.

hOW DOes a custODIan DIffer frOm an aDmInIstratOr Or facIlItatOr?

An Administrator also may handle formation and maintenance documentation for your IRA. The Administrator also can move funds from account to account and choose where to place your funds while you wait to make an investment.

However, unlike a Custodian, an Administrator has little to no regulation or oversight. Nor is the Administrator subject to routine audits, state-mandated capital requirements, etc. Be aware of the risk that such lack of oversight presents! Without the same authority as a Custodian, an Administrator must outsource custodial services to a third-party approved Custodian.

A Facilitator generally provides advice and consulting. The Facilitator

CHAPTER 4: CUSTODIANS, ADMINISTRATORS & FACILITATORS







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often can serve as a “one-stop shop,” helping file paperwork, serving as liaison between you and the Custodian and educating you on the process of rolling over your retirement funds to a self-directed account.

What shOulD I lOOK fOr In chOOsIng a custODIan?Since Custodians may

determine which assets they will allow, start by making sure that includes the asset in which you want to invest.

Fees vary, so compare services and rates among a variety of Custodians.

Here are some other questions to ask:

• Does the Custodian provide timely funding of investments?

• What is the breadth of services offered by the Custodian’s team?• What is the level of customer service?• Are there adequate educational resources?• What is the Custodian’s tenure and track record?

What respOnsIBIlItIes DOes the accOunt hOlDer have?

It is up to you to do your own due diligence and research about the investment and to provide all instructions to the account administrator to execute. All income and expenses related to the investment flow in and out of your IRA.

It always is advisable for you to seek the counsel of your own CPA or attorney who can evaluate your unique goals and circumstances and advise you on the most appropriate course of action.







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In What assets can my self-DIrecteD Ira Invest?

Unlike typical brokerage accounts that are limited to traditional financial instruments (stocks, bonds, mutual funds, CDs), self-direction allows for many non-traditional assets in addition, such as real estate, precious metals, hedge funds, private placements, commodities, leases, unsecured loans and mortgages, to name a few.

Other examples include;• Undeveloped, raw land.• Single-family rental property.• Multifamily rental property.• Commercial developments.• Real estate options.• Mortgage notes and trust deeds.• REITS.

CHAPTER 5: ASSETS







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• Water rights.• Mineral rights.• Timber rights.• Air space rights.• Gold, silver and other precious metals.• Intellectual property patent interest.

What assets are nOt allOWeD?It might be easier to list what you cannot invest in:• Collectibles (such as art, stamps, antiques, some coins).• Life insurance.• S-corporation stock.• Certain transactions prohibited by the IRS.







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What If I DOn’t have enOugh funDs In my self-DIrecteD Ira fOr a partIcular Deal I am cOntemplatIng?

Using leverage in an IRA to purchase real estate assets has been perfectly legal since IRAs were introduced as part of the Employee Retirement Income Security Act of 1974. Internal Revenue Service rules stipulate that there can be no personal guarantees, so your IRA would need to obtain a non-recourse loan.

What Is a nOn-recOurse lOan?A non-recourse loan is one that is secured entirely by the subject

collateral and nothing else. The lender has “no recourse” (other than the sale of the real estate) against any other assets in the IRA or the owner of the IRA should the IRA default on the loan.

The only recourse for the lender is to foreclose on and sell the property. Any deficiency left after the sale of the collateral is a real loss to the lender. The loan (and purchase agreement for the property) is written in the name of the Custodian or administrator of the IRA for

the benefit of (FBO) the IRA owner. Or it can be written in the name of the LLC, or whatever other type of entity the IRA owner has established and funded as the investment vehicle. The owner of the IRA does not sign the note or mortgage or deed of trust but merely

CHAPTER 6: FUNDING







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initiates the transaction and reviews and initials the final documents prior to closing. The IRA, not the individual, makes all payments to service the debt and to cover maintenance and holding costs of the property.

can a husBanD anD WIfe cOmBIne funDs IntO a sIngle Ira?

An IRA by definition is a retirement account set up in an individual’s name. Therefore, you cannot have both a husband and wife’s name combined in a single IRA. However, there are ways to pull and invest spouses’ IRAs jointly (for example, two self-directed IRA account partners on a deal or through a checkbook IRA with two partners).







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What Is meant By ‘checKBOOK Ira’?Just as there are different types of IRAs—such as Traditional, Roth

and SEP, for example—there also are different structures of self-directed accounts. Two of the main ones are Custodial Self-Directed IRA, in which only the IRA Custodian can write checks and pay bills, and IRA-LLC Self Directed IRA, also known as a Checkbook IRA. Under this structure the IRA owner may write checks from the IRA LLC account for the purpose of making investments and paying costs associated with those investments.

A checkbook IRA can be especially useful if your investments are time-sensitive (such as investing in tax liens, buying investment opportunities at auction or making investments that require prompt action).

It also will save you time (through reduced or eliminated delays in processing) and money (by reducing or eliminating check-writing and

processing fees).

What Is the prOcess tO set up a checK-BOOK Ira?

Step 1: After due diligence, select a company that specializes in that kind of

platform. Step 2: Set up an LLC for

the IRA. This process can take

CHAPTER 7: CHECKBOOK IRAs







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anywhere from 24 hours to three weeks. (LLC formation is handled via your local state government so the timing can vary.)

Step 3: At the same time, the self-directed company will facilitate setup with a Custodian for the self-directed account (as required by law). This may take two to three days

Step 4: After the IRA is set up with the new Custodian, you can roll over your retirement funds from a previous account (typically this takes a week or two, although expedited service usually is offered for an extra fee).

Step 5: Fund your LLC and open a checking account for it. The LLC is funded via a capitalization check from your new custodian, usually taking two to three days. Opening a checking account in the name of the LLC at your chosen bank is considerably quicker—less than an hour, on average.

Step 6: After you have deposited the capitalization check in the new checking account, you can start making deals.

The total setup process can be as short as 10 days with expedited services, or as long as six weeks if there are administrative hurdles, but the average is about three weeks.







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What Is meant By ‘DIsqualIfIeD persOn’?Investments through an IRA must be at “arm’s length” and not involve

self-dealing. “Disqualified persons” are those individuals or entities whom the

IRS deems to be too close for a legitimate transaction with an IRA. No disqualified person may enter into or benefit from a transaction with an IRA, either directly or indirectly.

The IRS’ list of disqualified persons includes:

• The IRA owner (who is a fiduciary for the IRA).

• The IRA owner’s spouse, parents and other lineal ascendants.

• The IRA owner’s children and other lineal descendants and their spouses.

• Any corporation, partnership, trust or estate in which any of those persons singly or in combination owns 50 percent or more.

• Any officers, directors, managers, trustees, key employees or partners of a disqualified entity.

What are prOhIBIteD transactIOns?By law, an investor (and close linear relatives) are prohibited from

giving or receiving any benefit from the retirement investments. Such prohibited transactions include:

• Doing direct maintenance on a property (such as painting, landscaping, rehab).

CHAPTER 8: OTHER CONSIDERATIONS







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• Personally paying a property’s bills.• Letting any of your children act as paid workers for the property.• Using the property as a vacation home.• Renting the property out to your children.• Using the property as collateral in an unrelated dealing. Because the IRS has very specific rules prohibiting “self-dealing”

(under Internal Revenue Code Section 4975) and tax regulations are prone to varying interpretations, you should seek the counsel of your own CPA or attorney who can evaluate your unique goals and circumstances and advise you on the most appropriate course of action for you. Remember: Due diligence is always up to you.







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Contact us today for more information. Click here.

hOW DO I get starteD?First, establish a self-directed

account with a qualified self-directed plan provider. Carefully vet your Custodian after your own thorough due diligence. Consultation with your own tax or financial adviser is always a good idea.

Second, fund your self-directed account, either through transfer or rollover of qualified funds or by contributions not exceeding the annual allowed maximum.

Third, invest your self-directed account in the assets of your choice.

An IRA rollover specialist or facilitator can help guide you through the process.

hOW We can help

Once you determine that rolling over your retirement account is in your best interests, we can help. Investment Resource of AZ, LLC is your Arizona rollover specialist. Our team has successfully rolled over millions of dollars in IRA funds for clients, educating them, streamlining the process and supervising each step of the way for them.

CHAPTER 9: READY? SET? GO!




https://azirarealestate.com/contact-us/

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