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Recently the General Accounting Office issued its report on retirement security.

It’s called GAO-17-102 and it says “Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets”.  This report outlines many key points about Self-Directed IRAs.

In 2015, IRA custodians were required to start reporting elected IRA Asset data to the IRS on Forms 1099 and 5498.  The IRS was trying to better understand alternative assets being held by retirement accounts.

There are nearly half a million retirement accounts holding alternative assets. IRAs make up the vast majority of these accounts.  These accounts have an aggregate value of approximately $50 billion dollars.

The GAO found that individuals investing in alternative assets through Self-Directed IRAs agree to be responsible for overseeing the selection, management and monitoring of the accounts and bear the responsibility of most decisions.

They also point out that current IRS guidelines offer little help to IRA owners about these responsibilities.

Unlike IRA accounts “Solo 401(k)” accounts are not covered under Title 1 of ERISA (Employee Retirement Income Security Act of 1974) since they have no full-time employees. This means there is a not a Fiduciary to help over the account. This can create challenges for the Solo(k) owner as the owner may not have the experience or knowledge to make sure they are complying with all required reporting.

Account owners are responsible for determining if the IRA owes taxes for UDFI (Unrelated Debt Financed Income) and UBIT (Unrelated Business Taxable Income). UDFI comes into play when an IRA uses financing to acquire real estate. UBIT occurs when the retirement account is running a business. Many accounts have difficulty in paying these taxes due to the illiquidity of the assets held.

The GAO reports that IRA owners need help with:
  1. Monitoring to determine when there is a federal tax liability
  2. Obtaining annual fair market evaluations.
It recommends the IRS Commissioner do the following:
  1. Provide guidance on holding alternative assets.
  2. Provide guidance on obtaining annual valuations.
  3. Require custodians to not make references or implications to their custodial forms being reviewed or approved by the IRS as the IRS does not provide that service.
If you would like to learn more you can view the full report here


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