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Self-Directed IRA Basics

From IRA basics and benefits to your alternative investment options, let us teach you about self-direction and how it really works.

What is a self-directed IRA?
A self-directed IRA is an individual retirement account that gives you complete control over your investment choices. Unlike other IRAs, you’re not limited to stocks, bonds, or mutual funds. This means you can take advantage of investing in alternative assets - such as real estate, LLCs, mortgage notes, precious metals, and tons of other alternative assets.
I thought only stocks, bonds, CDs or mutual funds were the type of investments allowed in a retirement account?

It’s a common misconception that the only investments allowed in a retirement account are stocks, bonds, CDs or mutual funds. In reality, more investment options have been available since 1975, when IRAs were introduced as part of the Employee Retirement Income Security Act of 1974. With the passage of the Small Business Jobs Protection Act of 1996, Congress allows certain precious metals to be held under an IRA.

What are the benefits of a self-directed IRA?
Benefits of a self-directed IRA include the tax-deferment of earnings on investments purchased by contributions to the accounts. Additional benefits include potential tax-deduction for contributions and potential tax-free distribution of earnings depending on the type of IRA. To receive the retirement tax benefits the account must be governed by a Trust document that contains the rules stated under the IRS. Investments must also be held by an approved institution for the IRA investor to avoid taxation, like Entrust.
Why haven’t I ever heard of self-directed IRAs before?
Typically, financial institutions offer investments under the umbrella of an IRA to attract investors to the investments they offer. Self-directed IRA providers, on the other hand, do not offer any investments. Instead, they offer the services of providing the necessary documentation, trust or custody services of the investments and perform the required government reporting for the IRA.
So a self-directed IRA allows me the freedom to choose what type of asset I want to invest in?
Yes. It is up to the investor to locate, investigate and determine the investment that they choose to hold under their IRA. This platform allows for access to a broader range of investments available to the IRA holders and not be limited to the investments the financial institution offers. Some examples of popular investments chosen by IRA holders include real estate, mortgage notes, precious metals, private placements and other alternative investments.
What types of investments are allowed in a self-directed IRA?

Here are some of the alternative investment options that our current clients have taken advantage of with their self-directed IRA:

  • Real Estate (both commercial and residential)
  • Precious Metals
  • Limited Liability Companies
  • Limited Partnerships
  • Private Placements
  • Securities, CDs, Stocks, Bonds, Mutual Funds
  • Joint Ventures
  • And more…
What investments or assets are not allowed in a self-directed IRA?

There are only three types of investments that are not permitted within a self-directed IRA: life insurance contracts, collectables (with some exceptions for coins and metals), and S corporations.

What are the basic 'individual' retirement account types?
The most popular accounts include Traditional IRAs and Roth IRAs. In addition to retirement plans, Entrust also administers self-directed Health Savings Accounts and Educational Savings Accounts. These plans help reduce costs for health and education expenses and provide a way to save on a tax-deferred basis.
What’s the difference between a Traditional IRA and a Roth IRA?

A Traditional IRA allows individuals to put aside tax-deferred money for retirement. Contributions may be used as a tax deduction if the individual is eligible.  The earnings on the contributions grow tax-free but will be taxed upon distribution. A Roth IRA is an individual retirement account that is funded with post-tax dollars (no deduction). All earnings including interest, capital gains, and dividend income, grow tax-deferred. However, yearly eligibility requirements based on income must be met to determine the eligibility to contribute.

Does Entrust provide retirement plans for small business owners and employers?
Yes, our small business plans offerings include SEP and SIMPLE plans as well as the Individual 401(k) plans which are for employers who employ only owners and their spouses.
What’s the difference between a SEP, SIMPLE and Individual 401(k)?

A SEP IRA (or Simplified Employee Pension plan) is a profit sharing type of plan that allows for a contribution of up to 25% of each employee’s compensation. A SIMPLE IRA (or Savings Incentive Match Plan for Employees) is an employer retirement plan that has similar characteristics to a 401(k). The difference is the plan is not subject to the additional yearly mandatory compliance test that typical 401(k) plans are subject to as well as the maximum contributions are lower. Lastly, an Individual 401(k), is designed for employers who only employ owners and their spouses.

Are my self-directed IRA investments guaranteed?

Since Entrust does not offer, provide nor endorse investment, it is up to the client to conduct proper due diligence with the investments they choose. Entrust does not and cannot guarantee any investment.

Are investments insured under FDIC? How is Entrust regulated in accordance with the IRS?

Only the cash investment an IRA holder transfers or rolls over to their account at Entrust is FDIC insured. The cash is placed in a non-interest bearing checking account as available cash to be directed to fund an investment the IRA holder chooses. Entrust does not offer any investments so Entrust also does not guarantee the investment chosen by the IRA holder. As a passive Custodian of IRAs, Entrust Trust Company a separate entity founded is regulated by the State of Tennessee where the Trust Company is chartered.

How are self-directed plan assets valued?

To comply with the IRS reporting requirements, plan assets must be valued at fair market value, not cost. According to the IRS, the Fair Market Value (FMV) is value of a property or asset, based on what a knowledgeable, willing, and unpressured buyer would likely pay to a knowledgeable, willing, and unpressured seller in the market. Entrust being the custodian of the IRA requires different levels of asset valuation depending on what purpose the valuation is being used for.

Is there a limitation on the number of IRAs, SEPs or SIMPLEs that I can open?
There’s no limit on the number of IRAs an individual can open. Employer plans such as SEP, SIMPLE and 401(k) plan on the other hand, since it’s an employer plan, it is limited to one per employer. Eligible employees may establish as many IRAs as they wish. Some establish multiple IRAs for many reasons such as segregating assets into different IRAs, or naming different beneficiaries in multiple IRAs for estate planning.
Can Entrust give me investment advice, or act as a financial advisor, even recommend the best investments?
Entrust cannot and does not provide any of the above. Entrust can work with you and any tax, legal or investment advisor to answer any general questions about self-direction. Entrust does not affiliate itself with or make any recommendations to any person or entity associated with investments of any type, nor does it provide investment advice or endorse any products.
Should I seek the assistance of a financial advisor before I make a self-directed investment?

It is always recommended to seek the assistance of a tax, investment or legal expert before entering into any transaction so that they can guide you through the information you need to know to make an informed decision. These professionals can help your source your investment, conduct proper due diligence and discuss risks and rewards. If you decide that self-directing is for you, The Entrust Group can help you get started.

What types of services can I expect if I decide to open a self-directed IRA with The Entrust Group?

Some of the main components of our services include providing the necessary documentation and performing the annual required government reporting for your IRA. Our team of professionals understands the self-direction process first-hand, and they are here to help be sounding board to answer all your IRA rules. To serve you in your area, Entrust has more office locations than any other self-directed IRA administrator. We help clients and professionals understand the broad spectrum of alternative investment options, including industry tips and strategies, as well as the benefits of self-directed investing.

What are the fees for opening a self-directed IRA at Entrust?

We are upfront about our fees and make them easy to understand. The four fee categories are establishment, administration, transaction, and termination. Click here to view Entrust’s fee schedule.

What documentation is needed to make an investment?

Documentation will vary depending upon the asset being purchased. However, the documentation required will be the same as if you were purchasing the asset in your non-retirement account. The only thing to keep in mind is that it is your IRA that is making the investment and not you personally. You are merely directing the Custodian to invest in an investment on your behalf.

How do I open a self-directed IRA account with The Entrust Group?

There are three basic steps to begin self-directing your IRA funds:

  1. Open a self-directed account. You can open an account by downloading a New Account Kit online, or by speaking with an Entrust representative. Visit www.TheEntrustGroup.com to find an office near you.
  2. Fund your account. You can fund your account by making a contribution or by rolling over funds from another IRA or 401(k) account.
  3. Choose an investment. If you have an investment in mind, contact Entrust to get started with the necessary paperwork. If you’re looking for investment ideas, visit the Entrust Learning Center (located on our website) to explore your options.

Funding Your IRA

You’ve opened an account, so now what? We answer your questions about all things funding including rollovers, transfers, and contributions.

How do I know the right funding method for me?

Once you have opened your self-directed IRA, you need to decide how you want to fund your account. Choose one of three options to get started with your investments: an IRA transfer from another IRA, a direct rollover from an employer plan, or a contribution to your new IRA.

What is the difference between a transfer and a direct rollover?

transfer is a direct movement of assets from your previous IRA custodian to another such as Entrust. If you are transferring your IRA from another institution, the transfer request will be initiated by Entrust who will be receiving the funds. This can only be done between like IRAs (i.e., Traditional to Traditional, Roth to Roth etc.) There no limitations on the number of transfers you can conduct.

A direct rollover is the process of moving your retirement savings from a qualified plan, typically a 401(k), a 403(b) or a Governmental 457(b) into an IRA. The funds are distributed with funds made payable to your IRA. You initiate the rollover request with your previous employer and provide them with the name of your IRA.

How do I use a contribution to fund my self-directed IRA?
There are two different IRAs an individual can choose from to contribute to. The first one is the Traditional IRA and the other is the Roth IRA. Each has criteria that must be met to determine an individual’s eligibility to contribute. For a Traditional IRA, an individual must be under the age of 70 ½ in the year of making a contribution and the individual must also have earned income during the tax year. For a Roth IRA, an individual can be over the age of 70 ½ however, the individual must have earned income and fall within the modified adjusted income limits associated with the tax filing status. Annual contributions can only be made in cash.
When can I take funds out of my 401(k)?
To take assets out of your 401(k), you must have reached a distributable event. These events include: reaching normal retirement age, separation from service, plan termination, death, disability, and in most plans, divorce. Without reaching these events, your employer will not allow you to move your 401(k) assets to a self-directed IRA.
Who initiates the transfer from one IRA custodian to another?

To transfer your current IRA savings account to a self-directed IRA, Entrust will initiate the transfer once we receive your request to do so. You must first establish an IRA of the same type at Entrust. Entrust will also need a copy of your current IRA statement from the other financial institution.

What if I have vested employer contributions?

In some plans there is a provision called an in-service distribution which will give you access to vested employer contributions that have been in your account for a period of 2 years. Once you have determined with your employer that you can directly rollover your funds, the first step is to establish an IRA at Entrust. Your pre-tax dollars will need to be rolled over to a Traditional IRA. If you have a designated Roth account in your 401(k) you will need to establish a Roth IRA to receive those funds.

If I don’t have enough funds for my investment, can I partner my funds with someone else?
Yes. A self-directed IRA can partner with anyone at the time of purchase. According to industry opinions, you can even partner with disqualified persons but only during the initial purchase, but after the transaction is complete, the IRA cannot conduct any business with a disqualified persons. Doing this could lead to significant tax penalties.
Who are disqualified persons?
  • You and your spouse
  • Your lineal ascendants and descendants, and their spouses
  • Any person providing plan-related services (custodians, advisors, fiduciaries, administrators).
  • Any entity (business, corporation, partnership) of which you own at least 50 percent, whether directly or indirectly.
Are there any other ways to purchase an investment if I’m low on funds?
Your IRA may also borrow to purchase an investment through a non-recourse loan provider. There may be taxes associated with the income from the IRA called Unrelated Debt Financed Income that is a type of Unrelated Business Income Tax. The IRA may need to file a tax return called an IRS Form 990-T to declare the income and pay those taxes.
Can I rollover a partial amount of a past employer's 401(k) to a self-directed IRA, and the other portion to a current employer 401(k)?
Assuming your employer will allow for two direct rollovers, you may. There is no prohibition on the number of direct rollovers you can conduct from 401(k) plans.
After I fund my account and before I invest, where does my funding reside?

Your cash will sit in a non-interest bearing checking account in your IRA and the account is FDIC insured.

Can I set up transfers back to my other IRAs?

You can transfer funds as often as you wish between any of your IRAs of the same type at any financial institution.

What is an excess contribution and recharacterization?

A recharacterization is a mechanism that allows a taxpayer to move a current year’s contribution from one type of IRA to a different type of IRA. This transaction is not taxable and must be completed prior to the tax return due date, including extensions. In most cases, the deadline is October 15 if someone filed their taxes timely.

In what types of situations can I use excess contributions and recharacterizations?

IRA excess contributions occur when an IRA holder makes a contribution that is not eligible. Other types of circumstances can cause an excess contribution. Rollovers in IRAs that are beyond the statutory 60-day period or rollovers that exceed beyond the limit of one per twelve-month period is reclassified as a current year contribution to the receiving IRA. While not automatically considered an excess contribution, it is treated as an excess contribution especially if the amount exceeds what is allowed according to law.

Do I need to recharacterize my full contribution or can I do a partial recharacterization?

You are not required to recharacterize the full contribution. A taxpayer may recharacterize any portion of a contribution. Since the earnings or loss associated with the amount must be recharacterized, the proportionate percentage of earning or loss must be moved along with the contribution.

Is there a limit on the number of recharacterizations I can conduct in one year?

There is no limit on the number of recharacterizations a taxpayer can conduct in a tax year. There is, however, a deadline on when this transaction must be completed. That is the taxpayer’s tax return due date, plus extension. There is a special rule however that if the tax payer files their taxes timely they get the automatic tax extension to recharacterize. In this case, since the tax payer may have filed their tax return already, an amended return will need to be filed.

What are the benefits of a recharacterization?

Here are two examples of taxpayer benefits.

Example 1: A SIMPLE IRA owner has been contributing for eight months. Without knowing the rules, he transferred his SIMPLE IRA assets to his Traditional IRA at another administrator to consolidate his investments. He was told later by his CPA that this was a violation of the rules. To correct the error, the taxpayer may recharacterize the Traditional IRA assets back to the SIMPLE IRA – as if the transaction never transpired. The administrator, at the end of the year, will report the transactions to the IRS and the IRA holder, showing the movement of the assets.

Example 2: A Roth IRA holder makes a contribution and later finds out that he was not eligible to make a Roth IRA contribution because he exceeds the Modified Adjusted Gross Income limits to contribute to the Roth IRA.   He may recharacterize his Roth IRA contribution to the Traditional IRA since there is no income limit when determining eligibility for Traditional IRA contributions.

Real Estate IRAs

Can I live in my investment home? Can I partner my IRA? Get answers to your questions about all things regarding Real Estate IRAs right here.

Can I live in my IRA-owned investment property? Or use the property as a second home?
No, the property is for investment only and you are considered a disqualified person. The direct or indirect furnishing of goods, services, or facilities between an IRA and a disqualified person is not allowed. See IRS Code 4975 for information on prohibited transactions, disqualified persons, and self-dealing.
Can my kids or other family members live in the IRA-owned property and pay me rent?
No, they cannot, they are considered disqualified persons. You cannot buy a house or vacation property for you or your lineal ascendants or descendants to use while your IRA owns it. See IRS Code 4975 for information on prohibited transactions, disqualified persons, and self-dealing.
Are there restrictions on the type of property I can purchase? Am I restricted to residential real estate?
You are not limited to residential real estate. Your IRA can hold various investment property types including: residential, commercial buildings, vacant land, condos, mobile homes, apartment buildings and more.
Can my IRA purchase property that I already own?
No, this is a prohibited transaction. See the IRS Code 4975 for information on prohibited transactions, disqualified persons, and self-dealing.
Can I sell the property to myself?
No. Pursuant to IRS Code 4975, the direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person” is prohibited. You can however, distribute the property in-kind but it will be a taxable event.
Can my IRA borrow money to purchase the investment property?

Yes. Your IRA may obtain a non-recourse loan, but keep in mind that in a non-recourse loan, you may not use your personal credit to facilitate the loan. The IRA is the borrower of the note and deed of trust, and the loan documents are signed by Entrust on behalf of the IRA at the direction of the IRA holder.

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

No, using an IRA asset to secure a personal loan is prohibited. Any amounts on an IRA pledged for a loan becomes taxable.

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 retirement plan because the IRA and the IRA holder are two separate entities. The proper way to handle this is to start a new contract using the correct vesting.

Can the rental income from the property in my IRA flow back to me personally?

No. However, you can request the funds in your IRA to be sent to you as a distribution.

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. If there is insufficient cash 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. Additionally, investors can fix and flip homes or hold on to rental properties for a flow of passive income with a Real Estate IRA.

Can I be the property manager?

No, but Entrust does permit the IRA owner to receive the rental income for record keeping, but the actual funds must be sent to Entrust for depositing. You cannot pay yourself income from profits generated from your IRA’s rental property as it is considered self-dealing.

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

No, it is not required. Some of our clients, however, choose to use a property manager for the purpose of consolidating the various expenses. Another advantage, if you are partnering with others, is that your tenants do not have to write multiple rental checks to the various investors. They just write one to the property manager, who then distributes the percentages accordingly.

How is the rent collected on rental property?

If the property is being managed by a property manager, the property manager collects the rent and sends it to Entrust for deposit, along with the profit and loss statement. It is preferred if the profit and loss statement is sent monthly. If a property management company is not managing the property, the rental income should be deposited directly to the IRA account.

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

Essentially it’s your IRA that owns the property and not you personally. Any income or expenses from an asset within your IRA must be received and paid via the IRA. You cannot use personal funds to pay for expenses incurred by the asset within your retirement account. See IRS Code 4975 for more information.

What expenses on the property can my IRA pay for? What is not payable from the IRA?

Regular real estate expenses, such as mortgage payments, property taxes, insurance, HOA dues, and repairs and maintenance, must be paid from the IRA. If these expenses are paid with personal funds, the IRA cannot reimburse you. Doing so is a prohibited transaction. Any payment to an IRA holder from an IRA, whether or not claimed as a reimbursement, is a distribution and must be reported on IRS Form 1099-R and therefore, subject to inclusion in gross income.

What do I do if my IRA doesn’t have sufficient funds in the account to pay for the expenses?

You have a few options: Make your yearly contribution to your IRA account if you are eligible to make one, transfer funds from another IRA account, liquidate other IRA assets to free funds, get a non-recourse loan, or sell the asset.

What are the different considerations for purchasing offshore properties?

First, verify that the title can be held in the name of the IRA. Some countries require that land be held in the name of an entity. In this situation, you may need to establish an entity to proceed with the purchase. It is best to involve a legal counsel and other advisors knowledgeable of the specific the country’s laws before purchasing offshore property. You should allow for additional time to close an offshore real estate transaction.

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

Consult with your real estate professional, legal and tax advisors to assist you with performing the necessary due diligence on the property to fit your individual needs. Some things to do are:

  • Verify that the title can be held in the name of an IRA or qualified plan.
  • 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 or through a corporation, trust, or other entity.
  • Find someone local to handle property management and other property maintenance services.
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 (IRA) defaults, the lender can seize the collateral, but cannot seek to collect from anyone else including the IRA holder—The lender has no recourse—for any further compensation, even if the collateral does not cover the full value of the defaulted amount. In this situation, the IRA holder does not have personal liability for the loan. The IRA owner must do the research to source out non-course loan lenders.

What is Unrelated Business Income Tax (UBIT)?

“Unrelated business income” is income from a trade or business, regularly carried on (showing frequency and continuity), that is not substantially related to the purpose of a retirement account. The Unrelated Business Income Tax (UBIT) was created by the Congress to level the playing field for businesses established under the umbrella of a tax-exempt entity, not to have a competitive advantage over other businesses outside of a retirement plan. Both should shoulder their tax responsibility.

What is Unrelated Debt-Financed Income (UDFI)?

Unrelated Debt-Financed Income (UDFI) is generated when an IRA borrows money to purchase real estate. UDFI is the result of Acquisition Indebtedness on the portion the IRA investment purchased using a loan. Having UDFI also will require filing an IRS Form 990-T.

Precious Metals IRAs

We’ve collected the most frequently asked questions about Precious Metals IRAs. Learn about holding options, dealer options, and more.

Is a Precious Metals IRA different from a self-directed IRA?

No, a Precious Metals IRA, or Gold IRA, is a type of self-directed IRA that invests and holds precious metals. When you choose to invest in precious metals with your IRA, you determine all aspects of the investment, including the type and kind of metal, the dealer from whom the metals are purchased, as well as the approved depository at which the metals will be stored.

Which precious metals are allowed in an IRA?

Precious metals can be held in your IRA in the form of physical gold, silver, platinum, and palladium bullion products. The precious metals allowed in an IRA must meet their respective minimum fineness requirement:

  •  Gold – 99.5%
  •  Silver – 99.9%
  •  Platinum – 99.95%
  •  Palladium – 99.95%

Please refer to the Precious Metals Center webpage for more information on which metals are allowed in a Precious Metals IRA.

Can I hold other types of investments in a Precious Metals IRA?

Yes. When you establish an IRA with Entrust, you may invest your IRA funds into any alternative assets permitted under the Internal Revenue Code.

Can I contribute bullions or coins I already own into my Precious Metals IRA?

No. You can only fund your account in the following ways: cash contribution, cash, and in-kind rollover or transfer from another custodian to Entrust.

In a Precious Metals IRA, do I own the physical metals?

Technically, you do not own the physical metals; your IRA owns them. You may take a distribution in-kind at any time. However, it is a taxable event and you may be subject to the early withdrawal penalty.

Are precious metals certificates allowed?

Some IRAs allow certificates. However, Entrust does not allow precious metals certificates.

Can I take possession of the precious metals?

You may not take possession of the metals while they are held in the IRA. Metals purchased in an IRA are transferred directly into the depository in the name of the IRA. However, you may take a distribution of the precious metal assets, which is a taxable event and you may be subject to the early distribution penalty. There may be some restrictions for international holdings.

Why do I need a custodian to hold precious metals in my IRA?
The Internal Revenue Code requires that a custodian hold your IRA assets, including precious metals, to keep the assets in a tax-deferred environment.
What does Entrust report to the government?

Entrust annually reports the value of the IRA to the IRS. Nothing else is reported to the government.

What fees are involved with opening a Precious Metals account with Entrust?

There are two fees associated with establishing a new Precious Metals IRA at Entrust. Entrust charges an all-inclusive flat rate $150 annual recordkeeping fee, with no set-up cost and no additional transaction costs. You may accumulate metals over the years without any additional costs. There is also an annual storage fee from the depository you choose. Depending on the depository, these fees range from an average of $95 to $300.

How do I choose a precious metals dealer?

Entrust does not sell or promote any products or vendors. Precious metals may be purchased from any dealer of your choice. Entrust strongly suggests that you perform a thorough due diligence on the dealer for security, including their business ratings, the dealer history, dealer affiliations, and proper review of the terms of agreement and pricing.

Can I buy metals from more than one dealer?

Yes, you may purchase from multiple dealers of your choice.

Can Entrust coordinate the metals purchase for me?

Because it is a self-directed IRA, you will need to negotiate the purchase price and the type of metals with the dealer yourself.

Can I use funds from my existing IRA or previous employer plans to invest?

Yes, any past employer or individual retirement plan can be rolled over or transferred to Entrust.