Self-Directed SEP IRA
The Self-Directed SEP IRA
A Self-Directed SEP IRA is a great way for individuals who are self-employed to establish a retirement account. Contrasting a traditional SEP IRA, a Self-Directed SEP IRA allows individuals to diversify their retirement accounts by investing in alternative assets. The decision to open a Self-Directed SEP IRA allows individuals to diversify their retirement accounts by investing in what they know. However, it is important to note that not all Self-Directed SEP IRA custodians allow individuals to purchase the same assets. Instead, some companies only allow individuals to purchase Cryptos or precious metals. At IRA Financial, your Self-Directed SEP IRA allows you to invest in a wide range of diversified assets.
Read More: Alternative Investments in an IRA
The SEP IRA
The SEP IRA was designed for self-employed individuals and small business owners. This is very similar to the Solo 401(k) but with a few differences. Any contributions you make to a SEP IRA are tax-deductible. Additionally, earnings within the account are tax-free until you make a withdrawal. However, before opening a Self-Directed SEP IRA, it is important to consider its benefits and limitations. For example, did you know you can invest more in a Solo 401(k)? In addition, a Self-Directed 401(k) has unique features such as the ability to take a loan against your retirement funds, and the ability to use non-recourse financing to invest in real estate.
Learn More: Why Choose a Solo 401(k) vs. a SEP IRA
Self-Directed SEP IRA Investments
With a Self-Directed SEP IRA, you can invest in almost anything. Popular investments in a Self-Directed SEP IRA include:
Real Estate:
Commercial properties (office buildings, retail centers, hotels, shopping centers, hospitals, etc.)
Residential properties (single-family homes, multi-family homes, condos, townhomes, duplexes, apartments, vacation homes, etc.)
Raw land, farmland, timberland
Foreclosures and fix-and-flip properties
Crowdfunding investments (e.g., private REITs)
Tax Liens and properties
Private Placements and LLCs:
Invest in private companies, startups, or joint ventures.
Participate in private equity, hedge funds, and venture capital.
Loans and Promissory Notes:
Lend money through hard money loans or peer-to-peer lending platforms.
Precious Metals:
Hold gold, silver, and other precious metals that meet certain purity standards.
Traditional Investments:
Stocks, bonds, and mutual funds
I bonds & T-Bills
Cryptocurrency:
Invest in digital currencies like Bitcoin or Ethereum.
How to Fund a Self-Directed SEP IRA
There are multiple ways that individuals can fund their new Self-Directed accounts. Individuals can easily open an account with IRA Financial through our app, online, or by calling one of dedicated professionals. Individuals who wish to open a Self-Directed SEP IRA can easily begin funding their new accounts by transferring money directly from your bank. In other cases, individuals may want to change IRA custodians. For example, you may already have a Self-Directed SEP IRA with another provider. Individuals have the option to roll their existing Self-Directed IRAs to IRA Financial.
One common reason that individuals decide to move their existing Self-Directed SEP accounts to IRA Financial is due to our fee structure. Although many Self-Directed IRA custodians offer "free accounts," they fail to mention account valuation fees and transaction fees. IRA Financial is one of the few Self-Directed IRA Custodians that use a flat fee structure. This means you pay a pre-established fee annually.
Another common reason individuals decide to move their Self-Directed SEP IRA to IRA Financial is due to the large diversity of assets you can hold in your IRA. Although many companies offer Self-Directed SEP IRAs, some simply offer the ability to invest in Cryptos or precious metals. However, at IRA Financial, you can invest in almost anything. While there are some stipulations on Self-Directed investments, we commonly see individuals use their retirement funds to purchase real estate, hard-money loans, invest in private companies, and more!
Many people ask if they can use their existing retirement accounts to fund a Self-Directed IRA. Individuals can use their existing retirement accounts to fund their Self-Directed SEP IRA or Solo 401(k) plans. The process is called a transfer or a rollover. Transfers and rollovers are types of transactions that allow the movement of assets like IRAs. For example:
- Traditional IRA to Traditional IRA. This includes Traditional IRAs that contain simplified employee pension (SEP) contributions.
A Self-Directed SEP IRA transfer is the most common method of funding a Self-Directed IRA LLC or Self-Directed Roth IRA.
Transfer a SEP IRA to a Self-Directed SEP IRA
A transfer from a Traditional IRA to a Traditional IRA is one of the most common methods of moving assets from one IRA to another. This includes Traditional IRAs that contain Self-Directed SEP IRA contributions.
A transfer usually occurs between two separate financial organizations. However, a transfer may also occur between IRAs in the same organization. If an IRA transfer is handled correctly the transfer is neither taxable nor reportable to the IRS.
With an IRA transfer, the IRA holder directs the transfer but does not actually receive the IRA assets. Instead, the distributing and receiving financial institutions will complete the transfer.
Basically, in order for the IRA transfer to be tax-free and penalty-free, the IRA holder must not receive the IRA funds in a transfer. Rather, the check must be payable to the new IRA custodian. Also, there is no reporting or withholding to the IRS on an IRA transfer.
Self-Directed SEP IRA Transfer Experts & Advantages
At IRA Financial, we are here to help you take back control of your retirement. While other Self-Directed IRA custodians exist, IRA Financial has these distinct advantages:
- Expertise: Our team has decades of experience in self-directed IRAs and alternative investments.
- Self-Directed IRAs: Break free from the cookie-cutter approach. With our self-directed IRAs, you can invest in real estate, precious metals, private companies, and more.
- Education: We empower you with knowledge. Attend our webinars, read our articles, and become a savvy investor.
- Personalized Service: No call centers here! When you reach out, youâll talk to a real person who genuinely cares about your financial goals.
How to Transfer a SEP IRA to a Self-Directed SEP IRA
You receive a retirement tax professional to achieve a Self-Directed SEP IRA. He or she will work with you to establish your new Self-Directed IRA account at a new FDIC and IRS-approved IRA custodian.
Then, the new custodian will request the transfer of your SEP IRA assets from the existing IRA custodian. Of course, they will only do this after your consent. The transfer will be tax-free and penalty-free.
Once the transfer of IRA funds is either complete by wire or check tax-free to the new IRA custodian, the new custodian will be able to invest the IRA assets into the new IRA LLC âcheckbook controlâ structure. With the newly funded IRA LLC, you become the manager of the LLC. This provides you with checkbook control over your retirement funds and investments.
60-Day Rollover Rule for the Self-Directed SEP IRA
Most IRA holders have 60 days from receipt of the eligible rollover distribution from a SEP IRA account to fund the Self-Directed IRA LLC.
The 60-day period starts the day after the individual receives the distribution. Usually, no exceptions apply to the 60-day time period. However, in cases where the 60-day period expires on a Saturday, Sunday, or legal holiday, the individual may execute the rollover on the following business day.
Rollover All or a Portion of your Funds/Assets
If you receive an eligible rollover distribution, you can rollover the entire amount you receive or just a portion. The amount of the eligible rollover distribution that doesn't go into an IRA is generally included in your gross income. As a result, it may be subject to a 10% early distribution penalty if you are under the age of 59 1/2.
Contact Us
Did You Know?
Your current SEP IRA can be changed over to a Self-Directed SEP IRA structure, tax and penalty-free. And when your new custodian handles all the paperwork, it can be a relatively painless alteration.
Can My Spouse and I Use Our IRAs for a Joint Venture?
With real estate prices rising over the last several years, a growing number of spouses are looking to figure out a way they can combine their IRA or rollover 401(k) funds to buy real estate together. Lucky for them – the IRS permits family members to use their retirement funds in a joint real estate venture investment. This article will explore how the Self-Directed IRA rules work and the most common ways to engage in a joint venture real estate investment using IRAs with a spouse or other family member.
- Using retirement funds is a popular way to make real estate investments
- The prohibited transaction rules place limitations on who you can partner with
- Since a retirement plan is not considered a disqualified person, you and your spouse can each use IRA funds for an investment
What is a Self-Directed IRA?
A Self-Directed IRA is basically a regular IRA that allows its owner to invest in alternative assets, such as real estate. The catch is that your custodian must permit these types of investments. While there are only a handful of investments you cannot make with IRA funds (collectibles, life insurance), it's up to the custodian to choose which investments it will allow.
The other caveat is that you cannot use your IRA investments to benefit yourself (the IRA owner) or any disqualified person. The investments must solely benefit the IRA itself. For example, you cannot own a vacation property in your IRA and use it for personal reasons. This is considered a prohibited transaction.
Your IRA is Not a Disqualified Person
The Internal Revenue Code (IRC) does not describe what an IRA can invest in, only what it cannot invest in. IRC Sections 408 and 4975 prohibit a “disqualified person” from engaging in certain types of transactions.
The rationale behind these rules was a congressional assumption that certain transactions between certain parties are inherently suspicious and should be disallowed.
The definition of a disqualified person extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, their spouses, and entities in which they holds a controlling equity or management interest.
Code Section 4975(e)(2) does not list a retirement account as a disqualified person in connection with the application of the IRS prohibited transaction rules. In September 2021, a version of the Build Back Better bill was released that contained a provision that would treat retirement accounts as a disqualified person in relation to the retirement account owner, but the bill was not passed. Hence, one can use multiple IRAs or 401(k) plans in a joint venture directly or via an LLC without triggering the prohibited transaction rules. In addition, since a retirement account is not deemed a disqualified person under the Code, the joint venture can be between the IRAs of disqualified persons, such as a spouse, child, or parent.
Best Ways to Do Joint Venture Real Estate Using a Self-Directed IRA
In general, there are two ways parties can engage in a joint venture to buy real estate with the use of multiple retirement accounts.
Self-Directed IRA
A full-service Self-Directed IRA offers an investor more investment options than a plan from a typical financial institution. A special IRA custodian, such as IRA Financial, will serve as the custodian of the IRA. Unlike a typical financial institution, most IRA custodians generate fees simply by opening and maintaining IRA accounts and do not offer any financial investment products or platforms. With a full-service Self-Directed IRA, the funds are generally held with the custodian, and at the IRA holder’s sole direction, the custodian will invest the funds on your behalf.
For spouses looking to each use a Self-Directed IRA to do a joint venture real estate deal, title to the real estate would need to include each individual IRA. For example, if John Doe and Jane Doe each used $100,000 to buy a piece of real estate, title to the real estate would be as follows: IRA Financial Trust Company CFBO John Doe IRA 50% & IRA Financial Trust Company CFBO Jane Doe IRA 50%.
In most cases, the joint venture would establish a bank account to receive any rental income or gains from the real estate asset. The funds would then be allocated to each IRA pro rata. Moreover, it is common in these situations to hire a third-party property management company to handle the day-to-day operations of the real estate as well as the allocation of rental income. However, for real estate joint ventures between IRAs, the Self-Directed IRA LLC is the far more popular option.
The Self-Directed IRA LLC
The Self-Directed IRA LLC with “checkbook control” has quickly become the most popular vehicle for investors looking to make real estate investments that require a high frequency of transactions, such as rental properties. Under the Checkbook IRA format, a limited liability company (LLC) is created which is funded and owned by one or more IRAs and managed by the IRA holder. Each IRA owner of the LLC will own a pro rata percentage of the LLC based on the amount of IRA funds invested in the LLC. This plan offers each IRA owner limited liability protection of any IRA assets outside of the LLC.
In addition, the Checkbook IRA LLC structure makes it much easier and cleaner for a joint venture real estate investment since title to the real estate would be in the name of the LLC. All rental income or gains would flow back to the LLC and can then be distributed tax-free to each IRA member pro rata.
With a Self-Directed IRA LLC, the manager(s) of the LLC can make real estate-related decisions and pay expenses without involving the IRA custodian, which is not the case with a full-service plan. In addition, each IRA investor would have a greater degree of privacy since title to the real estate would be in the name of the LLC rather than in the name of each IRA.
However, the one drawback of using an LLC that will be owned by multiple IRAs, is the an LLC with two or more owners is treated as a partnership for federal income tax purposes and is, thus, required to file IRS Form 1065 even though no tax is due (IRA Financial offers tax filing services for its clients).
Conclusion
With real estate prices growing at a faster rate than many IRA accounts, more and more individuals have looked to co-invest with their spouse or other family members using multiple IRAs. Since an IRA is not treated as a disqualified person, family members can co-mingle IRA funds in a single real estate transaction so long as no personal benefit is being derived from the transaction.
The most popular structure for a real estate joint venture for spouses using multiple IRAs is the Self-Directed IRA LLC. Using an LLC provides each IRA owner with many benefits, including limited liability protection, privacy, simpler management, easier administration, and greater flexibility. It is for all these reasons that most joint venture real estate investments involving multiple IRAs use the IRA LLC structure.
Do IRAs Get Audited?
Yes, your IRA can get audited by the Internal Revenue Service, and yes, you need the best audit protection for your Self-Directed IRA. So, do IRAs get audited? It's true, they can. When you're looking at retirement accounts, it's important to do what works best for you while choosing a provider that offers the best audit protection in the industry. Don't believe us? Just ask Investopedia.
According to the Government Accountability Office, the IRS could "provide better guidance" regarding audits of IRAs and how to remain compliant so that account owners do not fall into non-compliance. Could a Self-Directed IRA be just the thing for you?
A Self-Directed IRA is a retirement account that allows you to invest in traditional and alternative investments. Frequently, large financial institutions that manage retirement accounts limit investment opportunities to stocks, bonds, and mutual funds. A Self-Directed IRA allows you to invest in almost anything. In fact, there are only three things you cannot invest in: life insurance, collectibles, and transactions with a disqualified person.
Many investors open a Self-Directed IRA to diversify their retirement funds.
Related: Self-Directed IRA Investments
What About IRA Audits?
Interestingly enough, the IRS doesn’t have a department that specifically deals with IRAs. Therefore, there are no exact statistics to go by. IRA custodians file Form 5498 showing the value of IRAs. No specifics are given, just generic numbers about how funds are invested. But yes, IRAs get audited, too.
The Government Accountability Office recently issued a report about IRAs and the need to educate the IRS more about the plans and investments made. From that report: “Noncompliance involving IRAs with unconventional assets is generally detected through labor-intensive audits of individual taxpayers. IRS’s SB/SE division uses field audits to pursue complex individual tax return cases, including those that could involve IRAs with unconventional assets. …from fiscal years 2012 to 2016, IRS audited about 26,000 tax returns with IRA issues.”
Audits were conducted and those performing them inquired about retirement plans. That number of audits for IRA plans were discovered across millions of regular audits that occurred in that time frame.
Retirement plans are all about saving on taxes, but you do have to pay them at some point. So long as you're not trying to hide anything from the IRS and you’re not doing anything illegal, you will be fine. Yes, an audit can create stress, but they’re not all that scary if you are prepared for one. Don’t let that minuscule risk deter you from investing the way you want. You are not at any more risk if you choose to invest in real estate with IRA Financial than you are when investing in stocks at your local bank! The difference is IRA Financial has the best audit protection in the nation. Learn more about us.
Who can become a Self-Directed IRA Trustee?
An individual retirement account is defined under Internal Revenue Code Section 408 as a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries. The trustee of the IRA is the bank or IRA custodian who is responsible for the IRA administration and, in most cases, the custodian of the IRA assets.
What is an IRA Trustee?
An IRA trustee, also called a custodian, is the institution that administers your IRA. By law, every qualified retirement plan must have a custodian or trustee. A trustee may be a bank, credit union, financial institution, or trust company, such as IRA Financial. IRS regulations require that either a qualified trustee or custodian hold the IRA assets on behalf of the IRA owner. A Self-Directed IRA custodian, also called a passive custodian, allows IRA holders to engage in non-traditional investments (i.e. real estate), but generally does not offer investment advice or serve as a fiduciary.
In sum, pursuant to Internal Revenue Code Section 408, an IRA can be established and administered by a bank, financial institution, or authorized trust company. An IRA trustee, also called a custodian, is the institution that administers your IRA. By law, every IRA must have a custodian or trustee.
IRA Custodians
The IRA custodian has the right to decide what types of IRS approved investments it will allow its IRA clients to invest in. Almost all banks and financial institutions that offer IRAs only permit their IRA clients to invest in traditional assets, such as equities, mutual funds, and exchange traded funds. On the other hand, a Self-Directed IRA custodian, also called a passive custodian, allows IRA holders to engage in non-traditional investments (i.e. real estate) and does not offer investment advice. Hence, unlike financial institutions which earn fees and commissions from facilitating traditional investments, a Self-Directed IRA custodian does not sell investments or provide investment advice. A Self-Directed IRA custodian earns fees for providing IRA administration and custody services for IRS approved alternative assets
The IRA custodian is essentially responsible for maintaining and administering the IRA. To this end, the IRA custodian is tasked with the responsibility of complying with all IRS reporting requirements with respect to the IRA, such as the filing of IRS Forms 5498 and 1099-R.
The Self-Directed IRA custodian is not a fiduciary and does not offer any investment advice. Its sole role is to facilitate non-prohibited transactions based on the exclusive direction of the IRA holder. Making the investment(s) on the IRA owners behalf. In addition, a self-directed IRA custodian is not permitted to offer legal or tax advice.
Opening a Self-Directed IRA Account with an IRA Trustee
The first step to establishing a Self-Directed IRA is opening an account with a Self-Directed IRA custodian, such as IRA Financial. The account opening process can be done in minutes and generally involves completing an online application. The online application will request the personal information of the IRA holder as well as information pertaining to the type of IRA ones wishes to establish. In addition, the IRA holder will be asked to provide a copy of a license as well as an account statement displaying the rollover information.
The second step to establishing a Self-Directed IRA account is funding the account. In general, there are two ways to fund a Self-Directed IRA. The first is via an IRA contribution. The second way to fund in an IRA is via a rollover. Rollovers can be direct and indirect and are generally tax-free.
The third and final step to establishing a Self-Directed IRA is making the Self-Directed IRA investment. This is where the client directs the IRA trustee (the IRA custodian) to make the IRA investment. The IRA custodian is not responsible for advising on the investment nor is it permitted to provide any investment advice or investment recommendation. The Self-Directed IRA custodian has no fiduciary responsibility to the IRA owner and is simply the party responsible for facilitating the Self-Directed IRA investment. It is for this reason that every Self-Directed IRA investor should perform adequate due diligence on all Self-Directed IRA investments as they are solely responsible for its outcome. Accordingly, working with a financial or tax advisor that can help you review the financial terms and risks inherent in the Self-Directed IRA investment is important.
Solo 401(k) Tax Filing Rules
The major question to address when it comes to Solo 401(k) tax filing is: Are there any annual tax filing requirements for the plan?
Since a Solo 401k plan is considered a trust, under Internal Revenue Codes (IRC) Section 401 and 501, there is generally no requirement to file annual state or federal income tax returns. However, if the assets total more than $250,000, there is one form that must be filed, IRS Form 5500-EZ (or 5500-SF).
What is a Solo 401(k) Plan?
A Solo 401(k) plan is not a new type of retirement plan. It is a traditional 401(k) plan covering only one employee. In general, to be eligible to establish a Solo 401(k) plan, one must be self-employed or have a small business with no full-time employees (over one thousand hours during the year) other than a spouse or other owner(s).
As the name implies, the Solo 401(k) plan is an IRS-approved qualified 401(k) plan designed for a self-employed individual or the sole owner-employee of a corporation. It works best when there are no other employees or a very small number of employees.
What are the Eligibility Requirements for a Solo 401(k) Plan?
A Solo 401(k) plan is well suited for businesses that either do not employ any employees or employ certain employees that may be excluded from coverage. The plan is perfect for any sole proprietor, consultant, or independent contractor. To be eligible to benefit from the Solo 401(k) plan, investors must meet just two eligibility requirements:
- The presence of self-employment activity.
- The absence of full-time employees.
The business owner and their spouse are technically considered “owner-employees” rather than “employees”. The following types of employees may be excluded from coverage:
- Employees under 21 years of age
- Employees who work less than 1000 hours annually or three consecutive years of 500 hours or more
- Union employees
Nonresident alien employees
Solo 401k Tax Filing Rules
In the case of a Solo 401(k) plan, if the total plan assets in your Solo 401(k) are under $250,000, the 401(k) plan has no filing obligations with the IRS. The Solo 401(k) plan is easy to operate. There is generally no annual filing requirement unless your Solo 401(k) Plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).
What does Form 5500 entail?
The Internal Revenue Service (“IRS”) Form 5500-EZ is an annual information return that is required to be filed by every “One-Participant Plan” (owners and their spouses), also known as a Solo 401(k) Plan, with plan asset value in excess of $250,000 as of December 31 of the previous tax year. The purpose of filing and reporting the fair market value (“FMV”) of your solo 401(k) plan’s assets is to inform the IRS of assets over $250,000 annually held in a Solo 401(k) Plan. The Form 5500-EZ is due every July 31st of the next plan year. Ex: for a plan that was established in 2023, the IRS Form 5500-EZ is due by July 31st, 2024.
Why Choose IRA Financial to Establish a Solo 401(k) Plan?
IRA Financial “literally” wrote the book on the self-directed Solo 401(k). Our founder, Adam Bergman, Esq, has written 8 books on self-directed retirement plans and over the last 15+ years has helped over 24,000 self-directed clients invest over $3.2 billion in alternative assets. IRA Financial is the leading provider of self-directed solo 401(k) plans with “checkbook control. Our expertise and experience in designing and customizing solo 401(k) plan solutions for entrepreneurs and small businesses is unmatched.
IRA Financial Self-Directed Solo 401(k) solution is specifically designed and customized for each type of investment. Whether it is real estate, private equity, venture capital, hedge fund, private business, Cryptos, precious metals, hard money loans, or much more, our Solo 401(k) tax experts will work with you to design the perfect Self-Directed Solo 401(k) plan solution for your business and investment goals, including tax optimization, roth maximization, and UBIT protection. Additionally, IRA Financial is the only self-directed retirement company that provides annual consulting, IRS tax reporting/filings, BOI FinCEN reporting, and a full IRS audit guarantee.
Any Questions?
For questions on the Solo 401k Plan or the IRS Form 5500-EZ (or SF) please give us a call at 800-472-0646 or fill out a contact form here!
Can My Self-Directed IRA be an Accredited Investor?
Many of the more popular investments available to Self-Directed IRA investors, in many cases, require the investor to be an accredited investor. In essence, the accredited ancestor rules require an investor (or Self-Directed IRA owner) to have a certain level of annual net income or overall net worth to be permitted to invest in certain private placements or private investments.
This article will focus on how an investor can satisfy the definition of an accredited investor as per the Securities Exchange Commission (SEC), as well as highlight the types of investments that typically require an investor to be accredited.
- Some Self-Directed IRA Investments require accredited investor status
- To be an accredited investor, you must have a million dollar net worth, or earn $200,000 per year
- Popular investments include private placements, hedge funds, and venture capital
Intent of the Accredited Investor Rules
The accredited investor rules are one of the more controversial rules involving investor rights. Many investors are shocked to learn that they are not eligible to make a certain investment because of their income level or net worth. So, what is the reason behind the SEC’s rules?
The SEC has essentially predetermined that only certain investors, accredited investors, have the necessary financial sophistication, financial power, and investment expertise to completely understand and evaluate the risks associated with investing in a private placement type investment, without the need for the disclosures that are required for offerings to the general public. Unfair or not, the SEC is basically saying that only investors of a certain income category or net worth can handle the risks associated with many private investments.
Accredited Investor Definition
The SEC defines an individual accredited investor as either having a net worth of $1 million, excluding the value of one’s primary residence, or have earned at least $200,000 per year in each of the past two years and expect to do so again in the current year.
Married couples are allowed to aggregate their assets for the $1 million test, but they must have a joint income of at least $300,000 annually to meet the income test instead. It is up to the individual investor to certify that they satisfy the SEC definition.
Can A Self-Directed IRA Be an Accredited Investor?
Since an IRA is a retirement account and not a natural person, how does the SEC definition apply to a Self-Directed IRA? A Self-Directed IRA is a type of IRA account which permits the IRA holder to invest in alternative asset investments, such as private placements, and much more.
The belief is that one would use the individual IRA owner’s financial status to determine if the IRA will satisfy the accredited investor rules. In other words, to determine if an IRA is deemed an accredited investor, you would look to the IRA owner to make that determination. If the IRA owner has income above $200,000 ($300,000 if married and filing jointly) for two consecutive years or has a net worth above $1 million, not excusing a primary residence, then the IRA will be deemed an accredited investor.
From a legal standpoint, the idea is that since an IRA is treated as a trust, pursuant to IRC 408, under the accredited investor trust rules, if each of the people creating the trust is an accredited investor individually, then the trust will also carry accredited investor status.
Types of Investments
Most non-publicly traded or investment funds, such as private equity, hedge funds, and most private business investments, are structured as Reg A or Reg D type private placements. The advantage of an investment complying with the Reg A or Reg D rules is that it limits the fund or business seeking financing SEC reporting obligations. Hence, if the individual Self-Directed IRA owner satisfies the SEC accredited investor definition, it would then be permitted to make the Reg A or Reg D investment.
The most popular type of investments that require the investor to be an accredited investor are:
- Real estate syndication
- Private equity
- Hedge funds
- Venture capital
- Crowdfunding
- Private business start-up financing
- Hard money loans
- Debt funds
Conclusion
Unfortunately, not all investors can make all IRS-approved Self-Directed IRA investments. The SEC accredited investor rules tend to frustrate many investors who are not able to satisfy the definition. Nevertheless, understanding how the accredited investor rules apply to Self-Directed IRAs is important when determining whether an alternative asset investment can be made with a retirement account.
For those investors who can personally satisfy the SEC accredited investor rules, there are a number of very interesting private placement investments available to Self-Directed IRA investors that could serve as a good source of investment diversification.
Private Equity Investments with a Solo 401k
Investing in private equity investments with a Solo 401(k) will give you the freedom to make investment decisions on your own without custodian consent. Investments with a Solo 401k allow you to eliminate the expense and delays of using an IRA custodian.
What is Private Equity Investing?
The term "private equity" is used to describe pools of money from several investors that are established through a passthrough entity, such as a partnership or limited liability company (LLC) that are then used to acquire stakes in companies.
Private equity funds make money by charging a small fee for managing the fund, typically around 2%, and then taking a cut of the gains from the investments above a certain set threshold. This is known as the carried interest and is typically 20%. The fees associated with investing in a private equity or venture capital fund are steeper than investing in a mutual fund or ETF, but the hope is that the returns will more than make up for the associated costs.
What is the difference between private equity and venture capital?
Private equity and venture capital investments are quite similar. Private equity typically invests in mature type and revenue-generating companies in need of some revitalization. Whereas venture capital typically invests in very early-stage companies with little to no revenues.
Both private equity and venture capital funds typically raise money from wealthy accredited investors, family offices, banks, and financial institutions, other investment funds, pension funds, and even IRAs.
Private Equity Investments with a Solo 401k
With a Solo 401k retirement plan, the business owner or plan participant (you) can serve as trustee. As a result, you can make private equity investments simply by writing a check or wiring funds directly from the Solo 401k bank account, which can be opened at any local bank or credit union, such as Capital One.
By establishing a Solo 401k, you can make private equity investments without the formation of an LLC. Instead, the Solo 401k Plan can be adopted by any business including a sole proprietorship, LLC, C Corporation, S Corporation, or partnership.
Unlike a conventional Solo 401k Plan that can be opened at a traditional financial institution such as Fidelity, the Solo 401k Plan offered by the IRA Financial Group is open architecture and 100% self-directed. This provides you (the trustee) with "checkbook control" over the 401k plan assets and 100% control over the investments of the plan. With the Solo 401k, also known as a Self-Directed 401(k), you will have total control over your retirement funds so you can make private equity and 401k plan investments tax-free.
Related: Solo 401(k) Investments
Solo 401k Prohibited Transaction Rules
Although you can make private equity investments with a Solo 401k, investors should be knowledgeable of the IRS prohibited transaction rules under Internal Revenue Code Section 4975. The IRS restricts certain transactions between the Solo 401k and a “disqualified person.” Disqualified persons include, but are not limited to the Solo 401k trustee and any of his/her lineal descendants.
The prohibited transaction rules tend to become more of an issue when the person using the retirement funds, or any disqualified person related to the retirement account holder has a personal interest or relationship with the private equity fund investment.
In other words, you can generally make an investment into any private equity fund with which neither you nor another disqualified person has personal ownership or relationship. Issues will arise from an IRS-prohibited transaction standpoint when the retirement account holder wishes to use retirement funds to invest in a fund where her or she or a disqualified person is either an owner, employee, or, in some cases, has a professional relationship with the fund in question.
If the transaction is structured correctly, there may be a way to use retirement funds to invest in private equity that you are personally involved in. It is important to ensure that the investment into the private equity fund will not personally benefit the retirement account holder (directly or indirectly) or any disqualified person since that type of investment would likely trigger a prohibited transaction.
Triggering a prohibited transaction is based on the facts and circumstances involved. The retirement account holder must prove that he/she did not personally benefit from the retirement account investments (directly or indirectly). Failure of proof can trigger very steep taxes and penalties.
Who is Eligible for a Solo 401k?
In order to be eligible to adopt a Solo 401k plan, the individual must operate a business with no employees who work more than 1,000 hours during the year other than the owner(s) or their spouse(s). The business is not required to be profitable but there must be an active business with the anticipation of profit.
The individual can be employed by another business and still adopt a Solo 401k Plan through a side business. Therefore, if the individual does not have a business that generates self-employment income or has a business with employees, he or she will not be eligible for the Solo 401k Plan. Thus, the individual will be required to use a Solo 401k to make investments using retirement funds.
Read More: Best Solo 401(k)
Putting it All Together
Private equity fund investments are among the most popular investment options with a Solo 401k. In general, private equity investments are passive and do not offer many prohibited transaction risks, assuming you or another disqualified person is actively involved in the fund.
Related: Retirement Investors Bet Big on Private Placements
Why IRA Financial
IRA Financial has helped over 15,500 self-directed retirement investors invest over $4.5 billion in alternative assets. IRA Financial has significant experience assisting private equity and venture capital clients navigate the IRS rules in connection with all types of domestic and foreign investments.
For additional information on using a Solo 401k to make private equity investments, please contact one of our Solo 401k Experts at 800-472-0646.
Forex Trading with Your Solo 401k
You can investment in FOREX trading with a Solo 401k if you are eligible for the retirement plan. Eligibility requirements are the lack of full-time employees if you are a small business owner and you generate self-employment income, which includes side gigs.
The foreign exchange market, also known as Forex, allows individuals to exchange currencies around the world. Currency trading is one of the safest investments since fluctuations in the price of currency are very small (less than one cent per day). You can open and close positions in hours or hold them for as long as you want. Trading is done electronically, and the market is open 24 hours a day for five and a half days. It is also the largest market in the world, much bigger than the stock exchange.
FOREX Trading With a Solo 401k
A Solo 401k gives you the ability to invest in currencies at your leisure. Solo 401k plans from traditional financial institutions do not usually allow you trade currencies. They push their products on you (typically stocks, bonds, mutual funds). However, with a Checkbook Control Self-Directed Solo 401(k) plan from IRA Financial Group, you are not limited in your investment options. You have the ability to use your retirement funds any way you see fit, such as Forex trading.
A Solo 401k is perfect for sole proprietors, small businesses and independent contractors. With a “checkbook control” Solo 401k Plan you will never have to seek the consent of a custodian to make an investment or be subject to excessive custodian account fees based on account value and per transaction.
By having “checkbook control” over your retirement funds you will gain the following advantages:
Solo 401k "Checkbook Control"
You will no longer need each investment approved by the custodian of your account. Instead, all decisions are yours. To make an investment or perform Forex trading with your Solo 401(k), you can write a check and use the funds straight from your Solo 401(k) Plan bank account.
When making a Solo 401(k) real estate investment or purchasing foreign exchange with “checkbook control”, you are manager of the LLC, and as manager, you gain the ability to write a check (or wire funds) from your Solo 401(k) Plan bank account.
No Custodian Fees or Transaction Fees
The most significant cost benefit of the Solo 401(k) plan is that it does not require the participant to hire a bank or trust company to serve as trustee. In other words, there are no custodian fees or transaction fees when establishing a Solo 401(k) Plan with the IRA Financial. This flexibility allows the participant to serve in the trustee role. This means that all assets of the 401(k) trust are under the sole authority of the Solo 401k participant. A Solo 401(k) plan allows you to eliminate the expense and delays of an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.
Speed in Forex Trading with Solo 401k
Because you don't have to wait on custodial consent, you can act quickly on a great investment opportunity. This enables you to act quickly when the right investment opportunity presents itself. The ability to make investments quickly is important in any market, including Forex trading.
Offset the Cost of Your Plan with a Tax Deduction
By paying for your Solo 401(k) with business funds, you are eligible to claim a deduction for the cost of the plan, including annual maintenance fees. The deduction for the cost of the Solo 401(k) Plan and ongoing maintenance will help reduce your business's income tax liability, which will offset the cost of adopting a self-directed Solo 401(k) Plan. The retirement tax professionals at the IRA Financial will help you take advantage of the available business tax deduction for adopting a Solo 401(k) Plan.
Cost Effective Administration
If you are eligible for the Solo 401(k), it is easy to operate. There is generally no annual filing requirement unless your Solo 401K plan exceeds $250,000 in assets, in which case you will need to file a short information return with the IRS (Form 5500-EZ).
Get in Touch
If you want to learn more about Forex trading with your Solo 401(k), contact IRA Financial Group directly at 800-472-0646. Our certified 401(k) specialists are happy to assist you.
You can also get in touch by filling out our contact form.
Self-Directed Gold IRA
Benefits of Investing in Gold a Self-Directed IRA
Since the Gold Rush of 1849, people have clamored to get their hands on the precious metal. People often rush to gold, and other metals, in times of economic downturns. It's always been considered a "safe" investment. Apart from a few hiccups, gold has gone up since the turn of the century. The benefits of investing in Gold include:
Stability - Gold is one of the most stable investments. Yes, gold has had its down years, but the overall picture is quite clear that gold tends to retain its value.
Diversification - Purchasing gold and other precious metals in a retirement account, including a Gold IRA, allows you to diversify your portfolio. No longer are you limited to stocks and bonds. Instead, IRA Financial's Self-Directed IRA for Gold allows you to invest in almost anything that is allowed in the Internal Revenue Code. Common investments include gold, silver, other precious metals, real estate, private businesses, pre-ICO, pre-IPOs, and more!
Security - Since gold is a physical and valuable asset, precautions must be taken to keep it secure. If you choose to store it yourself, you'll need the best safe money can buy. If stored elsewhere, such as a bank vault, let's hope their security is capable of thwarting would-be bank robbers. However, if you purchase gold in a self-directed IRA, we recommend reading the section below.
Price - When this article was originally written, on 8/16/2019, the price of gold was $1,377. Two years later on 8/16/2021, the price of gold was $1,778.62. As on 03/04/25, gold is currently trading at $2,133.30
What is a Self-Directed IRA for Gold IRA?
A "Gold IRA," is a self-directed retirement account that primarily consists of gold or other precious metals. Like a real estate IRA, individuals frequently open Gold IRAs to diversify their portfolios. However, self-directed Gold IRAs are not limited to purchasing gold or precious metals. Instead, investors can invest in a wide range of alternative assets including real estate, cryptocurrencies, hard-money loans, and more.
Learn More: Gold IRA Rollover vs. Transfer
Gold Investments with a Self-Directed IRA
Gold is considered an alternative asset or alternative investment. While you can purchase gold in an IRA or Solo 401(k), you first need to identify a Self-Directed IRA or Solo 401(k) custodian. Although many financial institutions allow individuals to purchase stocks and mutual funds in an IRA, a Self-Directed IRA or Solo 401(k) allows you to purchase both traditional and alternative investments. However, it is important to note that not all Self-Directed IRA or Solo 401(k) custodians offer the same types of assets. For example, at IRA Financial, individuals can also invest in real estate, private companies, cryptos, and more! Yet other companies only allow individuals to invest in Gold or Cryptos. Even though you may have an interest in Gold, diversifying your portfolio is equally important.
Since many IRA custodians that offer Self-Directed IRAs or Solo 401(k) plans allow you to invest in Gold, it is fairly easy to use your retirement funds to purchase and invest in gold. If you are interested in investing in Gold, you must first establish a Self-Directed IRA (or Solo 401(k) for self-employed individuals) with a self-directed, or passive, custodian, such as IRA Financial. At IRA Financial, you can easily establish an account on our website, through our app, or by calling us. However, before deciding where to establish a Gold IRA, you must assess each company's fee structure. Many companies claim to offer free Self-Directed IRAs. While the initial set-up may be free, these companies often charge transaction fees or account valuation fees. These fees can quickly reduce your profits. At IRA Financial we offer a flat fee structure. Individuals pay annually for an account and are not charged account valuation or transaction fees.
After deciding on a Self-Directed IRA Custodian, you need to ask what types of gold you can invest in. Although you are permitted to invest in Gold and other precious metals in an IRA, there are a few regulations. In general, the IRS permits IRA investors to invest in gold and other alternative asset investments, such as real estate, tax liens, and more. The Internal Revenue Code has stipulations on what type of gold and other precious metals investors can purchase, but other than these few stipulations, it is legal to purchase gold with a self-directed IRA.
John
IRA Financial Client
What Type of Gold Can I Hold in a Self-Directed IRA?
Internal Revenue Code Section 408(m) lists the type of precious metals and coins that are permitted investments using IRA funds:
- (A) any coin which is:
- a gold coin described in paragraphs (7), (8), (9), or (10) of section 5112(a) of title 31, United States Code,
- a silver coin described in section 5112(e) of title 31, United States Code,
- a platinum coin described in section 5112(k) of title 31, United States Code, or
- a coin issued under the laws of any State,
- (B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) [2] requires for metals which may be delivered in satisfaction of a regulated futures contract if such bullion is in the physical possession of a trustee described under subsection (a) of this section.
In addition, the Technical and Miscellaneous Revenue Act of 1988 allowed IRA owners to invest in state-minted coins so long as they are held in the possession of the IRA holder.
How do I hold Gold in a Self-Directed IRA?
Internal Revenue Code Section 408(m) identifies what types of coins and precious metals (bullion) are permitted to be purchased using a Self-Directed IRA. Section 408(m) also states that bullion (IRS-approved gold, silver, or palladium) must be held in the physical possession of a trustee described under subsection (a). Bullion is defined as gold bars, silver bars, or other precious metal bars or ingots. Bullion is also used to refer to a metal piece shaped in the form of a coin or a bar and plated with precious metal. The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value as money. Examples are gold-plated bars and coins.
A trustee is defined in Internal Revenue Code Section 408(a) as a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.
Internal Revenue Code Section 408(n) defines a bank as any bank (as defined in section 581) or an insured credit union (within the meaning of paragraph (6) or (7) of section 101 of the Federal Credit Union Act).
Section 581 defines a bank as a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under authority of the Comptroller of the Currency, and which is subject by law to supervision and examination by State, Territorial, or Federal authority having supervision over banking institutions. Such a term also means a domestic building and loan association. The Code seems to suggest that metals cannot be held in a foreign bank account since it would not satisfy the definition of a bank. The question then becomes what does “physical possession” mean.
Related: How to Invest in Silver with an IRA
Schedule a Free, No Obligation Consultation
Learn how IRA Financial can help you diversify your retirement and invest in Gold
Read More: McNulty Case Reaffirms Physical Possession Rules
Tips for Buying Gold in a Self-Directed IRA
To hold Gold or precious metals in an IRA, you need to establish a Self-Directed IRA. However, not all Self-Directed IRAs are equal. Instead, some charge you asset valuation fees. These fees can quickly add up, costing you thousands in unnecessary fees. At IRA Financial, we use a flat fee model. Hence, you only pay a certain amount per year, regardless of how many investments you have or how much you have in your retirement account.
You will also need to decide whether you want a regular Self-Directed IRA or a Self-Directed IRA LLC. The main difference is that a Self-Directed IRA LLC allows you to make investments by writing a check. A Self-Directed IRA LLC is popular among those making more frequent investments. For example, you might want to add other traditional or alternative assets (like real estate) to your IRA. With a Self-Directed IRA LLC with Checkbook Control, you can invest by simply writing a check.
It is also important you understand the types of investments you are making. Since you have complete freedom to invest in almost anything, you will need to do your due diligence in vetting the investment. For example, with Gold or precious metals, it is important to work with a reputable dealer. While IRA Financial can provide you with a list of precious metal deals our clients recommend, it is your responsibility to do your due diligence and ensure the investment or broker is right for you.
Learn More:
What is Checkbook Control Self-Directed IRA?
How to Trade Tax-Free with a Self-Directed IRA
Get in Touch
IRA Financial is the market's leading provider of self-directed retirement plans. If you have questions on how to hold gold in a Self-Directed IRA or purchase gold with a Self-Directed IRA, contact us directly at 800-472-0646 or fill out our contact form.
Does a Solo 401(k) Have the Same UBTI Rules as a Self-Directed IRA LLC?
Yes and No. Like an IRA, the tax advantage of a Solo 401(k) Plan is that income is tax-free until distributed. In general, an exempt organization is not taxed on its income from an activity that is substantially related to the charitable, educational, or other purpose that is the basis for the organization's exemption. Such income is exempt even if the activity is a trade or business. However, to prevent tax-exempt entities from competing unfairly with taxable entities, tax-exempt entities are subject to unrelated business taxable income (UBTI) when their income is derived from any trade or business that is unrelated to its tax-exempt status. Solo 401(k) and UBTI rules are much different than an IRA.
What is Unrelated Business Taxable Income?
UBTI is defined as “gross income derived by any organization from any unrelated trade or business regularly carried on by it” reduced by deductions directly connected with the business. The UBTI rules only apply to exempt organizations such as charities, IRAs, and 401(k) Plans. Congress enacted the UBTI rules in the 1950s in order to prevent charities from competing with for-profit businesses since charities do not pay tax giving them an unfair advantage over for- profit businesses. With the enactment of ERISA in 1974, IRAs and 401(k), who are considered tax-exempt parties pursuant to Internal Revenue Code Sections 408 and 401 respectively, became subject to the UBTI rules. As a result, if an IRA or 401(k) invests in an active business through an LLC or partnership, the income generated by the IRA or 401(k) from the active business investment will be subject to the UBTI rules. In other words, a 401(k) Plan that is a limited partner, member of a LLC, or member of another non-corporate entity will have attributed to it the UBTI of the enterprise as if it were the direct recipient of its share of the entity's income which would be UBTI had it carried on the business of the entity. For example, if a Solo 401(k) Plan invests in an LLC that operates an active business such as a restaurant or gas station, the income or gains generated from the investment will generally be subject to the UBTI tax. However, if the Solo 401(k) Plan invested in an active business through a C corporation, there would be no UBTI since the C Corporation acts as a blocker blocking the income from flowing through to the Solo 401(k) Plan. This is why you can invest IRA and 401(k) funds into a public company, such as IBM without triggering the UBTI tax. Remember that if an IRA or 401(k) Plan makes a passive investment, such as rental income, dividends, and royalties, such income would not be subject to the UBTI rules.
Related: Solo 401(k) Investments
UDFI and The Solo 401(k) Plan
However, unlike a Self-Directed IRA LLC, in the case of a Solo 401(k) Plan, UBTI does not apply to unrelated debt-financed income (UDFI). The UDFI rules apply when a 401(k) Plan uses leverage to acquire property such as real estate. Pursuant to Internal Revenue Code Section 514(c)(9), a 401(k) Qualified Plan is not subject to the UDFI rules and, thus, the UBTI tax if non-recourse leverage is used to acquire property such as real estate. With the UBTI tax rates at approximately 40% for 2019, the Solo 401(k) Plan offers real estate investors looking to use non-recourse leverage in a transaction with a tax efficient solution.
Exceptions to the UBTI Rules
There are some important exceptions from UBTI: those exclusions generally exclude the majority of income generating investment activities from the UBTI rules - dividends, interest, annuities, royalties, most rentals from real estate, and gains/losses from the sale of real estate.
What is an Unrelated Business?
For a Solo 401(k), any business regularly carried on or by a partnership or corporation of which it is a member/partner is an unrelated business. For example, the operation of a shoe factory by a pension trusts, the operation of a financial consulting business for high net worth individuals by a university, or the operation of an computer rental business by a hospital would likely be treated as an unrelated business and subject to UBTI.
Solo 401(k) and UBTI - Real Estate Investments
Although there is little formal guidance on UBTI implications for Solo 401(k) Plans investing in real estate, there is a great deal of guidance on UBTI implications for real estate transactions by tax-exempt entities. In general, Gains and losses on dispositions of property (including casualties and other involuntary dispositions) are excluded from UBTI unless the property is inventory or property held primarily for sale to customers in the ordinary course of an unrelated trade or business. This exclusion covers gains and losses on dispositions of property used in an unrelated trade or business, as long as the property was not held for sale to customers. In addition, subject to a number of conditions, if an exempt organization acquires real property or mortgages held by a financial institution in conservatorship or receivership, gains on dispositions of the property are excluded from UBTI, even if the property is held for sale to customers in the ordinary course of business. The purpose of the provision seems to be to allow an exempt organization to acquire a package of assets of an insolvent financial institution with assurance that parts of the package can be sold off without risk of the re-sales tainting the organization as a dealer and thus subjecting gains on re-sales to the UBTI.
How Do I Avoid UBTI?
In general, if you make passive investments with your Solo 401(k) Plan, such as stocks, mutual funds, precious metals, foreign currency, rental real estate, etc. the passive income generated by the investment will generally not be subject to the UBTI tax. Only if your Solo 401(k) Plan will be making investments into an active business, such as a retail store, restaurant, software company using a passthrough entity such as an LLC or partnership will your Solo 401(k) Plan likely be subject to the UBTI tax. Solo 401(k) and UBTI rules can get very complicated. Please speak with a knowledgeable adviser concerning these matters.