Self Directed Education
What is an IRA?
An IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement. Provided you meet certain income guidelines, a Traditional IRA allows you to deduct your contribution in the tax year it is made, and investment earnings accumulate tax deferred. Upon reaching retirement age (59½ years old), distributions are treated as ordinary income. If you take a distribution before reaching retirement age, you will incur a 10% penalty as well as federal and state income taxes. You must begin taking distributions at age 70½.
What is different about a Roth IRA?
Contributions to a Roth IRA are made on an after-tax basis, meaning that contributions to your Roth IRA are not deductible. However, investment earnings accumulate without tax and once you have reached retirement age distributions are tax-free. Also, there are no mandatory distribution requirements with a Roth IRA.
How much can I contribute to my IRA?
Subject to some income limits, you may contribute up to $4,000 in the 2007 tax year to either your Traditional or Roth IRA. If you are 50 years old or older, you may contribute up to $5,000.
What types of accounts can I rollover into my IRA?
Among others, you may rollover a Traditional IRA, Roth IRA, SEP IRA, 401k, or 403b. In addition, you may consolidate multiple retirement accounts into one IRA. For example, if you have two 401k accounts open with former employers and an IRA, you may rollover all three accounts into one self-directed IRA.
Are there any investments that I can’t make with my self-directed IRA?
You cannot invest in Life Insurance Contracts or Collectibles (as defined by the IRS). Also, you may not participate in prohibited transactions. As an IRA owner, if you violate these rules, you could forfeit your entire IRA. It is crucial that you work with competent advisors to help you avoid these transactions.
What exactly is a prohibited transaction?
IRA transactions must be for the exclusive benefit of the retirement plan and must not directly or indirectly benefit the IRA owner, or certain other “disqualified” people. Therefore, prohibited transactions are those involving your IRA and a disqualified person. “You” are a disqualified person, as are some of your family members, some businesses that you or your family members own, and fiduciaries of your plan. You IRA may not make loans to any disqualified person, you cannot extend credit to your IRA, and you cannot pledge the assets of your IRA to secure a loan. By way of examples, your IRA may not purchase the home in which you live, your IRA may not rent real estate it owns to your children, and you cannot personally guarantee a loan that your IRA uses to finance the purchase of real estate.
However, there are many details about prohibited transactions and there are many exemptions to the rules. Security Trust Company can help you navigate these complex rules and keep your plan in compliance.
Penalties
The penalties for failing to comply with the rules can be severe. They range from a penalty tax to forfeiture of your entire IRA. To develop a true understanding, let’s invent a hypothetical prohibited transaction. Assume you have an expensive penthouse in New York City that you are renting to your son while he attends college. The IRS sends you a notice explaining that you are involved in a prohibited transaction and gives you the opportunity to correct the situation. You find your son a new apartment and get a new, unrelated tenant for your penthouse. The IRS can impose a penalty tax on the amount it determines to be subject to a prohibited transaction.
Assume the same set of circumstances, but in this case you ignore the IRS’ notice and continue to let your son rent the penthouse. The IRS will send you a notice stating that your failure to comply has resulted in the forfeiture of your penthouse. The IRS seizes your real estate, removes your son from it, and sells the property. The proceeds of the sale go into the US Treasury and your once-substantial IRA is now gone. The best way to avoid this type of situation is to make sure you have a solid team of advisors helping you navigate the process.
Federal Statutory Regulations
IRS Links:
Individual Retirement Arrangements
Retirement Plans for Small Business
US Department of Labor Links:
