Why IRS Pub 590-A Does not List Self-Directed IRAs | Frank Selden Law

Why IRS Pub 590-A Does not List Self-Directed IRAs

Does the IRS recognize self-directed IRAs? According to IRS Pub 590-A, the different types of IRAs are:

  • Traditional IRAs (including annuity and bond IRAs)
  • ROTH
  • SEP
  • Employer and Employee Association Trust Accounts

But is this a good thing?

Self-Directed IRAs

The term self-directed IRA is essentially a marketing term. A major financial company advertises they offer a self-directed IRA. What may you choose as your investments? Anything that finance company sells. Real estate? No, they don’t sell or facilitate real estate transactions. Is this really a self-directed IRA? Sure, just ask them. Compared to what? That is a great question!

Some custodians advertise that their self-directed IRAs give you the freedom to invest into anything the tax code allows. How about LLCs for which I am the manager? No. Pointless to argue with them that their advertising would indicate a yes. If you want an IRA-LLC, or IRA-Trust, you need a custodian who allows it. Most do not. Self-directed IRA is simply a marketing term used by promoters and custodians to get you to open one of the types of IRAs mentioned above with their company. That’s it.

Why does IRS Pub 590-A not List Self-Directed IRAs? Because self-directed is not a type of IRA, it is a way of managing or investing whatever type of IRA you own, as defined by the custodian.

Is IRS attention a good thing?

I do not doubt that when NGTS CEO Jaime Raskulinecz mentioned the words quoted above, she uttered them with pride. I am complimenting her here, not criticizing. Pride is also a virtue. Her company has a unique and compelling story. NGTS is, obviously, not solely responsible for the shift from IRAs held at investment choice controlled financial institutions toward independent custodians that allow a broader range of investment choices. That shift has been so remarkable, though, that Raskulinecz is correct – the IRS noticed.

IRA custodians must file information about each IRA on their platform. That information is transmitted to the IRS on form 5498. In the past, that information just listed the total fair market value (FMV) of the IRA. IRAs are now under heightened scrutiny, thanks primarily to the self-directed IRA industry. Why? I believe because of the numbers of people who do not report FMV information accurately.

IRA Reporting Requirements

IRS Form 5498  includes two new boxes: 15a and 15b. You can scroll down on that link to read the IRS instructions. Box 15a Shows the FMV of the hard to value assets (HVAs), not just the total IRA as before. Box 15b lists different HVA categories, such as:

  • C — Ownership interest in a limited liability company or similar entity (unless the interest is traded on an established securities market).
  • D — Real estate.
  • E — Ownership interest in a partnership, trust, or similar entity (unless the interest is traded on an established securities market).

Should someone shy away from self-directed IRAs just because the IRS now has eyes on more information? No. However, it is more important for any SDIRA owner to get it right. That’s where I come in. Who are you going to call? For ghost problems, call Ghostbusters at 555-2368 (from the movie, might help you in an 80s trivia game!).  For self-directed IRAs, call 206.550.9777 or book your own phone consult here.

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