1. IRA Rules & IRS Publication 590

It is very important to understand the rules and regulations of IRA accounts. One benefit of this understanding could be to possibly reduce taxable events you could face regarding your IRA account, caused by not following the rules properly. We will intentionally limit the scope of this section to specific areas we believe to be most beneficial to your understanding of Self-Directed IRA accounts. This section in no way tries to provide you with a complete education on the rules and regulations of IRA accounts, but instead attempts to provide you some basic information to help you start to form frameworks and reference points in your ultimate understanding of your IRA. The following sections contain information from IRS Publication 590 that has been summarized by Jason Helquist, MA, LL.M, and Chief Compliance Officer of the Provident Group, a Self-Directed IRA Custodian located in Las Vegas, Nevada.

Note: it is of utmost importance for you to seek and receive advice from qualified tax, legal, and financial advisors regarding any questions you have, or actions you plan to take, regarding your Self-Directed IRA.

Topics addressed by this publication include:

• What Acts Result in Penalties or Additional Taxes?

• Early Distribution

• Additional 10% Tax

IRA Rules & IRS Publication 590

It is very important to understand the rules and regulations of IRA accounts. One benefit of this understanding could be to possibly reduce taxable events you could face regarding your IRA account, caused by not following the rules properly. We will intentionally limit the scope of this section to specific areas we believe to be most beneficial to your understanding of Self-Directed IRA accounts. This section in no way tries to provide you with a complete education on the rules and regulations of IRA accounts, but instead attempts to provide you some basic information to help you start to form frameworks and reference points in your ultimate understanding of your IRA. The following sections contain information from IRS Publication 590 that has been summarized by Jason Helquist, MA, LL.M, and Chief Compliance Officer of the Provident Group, a Self-Directed IRA Custodian located in Las Vegas, Nevada.

Note: it is of utmost importance for you to seek and receive advice from qualified tax, legal, and financial advisors regarding any questions you have, or actions you plan to take, regarding your Self-Directed IRA.

Topics addressed by this publication include:

• What Acts Result in Penalties or Additional Taxes?

• Early Distribution

• Additional 10% Tax

What Acts Result in Penalties or Additional Taxes?

The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities.

• Investing in collectibles
• Making excess contributions
• Taking early distributions
• Allowing excess amounts to accumulate (failing to take required distributions)

There are penalties for overstating the amount of nondeductible contributions and for failure to file Form 8606, if required. This section discusses those acts that you should avoid and the additional taxes and other costs, including loss of IRA status, that apply if you do not avoid those acts. This section is stating that to avoid additional income taxes or penalties, you should avoid prohibited transactions, investing in collectibles, making excess contributions, taking early distributions, and allowing excess amounts to accumulate.

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are examples of prohibited transactions with a traditional IRA:

• Borrowing money from it
• Selling property to it
• Receiving unreasonable compensation for managing it
• Using it as security for a loan
• Buying property for personal use (present or future) with IRA funds

Fiduciary. For these purposes, a fiduciary includes anyone who exercises any discretionary authority or control in managing your IRA or exercises any authority or control in managing or disposing of its assets; Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so; or has any discretionary authority or responsibility in administering your IRA.

Effect on an IRA account. Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year.

Effect on You or Your Beneficiary. If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. The distribution may be subject to additional taxes or penalties.

Borrowing on an Annuity Contract. If you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early distributions, discussed later.

Pledging an Account as Security. If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions, discussed later.

Taxes on Prohibited Transactions. If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected.

Loss of IRA status. If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary are not liable for these excise taxes. However, you or your beneficiary may have to pay other taxes as discussed under "Effect on You or Your Beneficiary" earlier.

Investment in Collectibles. If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later. Collectibles include: Artworks, Rugs, Antiques, Metals, Gems, Stamps, Coins, Alcoholic Beverages and certain other tangible personal property.

Exception: Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.

Excess Contributions. Contributions for the year you reach age 70½ and any later year are also excess contributions. An excess contribution could be the result of your contribution, your spouse's contribution, your employer's contribution, or an improper rollover contribution. If your employer makes contributions on your behalf to a SEP IRA, see Publication 560.

Tax on Excess Contributions. In general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year. The additional tax is figured on Form 5329.

Hypothetical Example. For 2008, Paul Jones is 45 years old and single, his compensation is $31,000, and he contributed $5,500 to his traditional IRA. Paul has made an excess contribution to his IRA of $500 ($5,500 minus the $5,000 limit). The contribution earned $5 interest in 2008 and $6 interest in 2009 before the due date of the return, including extensions. He does not withdraw the $500 or the interest it earned by the due date of his return, including extensions. Paul figures his additional tax for 2008 by multiplying the excess contribution ($500) shown on Form 5329, line 16, by .06, giving him an additional tax liability of $30.

Excess Contributions Withdrawn by Due Date of Return. You will not have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.

Early Distributions

You must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax, as discussed later. Early distributions generally are amounts distributed from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age 59½.

Age 59½ Rule. Generally, if you are under age 59½, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59½ are called early distributions. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.

• Generally, if you are under age 59½, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59½ are called early distributions.
• The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.

You may have to pay a 25%, rather than a 10%, additional tax if you receive distributions from a SIMPLE IRA before you are age 59½. After you reach age 59½, you can receive distributions without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 59½, distributions are not required until you reach age 70½.

Exceptions - There are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations:

• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
• The distributions are not more than the cost of your medical insurance.
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You are receiving distributions in the form of an annuity.
• The distributions are not more than your qualified higher education expenses.
• You use the distributions to buy, build, or rebuild a first home.
• The distribution is due to an IRS levy of the qualified plan.
• The distribution is a qualified reservist distribution.

Distributions that are timely and properly rolled over, are not subject to either regular income tax or the 10% additional tax.

Unreimbursed Medical Expenses. Even if you are under age 59½, you do not have to pay the 10% additional tax on distributions that are not more than the amount you paid for unreimbursed medical expenses during the year of the distribution, minus 7.5% of your adjusted gross income for the year of the distribution. Adjusted gross income is the amount on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 36. You can only take into account unreimbursed medical expenses that you would be able to include in figuring a deduction for medical expenses on Schedule A, Form 1040. You do not have to itemize your deductions to take advantage of this exception to the 10% additional tax.

Medical Insurance. Even if you are under age 59½, you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply:

• You lost your job.
• You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.
• You receive the distributions during either the year you received the unemployment compensation or the following year.
• You receive the distributions no later than 60 days after you have been re-employed.

Disabled. If you become disabled before you reach age 59½, any distributions from your traditional IRA because of your disability are not subject to the 10% additional tax. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.

Beneficiary. If you die before reaching age 59½, the assets in your traditional IRA can be distributed to your beneficiary or to your estate without either having to pay the 10% additional tax. However, if you inherit a traditional IRA from your deceased spouse and elect to treat it as your own, any distribution you later receive before you reach age 59½ may be subject to the 10% additional tax.

Annuity. You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59½. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The “required minimum distribution method,” when used for this purpose, results in the exact amount required to be distributed, not the minimum amount.

There are two other IRS-approved distribution methods that you can use. They are generally referred to as the “fixed amortization method” and the “fixed annuitization method.” These two methods are not discussed in this publication because they are more complex and generally require professional assistance.

For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at www.irs.gov/pub/irs-irbs/irb02-42.pdf.

Recapture tax for changes in distribution method under equal payment exception. You may have to pay an early distribution recapture tax if, before you reach age 59½, the distribution method under the equal periodic payment exception changes (for reasons other than your death or disability). The tax applies if the method changes from the method requiring equal payments to a method that would not have qualified for the exception to the tax. The recapture tax applies to the first tax year to which the change applies. The amount of tax is the amount that would have been imposed had the exception not applied, plus interest for the deferral period. You may have to pay the recapture tax if you do not receive the payments for at least 5 years under a method that qualifies for the exception. You may have to pay it even if you modify your method of distribution after you reach age 59½. In that case, the tax applies only to payments distributed before you reach age 59½.

One-time switch. If you are receiving a series of substantially equal periodic payments, you can make a one-time switch to the required minimum distribution method at any time without incurring the additional tax. Once a change is made, you must follow the required minimum distribution method in all subsequent years.

Higher Education Expenses. Even if you are under age 59½, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax is generally the amount that is not more than the qualified higher education expenses (defined later) for the year for education furnished at an eligible educational institution (defined later). The education must be for you, your spouse, or the children or grandchildren of you or your spouse. When determining the amount of the distribution that is not subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds:

• Payment for services, such as wages
• A loan
• A gift
• An inheritance given to either the student or the individual making the withdrawal
• A withdrawal from personal savings (including savings from a qualified tuition program)

Do not include expenses paid with any of the following funds:

• Tax-free distributions from a Coverdell education savings account
• Tax-free part of scholarships and fellowships
• Pell grants
• Employer-provided educational assistance
• Veterans' educational assistance
• Any other tax-free payment (other than a gift or inheritance) received as educational assistance

Qualified higher education expenses. Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.

Eligible educational institution. This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

First home. Even if you are under age 59½, you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.

1. It must be used to pay qualified acquisition costs before the close of the 120th day after the day you received it. Qualified acquisition costs include the costs of buying, building, or rebuilding a home, as well as any usual or reasonable settlement, financing, or other closing costs.
2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer who is any of the following:
    a. Yourself.
    b. Your spouse.
    c. Your / your spouse's child.
    d. Your / your spouse's grandchild.
    e. Your / your spouse's parent or other ancestor.
3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000. If both you and your spouse are first-time homebuyers, each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax. Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.

Additional 10% Tax

The additional tax on early distributions is 10% of the amount of the early distribution that you must include in your gross income. This tax is in addition to any regular income tax resulting from including the distribution in income. Early distributions of funds from a SIMPLE retirement account made within 2 years of beginning participation in the SIMPLE are subject to a 25%, rather than a 10%, early distributions tax.

Hypothetical Example: Tom Jones, who is 35 years old, receives a $3,000 distribution from his traditional IRA account. Tom does not meet any of the exceptions to the 10% additional tax, so the $3,000 is an early distribution. Tom never made any nondeductible contributions to his IRA. He must include the $3,000 in his gross income for the year of the distribution and pay income tax on it. Tom must also pay an additional tax of $300 (10% × $3,000).

Nondeductible contributions. The tax on early distributions does not apply to the part of a distribution that represents a return of your nondeductible contributions (basis).

Excess Accumulations (Insufficient Distributions). You cannot keep amounts in your traditional IRA indefinitely. Generally, you must begin receiving distributions by April 1 of the year following the year in which you reach age 70½. The required minimum distribution for any year after the year in which you reach age 70½ must be made by December 31 of that later year. If distributions are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required.

Temporary waiver for 2009. No minimum distribution is required from your IRA for 2009.

Note: If you rolled over part or all of a distribution from a qualified retirement plan, the part rolled over is not subject to the tax on early distributions.

 

1. Introduction to IRAs
2. IRA Market Growth
3. Why Rollovers?
4. Self-Directed IRAs
5. Confusion - IRA Value
6. IRA Options
7. Efficient Alternative
8. Trustee Requirement
9. Possible Problems
10. SD IRA Alternative
11. Increasing Popularity
12. SD IRA Guidelines
13. Practices to Avoid
14. SD IRA Process
15. Why Consider
16. Your SD IRA Team
17. IRA Rules, Restrictions
18. IRS Rules and Restrictions
19. 1. ​Invest in Trust Deed with High Yeilds

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   1. UBTI
   2. Frequent Questions
   3. Disclosure

    

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