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.
- Custodian’s Responsibilities
- Who is a “Disqualified Person”?
- What are “Prohibited Transactions”?
- What exactly is an “Alternative Investment”?
- What happens after the investment is made?
- How do I find an alternative investment?
- What are M2 Trust’s fees?
- How long does it take to setup an M2 Trust self-directed IRA?
- Is an administrator a custodian?
- Why do I need a custodian?
- Can I make an annual contribution to my self-directed IRA in addition to other IRAs I may have?
- How do I rollover funds from an old 401(k)?
- How do I move funds from an existing IRA?
- Are there any investment restrictions?
- Why doesn’t my financial adviser know about self-directed IRA investing in Alternatives?
Custodian’s Responsibilities
M2 Trust Services LLC is a passive custodian for investor-directed individual retirement accounts. M2 Trust specializes in the custody and administration of non-publicly traded, Alternative Investments. As a passive custodian M2 Trust does give tax, legal or investment advice and does not sell, endorse or promote any investment strategy or product.
M2 Trust’s duties as a passive custodian for self-directed investors include the following:
- Processes applications to establish IRAs
- Maintains IRA agreements and forms subject to the Rules and Regulations of the IRS
- Implements and follows an Anti-Money Laundering (AML) program
- Implements policies and procedures to comply with the Bank Secrecy Act (BSA), US Patriot Act, FinCEN, OFAC and ATF laws and regulations
- Implements technology and procedures to protect the privacy of IRA account owner data
- Executes account owner’s Investment Directives by sending funds from the IRA to client-chosen investments
- Gathers, executes and custodies investment documentation, inExcluding subscription agreements, purchase agreements, promissory notes, precious metals dealer invoices and other evidences of ownership
- Receives and records income from the assets held in the IRA
- Process asset expense payments as directed by the IRA owner
- Executes account owner’s Investment Directives to liquidate investments and receives and deposits proceeds from the sale in to the IRA account
- Processes distribution requests
- Processes account or asset transfers as directed by the IRA account owner
- Issues Tax Forms 1099-R and 5498 as required by the IRS
- May assist with filing Tax Form 990-T
- Provides quarterly and annual account statements to the IRA account owner and the IRS, as required by law
- Complies with all State and Federal Regulations governing IRA custodians
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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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What are M2 Trust’s fees?
There is no charge to establish a self-directed IRA account with M2 Trust Services when using the online account-opening feature. The fee for opening an account by completing, signing and sending a paper-based application is $50.
M2 Trust’s annual account and asset administration fees vary based on the number and types of assets and not on total account value, giving you the ability to retain more money in your IRA as your account value grows.
You may want to review our fee schedule found under the Forms tab on our website prior to establishing an account.
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How long does it take to setup an M2 Trust self-directed IRA?
An account can be opened within one day by using our online account-opening feature.Accounts opened via paper application can take 2 to 3 business days to open after receipt of completed and signed paperwork.
Please note: Even though account opening can be a relatively fast process, it is important to understand and take into consideration that funding the account via a custodian to custodian transfer or 401(k) rollover can take from several days to weeks to accomplish. Once the transfer paperwork leaves the M2 Trust office we are totally dependent on the processing timeframes of the releasing custodian.
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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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Can I make an annual contribution to my self-directed IRA in addition to other IRAs I may have?
Yes, you may be able to make a contribution, however, the contribution limits are per individual and not per account.
Making a contribution is the quickest method for initial funding your M2 Trust self-directed IRA account but remember that there limits to how much you can contribute on an annual basis.
Current contribution limits for Traditional and Roth IRAs are $5,500. If you’re over the age of 50 you can contribute an additional $1,000 per year.
IRA contributions can be made via ACH from your personal bank account or by check. Please note that M2 Trust’s check clearing period is 3 business days for personal checks.
Please consult with IRS Publication 590-A for current contribution limits, limitations on deductibility for Traditional and your ability to contribute to a Roth IRA.
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How do I rollover funds from an old 401(k)?
You may request a rollover of an old 401k from a former employer. Contact the 401(k) plan administrator (contact info can be found on your statement) to determine their rollover process and request that the funds be rolled over to your new self-directed IRA account with M2 Trust Services. If the administrator indicates that they will be sending a check, the check should be made payable to M2 Trust Service Company LLC.
It could take from 1 to 2 weeks to complete account funding via a 401(k) rollover and again is dependent on the plan administrator’s process.
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How do I move funds from an existing IRA?
To initiate a “custodian to custodian” transfer, you must complete, sign and send a “Transfer Authorization” form to M2 Trust for processing. This form can be found under the Forms section of our websiste.
Unfortunately some custodians still require a signed hard copy of the transfer request and therefore the reason for mailing the form to our office for processing. We request that you include a copy of a recent statement from your current custodian so that we may verify the account registration.
Please note: This process can take up to 2 weeks to complete taking into consideration liquidation timeframes (2 to 3 days for mutual fund and stock sales) and the process designated for receiving funds (wire or check). Requesting a wire transfer is the most efficient method of account funding via transfers but may incur a fee.
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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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