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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
A self-directed IRA can hold certain private or non-traded REIT investments when its custodian accepts them. It follows the same core retirement-account rules as other IRAs, while adding work around custody, valuation, fees, and liquidity. Listed REIT shares can often be held in an ordinary brokerage IRA without opening a specialist account.
I would start by asking why you want the REIT. Does it fill a useful role in your retirement plan? Do you understand its properties, debt, fees, and exit limits? Opening an account should follow those answers.
A self-directed IRA is an IRA with a custodian that permits a broader investment menu. The term does not create a new tax exemption or signal that an investment has passed a government review. The SEC, FINRA, and NASAA warn that alternative assets in these accounts can carry limited information, limited liquidity, and fraud risks. [1]
For example, you may want $60,000 of real estate exposure. That goal alone does not establish that you need a private REIT or a new custodian. First compare the investment choices. Then find out which account can hold the one that fits.
I also want to know whether this money is for spending soon or for a much later stage of retirement. A useful investment with the wrong holding period can still create problems. The account's tax treatment does not shorten that period.
Listed REITs trade on an exchange. Public non-traded REITs register public offerings but do not trade on a national exchange. Private REIT offerings use exemptions from registration. Access, disclosure, transfer rights, and selling costs can differ across these groups. [2]
Do not assume every unlisted REIT requires the same account. Ask your existing custodian whether it accepts the exact security and share class. Some firms support certain alternative investments while declining others.
Get the answer in writing using the issuer's full legal name. A custodian may accept one offering from a sponsor but not another. A similar name on an approved-asset list is not enough to authorize the purchase you have in mind. Keep that written response with the application, including its date and the name of the person who confirmed acceptance.
My comparison sheet would include the share class, minimum purchase, purchase price method, ongoing expenses, distribution choice, and transfer rules. If those items are unclear, moving money into a new IRA is premature. Resolve the investment facts first.
The custodian holds and administers the account. A self-directed custodian generally does not judge the quality of an investment or verify the sponsor's financial claims. Acceptance for custody is not investment approval. That distinction is central to the regulators' investor alert. [1]
The sponsor supplies the offering documents and shareholder records. Your investment professional helps evaluate the security and its fit. Your CPA handles tax questions. An attorney should address legal concerns such as related-party transactions or unusual ownership terms.
Write down who performs each task before you sign. “They handle it” is too vague when three firms are involved. One may prepare a form while another signs it and a third sends the funds.
I would ask each party for one contact who can resolve problems. If a transfer arrives without the correct account reference, who finds it? If the sponsor rejects the subscription, who returns the money? This is ordinary administration, but it protects your time and prevents avoidable mistakes.
Request the full fee schedule, not just the annual account fee. Ask about setup, each asset held, purchases, sales, wires, valuations, tax returns, distributions, and account closure. These are questions to ask; a particular custodian may not charge each fee.
Then build a small example using the written quote. Suppose a hypothetical account charges $300 per year, $150 for each alternative asset, and $50 for each transaction. Two assets and two transactions would cost $700 for that year: $300 plus $300 plus $100.
On a $50,000 balance, $700 equals 1.4%. On a $200,000 balance, it equals 0.35%. The dollars are the same, but their effect on the account differs. These figures are invented and do not describe a specific firm's prices.
Add investment-level expenses separately. A custodian's fee does not replace the REIT's management expenses or share-class charges. Keep the two layers visible so that a low account fee does not hide a costly investment.
Also compare the cost of leaving. Ask what it would take to transfer the holding to another custodian. A cheap entry price can be less useful if the exit requires paperwork, consent, and charges you did not expect.
A direct trustee-to-trustee transfer between traditional IRAs is different from receiving an IRA distribution and redepositing it. The direct transfer is not subject to the one-rollover-per-year limit. A rollover paid to you generally involves a 60-day rule and other restrictions. Confirm the correct method for your source account. [3]
Do not instruct your current firm to send money to your personal bank merely because the new application says “fund the account.” Let the receiving custodian explain the transfer process and coordinate with the sending firm.
Employer-plan money, inherited IRAs, SIMPLE IRAs, and Roth conversions can require different treatment. A direct movement of funds does not make every movement tax-free. In particular, moving pre-tax money into a Roth account can create taxable income.
Before submitting instructions, I would check the source account, destination account, owner name, tax type, amount, and whether investments must first be sold. Save both firms' confirmations. A completed account-opening form is not proof that the money arrived.
Leave time between transfer and investment deadlines. If the offering closes Friday, a transfer requested Thursday is not a plan. Ask about expected timing, but do not turn an estimate into a guarantee.
The investor on the subscription should match the ownership title approved by the custodian. It will identify the custodial relationship and the account's beneficial owner. Use the custodian's exact instructions rather than inventing a title from an online example.
The name on your personal checking account is not an acceptable substitute just because you direct the IRA. The money, security, and shareholder records need to point to the same legal owner.
Check where future distributions will go. Money intended to remain in the IRA should go to the account under its approved instructions. A payment sent directly to you raises a different question from a payment retained in the account.
I would have one person compare the subscription, transfer instructions, tax identification information, and acceptance notice. A second look is useful when a form has several account numbers or similar names. Small entry errors can take much longer to fix after closing.
Section 4975 restricts certain dealings between a retirement account and disqualified persons. The rules cover sales, loans, use of assets, and other forms of self-dealing. Relevant family relationships include a spouse, ancestors, descendants, and spouses of descendants; other rules cover fiduciaries and related entities. [4]
Do not treat the account as a source of personal credit. If a proposal involves your business, family, guarantee, compensation, or use of property, stop and obtain a legal review before acting. The analysis goes beyond whether the price looks fair.
For a plain share purchase from an unrelated REIT, the review may be straightforward. Adding a side arrangement can change it. A special promise to employ a relative or provide a personal benefit deserves attention even if it is not written into the share certificate.
If an owner or beneficiary engages in a prohibited transaction, the affected account can cease to be an IRA as of the start of that tax year. That is much broader than simply paying tax on one dividend. [5]
The IRS does not maintain a list of investments approved for your IRA. Tax rules restrict certain assets and transactions, while custodians can impose their own narrower investment policies. An asset can be permissible under tax law yet unavailable through a particular account provider. [6]
This gives you two questions, not one. Is the transaction permitted under the retirement rules? Will the custodian accept and administer this security? A positive answer to either does not establish the other.
For example, a custodian might decline an offering because it cannot obtain the needed ownership records. That does not necessarily mean the investment is illegal. It means this provider cannot support the proposed arrangement on the terms offered.
I would avoid forcing the transaction through by changing labels. Calling a partnership unit “REIT stock” on an account form does not change what it is. Clear descriptions make the review faster and preserve the record of what you actually bought.
Assume a hypothetical IRA has $400,000. You are considering $120,000 in an illiquid REIT and would leave $280,000 elsewhere in the account. Before investing, list likely withdrawals, account costs, tax needs, and any planned purchases from that remaining balance.
If expected annual withdrawals are $18,000 and annual costs are $1,000, the account needs $19,000 before any unexpected expense. A $20,000 cash position leaves only $1,000 beyond that plan. This is a cash test, not a recommended reserve or allocation.
Now assume the REIT's expected $6,000 distribution stops for a year. If you planned to use that payment to meet the $19,000 need, other assets must supply the gap. Model that possibility before treating the distribution as part of a dependable spending budget.
Public non-traded REIT redemption programs may limit, delay, or suspend repurchases. Private offerings may offer even less access. A published redemption schedule is not the same as a guaranteed sale when your account needs cash. [2]
Traditional IRA owners eventually face required minimum distributions, with timing based on the applicable rules and birth year. An owner generally calculates each IRA's requirement separately but may take the total from one or more of their IRAs. That flexibility does not broadly combine IRA requirements with those of employer plans. [7]
Have your preparer confirm which accounts can be grouped. An inherited IRA needs its own review. Do not assume that money withdrawn from any retirement account will satisfy the obligation for another.
For illustration, assume two eligible traditional IRAs have calculated requirements of $9,000 and $6,000. If the rules permit aggregation for those accounts, the combined $15,000 may be taken from the liquid account. That can help avoid a forced request to redeem the illiquid holding.
But flexibility is not unlimited capacity. If the liquid account has only $11,000 available, there is still a $4,000 gap. Review next year's likely needs too. Solving one December deadline should not create the same problem again a year later.
An in-kind distribution moves an investment out of the IRA rather than selling it for cash first. It may be possible, but the sponsor and custodian must be able to process the transfer. The value and tax treatment still matter.
IRS reporting instructions address distributions of assets without a readily available fair market value. They also require reporting of year-end values for certain hard-to-value IRA assets. Lack of an exchange quote does not remove the reporting duty. [8]
Suppose you need to distribute $12,000 of value. A holding's transfer rules allow only whole units, and each unit is valued at $5,000. That can make an exact $12,000 transfer impractical. The real documents, valuation method, and other available assets determine the next step.
Ask whether consent is required, how long transfers take, and whether the receiving personal account can hold the security. Do this while there is time to choose another method. An in-kind option is useful only if it can actually be completed.
For an unlisted holding, ask who supplies the value, what date it represents, and how it was calculated. A statement that repeats your original purchase price may not answer today's valuation question.
Consider 10,000 shares bought at $10 each. A later estimated value of $8.80 would put the holding at $88,000, a $12,000 decrease. If the statement still shows $100,000, find out whether the new value has reached the custodian. Do not simply choose the more comfortable number.
Keep the sponsor's valuation notice, account statements, and any corrections together. If a value is being used for a distribution or conversion, ask whether a different date or method is required. A year-end estimate is not automatically the right value for every transaction.
For planning, I would also label uncertain values. A number can be reasonable for reporting yet still differ from what a willing buyer would pay. That distinction belongs in the household's liquidity plan.
Ordinary REIT dividends generally fall within the passive-income exclusion from unrelated business taxable income. Account borrowing, partnership interests, or special income can require a different analysis. Ask for the treatment of this security rather than assuming all real estate investments work alike. [9]
Traditional IRA withdrawals are generally taxable to the extent they do not recover after-tax basis. Qualified Roth distributions can be tax-free. Rules for early withdrawals and inherited accounts still apply. The tax result belongs to the account and transaction, not the word “REIT.” [10]
Keep the account decision separate from a promise of better returns. Tax deferral may be useful, but fees, losses, or a poor purchase price can outweigh it. I would rather compare complete dollar outcomes than treat a tax label as the investment case.
After closing, confirm that the shares appear under the correct account title. Reconcile the cash sent, shares received, and fees charged. Then confirm the distribution election and the method for receiving notices.
Create a short annual review with four columns: investment results, account costs, cash needs, and unfinished administrative work. This separates a weak investment result from an account error. Both need attention, but they need different solutions.
For example, a missing $500 distribution may reflect an incorrect payment instruction rather than a dividend cut. A lower share value may reflect a real property problem rather than a bookkeeping error. Ask for the evidence before deciding which explanation fits.
Review the beneficiary designation too. Make sure the people who may inherit the account know where its records are kept. They do not need every quarterly report now, but they should be able to locate the custodian, sponsor, and adviser later.
Ask how you would move the asset if you changed custodians. A transfer of custody is different from a sale of the investment. The first changes the firm holding the account. The second changes what the account owns and may require a buyer or an issuer repurchase.
A new custodian must accept the asset before you can rely on that option. It may need the current offering documents, a transfer form, and an updated value. The sponsor may need to update its owner records as well.
Here is a simple planning exercise. You want to move two holdings and $8,000 in cash. One holding is accepted by the new firm. The other is still under review. Ask whether a partial transfer is possible and what fees would remain at the old firm. Do not assume the whole account can close at once.
If the first transfer costs $150 and keeping the old account open costs another $300 for a year, your plan has $450 of added costs before any fee for the second holding. These are hypothetical charges. Use actual written quotes for a real decision.
Also ask how notices and distributions will be handled while the transfer is pending. You want to avoid money going to an account that has already been closed. Keep enough detail to trace a payment without relying on memory.
Finally, name a reason for making the move. Lower cost, better service, or simpler records may be useful goals. Moving solely because a salesperson prefers a different provider deserves more questions. The process should serve the account owner, and its benefits should be clear enough to explain in a few sentences.
Usually not. An ordinary brokerage IRA often supports listed REIT shares and REIT funds. Check the provider's investment menu before opening another account.
Acceptance for custody does not mean the investment passed a quality review. Ask separately who has reviewed the offering, financial statements, risks, and fit for you.
A direct trustee-to-trustee IRA transfer may allow that. The correct process depends on the source and destination account types. Confirm the instructions before requesting a distribution.
No. The investment may have little or no ready liquidity. Plan withdrawals using the actual transfer and redemption terms and other assets that are available.
No. The account remains subject to prohibited-transaction rules. Personal use, related-party deals, or guarantees need careful legal review before you proceed.
Keep the accepted subscription, evidence of funding, ownership confirmation, fee schedule, distribution instructions, and valuation process. Confirm that the custodian's records match the sponsor's.
I would pause for unclear ownership, uncertain cash needs, missing financial information, unexplained fees, or pressure to move funds before questions are answered. A deadline does not resolve those gaps.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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