IRA FAQs

Learn more on IRA plan types, the rollover process, and real estate requirements.

IRA Fundamentals FAQ

IRA Transfer and Rollover FAQ

IRA Real Estate FAQ

IRA Fundamentals FAQ

Below are answers to the questions we are most frequently asked regarding self directed Individual Retirement accounts (IRAs).

• What is an IRA?
• What is meant by a self-directed IRA?
• What are the advantages of a self-directed IRA?
• What is meant by a passive custodian?
• Who can establish an IRA?
• What is the difference between tax-deferred and tax-free?
• How is compensation defined?
• How much can I contribute per year to a self-directed IRA?
• Can I contribute more than $5,000 to a self-directed IRA? 
• When I convert funds from a Traditional IRA to a Roth IRA, is this a taxable event?
• Is there a minimum or maximum that I have to convert in a given year?
• Is there an establishment deadline for converting a Traditional IRA to a Roth IRA?
• Are there income limits for conversion of funds from a Traditional IRA to a Roth IRA?
• What is meant by a spousal IRA?
• What is meant by an inherited IRA?
• Can I have a Traditional/Roth IRA in addition to my other retirement plans, such as a 401(k), 403(b), SEP, SIMPLE or Individual(k) plan?
• Can I self direct in various IRAs such as Roth, SEP, SIMPLE, Individual(k), etc?
• Can I transfer funds from a previously established IRA to a self-directed IRA?
• Is there a limit on how much or how little I may transfer to my self-directed IRA?
• Are there penalties for early withdrawals from retirement plans?
• Are there exceptions for early withdrawals that do not incur the pre-59 1/2 penalty?
• What are Required Minimum Distributions (RMDs)?
• How do I calculate my RMD?
• When do I have to start taking my RMD?
• Do RMDs have to be taken out of one account or can they be taken out of several accounts?
   

What is an IRA?
An Individual Retirement Account is a personal savings plan that allows you to set aside funds for your retirement. Investments made within these plans grow in either a tax-deferred or tax-free environment.

 What is meant by a self-directed IRA?
A self-directed IRA allows complete diversification, from “traditional” investments such as stocks, bonds, and mutual funds to “non-traditional” investments, in assets such as real estate, mortgages/deeds of trust, tax liens, mobile homes and other private placements and limited partnership interests.
A truly self-directed IRA will enable you to use your investment knowledge and expertise to prepare for your retirement. While some custodians claim to allow for self direction, most only allow investments in their approved list of stock, bonds and/or mutual funds, or only make available proprietary investments such as CDs. However, clients of a few self-directed IRA custodial accounts are able to make their own investment decisions from a wide range of acceptable investments

What are the advantages of a self-directed IRA?
A truly self-directed IRA allows you to diversify your retirement portfolio beyond the standard investments allowed by most IRA custodians, such as stocks or mutual funds. By combining your knowledge and expertise, you can self direct your IRA into alternative investments which you understand better - such as real estate or limited partnerships - helping to better prepare for your future and your family's future.

What is meant by a passive custodian?
A passive custodian is one that does not offer investment, legal or tax advice. When utilizing a passive custodian, you will never have to worry about conflicts of interest with respect to a custodian. However you will still need to be aware of, and avoid conflicts of interest that could arise relative to third party individuals and entities (especially family members) regarding the investment decisions of the IRA. This type of passive trustee arrangement allows you the ability to use your knowledge and expertise to prepare for your retirement.

Who can establish an IRA?
Every individual that has a Social Security number and compensation can establish an IRA. The main requirements for establishing an IRA are that it: (i) must be for the exclusive benefit of the participant or a beneficiary; (ii) the IRA trust must have a U.S. situs; and (iii) the IRA must be encapsulated in a written document. If these conditions are satisfied, the IRA owner can make annual contributions of his or her compensation into the IRA within certain income limitations.

What is the difference between tax-deferred and tax-free?
A "tax-deferred" account is one that is funded with pre-tax dollars, which means, in most cases, that you get a deduction for your contributions. When distributions are taken from the account, those funds are taxed. Traditional, SEP, SIMPLE and Individual(k) Plans are referred to as "tax-deferred" accounts.
By contrast, a "tax-free" account is one that is funded with after-tax dollars, which means that you do not receive a deduction for contributions. When distributions are taken, there are no taxes incurred in a tax-free account. The Roth IRA and the Coverdell Education plan are referred to as "tax-free" accounts.

How is compensation defined?
Compensation is defined as the wages, salaries, commissions, bonus, alimony and any other amount that you receive for providing personal services. For individuals who are self-employed, sole proprietors and partners in a partnership, "earned income" is another term for compensation. Passive income such as interest, dividends and most rental income are not considered compensation for the purpose of funding an IRA. For more information, please see IRS Publication 590.

How much can I contribute per year to a self-directed IRA?
Contribution amounts vary with different self-directed IRA plans.

Can I contribute more than $5,000 to a self-directed IRA?
For the 2008 tax year, the maximum contribution amount to a Traditional or Roth IRA is $5,000 (plus an additional $1,000 "catch-up" contribution for those 50 years of age or older, which will be indexed for inflation and increase in $500 increments.

When I convert funds from a Traditional IRA to a Roth IRA, is this a taxable event?
Yes. The amount you convert in any given year is added to your adjusted gross income for tax purposes.

Is there a minimum or maximum that I have to convert in a given year?
No. The amount you convert is completely up to you.

Is there an establishment deadline for converting a self-directed Traditional IRA to a self-directed Roth IRA?
Yes. If you convert to a Roth IRA through either a trustee-to-trustee transfer or by re-designating funds held by a trustee to a Roth IRA, you will need to do so by December 31st of that calendar year. If, however, you elect to convert to a Roth IRA by distributing assets from your Traditional IRA and then personally transferring them to a Roth IRA, you will need to distribute such assets by December 31st of that calendar year and you will then have 60 days after such assets are distributed to deposit them into a Roth IRA.

Are there income limits for conversion of funds from a Traditional IRA to a Roth IRA?
Yes. You may convert all or part of your IRA assets into a Roth IRA, provided that your modified adjusted gross income (MAGI) for the transfer year is less than $110,000. This $110,000 limit with respect to Roth IRA conversions applies to both individuals and married couple filing jointly. If, however, you are a married couple filing separately, you are not permitted to convert your traditional IRA to a Roth IRA, regardless of your MAGI.

What is meant by a spousal IRA?
A spousal IRA is any type of IRA that is set up for the benefit of a non-working spouse. In order to make contributions to a spousal IRA you must file a joint return with your spouse. Your spouse need not have compensation or earned income in order to have contributions made to a spousal IRA. The amount that may be contributed is further limited by the amount of compensation includible in income of both you and your spouse after subtracting any deductible and nondeductible IRA contributions or Roth IRA contributions made for such taxable year.

What is meant by an inherited IRA?
When an account is established, the individual opening it designates a beneficiary or beneficiaries. When the individual passes away, his or her account reverts to the named beneficiary (ies) and is termed an inherited IRA.

Can I have a Traditional/Roth IRA in addition to my other retirement plans such as a 401(k), 403(b), SEP, SIMPLE or Individual(k) plan?
The amount of IRA contribution for which a deduction is allowable will depend upon whether the IRA owner is an active participant in a qualified plan, a 403(a) or (b) annuity, a SEP, a SIMPLE IRA or a governmental plan and, if so, the individual's adjusted gross income.

Can I self-direct in various IRAs such as Roth, SEP, SIMPLE, Individual(k), etc?
Yes. All IRAs have the same investment rules.

Can I transfer funds from a previously established IRA to a self- directed IRA?
Yes.

Is there a limit on how much or how little I may transfer to my self- directed IRA?
No. The amount you transfer/rollover is completely up to you.

Are there penalties for early withdrawals from retirement plans?
Yes. There is a ten percent (10%) penalty for withdrawals made prior to an account owner reaching the age of 59 1/2.

Are there exceptions for early withdrawals that do not incur the pre-59 1/2 penalty?
Yes. These exemptions include death, disability, education, un-reimbursed medical expenses that exceed 7.5% of your adjusted gross income, medical insurance premiums, expenses associated with buying or building your first home, and payment of an IRS levy.

What are Required Minimum Distributions (RMDs)?
To prevent individuals from totally deferring benefits under Traditional, SEP, SIMPLE and Individual (k) plans, RMDs are specially calculated amounts that must begin to be distributed from such arrangements by April 1 of the year following the year in which the individual over attains age 70 1/2.

How do I calculate my RMD?
RMD is computed on either your life expectancy or a combined life expectancy with your spouse. For further information, please refer to IRS Publication 590 and consult a certified tax advisor.

When do I have to start taking my RMD?
You must start to take RMDs no later than April 1 of the year in which you turn 70 1/2.

Do RMDs have to be taken out of one account or can they be taken out of several accounts?
RMDs are calculated for each account.  The sum of these amounts is the required minimum distribution. Funds can be taken from one account or any combination of accounts.