Self-Directed IRAs for Medical Professionals

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Eschewing Limited Investment Choices

[By Rick Kahler CFP® MS ChFC CCIM]

Most people, and medical professionals, with Individual Retirement Accounts [IRAs] open them with a bank or brokerage firm (the custodian) that limits what investments can go into the account. These custodians typically limit your investments to stocks, bonds and mutual funds with firms where they have distribution agreements.

The Self-Directed IRA

A little-known option that allows owners of an IRA to have unlimited control of the investments they can hold is the self-directed IRA. Assets permitted in self-directed IRAs include real estate, promissory notes, mortgages, tax lien certificates, US gold coins, and private placement securities.

For example, I have clients who use self-directed IRAs to hold promissory notes, mortgages, and contracts for deed. The IRA acts like a bank by making a loan (secured by real estate) to a non-related party. They can often earn 5% to 10% returns. Of course, there is also a significant risk of having to foreclose on the loan and losing a portion of the investment.

But, before you jump into a self-directed IRA, you need to do some homework. When you make an investment in a self-directed account, you are on your own. The custodian does little more than be sure your documents are in order. It’s up to you to do your own due diligence on the merits of the investment.

Beware the Unscrupulous Promoters

Self-directed IRAs are proving to be such a magnet for unscrupulous promoters of dubious investment schemes that the SEC has issued an investor alert warning owners against fraudulent promoters. The best advice is the old axiom, “if it sounds too good to be true, it probably is.”

Tips and Pearls

That said; Ed Slot, publisher of the IRA Advisor, has some tips for self-directed IRA owners:

  • Be sure the investment is allowed in an IRA. Life insurance, collectables, numismatic coins, and S-corporation stock are not allowed.
  • Don’t partner with or purchase anything from a “disqualified person,”—a spouse, child, grandchild, or someone acting in a fiduciary role for the IRA.
  • If you sell real estate held in a traditional IRA, gains will be taxed at ordinary income rates when the proceeds come out of the IRA instead of as long-term capital gains. Gains on real estate held in Roth IRAs, however, come out tax-free.
  • Don’t think putting your business into an IRA could allow profits to grow tax-free. The Unrelated Business Income Tax is levied on a business owned by a tax-exempt entity like an IRA.
  • The IRS prohibits a “disqualified person” from running or occupying any business or investment owned by your IRA. You or your extended family cannot farm land owned by your IRA. You cannot occupy, even for a day, a property owned by your IRA. Doing so nullifies your IRA and makes it completely taxable.
  • Investment real estate in an IRA might be best owned free and clear of any financing. The Unrelated Debt-Financed Income tax applies to mortgage loans. Also, personally guaranteeing a loan is a prohibited transaction that nullifies your IRA.
  • You must value the assets of the IRA annually. This is a no-brainer for stocks, bonds, and mutual funds, but for real estate it may mean paying for costly annual appraisals.
  • Real estate owned in an IRA must generate enough cash flow to pay all its expenses. Writing a personal check for repairs or loaning money to the IRA are prohibited transactions that make the IRA fully taxable.
  • Holding illiquid investments in a self-directed IRA poses a problem when you reach 70½ and must begin taking distributions.


Self-directed IRAs can be a great tool to bolster retirement income, when used properly. Just be sure you consider all the pitfalls before taking the plunge.

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6 Responses

  1. Too much talk on accumulation when the 4% withdrawal rule is called into question

    Rick – For nearly 20 years, many financial advisers have operated under the notion that most retired clients can confidently spend a maximum of 4% of their nest egg — adjusted for inflation — each year without worrying about running out of money.

    Now, thanks to myriad factors that include the economic downturn and relentless stock market volatility, many are reconsidering whether the so-called 4% rule makes sense.



  2. Dodging The Income Limits on Roth Contributions
    [Strategy Or Abuse?]

    As a part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), income limits on Roth conversions were repealed, starting in 2010.

    However, while TIPRA removed income limits for Roth conversions, it did not eliminate the income limits for new Roth contributions.

    Ann Miller RN MHA


  3. Unforgettable Birthdays and Retirement

    Birthdays may seem less important as you grow older. They may not offer the impact of watershed moments, such as getting a driver’s license at 16 and voting at 18. But beginning at age 59, there are several key birthdays that can affect your tax situation, health-care eligibility, and retirement benefits.

    59½ — You can start taking penalty-free withdrawals from IRAs and qualified retirement plans, provided certain conditions are met. Ordinary income taxes generally apply to these distributions. (Withdrawals taken prior to age 59½ are subject to a 10% federal income tax penalty.)

    62 — You are eligible to start collecting Social Security benefits, although your benefit will be reduced by up to 30%. To receive full benefits, you must wait until “full retirement age,” which ranges from 65 to 67, depending on the year you were born.

    65 — You are eligible to enroll in Medicare. Medicare Part A Hospital Insurance benefits are automatic for those eligible for Social Security. Part B Medical Insurance ­ben­efits are voluntary and have a monthly premium. To obtain ­coverage at the ­earliest possible date, you should generally enroll about two to three months before turning 65.1

    70½ — You must start taking minimum distributions from most tax-deferred retirement plans or face a 50% penalty on the amount that should have been withdrawn. Annual required minimum distributions are calculated according to life expectancies determined by the federal government.



  4. Using the Five-Year Rule For Inherited IRAs

    IRA expert, Ed Slott, explains when and why it’s best to use the five-year rule for distributions from an inherited IRA.



  5. The self-directed IRA

    The laws governing self-directed IRA’s say that I must have a custodian or qualified trustee. These companies do not give investment advice, but rather have the specialized knowledge and experience in dealing with the paperwork and regulations necessary to carry out my investment decisions. While this list is by no means all-encompassing, nor is it intended as a recommendation, here are a few names of companies that I am aware of who act as IRA Custodians:

    * Equity Trust
    * Pensco
    * Provident Trust
    * IRA Services
    * Sunwest Trust

    I have never used Pensco, Provident Trust, or Sunwest Trust. I am currently with IRA Services and have been satisfied. I previously had money with Equity Trust and found their services lacking. Whether you decide to use one of these companies or find another one on your own, it is important to keep a few things in mind when looking for an IRA Custodian.

    * Time in Business (I prefer one with at least 15 years in business)

    * Assets Under Administration (I prefer a $1 billion minimum)

    * Good Service Record (no ERISA or BBB complaints and a good reputation)

    * Fee Structure (avoid Custodians that charge you based on a percentage of your assets under administrations.

    Instead go with a reasonable flat-fee structure with minimum transaction fees)

    Dennis Bethel MD
    [via Ann Miller RN MHA]


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