InSight

The Rules of Self-Directed IRAs

Financial Planning Dentist

At InSight, our clients know that when you understand the rules you make better decisions. Our InSight-Full® plan is about marrying the goals that you have with the right Rules of Self-Directed IRAs and the right strategy. We cannot stress enough the importance of knowing the rules and how to avoid problems both now and in the future. 

By Kevin T. Taylor AIF® and Peter Locke CFP®

self directed IRAsThe first rule is when you open a self-directed IRA you’re not the owner. The tax code requires the assets in a Self-Directed IRA (SDIRA) and its owner remain separate and not used in a way that one indirectly enriches the other (beyond permitted rules). When you think about investing into something using your IRA think of it as solely an investment and not for personal use.  The IRA owner and anyone else responsible for the account is prohibited from commingling their vested interests of the SDIRA with its owner or any “disqualified persons” which includes:

  • The fiduciary of the account including the SDIRA owner
  • Family member (ancestor, spouse, lineal descendant, or spouse of a lineal descendant 
  • Corporation, partnership, trust, or estate where 50% or more of the shares/profits/beneficial interests are owned by any of the above
  • Officer, director, or 10% or more shareholder or partner of an entity above

If someone is a disqualified person, they’re prohibited from directly or indirectly transacting between the SDIRA and the disqualified person in the following manners:

  • Transfer, use, or benefit of the assets
  • Lending or extending credit (both ways)
  • Sale, lease, or exchange of property
  • Furnishing of goods, services, or facilities
  • Dealing assets for your own benefit as the fiduciary
  • Personally receiving consideration as a fiduciary from a third party that engaged in a transaction with the IRA

This means that if any of these transactions listed above with any disqualified person occur even if done at fair market value, will be subject to severe consequences. The standard penalty is 15% of the amount involved in the transaction which is imposed on any disqualified person engaged in the transaction. Furthermore, if it’s not resolved by the end of the year in which the violation occurred, the penalty is increased to 100% of the transaction amount. And to top it off, the entire account loses its tax-deferred status and is treated as if the entire account was liquidated and distributed as of the current year. 

The majority of clients for asset protection purposes and clean book keeping manage their self-directed IRA inside of an LLC. Don’t have your IRA own the property, have your IRA own an LLC that has a bank account that you’re the manager of.  Then the LLC is the owner on the contract. This like any other rental property gives you the ability to have limited liability in the event someone comes after your assets. 

These are investment assets not personal assets, this is definitely a breach of rules of self-directed IRAs. You cannot live there, your parents, kids, or grandparents cannot live there. You cannot sell your own property or buy a piece of property from yourself using the IRA. Don’t take a salary or commission (prohibitive transaction).  Any repairs or maintenance must be done by a third party. The reason is if you were to work on it on your own then you’re self serving and this could be viewed as a contribution to the IRA which is prohibited. Also, if you own a property management company and are a 50%+ owner, your company cannot do work on the property. The easiest thing you can do is separate yourself completely from the investment and let third parties do the work. 

If you follow through with the purchase, keep all accounting separate. You don’t want to accidentally make a mistake and disqualify yourself by accidentally mixing personal use assets with your Self-Directed IRA. For example, if you think you can use a credit card to pay for the repair of something you cannot. All expenses come out of the IRA not your bank account. 

Another prohibited transaction in this type of account is transacting with prohibited parties or disqualified persons such as kids, parents, spouse, grandparents, spouses of your kids and yourself. Although, siblings are allowed.  The rule specifies disqualified persons as ancestors. 

Keep your Self-Directed IRA separate from your business where you’re a 50% or more owner. In this case, your IRA is a prohibited party and therefore you cannot loan to an LLC that is associated with your business. 

If you’re not putting down the full amount to buy in this case a rental property, you’ll need to get a non-recourse loan. This means the bank will charge a higher interest rate but if you default then they will only take the property. Having a non-recourse loan in an IRA means you will be subject to unrelated debt taxable income (UDTI). UDTI is generated when you finance the purchase of property in an SDIRA. Unrelated Debt Financed Income (UDFI) and Unrelated Business Taxable Income both trigger UBIT (Unrelated Business Income Tax). To even the playing field for everyone (because using leverage in an IRA and collecting income is way to get huge contributions into your IRA which isn’t fair to non-exempt persons) the IRS made it so tax-exempt entities you must pay income tax on the income they realize from the UDFI that year at the Estate Tax level which is much higher than ordinary income levels. 

Lastly, invest in what you know. Don’t take unnecessary risk by breaking one of the Rules of Self-Directed IRAs, and don’t invest in your friend’s start-up that you know nothing about. If you know rentals buy rentals, if you know commercial real estate buy commercial real estate. Just like anything we do here at InSight, have the right people, process, and policies set up to hold yourself accountable so you make more informed investments. 

More related articles:

New
Kevin Taylor

An InSightful Guide to Profit Sharing for Plan Sponsors

At InSight, we encourage profit sharing as a valuable option within a 401(k) plan, allowing employers to make pre-tax contributions to their employees’ retirement accounts at the end of the year. Contrary to its name, profit sharing doesn’t necessitate that your organization generates profits for the year. Instead, it provides flexibility for rewarding employees with additional retirement contributions based on your discretion.   Why You Should Consider Profit Sharing: There are numerous advantages to making profit-sharing contributions, including: Tax-Deductible Contributions: Profit-sharing contributions are typically tax-deductible for the previous tax year. Financial Assessment: You can assess your finances before deciding the amount to contribute. No Minimum Requirement: No minimum amount for profit-sharing contributions exists. Contribution Limits: While profit-sharing contributions don’t count toward the annual deferral limit, they are limited to 25% of eligible compensation (the deduction limit) for the plan year. Additionally, total contributions per participant can be at most $66,000 ($73,500 with catch-up contributions) for 2023 (the annual additions limit). Inclusive Contributions: You can contribute to all employees, even those who don’t personally contribute. Vesting Options: Vesting schedules can be chosen to incentivize employee retention. Please note that if your business is part of a legally related group, you may be obligated to distribute profit sharing across all entities involved.   How to Make Profit-Sharing Contributions: InSight simplifies the process of implementing profit-sharing plans. If you plan to make a profit-sharing contribution, follow these steps: Verify Plan Settings: Ensure that your plan includes the desired profit-sharing allocation formula. Formula Options: Pro-rata and flat dollar profit-sharing formulas are available for InSight Core and Enterprise plans. New comparability is also an option for Enterprise plans or can be added for a fee in Core plans. Initiate Profit Sharing: InSight will create a profit-sharing task on your administrator dashboard in the first quarter after receiving compensation data. Simply complete this task to initiate profit sharing. Confirmation Notice: After your request is submitted, InSight will provide you with a confirmation notice to review before processing the profit-sharing contributions. For more details on the availability of profit sharing and specific timelines, please refer to our resources. This guide aims to help plan sponsors navigate the profit-sharing process with ease, providing a valuable benefit to both employers and employees.

Read More »
mindfulness
Articles
Kevin Taylor

Meditation, Mindfulness and Money: 4 ways to channel mindfulness into your money

If you’re looking for some broader answers to the ‘universal question’ I’m not your guy and this is not that article. But I will say that after years of thinking the transcendental was not for me, I’ve changed. If it was real, here and now, I would investigate it for legitimacy. If it was ethereal and spiritual it was for guru’s, theologians, monks and priests. But that has changed for me. I now see mindfulness as a tool that has a very real way of actualizing my intentions, and meditation is the gateway to getting in touch with that.  The deliberate focusing of your mind is no more than coaching it to react in a particular way. Drawing from techniques that are metaphysical (more controllable) and shaping the physical (less controllable). So, to cut through the chaos of daily life, and getting your mind thinking about money, or more broadly wealth is no more difficult than coaching it to think more deeply about your family, career, or your other passions.  Visualize your financial goals Players and coaches have for decades now taught visualization as a method for success. Mindfulness allows the player to be mentally prepared for a situation, before they are called on to act in that moment. To see their options and take advantage of opportunity by running through a situation and potential variables. This speeds up decision making ability and allows people to react faster and with a better sense of how a decision reflects the hope of a game plan. They do this to focus the mind on their desired outcome, before the situation arises. Visualization can similarly help you premeditate the outcome you’re seeking for you and your family’s financial future. It is rarely a lack of opportunity that hinders success, but a failure of recognizing that opportunity in the moment it exposes itself. Having coached your mind to see and react to risk and opportunity is something that you mind can be coached into understanding before the opportunity presents itself. Get real about your finances By taking time to reflect and gain comfortability with your financial situation you can become more intimate and realistic with your expectations. By carving out time to reflect on your situation, the calmness of the moment can help you define more achievable outcomes. This is not to say you shouldn’t expect an extravagant life, but to help you control the resources at your disposal and become capable of mastering the decision making process in front of you.  Through meditation you can calm down otherwise erratic parts of life and focus your mind with greater intention. You can isolate the parts about your financial life that bring you joy and contentment and ready your mind to make decisions that have often been the result of emotion or reaction. Deliberately bringing your mind into focus brings clarity to the more important aspects of your life. Mindfulness about your past Meditation can be used to deliberately shape the way you react to a situation. Using mindfulness it can also be used to relive and relearn from events in your past. Taking time to re-feel how a situation in your past affected your present is a way of coaching your mind to learn from those events. By using the emotions which drive so much of our decision making and combining that with the more deliberative parts of the brain, you can combine the events of your past into the reactions you hope are part of your present.  Imagine if you isolate a single event from your past that shaped your current relationship with money. Reflecting through meditation the events that have caused your current understanding of your financial situation and the history you associate with the subject. You can then reimagine the events and outcome from your past. Learn from that very visceral event, and reshape how you would have rather reacted. The goal is not to relive financial missteps that you cannot get back, but to coach your emotional reptilian brain to cede the lead to your primate and more deliberative brain. By reflecting on the emotional drivers in a meditative process you can recognize the leading indicators events and avoid them in your current situation. Discover your money beliefs though mindfulness By channeling meditation time towards your money habits you can have a more complete and intimate relationship with money. Meditation helps you uncover the person you want to be in life, to shape and imagine how that person thinks and reacts to help define what that person’s intentions about money are. We all hold certain money beliefs, usually as a reaction to our emotions with money and lifestyle. One you begin spending even small amounts of time focusing your mind on money and your relationship with it, you’ll find the beliefs you have about money change. Channeling a deliberate intention into your beliefs will develop more positive money reactions, and those reactions will evolve in habits. This process enshrines the positive money outcomes you desire, into tactical decisions you can control. For many this transformation can happen in the way they save which is one of the leading indicators to financial success. They can transform the way they think and transform the way cash flows through their household flow from “income – spend = save” to “income – save = spend.” This shift in the belief that saving is more pressing then spending is not the natural state for most people, until they gain that more intimate and purposeful mindset around the value of saving. Conclusion Becoming more purposeful with your actions and ultimately your money begins with mindfulness. This mindfulness can be the result of focused meditation on the subject. Reshaping to the way you feel about and react to investment situations, market performance, and risk. Finding time to be deliberative about money allows you to cultivate your reaction to your money and better develop the fiscal life you want.  

Read More »
Boulder Financial Advisors
Articles
Kevin Taylor

The AI Showdown: Unveiling the Global Race for Technological Supremacy

The global AI race between the United States and China has been a prominent topic in recent years, as both countries strive to establish themselves as leaders in artificial intelligence. This competition has spurred significant investments in AI research, development, and infrastructure, with particular emphasis on chips and AI technologies. The United States, with its long-standing tradition of technological innovation, has been at the forefront of AI advancements. American tech giants such as Google, Microsoft, and IBM have heavily invested in AI research and development, establishing themselves as key players in the industry. The U.S. government has also recognized the strategic importance of AI and has taken steps to support its growth through funding initiatives, regulatory frameworks, and collaborations between academia and industry. On the other hand, China has rapidly emerged as a formidable competitor in the AI race. The Chinese government has set ambitious goals to become the global leader in AI by 2030, outlining plans to invest heavily in research and development, talent acquisition, and infrastructure. China’s large population and vast consumer market provide a fertile ground for AI implementation, leading to the proliferation of AI-powered applications in various sectors such as e-commerce, finance, and healthcare. Chinese companies like Baidu, Alibaba, and Tencent have made significant advancements in AI technologies and have been actively expanding their influence both domestically and globally. Chips play a critical role in AI development, as they form the foundation for powering AI algorithms and applications. The United States and China have recognized the strategic importance of chip manufacturing and have made substantial investments in this area. The U.S. semiconductor industry has long been a global leader, with companies like Intel, Nvidia, and Qualcomm driving innovation. However, China has been making significant efforts to reduce its reliance on foreign chip technology and establish its domestic semiconductor industry. The Chinese government has invested billions of dollars in supporting local chip manufacturers and fostering collaborations with international semiconductor companies. Both the United States and China understand that AI has far-reaching implications, not only in terms of economic growth but also for national security and military applications. AI technologies have the potential to enhance military capabilities, automate warfare systems, and drive advancements in autonomous weapons. As a result, there is a growing concern about an arms race in AI between these two superpowers. To support their respective AI ambitions, both countries have also been investing in military-related AI research and development. The United States has established the Joint Artificial Intelligence Center (JAIC) and is actively exploring the integration of AI into defense systems. Similarly, China has made significant investments in military AI applications, with the People’s Liberation Army (PLA) focusing on areas such as autonomous vehicles, intelligent surveillance, and battlefield decision-making systems. It is important to note that while the United States and China are at the forefront of the global AI race, other countries and regions are also making significant strides in AI research and development. Countries like Canada, the United Kingdom, and Germany, among others, have their own AI initiatives and are fostering innovation in this field. As the competition intensifies, the United States and China must balance their pursuit of technological dominance with ethical considerations, transparency, and international collaboration. The development and deployment of AI technologies should be guided by principles that prioritize human rights, privacy, and accountability. By fostering a cooperative approach, global collaboration can drive the responsible and beneficial use of AI, benefiting society as a whole. The global AI race between the United States and China presents various investment opportunities and potential conflicts. Let’s explore them further: Investment Opportunities: AI Research and Development: Both the United States and China are investing heavily in AI research and development. This creates opportunities for companies and startups specializing in AI technologies, algorithms, and applications. Funding and partnerships from government agencies, venture capital firms, and tech giants can fuel innovation and growth in this sector. Semiconductor Industry: The development of AI requires high-performance chips, and investment in the semiconductor industry is crucial. Companies involved in chip manufacturing, design, and fabrication, as well as those focused on AI-specific chips, can benefit from the increased demand for advanced semiconductor technology. AI Infrastructure: The race to develop robust AI infrastructure, including cloud computing, data centers, and network capabilities, offers investment opportunities. Building scalable and secure infrastructure to handle the vast amounts of data and computational requirements of AI applications is a key focus area. AI Startups and Incubators: The growing interest in AI creates a fertile ground for startups and incubators specializing in AI technologies. Investors can identify promising startups and provide funding, mentoring, and resources to help them flourish. These startups can offer disruptive AI solutions in various sectors, presenting attractive investment opportunities. Conflicts and Challenges: Intellectual Property and Technology Transfer: The competition between the United States and China can lead to intellectual property disputes, as both countries strive to protect their AI advancements. Issues related to technology transfer, trade secrets, and patent infringements may arise, potentially leading to conflicts and legal battles. Talent Acquisition and Retention: Both countries face challenges in attracting and retaining top AI talent. The demand for skilled AI professionals exceeds the current supply, creating a talent shortage. This talent competition can result in wage inflation, poaching of experts, and brain drain from certain regions, leading to conflicts and talent imbalances. Ethical Considerations: As AI technology advances, ethical considerations become increasingly important. Conflicts may arise when different countries or organizations have divergent views on the ethical use of AI, particularly in areas such as privacy, bias, algorithmic transparency, and autonomous weapons. Establishing international standards and regulations to address these concerns can be a complex and contentious process. National Security and Military Applications: The militarization of AI can heighten conflicts between nations. Developing AI for military applications, such as autonomous weapons and cyber warfare, raises concerns about arms races and the potential for escalating tensions. Striking a balance between innovation and ensuring responsible use of AI in the military domain is crucial to

Read More »

Pin It on Pinterest