Self Directed IRA Services, Inc. » Investment Options

Investing in Gold, Silver and Other Precious Metals in a Self Directed IRA

Kelli Click — Thu, 16 Feb 2012 20:36:02 +0000

Gold and precious metals have long been viewed as a great way to diversify your IRA portfolio, and gold in particular has recently garnered the attention of many investors. Today, with the stock market and economy on a seemingly endless roller coaster ride, there is a growing interest in investing in gold and precious metals in a self directed IRA.

Below are some of the common questions investors often ask.

How do I invest in gold and precious metals within a self directed IRA?
The first step would be to establish and fund your IRA account with a self directed IRA custodian. A self directed IRA account is usually funded by a direct transfer or rollover from another IRA, 401(k) or other qualified retirement plan. If eligible, you may also make an annual IRA contribution.
Once your account is funded you can select the metals you would like to invest in and send instruction to purchase them to your IRA custodian. Your custodian will send payment from your self directed IRA along with shipping instructions to the precious metals dealer.

What should I look for in a self directed IRA custodian?
First make sure the IRA custodian will allow you to invest in precious metals. Find several custodians and compare their IRA fee schedules. Fees may vary among firms, but typically range from $200-$400 or more. Also check out the custodian’s service level and ask about its processing time.
Self Directed IRA Services invites you to compare our IRA fees and delivers fast, reliable service.

What types of precious metals can I invest in with my IRA?
Initially, the Internal Revenue Code section 408 only mentioned two coins as being IRA permissible: American Gold Eagles and Silver Eagles. However, in 1997, gold bullion, silver bullion, platinum and palladium also became approved for IRA investments.
All bullion and coins must meet certain minimum fineness requirements and be COMEX or NYMEX approved. For more information, please refer to our list of acceptable precious metals.

Can I purchase precious metals I already own?
The IRS does not permit you to purchase any metals that you personally own, which would be considered a prohibited transaction. As with any IRA asset, precious metals should be purchased directly by your IRA custodian from your precious metals dealer.

Where do I find a precious metals dealer?
You can find a precious metals dealer through trade groups such as Industry Council for Tangible Assets (ICTA) or the American Numismatic Association (ANA). As a word of caution, you should check and compare prices with several precious metals dealers. Make sure the dealer has experience and is in good standing with the state in which it operates. You must place your buy and sell orders directly with the precious metals dealer. Your IRA custodian does not place these trades for you.

Where are the precious metals stored when purchased by my IRA?
Precious metals held by your IRA should be stored with an approved depository, such as Delaware Depository. Precious metals can be stored within a storage facility two ways: commingled, where metals for different owners are all stored together in an area within the depository designated for the IRA custodian’s customers, or segregated, where metals are stored separately for each investor. You should expect to pay an annual storage fee, in addition to your annual IRA fee.

Can I receive the precious metals when I start taking distributions from my IRA?
Yes, if you decide not to sell or liquidate the precious metals held in your IRA, you may elect to take an “in-kind” distribution, in which you take physical possession of the bullion or coins. Your IRA custodian will then make arrangements for the depository to ship the bullion or coins directly to you.

Why consider investing in precious metals in a self directed IRA?
Historically, gold and other precious metals provide one of the few ways to hedge or protect assets from high inflation, stock market volatility and economic uncertainty. Gold in particular is often referred to as the crisis commodity because it tends to appreciate in value in response to negative economic, monetary, or political conditions.

How would the precious metals in my IRA with Self Directed IRA Services, Inc. be priced or valued?
All precious metal values reported on SDIRA’s account statements and online records are estimated bid values provided by www.BullionValues.org. Estimated bid values are considered to be conservative estimates, particularly for proof coins, and should not be used as a firm bid price to buy by any broker or dealer. Estimated bid values are generally based on small quantities, and the actual quantity of a transaction may affect the price received for any given bullion item. In addition, estimated bid values do not include dealer mark-ups, mark-downs or commissions. Before making a decision to buy or sell any specific bullion product, an IRA owner is urged to obtain and compare pricing from various sources, including your precious metal dealer.

Want more information?
To learn more about investing in gold and precious metals in an IRA with Self Directed IRA Services, Inc:
• Visit our Gold and Precious Metals IRA Investing section on our website.
• Download these items:
Precious Metals Checklist and Investment Direction
Precious Metals IRA Fact Sheet
• Call us at 866.928.9394.

Understanding Unrelated Debt Financed Income in an IRA

Kelli Click — Wed, 28 Dec 2011 21:48:57 +0000

In Part 1 of Understanding Unrelated Business Taxable Income, we discussed UBIT. The second type of UBTI that a self directed IRA may generate is Unrelated Debt Financed Income, or UDFI. UDFI may be generated when a tax exempt or tax deferred entity owns property that is debt financed. If an IRA holds leveraged real estate or an interest in an LP or LLC which obtained financing, the portion of the profit realized through the debt may be subject to UDFI tax, and taxed at trust rates.

UDFI Defined
Unrelated Debt Financed Income is covered in IRC 514, which defines debt financed property as “any property which is held to produce income and with respect to which there is acquisition indebtedness at any time during the taxable year.”

UDFI is only applied to profit realized through debt. An IRA may owe tax if income is generated by a leveraged property, or if debt financed property is sold for a profit. UDFI would not apply if the debt is paid off 12 months or more prior to the sale.

Calculating UDFI
Taxes are based on the highest amount of leverage the self directed IRA carried in the past 12 months. UDFI is only applied to the gain or profit realized through debt. The formula below is used to find the amount of income that is taxable as UDFI:

Average Acquisition Indebtedness is the average outstanding principal indebtedness during the portion of the year the property is held. This amount is found by averaging the amount of outstanding principal for the first day of each month that the property is held.

Average Adjusted Basis is found by averaging the adjusted basis of the property for the first and last day of the year that the property is held.

Gross Income from Property may be able to have certain deductions taken before calculating UDFI, such as depreciation. However, deductions for depreciation can only be taken by using the Straight Line Method; all deductions must be clearly related to the income and property.

When selling the investment at a profit, the taxable amount may be determined by dividing the Average Acquisition Indebtedness by the Average Adjusted Basis.

UDFI Tax Filing
If your IRA does owe UDFI, it is best to consult a tax professional for preparation of IRS Form 990-T. Once complete, Form 990-T can be submitted to the IRA custodian with the authorization to file and instruction to pay the UDFI tax.

Summary
Keep in mind that most self directed IRAs that hold leveraged real estate will not owe UDFI tax for the first few years due to depreciation.

If you are considering an investment that may generate UDFI, your tax advisor should be consulted in advance. To learn more about Unrelated Debt Financed Income please view IRS Publication 598.

Don’t Leave Your 401k Behind

Kelli Click — Wed, 28 Dec 2011 20:09:49 +0000

Rollover to an IRA and Expand Your Investment Options

As the stock market rollercoaster leaves much out of our individual control, there is something you may want to consider for gaining better control and protecting your retirement dollars from market losses.

A self directed IRA is a retirement tool that has allowed individuals to direct their retirement dollars into alternative investments, outside of the stock market, for over 35 years.

You can take control and rollover your 401(k) with a former employer into a self directed IRA. What advantages would it offer? Simply stated, a rollover provides the opportunity to diversify your retirement dollars in assets not available under the employer’s 401k plan.

The IRS doesn’t say what you can invest your IRA in, only what you cannot invest in (see IRS Pub 590). Specifically, section 408 of the Internal Revenue Code tells us we cannot invest our IRA dollars in life insurance contracts and collectibles (artwork, rugs, gems, stamps, etc.).

Beyond this, other investments are fair game as long as they are deemed to be made for “investment purposes only” (and not considered a prohibited transaction). For example, your IRA can not purchase a home for you (or those related to you) to live in. However, your IRA can purchase a property which you can lease to an unrelated party and have the rental income flow back into the IRA tax-free or tax-deferred.

In the chaos of changing jobs, people often forget about their 401k. The good news is that even after you leave an employer, you can still rollover your 401k to an IRA.

Do your homework and find the best investment for you. Your IRA can invest in alternative investments such as:
• Residential real estate, including apartments, single family homes, and duplexes
• Commercial real estate
• Undeveloped or raw land
• Real estate notes (mortgages and deeds of trusts)
• REITs (Real Estate Investment Trusts)
• Promissory notes
• Public or private limited partnerships and limited liability companies
• Private stock offerings
• Oil and gas investments
• Structured settlements
• Gold and silver bullion
• Publicly-traded stocks, bonds, mutual funds or ETFs (in a brokerage account)

Don’t leave your 401(k) behind with a former employer. Rollover to a self directed IRA and expand your investment options. Visit our website at www.SDIRAServices.com or contact us at info@SDIRAServices.com. Our toll-free number is (866) 928-9394.

Ask a Question or Request Additional Information

Debt-Financed Property with your IRA

Kelli Click — Tue, 27 Dec 2011 18:31:26 +0000

Real estate is a popular self directed IRA investment, and we previously covered a few of the basics of owning real estate in an IRA. There are times when investors are interested in a particular residential or commercial property but only have a portion of the funds needed for the purchase available. Self directed IRA owners that find themselves in this position may have the option to finance the purchase with a non-recourse loan from an IRA lender.

A non-recourse loan is one in which the lender has no recourse to other assets owned by an IRA owner in the event of default. If the loan goes into default the lender may take possession of the underlying property, but it would be the only eligible asset that the lender would be able to pursue.

Few companies offer IRA lending, and the requirements for a loan to an IRA are very different than for personal loans. Here are a few points to consider if you are thinking about financing a property with your IRA:

1) A minimum of 30% down is needed, with some lenders requiring 40%.
2) The property appraisal and potential income will be the main points of consideration.
3) Properties that are not move-in ready or needing only minor work or repairs may not qualify for funding by the lender.
4) Most IRA lenders will require that a portion of the loan remain in the IRA account for any expenses that might come up.
5) The IRA may need to pay unrelated business income tax (UBIT) on the leveraged portion of the real estate.

Self Directed IRA Services, Inc. does not recommend any individual investments, and as a self directed IRA custodian, we do not offer non-recourse loans. For more information on non-recourse loans in a self directed IRA you may view the FAQ and Fact Sheet provided by Matt Allen, Director of IRA Lending, at www.IRALending.com.

Considering Real Estate in a Self Directed IRA?

Kelli Click — Tue, 27 Dec 2011 18:11:16 +0000

With the economic downtown, savvy investors are looking for investment opportunities in real estate and may consider using a self directed IRA or real estate IRA. After all, real estate has long been considered the number one way to building wealth – and what better way than to build wealth tax-deferred or tax-free than in a retirement portfolio?

Here are the basics to help you get started and understand how it works.

Find an IRA Custodian
Locate an IRA custodian, preferably a bank or trust company, which accepts real estate in a self directed IRA or real estate IRA. It’s best to use a custodian rather than an administrator. Administrators use the services of a third party to custody your IRA investments which creates an extra layer that can lead to problems. Custodians are regulated by a state or federal authority, while administrators are not subject to any regulatory oversight.

Likewise, if you use a facilitator or middleman to assist you in finding a property, make sure they either work with or recommend an IRA custodian. Many new firms offering self directed IRAs and real estate IRAs have entered the market in recent years promoting the LLC-structured concept of “checkbook control” IRAs. Under this scenario, the IRA owner has full control over the use of their IRA funds– something that seems to contradict the IRS rules and many IRA custodians consider a gray area. Even some regulators have recently become concerned with the checkbook control concept and fear it may mislead an investor into a prohibited transaction which could lead to disqualification of the IRA and result in taxes and possible penalties.

Funding the Purchase
Once you find the property you want to purchase, you can either use cash from your IRA to purchase the property outright, or you can locate a lender to finance the purchase. If your purchase will be financed, the lender must use a non-recourse promissory note. This limits the recourse the lender would have to only the underlying property (and not other IRA assets) in the event of default. No other IRA assets or personal assets can be used to collateralize the loan. If your IRA purchase uses debt financing, you should be aware that this would generate Unrelated Business Taxable Income (UBTI) and discuss this with your tax professional.

Starting the Transaction
It is also important to remember that the purchase offer and contract must identify the named purchaser as your IRA custodian for benefit of your IRA account (i.e., Self Directed IRA Services, Inc., Custodian FBO John Doe IRA). In addition, all funds, including the earnest or escrow deposit must be paid directly from the IRA rather than out of your personal pocketbook. Also, a closing date should not be set until the IRA is established and funded with your custodian.

Spare Funds Needed
Keep in mind that all expenses related to owning, maintaining or improving the property owned within an IRA must be paid by the IRA. This includes maintenance, repairs, taxes, insurance and improvements, as well as any mortgage payments if debt-financed. The way this usually works is that once you receive a bill or invoice for the expense, you would sign it as approved and send it, along with payment instructions, to your IRA custodian. The custodian then issues the payment from your IRA.

Income-Producing Property
If the property generates any income through rental or lease of the property, the income must flow back into the IRA. So whether you have residential, commercial, raw land or vacation renters, any tenant of the property would need to write checks to the IRA rather than to you personally. With an income-producing property, you may be required to use a third party property manager to handle the process and remit the income to your IRA. Your custodian will provide the specifics for how this should work.

Keep it Arms-Length
Now, let’s address the questions we hear most often—
• Can I use the property for a vacation home?
• Can I lease the property to my son/daughter to use for their business?
• Can my IRA buy a property that I/my parents currently own?

These questions fall under the rules about prohibited transactions and self dealing under Internal Revenue Code § 4975. A prohibited transaction most commonly results when your IRA engages in a transaction with a disqualified person, primarily:

• The IRA owner and their spouse,
• The IRA owner’s ancestors (parents and grandparents) or lineal descendants (children and grandchildren) and their spouses,
• Any entity in which the IRA owner has a combined ownership of 50% or more.

In general, you cannot have any direct use or benefit of the property owned within your IRA. Likewise, you should not engage in a transaction with a family member. This means your IRA cannot lease a property to a disqualified person, nor can it buy or sell a property from a disqualified person. As a general rule, if you follow the guidelines set forth, your IRA transaction should be okay.

Selling the Property
The property can be sold at any time to an unrelated party and the proceeds from selling an IRA-owned property roll back into the IRA without facing capital-gains taxes.

You can then invest the proceeds in another property or any other asset within your IRA. When you eventually withdraw funds from the IRA, the profit would be taxed at ordinary income rates when withdrawn from a traditional IRA— or tax-free if in a Roth IRA.

Summary
Given the uncertainty in today’s mainstream investments, real estate is gaining a great deal of interest as an investment option in self directed IRAs. It’s easy to see why. After all, most people prefer to invest in what they know and understand.

Knowing the rules associated with owning property in your IRA is essential, so do your homework and consult with your tax advisor so they may cover the details relating to the investment you are considering.

Whether your retirement strategy is to retain properties or buy and sell for gain, real estate investing through your IRA can yield astonishing profits toward your potential retirement.