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Step Five: Manage Your Investment
Once your IRA owns the investment, all expenses related to the investment are paid from the IRA and all profits from the investment return, tax-advantaged, to the IRA.
Let’s use a real estate example to explain the concept further: If you need to replace a leaky faucet, your IRA must pay for the faucet and the cost of installation. Additionally, any taxes or insurance related to the property must be paid from your account. On the income side, rent checks or other income you may receive from the property are deposited back into your IRA without being taxed.
IRS rules state that you and the investment must remain at arm’s length. For example, you cannot personally use a property that your IRA owns, lend yourself money from your IRA, or pay yourself (or a company you own) to do work on an investment owned by your IRA. In addition, the same rules apply for anyone of lineal descent/ascent or considered by the IRS to be a disqualified individual. (For more information, download our Self-Directed IRA Rules & Regulations report on the Resources page or reference IRS Publication 590.)
The Role of the Investor and the Role of the Custodian
All investment decisions and direction are the responsibility of the investor/owner of a self-directed IRA, such as requesting additional funds to improve or maintain the investment and when/how to collect payments, sell, upgrade, or repair your asset.
As a passive custodian, Equity Trust will process your investment based on your instructions and can assist with procedural and administrative needs. However, Equity Trust cannot offer advice on which investments the investor should choose or how to manage those investments.
Think of self-directed IRA investing as a partnership that forms a three-legged stool. The first leg is you, the investor, who works with your support team to identify goals for your account and the investments that will be pursued.
The second leg is your tax, legal, and/or financial advisors. They offer valuable advice on how your investments factor into your overall portfolio and how to manage the account in a way that follows all of the IRS rules.
The third leg is the custodian of your account. They provide the administrative support needed for the account. This includes storing documents provided by the investor, processing investment funds according to the investor’s instructions, accepting deposits, etc.
Each leg is essential in order for the stool to stand and for an IRA transaction to be completed.