What Mistakes Millennials Make When They Should be Rolling Over Their 401(K)

Getting an early start on saving for retirement is critical. If you do not believe this, here is an example:  A 22-year-old worker earning $40,000 starts saving 6% of that in a 401(K) while the employer adds another 3%. Assuming a 6% rate of return, that person will have accumulated $827,000 by the time retirement rolls around at age 67.

If that same worker waits until age 30 to start saving, that same annual contribution of $3,600 will have grown to $490,000—that’s $337,000 less!

When it comes to accruing a substantial retirement nest egg, time can be even more important than the type of investments you choose. Those eight years from the previous example can never be recovered, so it is crucial not to waste them.

The time to Rollover the old 401(K) is now!

Many millennials are missing out on saving for retirement during these all-important early years on the job. By the time they have reached the age of 32, the average millennial will have had four different jobs—and over 20% of them have changed jobs in the past year! That rate is three times higher than earlier generations.

While living for today and disregarding the future might seem to make sense to a twenty-something, that same person could be filled with regrets when it is hard to make ends meet in retirement. This short-sighted philosophy can result in millennials cashing out their small distributions and paying the taxes and penalties they owe.

Worse yet, many of them, believing the paperwork is not worth the effort, abandon their 401(K) plans as they move on to the next job. In doing so, these young workers are missing out on the magic of compounding, as even the smallest accounts can grow to be substantial amounts.

Here’s another example:

A young worker decides to change jobs at the age of 26, having accumulated $7,000 in a 401(K) over four years of work. That amount does not seem significant enough to make a difference, so the worker cashes in and puts a down payment on a car. After paying taxes and penalties, there is about $5,000 to put toward the car.

If that same worker rolled that $7,000 into an IRA and allowed it to grow at a 6% rate of return until retirement, it would be worth over $81,000 and that car would have been long forgotten!

It is easy to roll over a 401(K) managed by your former employer to either a plan at your new company or to your IRA. And even if it is a bit of a hassle, the previous example should convince you that your efforts will be handsomely rewarded.

Some millennials opt for an indirect rollover

It sounds like a good idea on the surface. The indirect rollover allows you to receive a check when you leave your job and then roll the proceeds into another 401(K) or IRA at a later date. But this method is fraught with complications: You have the responsibility of getting this money to the right place, and you must do it within 60 days. If you cannot manage that, you will be hit with taxes and penalties.

One more reason to stick with a direct transfer: Your old employer is required to withhold 20 percent from your distribution for income taxes, so to keep from having to pay taxes and penalties on that 20%, you need to come up with that amount for the rollover and wait until you file your taxes to get back the withheld amount.

Possibly the biggest mistake millennials are making

As mentioned, many younger workers believe that retirement is a long way off and they need not concern themselves with it just yet. As a result, they choose not to participate in their employer’s 401(K) plan, and they miss out on those essential early years that allow compounding to begin sooner and turn small amounts into substantial savings at retirement.

Contributing to an employer’s 401(K) is the best way to put retirement savings on auto-pilot and save money on taxes right now. Once the plan is set up, you can begin to revolve your budget around the new net pay. Most people don’t notice the difference in their paychecks after a few weeks, but after a few years, they will be paying attention to that growing sum of money in their retirement account.

When you get right down to it, the biggest mistake the younger generation is making is not having anything to roll over when they hop to their next job.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

IRS Announces Higher Self-Directed Contribution Limits for Self-Directed IRAs, 401(K)s

Self-Directed IRA Success Story

Larry (66) and Ethel (62) were both successful real estate investors for years. But did not realize they could leverage their real estate experience and expertise using retirement funds until about 15 years ago, when they discovered investing with Self-Directed IRAs. They had significant assets in a Roth IRA account and were delighted to learn they could roll it over and enjoy tax-free rent income from a portfolio of real estate investments. Over the last 15 years, their real estate profits have exceeded anything they could have expected to earn had they invested in diverse but conventional IRA assets like mutual funds, stocks and funds. They have not needed to tap the income yet, but when they do, a sizeable fraction of their retirement income will be tax free, largely protected from creditors, and have had the benefit of years of tax-free appreciation in the meantime.

Good news: The Internal Revenue Service has increased the amount of allowable contributions to Self-Directed IRAs, Roth’s and other retirement accounts in tax year 2019.

The new contribution limits are as follows:

Traditional IRAs, including Self-Directed IRAs: Increased from $5,500 to $6,000 per year.

Roth IRAs, including Self-Directed Roth IRAs: Increased from $5,500 to $6,000.

The annual catch-up contribution allowance for those ages 50 and older is unchanged, however, remaining at $1,000 for traditional and Roth IRAs, including their self-directed varieties. Unlike the baseline contribution limits for IRAs and Roth IRAs, the catch-up contributions are not subject to an automated cost-of-living adjustment. Any increases in the catch-up limits have to be specifically authorized by Congress.

This news is welcome since the contribution allowances for Self-Directed IRAs have not been increased since 2013.

Likewise, the allowable income limits for deductible IRA contributions and Roth IRA contributions have each increased as well:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $64,000 to $74,000, up from $63,000 to $73,000.
  • For married couples filing jointly, where the spouse making the Self-Directed IRA contribution is covered by a workplace retirement plan, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.
  • For a Self-Directed IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000, up from $189,000 and $199,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA is $122,000 to $137,000 for singles and heads of household for tax year 2019, up from $120,000 to $135,000. For married couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

In all cases, Self-Directed Roth IRA and Self-Directed IRA thresholds and limits are the same as their conventional IRA counterparts.

Contribution limits for employees who participate in a 401(K), 403(b) and most 457 plans, as well as the federal government’s Thrift Savings Plan, are increased from $18,500 to $19,000.

A full list of the IRS’s contribution limit and income threshold allowances is available here.

Increase your contribution limits.

For now, there is nothing you need to do differently. Most planners would recommend maximizing any 401(K) match, eliminating any high-interest debt, building an emergency fund of three to six months’ worth of expenses, and then maximizing available retirement contributions for the current year.

Remember that for IRAs, self-directed or otherwise, Roths and Self-Directed SEP IRAs, you have until April 15th of 2019 to make your contributions for the year – but any contributions to 401(K)s have to be in by the end of the calendar year.

Beginning in January, though, you are clear to increase your monthly Self-Directed IRA contributions to $500 per month, not including the catch-up allowance for those over age 50.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Tax Considerations for Self-Directed IRA Investors

The Self-Directed IRA is a potent tool both for investing and for the management of income tax liabilities. Traditional Self-Directed IRAs, like conventional Traditional IRAs and qualified retirement plans like 401(K)s, Self-Directed SEP IRAs and Self-Directed SIMPLE IRAs allow investors to defer tax liability on interest income, dividends and capital gains until they actually begin taking the money.

This tax advantage is a potent form of leverage: You do not have to keep siphoning money out of your portfolio to pay taxes with. Everything can be efficiently reinvested, including the IRS’s money!

Traditional vs. Roth Self-Directed IRAs

With a Roth IRA, including a Self-Directed Roth IRA, you fund the account with after-tax dollars (no deduction on contributions), but the balance in your Roth IRA and that has remained in your for at least five years (and that is not growth attributable to borrowed money) grows tax-free!

Self-Directed IRA investors should balance current tax rates against the likelihood of future increases in marginal tax rates when deciding how much to allocate to traditional vs. Roth investments.

Some Self-Directed IRA investors choose to balance their investments between the traditional and Roth approaches in order to hedge against future changes in the tax code.

Estate Tax Considerations with Self-Directed IRAs

Those likely to have significant estate tax considerations may want to consider preferring Self-Directed Roth IRAs, because that gets money out of the estate where it would otherwise be taxable upon the death of the investor or the death of a surviving spouse.

Those early in their careers, or who have reason to believe that their incomes will be much higher in retirement than they are currently, may also want to lean towards Roth accounts over traditional accounts.

Leverage and Self-Directed IRAs

Many Self-Directed IRA investors use leverage to buy assets with their Self-Directed IRAs – especially real estate, where mortgaging is routine, and lenders are readily available. Leverage can increase potential returns on invested assets (along with risk!), but they also present an important tax consideration: Tax on the unrelated debt-financed income.

The law allows you to defer income and capital gains tax on growth on your own money in a Self-Directed IRA. But no such privilege is afforded to other peoples’ money! Therefore, if you have leveraged an asset in an IRA, and the Self-Directed IRA generates growth or income, you may have to pay taxes on that fraction of growth or income that is attributable to the leverage.

Example: If your Self-Directed Real Estate IRA has a house worth $300,000 in it, you have a mortgage of $150,000, then you have 50 percent equity in it. Therefore, half the rent you receive from the investment, net of repairs and other deductible expenses, will be subject to tax on the unrelated debt-financed income.

Likewise, if you sell your home for a capital gain of $50,000, half of that gain is attributable to leverage, and therefore subject to the tax.

401(K)s Exempt from Tax on Unrelated Debt-Financed Income

Generally, 401(K) plans do not present the same Unrelated debt-financed income taxation issues as Self-Directed IRAs, Self-Directed SEP IRAs and Self-Directed SIMPLE IRAs. If you have significant self-employment income or you are the owner-employee of your own corporation, contact American IRA about opening up a self-directed 401(K) account.

This makes particular sense if you are interested in real estate 401(K)s or employing leverage as part of your retirement investment strategy.

For more information on how this tax may apply to your individual situation, speak with your qualified tax advisor.

American IRA is a leading administrator of Self-Directed IRAs and other retirement accounts. To learn more about the power of Self-Directed IRA investing, or to open an account, click here, or call us at 866-7500-IRA (472).


President Trump Signs Executive Order that Could Ultimately Benefit Self-Directed IRA Savers

President Donald Trump signed an executive order recently to increase access to employer-sponsored retirement plans, which include the popular 401(K)s. By signing the order, President Trump has instructed the Departments of Labor and Treasury to explore methods to improve notice requirements, which would lessen the burden on small businesses and reduce paperwork for Self-Directed IRA savers.

Right now, 47% of workers at companies that employ fewer than one hundred do not have an employer retirement savings plan. The main reason for the executive order is to entice more small companies to offer sponsored plans to their employees. It also directs his administration to make it easier for small businesses to band together to set up retirement-savings plans.

Here of the main points that the President is asking Labor and Treasury to study and offer new rules:

Make retirement plans more amenable to smaller companies

By cutting some of the administrative burdens and costs that might be preventing smaller businesses from providing 401(K) plans, President Trump is hoping that more of their workers will be able to accumulate funds for retirement through a tax-advantaged vehicle.

Preston Rutledge, an assistant secretary of labor for the Employee Benefits Security Administration, explains: “We will try to find policy ideas that will make joining a 401(K) plan a more attractive proposition for small employers to the ultimate benefit of their employees.”

Expand criteria for multiple-employer plans

Larger corporations have the financial resources to take on the costs of retirement plans or at least they can spread them out over a more substantial number of workers. Multi-employer retirement plans can do the same thing for smaller businesses by allowing them to pool their resources, reducing their costs and affording them the opportunity to hire professionals to manage and advise them on the investments within the plan.

As it stands now, companies that make up a pool must share common characteristics, such as being in the same industry. This requirement is one that could change in the future so that more companies could participate.

Change the rules on required minimum distributions (RMDs)

In case you were not aware of it, you are required to begin withdrawing a certain amount of money from your retirement account each year when you turn 70½. It is called a required minimum distribution, or RMD. The RMD rules apply to tax-deferred accounts and include the following:

  • Traditional IRAs
  • Rollover IRAs
  • Self-Directed Simple IRAs
  • Self-Directed SEP IRAs
  • Most 401(K) and 403(b) plans

There are strict deadlines for making the withdrawal and steep penalties for missing them—50% of the amount that was not taken on time!

The executive order asks the Department of the Treasury to review the rules on required minimum distributions to see if retirees should be allowed to keep more money in 401(K)s and Individual Retirement Accounts past 70 ½. It would seem to make sense since the average life expectancy has risen considerably over the years since the original RMD age was put into place.

Bear in mind that you can eliminate the RMD by converting your taxable IRA to a Roth IRA. You will not be forced to take distributions, and your beneficiaries might not ever be required to pay tax on their distributions either.

If enacted, these rule changes could have a significant impact on your retirement planning, so stay tuned for updates.

Also, at some point, you will want to roll over your 401(K) into an IRA. When you are ready, give us a call. A Self-Directed IRA gives you the options you need for a prosperous retirement. In today’s financial environment you need what a Self-Directed IRA can provide—higher returns and diversification for your portfolio from alternative investments that you can’t get with a Traditional IRA.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

4th Quarter Financial Checklist for Self-Directed IRA Investors

It is autumn, and that means we are heading into the final quarter of the calendar year. That’s the most crucial one for Self-Directed IRA investors and any other taxpayers, because there are some critical deadlines at the end of the year all Self-Directed IRA investors, business owners and self-employed individuals should be aware of.

Required Minimum Distributions

Required minimum distributions (RMDs) must be taken by the end of the year if you turned 70 ½ or older during 2017. RMDs generally are determined by dividing the prior year-end IRA balance by the life expectancy factor (or distribution period), as defined in IRS tables.

Failure to take your required distributions can result in a significant tax penalty of up to half of the distribution you were supposed to take but did not. That is one of the most draconian penalties in the tax code, so it is important you are on the ball about taking RMDs.

If you have any questions about RMDs, you are over age 70½ and you are an American IRA account holder, contact us immediately to make sure you are not caught by surprise when the end of the year comes, or hit with a large unwanted tax bill.


If you own assets in Self-Directed IRAs or other retirement accounts that do not have a readily ascertainable market value, then you must provide a fair value estimate to use in calculating RMDs.


If you want to transfer any assets as gifts or execute any rollovers of assets not currently liquid prior to the year end, start planning now, to give yourself time to execute the necessary transactions before December 31st.

Roth Conversions

Now’s the time to discuss any Roth conversion (or re-characterization) strategies with your tax advisor. Have the conversation now before the end of-the-year rush.


Maximize contributions for the year.

While you have until your April tax-filing deadline to make contributions for the current tax year to your Self-Directed IRA, Self-Directed Roth IRA or Self-Directed SEP IRA accounts, you must make your Self-Directed 401(K) and Self-Directed SIMPLE IRA contributions prior to the end of the year for them to count for the current year.

With Self-Directed 401(K)s, you can make up to $18,500 in employee salary deferral contributions for the current tax year (up to $24,500 if you are age 50 or older thanks to catch-up contribution rules) and up to $55,000 total.

Consider income timing strategies.

Now’s the time to begin plotting whether you want to accelerate income from tax year 2019 into the current year, or if you want to delay income to have it count for next-year’s taxable income. This is a matter to discuss with your income tax professional, as American IRA, LLC does not give individualized tax advice.

Make Self-Directed HSA contributions

If you have a high-deductible health plan and are eligible to contribute to a health savings account, make that contribution by the end of the calendar year. You can also open a self-directed health savings account if you choose by contacting American IRA, LLC.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Having a hard time filling your Self-Directed IRA rentals? Think about allowing pets

One of the best ways to give your Self-Directed IRA an opportunity for maximum growth is to use it to purchase rental property. A Self-Directed IRA gives you so many more choices than a Traditional IRA, and one of those is the capability to invest in alternative investments such as real estate.

The term “real estate” captures a vast realm of opportunities—commercial properties, different types of land, etc. But it is the apartment buildings, condos, single-family houses, and multi-unit homes that are typically the most popular for Self-Directed IRAs. And these require a high occupancy rate to make the most of the investment.

There are lots of renters out there

Many people have decided to live in rent for various reasons. Some areas are experiencing housing shortages, which is resulting in escalating prices. Many older couples are selling the four- and five-bedroom homes that they no longer need or want to maintain and are choosing to live in rent. And some of the younger generation–millennials, in particular–are unsure of where they will be working next and are refusing to commit to buying a house.

The fact is that there are plenty of potential renters, but are you doing everything possible to entice them toward your property?

Renters love their pets as much as anyone

You probably know more than a few of them. They are the pet-lovers who consider their dogs or cats (or whatever!) to be part of the family. They are not moving anywhere without that family member, and you are alienating them with a “No Pets Allowed” clause in your listing. If you do not believe it is happening, take a look at the results of a study from Harris Research:

  • 87% percent of recent home buyers considered the needs of their pets before making a final decision.
  • 90% buyers under age 35 reported owning pets.
  • 63% of buyers age 55 or older are also pet owners.

While the study targeted home buyers and their pets, it is unlikely that these results would have been different for renters. The study provides overwhelming evidence that people are looking for pet-friendly properties, and those investors with rental property could increase the pool of potential renters significantly by catering to pets. You could be setting yourself apart from the competition and giving your retirement savings a boost by changing your policy by putting out a welcome mat for renters and their furry family members.

What about the mess and damage?

There is no denying that dogs and cats are smelly, and they can create a mess. They may even do considerable damage to kitchen cabinets, carpeting, curtains, and molding. Add to that the lingering effects that can turn off future renters and you could end up with plenty of persuasive reasons to disallow pets.

But remember that your Self-Directed IRA for Real Estate is set up to deal with issues like this. Your IRA owns the property, and all income from the property goes back into the account. The same goes for expenses; any repairs or special cleaning are paid by the Self-Directed IRA and do not come out of your pocket.

A higher occupancy rate is always your goal with a rental. And welcoming pets should help you achieve that, even with the extra expense that might come with them. It is worth giving it serious consideration if attracting more tenants helps you build up your retirement savings.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Still Working into Retirement? Here’s how your Self-Directed Solo 401(K) Works

Case Study: George and Loretta, a married couple in their late 60s, have a small company they run together in Raleigh. They have plenty of income from pensions and do not expect to need the income from their Self-Directed Solo 401(K) for a long time, if ever. They preferred to let the assets compound until they pass them on to their children and grandchildren. To avoid RMDs, they began rolling over chunks of their Solo 401(K) to an IRA and then converting to a Self-Directed Roth IRA several years ago. They may sell their company to a competitor in their town, or to an interested family member and remain as employees, in order to continue to defer distributions and avoid RMDs.

Most of our Self-Directed IRA clients understand that they need to begin taking required minimum distributions (RMDs) from their Self-Directed IRAs and other tax-advantaged non-Roth retirement accounts by April 1 of the year after the year in which they turn age 70½ and take their next RMDs by December 31st of every year thereafter.

But more Americans are working well into their retirement years, and often because they want to. Advances in medical technology, lifestyle and nutrition have us living much longer than prior generations, and fewer of us are working in physically punishing professions that our ancestors worked, like coal mining, farming and construction.

For those of you working or planning to work well into your retirement years – and beyond age 70½, here’s how your RMDs from Self-Directed IRAs work:

If you have a qualified plan such as a 401(K) from your current employer, you may be able to continue to defer RMDs from that company’s plan. As long as that’s true, you have no required minimum distributions due until you actually separate from the service of that company or roll the assets into an IRA or Self-Directed IRA.

This provision only applies to employer plans like 401(K)s and 403(b)s, but not to IRAs. The IRS also does not allow you to apply this provision to Self-Directed SEP IRAs or Self-Directed SIMPLE IRAs.

So, what, precisely, does “still working” mean? Neither Congress nor the IRS has been entirely clear on this point. In theory, one could claim one is still working at a firm even if he or she is only working a single day out of the year.

But there is a trap here: It is easy for the unwary to say, “A-ha! I can form my own corporation, establish a Self-Directed Solo 401(K), load it up with assets, show up to “work” just an hour every year on New Year’s Day, and avoid taking RMDs indefinitely! I can let my retirement assets compound until the cows come home!”

But the cows would tell you that’s a bad mooooove.

Why? The IRS prohibits plan members still in the work force from deferring RMDs from their company’s plan if they own 5 percent or more of the business.

If you want to avoid RMDs entirely on your Self-Directed Solo 401(K), you have a couple of options:

You can establish a Roth 401(K) and contribute to that instead of a traditional tax-deferred Self-Directed Solo 401(K). But only your contributions are taxed under Roth rules – you still have the same issue with employer contributions, which would still be subject to RMDs.

The other option is to sell your company and continue to work there. As long as you do not retain more than a 5 percent ownership interest in the company, and as long as the plan’s documents allow for a still-working exemption, you can continue to defer taxes on it and you will not be required to take RMDs.

The other option to avoid being forced to take RMDs is to roll your 401(K) assets over to an IRA, and then convert it to a Self-Directed Roth IRA or Roth conventional IRA.

This move does involve a distribution – a large one, normally – which can push you into a higher marginal income tax bracket if you are not careful. You will have to pay income taxes on your Roth conversion. But once that’s done, you can continue to defer taxes on income and capital gains alike until you pull that money out of your Roth IRA or Self-Directed Roth IRA – tax-free.

Of course, to qualify for tax-free treatment, that money has to remain in the Roth for at least five years and have reached age 59 ½.  So be sure to plan ahead and execute the Roth conversion well before you expect to begin to need the money.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Are Your Self-Directed IRA Investments Generating Unrelated Income?

For just about every retirement investor who uses a Self-Directed IRA, most of those investments are exempt from federal income tax. Internal Revenue Code 408, and Section 512 of the Internal Revenue Codes exempts most forms of investment income generated within your Self-Directed IRA from taxation. This exemption includes dividends, loan interest, annuities, rental income from real estate, and gains from the sale of stocks or real estate.

Most investors have never heard of a tax on unrelated income (UBTI) or on income stemming from a debt-financed property that is owned for income-producing purposes (UDFI). These taxes do not apply to them, and they need not concern themselves with them.

But for anyone with a Self-Directed IRA who is considering an investment in real estate, using a loan in a transaction, or investing in a private business operated through a pass-through entity, you should become familiar with the UBTI/UDFI rules.

How can activity in a Self-Directed IRA trigger the UBTI?

According to the IRS, UBTI is defined as gross income regularly generated by a tax-exempt entity via taxable activity unrelated to the entity’s main function. An example of this would be a large manufacturing company that your Self-Directed IRA owns. As long as all activities within the company are related to manufacturing, the income remains exempt. But suppose the company is leasing some of their equipment to other businesses, that lease income could generate UBTI.

Keep in mind the two factors that can potentially trigger the UBTI rules: whether the activity attains the level of a trade or business and whether it is regularly carried on. In the previous example, the manufacturing company was getting regular income from a business (leasing their equipment) that was not substantially related to the exempt status.

Here are some other examples of activities that the IRS could deem to be rising to the level of an active business that is regularly carried on and could be subject to the UBTI rules:

  • Business income from the operations of an active business–restaurants, stores, gas stations, etc.–that are operated through a pass-through entity, such as an LLC or partnership. (Remember, any income from a “C” Corporation will not trigger the application of the UBTI tax. This is why most investors are not affected by the tax).
  • Using a nonrecourse loan, which means a loan not personally guaranteed by the retirement account owner, to purchase a property.
  • Developing or subdividing land and selling a large number of homes or tracts of land from that development in a given period
  • Buying and selling a large number of real estate properties within a given year
  • Making hundreds of private loans in any given year

Which transactions generate the UDFI?

You can hold rental property in your Self-Directed IRA without creating UBTI. But if your IRA uses debt to purchases the rental property, you could create UDFI. The UDFI taxes would apply only to that portion of the rental income that was derived from the debt. In other words, if the Self-Directed IRA purchases property with 60 percent cash and 40 percent debt, then only 40 percent of the rental income is subject to UDFI. You would then be allowed to use 40 percent of the property expenses to offset rental income.

It is obvious that taxation on unrelated income can get complicated. It is in your best interests to work with professionals, including attorneys and tax advisors, to ensure that you understand the rules of UBTI and UDFI. Using your Self-Directed IRA to invest in real estate is an extraordinary tool as long as you follow the IRS guidelines.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

Property Management Tips for Self-Directed IRA Investors

Lots of people want to be Self-Directed IRA investors. But few people want to take a 3AM phone call to fix a broken toilet. Fortunately, you do not have to. That is why we have property managers. For a relatively small fee of between 10 and 20 percent of rents collected, these real estate professionals handle the day-to-day tasks of maintaining and running your properties. All you have to do is make the strategic decisions, approve the purchase and sale of Self-Directed IRA properties, and ensure you are in compliance with applicable laws concerning prohibited transactions.

Here are the basic things all Self-Directed IRA investors should know about property management.

1.)  They should be licensed. With very limited exceptions, property management firms should have a real estate brokerage license valid in the state where you have your Self-Directed IRA

As part of their licensing requirements, real estate brokers must maintain adequate errors and omissions insurance. This helps protect you and your Self-Directed IRA against liability that         may arise because of mistakes the broker and his or her staff may make in managing your property.

2.)  You cannot pay them directly. If you hire a manager to run your Self-Directed IRA property, you cannot simply write them a check out of your personal account. Instead, you must make             all transfers to them via your Self-Directed IRA. If you pay them directly, you may face significant tax and legal consequences, including the disallowing of your Self-Directed IRA’s tax           advantaged status. This could result in significant immediate tax liabilities and penalties.

That means all maintenance reserves, special assessments, reimbursements and fees not covered by rent withholding must come from within your Self-Directed IRA. The same goes with           any real estate taxes due on the property.

3.)  Property managers cannot pay you directly. If you own the property in a Self-Directed IRA, they must transfer rent payments, deposits forfeited by the tenants and               any other                     moneys to your IRA, and not to you directly.

If they pay you directly, rather than transferring funds to your Self-Directed IRA, you may again run afoul of prohibited transaction rules, resulting in possible taxes and penalties.

4.)  The property manager cannot be a prohibited counterparty. Self-Directed IRA rules strictly prohibit you from transferring money from your IRA to your property manager if the money is           going to any of the following:

  • Yourself
  • Your spouse
  • Your children, grandchildren or great grandchildren or those of your spouse.
  • Your parents, grandparents or great grandparents or those of your spouse.
  • An attorney, financial planner, agent or other fiduciary who provides you advice concerning your Self-Directed IRA.
  • Any entities controlled by any of the above prohibited counterparties.

This also means you cannot hire yourself and pay yourself what you would otherwise pay a property manager to manage your own property.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.