Understanding IRA Rules
Self-directed IRA investors should be aware of the IRS prohibited transaction rules and investments considered off-limits.
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 are determined by intent. Basically, any transaction that is intended for immediate personal financial gain rather than for your future retirement is considered prohibited.
×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 are defined as the account holder and his/her spouse, lineal descendants, account fiduciaries, trustees, investment managers and advisors, and any corporate entity in which the account holder has at least a 50% ownership. See IRC 4975 for a comprehensive explanation of prohibited transactions.
The great thing about SDIRAs is the investment flexibility they allow. In fact, the IRS has a fairly short list of investments that aren’t allowed—and beyond that, it is up to the IRA custodian to determine the assets it will or will not custody.
The guidelines below are simply to ensure that you understand which investments you can’t make with your IRA funds without risking significant penalties and tax implications. See IRC Section 408 or IRS Publication 590-A and IRS Publication 590-B for additional information.
×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)
×S-Corp stock (typically not permitted because allowing an IRA investor to purchase S-Corp stock may disqualify the favorable tax status of this structure)
Understanding IRA Rules
Because an IRA is a tax-advantaged account, there are IRS rules on how money flows in and out of the account.
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, and 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 (the federal tax filing deadline), 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 Distributions
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 31st each year.
Understanding IRA Rules
In circumstances where self-directed IRA assets are invested in certain types of income-generating investments, the IRA itself is required to pay tax each year on the investment income—referred to as UBTI or UDFI. It is the responsibility of the IRA owner to determine whether there is UBTI or UDFI to be reported and, if necessary, to file Form 990T and take the steps to pay the taxes from the IRA. We suggest working with a tax professional to help make this calculation.
Unrelated Business Taxable Income (UBTI) occurs when a retirement account earns active business income, which is considered unrelated business income under federal tax law and is subject to its own tax.
If your IRA investments generate $1,000 or more of UBTI in a year, the IRA must pay tax on that income. Because the income is earned within a trust, UBTI is taxed at the trust tax rates. Although certain exclusions apply for income that includes interest, dividends, royalties, capital gains, and rents (if not debt-financed). See IRS publication 598 for additional details.
Unrelated Debt-Financed Income (UDFI) occurs when a retirement account owns a real estate property that is debt-financed (with a non-recourse promissory note) and the property generates income.
The amount of income classified as UDFI is proportionate to the debt owed on the property. As the debt is paid down, the percentage of income that is taxable decreases. If the IRA sells the property and there is any debt during the preceding 12-months, a percentage of the gain will be taxable as UDFI.
View our Quick Guide to UBTI/UDFI for more in-depth information.