Rules & Regulations — OLD

Prohibited Transactions

It’s important to understand what you’re not allowed to invest in with a self-directed IRA because making a prohibited transaction can cause you to lose the tax-deferred status of your account and incur subsequent taxes and penalties. This would also erase any gains you have earned because your account will be disqualified by the IRS. Prohibited transactions have to do with intent. Basically, any transaction that is intended for immediate personal financial gain rather than for your future retirement is considered prohibited.

Here’s a list of specific prohibited IRA transactions:

• Personally borrowing money from the IRA
• Selling, leasing or exchanging property to the account
• Accepting unreasonable compensation for managing property or assets held by the IRA
• Using the account as security for a loan
• Granting account fiduciaries permission to obtain, use or borrow against account assets for their own gain
• Transferring plan assets, lending money or providing goods and services to disqualified persons*

* Disqualified Persons: For Plan purposes, disqualified persons are defined as the account holder and his or her spouse, lineal descendants, account fiduciaries, trustees, investment managers and advisors and/or any corporate entity in which the account holder has at least a 50% ownership.

For the complete list of prohibited transactions, see IRC Section 4975.

Investments not allowed by the IRS

The following list details what you cannot invest in with an IRA under IRC Section 408. If you don’t see it on this list, then chances are we can help you find a way to invest in it towards your IRA.

• Collectibles such as artwork, coins, stamps, rugs, antiques, beverages and other personal property
• Gemstones and metals (except for certain U.S. coins and bullion which are allowed)
• Insurance contracts
• S-corp stock is typically not permitted because by allowing an IRA investor to purchase S-corp stock, it may disqualify the favorable tax status of this structure

See IRS Publication 590 for a complete list of prohibited investments. These guidelines are simply to ensure that you understand which investments you can’t make with your IRA funds without risking significant penalties and tax implications.

Beyond these rules, it’s up to each custodian to determine what assets it will custody.  As long as you follow these rules and check with your custodian first, you can be on your way to directing your retirement.

Unrelated Business Taxable Income

IRA owners who invest in active businesses or debt-financed properties will need to monitor their accounts for ongoing tax liability, referred to as unrelated business taxable income (UBTI), which must be paid from your IRA. Failure to do so can result in underpayment penalties.

Unrelated business taxable income (UBTI) is defined as the gross income derived from any unrelated trade or business regularly carried out by an exempt organization. The tax on UBTI is called unrelated business income tax (UBIT) and applies to all IRAs, including Traditional, Roth, SEP and SIMPLE IRAs.

If an enterprise is a pass-through entity, also known as a partnership or limited liability company (LLC), that produces and sells goods or provides services, the IRA’s share of the enterprise’s ongoing net income will be UBTI, and the IRA is required to pay income tax (UBIT) at current trust tax rates. Additionally, if the business is a pass-through entity that acquires any assets through loans or on margin, a portion of the IRA’s share of the income may also constitute UBTI subject to UBIT.

Unrelated Debt-Financed Income

Unrelated debt-financed income (UDFI) is income derived from any debt-financed property held to produce income (including gain from its disposition), including rental real estate, tangible personal property and corporate stock. The amount of UDFI is a percentage of the total gross income derived from the property during a tax year, and that income is also subject to UBIT. When an investor chooses to leverage an IRA real estate investment through the use of a non-recourse loan, the IRA will be subject to unrelated business income tax (UBIT) because of the unrelated debt-financed income (UDFI) produced by the property.

Investors are encouraged to review the implications of UBIT on UBTI or UDFI with their tax professional. Both require the filing of IRS Form 990-T. More information can also be found by reviewing IRS Publication 598.

Required IRS Reporting for IRAs

IRA custodians are required to file certain reports with the IRS each year, and as a custodian, STRATA Trust Company will file:

• Form 1099R to report any distributions taken as cash or in-kind assets during the previous year
• Form 5498 to report the value of the IRA, as well as any contributions made for the previous year
• Form 990T, at the IRA owner’s direction, if there is UBIT or UDFI to be reported and tax paid from the IRA

IRS Contribution Rules and Limits

If you are eligible to make an annual IRA contribution, you may contribute up to the maximum annual amount allotted for the current tax year, for those 50+ you may include the catch-up contribution amount.  Contributions can be made as often as you like during the year (monthly, quarterly, etc.) as long as you do not exceed your eligible limit.

The deadline for making an IRA contribution is generally April 15, and the envelope must be postmarked to STRATA Trust Company (not to an IRA-owned investment or to your dealer) no later than the annual tax filing deadline (excluding extensions) if contributing for the prior tax year. If contributing for the current tax year, your contribution can be made as early as January 1.

You may refer to STRATA’s IRA Annual Limits chart for the most current IRS contribution amounts for Traditional, Roth, SEP, and SIMPLE contribution limits.

Required Minimum Distribution Rules for Traditional IRAs

Required minimum distributions (RMDs) are mandatory minimum withdrawal amounts that must be taken annually by the Traditional IRA owner. As a result of the SECURE Act (passed Dec. 20, 2019), RMDs must begin within the year the IRA owner turns 72 years of age. RMDs must be taken no later than December 31 each year. However, the initial RMD may be postponed until April 1 of the year following the calendar year in which the IRA owner reaches age 72. IRA owners are responsible for taking the correct amount of RMDs on time every year, or they will face stiff penalties for failure to do so. Roth IRA owners do not have to take RMDs.

At STRATA, as a courtesy to our account owners, your RMD amount will be calculated and provided to you based on your preferred method of communication delivery by January 31^st each year.

Additional IRS Rules and Guidelines

For your convenience, we’ve compiled a list of relevant IRS links regarding IRAs and small business retirement plans.
Note: The information presented below is for educational purposes only and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with legal, tax and accounting professionals.

•      IRS Publication 560 – Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
•      IRS Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
•      IRS Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs)
•      IRS Publication 575 – Pension and Annuity Income
•      IRS Publication 529 – Miscellaneous Deductions
•      IRS Publication 550 – Investment Income and Expenses
•      IRS Publication 598 – Tax on Unrelated Business Income of Tax-Exempt Organizations
•      IRS Publication 3125 – An Important Message for Taxpayers with IRAs