Investing with Your Self-Directed IRA
Once you have your new self-directed IRA opened and funded, it’s time to invest. You can invest your IRA dollars in anything except life insurance contracts and collectibles. Keep in mind the self-directed IRA investment rules about prohibited transactions. Prohibited Transactions are discussed in Internal Revenue Code (IRC) 4975. Some of the more common investment transactions with a self-directed IRA would include: real estate, Notes (both secured and unsecured), Private Placements (subscriptions into non-publicly traded stock), wholesaling, and precious metals, to name a few. Also common are IRA owned LLC’s whereby the account holder is the manager, the IRA is the sole member. Such set up is often referred to as a ‘checkbook IRA’, since the account holder has check writing authority of IRA funds as the manager of the LLC. Regardless of the investment type, the account holder will provide the supporting investment docs with their Direction of Investment (DOI) form. We will discuss further some of the more common types of investments in this article.
According to self-directed IRA investment rules, new titling for all investments should be in the name of: <client First Name Last Name>, legal owner via non-trust custodial IRA with AET. This titling allows you, the account holder, to sign investment docs for your IRA. However, it should be noted that you cannot title documents in your personal name nor can you assign a contract to your IRA.
Purchasing real estate with your IRA is much the same process as purchasing from personal funds, with the main exception being how titling is held. All real estate transactions, and investments in general for that matter, should be arms-length transactions. To fund the earnest money deposit and/or the balance due for settlement, the account holder will complete a DOI form instructing the IRA to fund said investment. Along with the completed DOI form, the account holder should provide a copy of the related purchase contract along with closing statement from the settlement agent, for funding of balance due for settlement. The custodian will stamp the contract, at time of funding the transaction, acknowledging the transaction to be an IRA asset.
Promissory Notes, both secured and unsecured, are another common investment we see. Investing in Promissory Notes can be done via a new Note, or the purchase of an existing Note. A secured Note would require a Deed of Trust, or Mortgage, be provided along with the Note. Whether the collateral/security document is to be a Deed of Trust or Mortgage will depend on the state the loan collateral is located/to be secured in. If the Note is to be unsecured, the self-directed IRA investment rules would require a Hold Harmless letter to be signed by the account holder acknowledging the higher risk of loss involved in an unsecured Note. Should you purchase an existing Note, you would also provide an Assignment from seller to the IRA and, if purchasing Note for less than face value, a Bill of Sale between the IRA and the seller outlining the price to be paid for the Note by the IRA. Often times, an amortization schedule may be needed as well when purchasing an existing Note for less than face value.
Self-directed IRA’s can also invest in non-publicly traded stock. Such stock is referred to as a private placement. Investing into a private placement is typically done through a Subscription Agreement. In some cases, especially with companies raising capital through only a handful of investors, the company may only use/provide an Operating Agreement with a member ledger outlining the investors and initial capital contributions. In other cases, both a Subscription Agreement and Operating Agreement will be needed to complete your private placement investment. In either case, the company you intend to invest into with your IRA will provide the documents needed to complete the investment. Of course, a DOI form will also be needed directing the IRA to make said investment.
Wholesaling is another type of investment that can be completed through your IRA. This method also comes with its own set of self-directed IRA investment rules. Wholesaling typically involves real estate whereby the account holder enters into contract on behalf of the IRA to purchase a property. However, the contract is then assigned to another purchaser to complete the purchase of the property. Of course, the idea here is that the IRA receives a wholesaling fee, or finder’s fee, for the transaction. Much like a real estate transaction, the account holder will provide the purchase contract, DOI form, Assignment (to assign the contract from IRA to new buyer), wholesaling contract/bill of sale, along with an Authorization to Execute form requesting the IRA ‘stamp’ the contract to acknowledge the pending investment. Upon completion of the buyer’s purchase of the property, the IRA receives its wholesaling fee at time of settlement from the closing agent.
For those account holders that wish to have direct control, including check writing authority over their investments, there’s the IRA owned LLC. As briefly mentioned earlier, an IRA owned LLC is an LLC entity whereby the IRA is the sole member and the account holder is its manager. This set up allows the account holder to have direct check writing abilities along with investment decision making under the LLC’s umbrella. Of course, with such control comes great responsibility. Since self-directed IRA investment rule compliance is only involved in the initial funding of the LLC, any subsequent investments made under the LLC are not subject to IRA review. In other words, the asset of the IRA is the LLC. The asset(s) of the LLC are all subsequent investments that are then made under the LLC’s umbrella. For our compliance to approve and fund the LLC, we generally need copies of (1) manager signed Operating Agreement with member ledger showing IRA as sole member and amount of initial contribution to be made from the IRA, (2) EIN Acceptance Letter (this is the letter issued by the IRS confirming issuance of the company’s tax ID number), (3) Hold Harmless letter signed by account holder (account holder agrees to abide by IRC 4975 guidelines governing prohibited transactions), and (3) completed DOI form, of course.
Precious metals can also be held in your IRA. Unlike some publicly traded funds that merely hedge the prices of gold or silver, or other metals for that matter, your IRA can physically hold precious metals. However, according to self-directed IRA investment rules, not all metals can be held. Fineness requirements of precious metals restrict those metals that can be held to a purity fineness of .9999. Metals are stored in a warehouse, such as with Delaware Depository. To complete a metals investment with your IRA generally requires: (1) invoice/bill of sale between the IRA and metals dealer of your choosing. The invoice/bill of sale should outline the metals to be purchased and price to be paid by the IRA. (2) packing slip completed by the dealer, and (3) completed DOI form from account holder.
There are many other types of investments that can be made from your IRA. Some of those not covered here may include, but are not limited to: tax lien certificates, oil and gas investments, judgments/structured settlements, accounts receivable, and equipment leasing. It’s important to understand the specific self-directed IRA investment rules for each investment type.
Not “Administratively Feasible”
All investments are subject to IRA compliance review. That said, not all investments will be deemed to be ‘administratively feasible’ for the IRA to hold. This is a term used in the industry to indicate the investment will not be held in custody by the custodian for varying reasons. One example of non-administratively feasible asset would be Bitcoin. Our custodian has deemed cryptocurrencies, such as Bitcoin, to not be administratively feasible for the IRA to hold. Cryptocurrencies, unlike precious metals, cannot be physically held in custody by our custodian. Accordingly, our account holders cannot invest in such currency. Not all custodians share this viewpoint. Another investment that is deemed not administratively feasible at-the-moment are investments into companies dealing in the marijuana trade. Such businesses are becoming popular in those states such as California that have legalized the trade, but remember, Federal Law trumps State Law. It is Federal Law, not State Law, that oversees legislation pertaining to IRA’s and other qualified retirement plans. Think IRS Pub 590 A/ Pub 590B and IRC 4975 that govern qualified plans, for example. We must allow three to five days for our compliance review time of any investment transaction submitted for IRA consideration.