Don’t tell me the sky’s the limit when there are footprints on the moon. This is the mentality of most checkbook IRA investors. Double or triple digit gains are the goal for many. At the same time, they don’t want to violate checkbook ira rules or risk the tax-deferred status of a self-directed IRA. Knowing the checkbook IRA rules lets you play to win while playing by the rules. When it comes to self-directed IRA rules, there are a few things you need to know so you don’t end up owing the IRS unexpected taxes and penalties.
Rules about prohibited transactions
A checkbook IRA gives you more freedom or control than conventional IRA platforms but you are still restricted by IRA rules. As the owner, you have complete signing authority over your retirement money, but with control comes responsibilities. If you engage in a prohibited transaction with your checkbook IRA, you could face major tax consequences. The IRS enforces the rules because a violation would distribute the IRA and leave you with a tax liability for the balance. As a general rule, you can’t use your self-directed IRA to make transactions with yourself or other disqualified individuals. You can invest in anything that is arms length from disqualified parties and isn’t specifically listed as a taxable investment or prohibited transaction. The good news is that this list is really short. The two taxable investments are life insurance and collectibles and there are only 6 prohibited transactions.
With a checkbook IRA you are only restricted to these disallowed investments and transactions. Everything else is fair game. This is a huge advantage to conventional IRAs where you can only invest on your brokers platform of allowable investments.
Rules about disqualified individuals
When it comes to the rules about disqualified individuals, it’s frustrating for some people. You can buy a rental property with a self-directed IRA and turn around to rent it out to your sister, but you can’t rent it out to your son or daughter or your mother or father. You are strictly forbidden from living in a home you purchase with a self-directed IRA, even if it’s just for vacations until you retire and transfer it to yourself as an IRA distribution. In general, the rules regarding disqualified individuals are all about “self dealing.” The IRS doesn’t want disqualified individuals to engage in any leasing, direct or indirect sale or exchange of property. They don’t allow lending of money or credit, the furnishing of goods or services or the transfer of IRA assets or income. Disqualified individuals include you as the owner as well as your spouse, children, grandchildren and great-grandchildren, parents, grandparents. Your chi ldren’s spouses and grandchildren’s spouses and great-grandchildren’s spouses are also disqualified individuals. Other disqualified people include service providers such as your IRA custodian or investment broker. In other words, a fiduciary to your IRA can’t manage your IRA for their own benefit. So it is very important that you manage your own self-directed IRA instead of allowing your partner to manage it.
Rules about indirect benefits
Because the purpose of your IRA is to provide retirement income when you are older, the goal isn’t to benefit you personally in the moment. In general, the IRS designed rules about indirect benefits to prevent you from reaping your rewards early (without paying taxes). Some indirect benefits include using real estate you bought with a checkbook IRA to use as your office, vacation home or home for a child. You can’t lend yourself money, pay yourself as the property manager for a home you own through a self-directed IRA. you can’t pay your children to work on your real estate if it’s owned with a self-directed IRA.
Once you know about the rules, it’s easy to take control of your own financial future with a checkbook control IRA. A truly self-directedIRA lets you build wealth by using your own areas of knowledge and expertise without relying on so-called experts who aren’t as vested in your financial future.
At New Standard IRA, we set the standard in excellence for free-spirited investors who want to make their own way in the world of alternative investing. When you follow the rules, you keep your IRA grows tax deferred until you decide to make IRA distributions in retirement. If you own a Roth, you’ll be able to enjoy tax-free withdrawals. For more information about checkbook IRA rules, please contact us.