Often times, as real estate and estate planning attorneys, our clients ask us about owning or purchasing property through a self-directed IRA account. Here is a brief synopsis of how a self-directed IRA works.
Self-Directed Individual Retirement Accounts (IRA) are like traditional IRAs in that they are designed to allow investments to grow tax free or tax deferred over time. However, self-directed IRAs allow people to make alternative investments. The variety of investment options that are available for a self-directed IRA exceed the investment options of traditional IRA accounts.
How Do I Set Up A Self-Directed IRA Account?
There are several steps involved in setting up a self-directed IRA account.
1. The account must be established and funded. Like any IRA, you must sign up for the account with an investment firm or broker. The IRS requires that self-directed IRAs be held by a trustee on behalf of the IRA owner. Once you have signed up with a trustee or custodian, you will need to fund the account with initial capital so that you can make investments with your self-directed IRA account. The self-directed IRA account can be funded with new capital or a transfer from an existing IRA account.
2. Choose an investment opportunity. You may choose what investment opportunity you would like your self-directed IRA funds to go into. There are many different types of assets that self directed IRAs can be used to invest in, yet there are also certain assets that specifically cannot be invested in by using a self-directed IRA.
3. Request that the funds be made available from your self-directed IRA to make the investment purchase. Working with your self-directed IRA custodian or trustee, you can request that your self-directed IRA funds be made available to purchase your desired asset. The trustee or custodian will manage the transaction for you.
4. Manage your self directed IRA investments. Again, by working with your self-directed IRA trustee or custodian, you can manage or sell your self-directed IRA investments. All transactions must be run through your self-directed IRA in order to remain in compliance with the IRS regulations.
What Can I Own in My Self-Directed IRA Account?
Self-directed IRAs can include investment options such as:
- Mutual funds;
- Promissory notes;
- Real estate;
- Private mortgages;
- Tax liens;
- Precious metals;
- Private businesses; and
- Intellectual property.
There are also several types of assets into which investment is not permitted with a self-directed IRA. Under IRS Code 408(m), prohibited investments include investment in collectibles such as stamps, art, gems, certain types of metals and coins, alcoholic beverages, and certain other tangible personal property.
If you feel that a self-directed IRA may be helpful with your purchase of investment property or your estate plan, please feel free to contact one of our experienced Illinois estate planning attorneys today. Our firm serves the communities of Crystal Lake, Riverwoods, Kenilworth, South Barrington, Mount Prospect, Palatine, Des Plaines, Buffalo Grove, Barrington, and Arlington Heights. Call 847-934-6000 to speak to a member of our team.
About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.