Lori Calabro, CFO Magazine
October 1, 2006

Self-directed IRAs

Are self-directed IRAs different from self-directed 401(k) investment options provided by company as peart of their retirement offering? This clarification would help me in my present study of the self-directed 401(k)s.

Thanks
Deepa
deepa.nair@fmr.com

Posted by deepa nair | May 21, 2007 2:38 AM ET

Self-Directed IRA Clarification

There was a bit of confusion in your article. The IRS does have some very specific restrictions on who may benefit from your IRA investment. Relatives in your direct line: mother, father, wife/husband, children, and adopted children are in your direct line and cannot benefit.

You indicated that a person cannot invest in their brother?s restaurant. Actually, brothers, sisters, aunt, uncles, cousins and stepchildren are not restricted. So, go ahead and invest in your brother?s restaurant. I would think twice about any slippery reciprocal investments like you buy a home and rent it to your brother, and he buys a home and rents it to you. It may meet the letter, but not the spirit of the law.

The information attributed to Holly Isdale is misleading and inaccurate. It is not unusual for institutions such as Lehman Brothers to talk down self-directed IRAs. Brokers sell equities and bonds. They cannot benefit from the other investment opportunities available to a self-directed IRA. However, self-directed IRA investments are not ?play money?. An equity investment can reduce its value by 50% in a few days due to adverse economic or political conditions. In even the worst market, a self-directed IRA investment in real estate will not lose 50% of its value.

To be perfectly accurate, you can ?buy that beach house you drove past and fell in love with.? You can rent it out until you retire. Then, you can take it as a distribution and live in it.

Investing in an LLC is a preferred method for IRA investments. There are rules to follow, but this does not change the IRA taxation rules that apply to any investment vehicle. Additionally, if the purchase of a property is leveraged, Unrelated Business Income Tax (UBIT) is paid on the portion of the investment attributed to the borrowed money. Still, this does not affect the taxation of the IRA.

William Bell
www.williamabell.com/tablestakes

Posted by William Bell | Oct 19, 2006 12:55 AM ET