Here is a partial list of self-directed IRA frequently asked questions — and answers.  We’ll be updating this list on a frequent basis so bookmark this page and check back often.

Who is a “Disqualified Person”?

A Disqualified Person is any of the following:

  • The IRA account owner.
  • Anyone providing fiduciary services to the plan (IRA).
  • A member of the IRA account owner’s family including spouse, parents, lineal descendant and any spouse of any lineal descendant (children and their spouses).
  • Any person or entity providing services to the IRA (a custodian).
  • An owner, direct or indirect, with 50 percent or more ownership in the entity. This could include a combination of disqualified persons with combined interests of 50 percent or more.
  • An officer, director, a 10 percent or more shareholder or highly compensated employee.

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What are “Prohibited Transactions”?

Self-directed investors should be aware of, and avoid any, Prohibited Transaction between the IRA and a Disqualified Person.

The following is a summary of what is contained in Section 4975 of the Internal Revenue Code that describes Prohibited Transactions, and tax implications, in detail.

PT:  Lending money or engaging in some other extension of credit between an IRA and a Disqualified Person.

Example: You, the IRA account owner, cannot lend money from your IRA to yourself, your spouse or other disqualified person.  

PT:  Furnishing goods, services or facilities, directly or indirectly, between an IRA and a disqualified person.

Example: you cannot personally make an improvement to a rental property held by your IRA.

PT:  Using the income or assets of your retirement account to benefit a disqualified person.

Example: You may not stay in a vacation property that is owned by your IRA.

PT:  When a disqualified person, who is a fiduciary on the retirement account, uses the income or assets of his IRA in his own interest and for his own account.

Example: you cannot pay yourself income from profits generated from the rental property held by your IRA.

PT:  Receiving any consideration by a disqualified person, who is a fiduciary for his account, from any party dealing with the IRA in connection with a transaction involving the income or assets of the plan.

Example:  if the owner of the IRA is a real estate agent, IRA funds can be used to buy real estate however no commission can be paid to the IRA account owner/agent from the sale.

 

 


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What exactly is an “Alternative Investment”?

Alternative Investments are not publicly traded investments meaning there is no exchange to facilitate the buying and selling of these types of assets.

Alternative Investments include a wide variety of real estate, secured or unsecured promissory notes, certain precious metals, investments in privately held companies, hedge funds, offshore funds, private equity funds, private real estate trusts and offerings available from online marketplace platforms.


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What happens after the investment is made?

Any income or expenses related to the IRA investment must flow through the IRA.

For real estate this includes rental income or real estate tax payments. Rent checks should be made payable to M2 Trust Services Custodian FBO (your name) (IRA account number); real estate property tax bills should be submitted to the custodian for payment from IRA.

For deeds of trust or promissory notes, principal and interest payments should be made directly to M2 Trust Services LLC.  The same process should be followed for any type of income generated from passive investments in privately held companies.


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How do I find an alternative investment?

Since you are self-directing your IRA investments, you, the account owner, are totally responsible for selecting and performing due diligence on the targeted investment.

As a “directed custodian” M2 Trust Services does not perform any due diligence on any investment, recommend or endorse any type of investment, nor does it provide any tax, legal or advisory services.  We simply assist, at your direction, in completing the investment transaction.  Our role is to custody and administer the assets held in your self-directed IRA and provide annual reporting to you and the IRAs as required.

M2 Trust Services has instruction sheets and documentation requirements to help you understand our requirements and processing timeframe for various types of alternative investments.

Some important points to remember:

  • The investment will be made in the name of the custodian for the benefit of your IRA. Where you would normally enter your name as the purchaser or investor you should enter the following:

M2 Trust Services Company, Custodian FBO (your name) IRA Account Number

All investment paperwork should be signed by the account owner as “read and approved” and sent directly to M2 Trust Services for processing. M2 Trust Services will execute the documents on behalf of your IRA.

 


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Is an administrator a custodian?

A custodian may only be a bank, federal credit union or an entity approved to act as a custodian.

Administrators cannot act as a custodian if they are not one of the abov, and therefore must use a third-party custodian for the custody of the alternative assets held in the IRA.

A self-directed IRA administrator should disclose who is acting as a custodian for the assets of the self-directed IRA.


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Why do I need a custodian?

The Internal Revenue Code, Section 408, requires that an IRA must have a custodian to hold the assets of the plan and provide annual reports to the account owner and the IRS.  A custodian may be a bank, federal credit union or entity approved to act as a custodian by the IRS.  Most brokerage companies fall under this last category of IRS-approved custodians.

M2 Trust Services LLC is a trust company chartered by the State of Colorado subject to regulatory oversight by the Colorado Banking Commission.


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Are there any investment restrictions?

IRAs are not permitted to invest in life insurance and collectibles.

In addition, due to the nature of its structure, a sub-chapter S corporation will not permit an IRA investor.


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Why doesn’t my financial adviser know about self-directed IRA investing in Alternatives?

All IRAs — Traditional, Roth, SEP and Simple – are permitted to hold a wide variety of investments beyond stocks, bonds, mutual funds and ETFs.

Your financial adviser’s firm may limit investment choices or its compliance department may not accept non-traditional assets such as direct real estate investments and promissory notes and deeds of trust.  In other cases, it may simply be due to a lack of knowledge on the part of your adviser.  In that case, you may consider directing your adviser to M2 Trust’s website or having your adviser contact one of our representatives to learn more.

M2 Trust Services specializes in the custody and administration of Alternative Investments held in Self-directed Traditional, Roth, SEP and Simple IRAs.


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M2 Trust Services LLC does not offer tax, legal or investment advice nor does it evaluate, endorse, promote or sell any investment sponsor or investment product.  Alternative investments are not FDIC insured and are subject to higher risk.