Syndicators' Guide to Self-Directed IRAs: Maximizing Capital Sources

A self-directed individual retirement account (IRA) is a fantastic opportunity for syndicators and fund sponsors. It functions similarly to a traditional IRA, with an institution holding the funds and ensuring tax protection by preventing investors from accessing the money prematurely. However, a self-directed IRA goes a step further by allowing the investor to make investment decisions and choose where to allocate their funds. This includes the option to invest in private offerings under Regulation D, such as Rule 506b and Rule 506c.

Here's how it works: the investor becomes a beneficiary of their self-directed IRA, which is managed by an administrator responsible for complying with IRS and state regulations to avoid tax consequences. To facilitate this process, the sponsor provides investors with recommendations for several self-directed IRA companies, and they choose the one that best suits their needs. Once they open the account, the investor becomes the beneficiary, and the administrator takes control. The administrator reads the ppm and operating agreements to ensure they are structured properly to protect the investor from any tax-related issues.

Assuming everything is in order, the administrator signs the subscription agreement and may ask the investor to do the same. This gives the administrator the authority to transfer the funds and purchase the security. When tax time comes, issue the K-1 to the self-directed IRA, with a copy sent to the investor. This ensures proper tax compliance according to IRA rules.

When making distributions, it is crucial to send the funds to the administrator for the benefit of the investor, never directly to the investor themselves. Any control or access the investor has over the funds can lead to severe consequences, including imputed income and potential penalties that may jeopardize their entire IRA.

The beauty of self-directed IRAs is that they provide syndicators with access to a substantial pool of capital and investors the chance to make more money in a tax-sheltered manner.

Read more about Reg D Rule 506b - Rule 506b of Reg D: Non-Accredited Investors & No Solicitation: https://www.moschettilaw.com/rule-506b-of-reg-d/

Read more about Reg D Rule 506c - Rule 506c of Reg D – Solicitation & No Non-Accredited Investors: https://www.moschettilaw.com/rule-506c-of-reg-d/

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