Your individual retirement account (IRA) is a great way to save for your future. A traditional IRA uses pre-tax dollars to invest in mutual funds, bonds and stocks. A Roth IRA, however, uses post-tax dollars to do this. With an IRA, you have limited choices you can invest in. However, with a self-directed IRA, also known as a SDIRA, you have much more potential investment opportunities you can make. This is true of both the traditional and Roth SDIRA.
The Internal Revenue Service (IRS) provides rules and regulations that govern how your money is taxed. This includes you income and your retirement accounts. In general, however, the IRS does not dictate what you can invest in. It only outlines the things you cannot invest in. (Check out the Internal Revenue Code (IRC) Section 408 to find out more about what the IRS does not allow you to invest in.) The IRS also establishes “prohibited transactions” and “taxable incomes.”
IRC Section 4975 defines “disqualified persons” and “prohibited transactions” as well as the penalties that you will face for participating in them. Prohibited transactions are typically those that occur between your IRA or an IRA owned entity and a disqualified person.
The IRS defines the UBTI through IRC Sections 512 to 514. In general, most IRA investors have found a loophole in the UBTI. When your IRA funds are used to invest in publically traded stocks, for example, IRC 512(b) allows any gains to be exempt from the UBTI.
As with other types of IRAs, you can establish a limited liability company (LLC) with your self-directed Roth IRA. Using this LLC, you can invest in a contract vehicle that allows the buyer to buy or sell any asset at a specified price by a certain date. These contract vehicles are known as “options”. Like a stock, an option is considered to be a security. However, it is also a binding contract, complete with terms and properties. If you use your self-directed Roth IRA LLC to invest in options, you are in luck. The IRS excludes most of these transactions from the UBTI.
Finding the right retirement account can be confusing. There are many different types of accounts you can pick from. Consulting with a reputable firm, like Royal Legal Solutions, can help you. A self-directed Roth IRA is a great way to diversify your investment portfolio. Best yet, because you used post-tax dollars to fund this type of account, your gains and interests are tax-free! If you would like to find out more about retirement accounts, contact us today.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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