A Self-Directed IRA (SDIRA) gives you control of your retirement account and investments. Unlike traditional IRAs limited to stocks, bonds, and mutual funds, an SDIRA lets you invest in real estate, precious metals, private businesses, and more potentially leading to higher returns.
With self directed IRAs, you get to find, buy, and sell the alternative investments in your individual retirement account— this is true self-directed investing. This is especially beneficial if you already have expertise in certain types of investments or a specific market, for example, a real estate investor.
Self-Directed IRAs can be a useful tool for diversification, but they require research and an understanding of the rules. They give you more control over your retirement investments, along with more responsibility. Conducting due diligence is essential before investing through a Self-Directed IRA (SDIRA).
A Self-Directed IRA is a retirement account that gives you more control over your investment choices while offering the same tax advantages as other IRAs. You are responsible for finding, selecting, purchasing, and overseeing the assets held in the account. Unlike IRAs offered by many traditional financial institutions, an SDIRA can hold alternative assets such as real estate and private equity.
IRAs offered by large financial institutions, such as Charles Schwab, Fidelity, and Wells Fargo, generally limit investments to traditional assets such as stocks, bonds, and mutual funds.
Although these accounts may let you direct your investment selections, they typically do not support alternative assets such as real estate or private equity. A true Self-Directed IRA provides access to a broader range of investments beyond traditional market assets.
Self-Directed IRAs provide more control and access to investment opportunities beyond the stock market.
Alternative assets can help diversify your retirement portfolio, but all investments involve risk and require careful due diligence.
A Self-Directed IRA gives you the flexibility to diversify your portfolio with a range of alternative assets, including real estate. Depending on the investment, real estate may generate rental income or increase in value over time.
You are responsible for finding and selecting investments that align with your retirement strategy. Examples of investments that may be held in a Self-Directed IRA include:
With a Self-Directed IRA, you can invest in assets such as private companies, tax lien certificates, real estate, and LLCs. These alternative investments may provide opportunities beyond the stock market.
You do not have to move your entire retirement account into a Self-Directed IRA. You may be able to keep mutual funds and other traditional investments with your current IRA provider while transferring a portion of your funds to an SDIRA.
Alternative investments can help diversify your portfolio and allow you to apply your experience in a particular industry. They may also reduce your retirement savings’ reliance on the performance of the stock market. However, every investment carries risk and requires careful due diligence.
For example, a real estate professional or experienced investor may use their knowledge to evaluate residential, commercial, and other types of real estate investments. Their familiarity with local markets, property values, and rental demand may help them identify opportunities that fit their retirement strategy.
Self-Directed IRAs are generally subject to the same IRS rules governing other IRAs. You must avoid prohibited transactions and transactions involving disqualified persons to protect the account’s tax-advantaged status.
Keep these three rules in mind:
As the account owner, you are responsible for finding investments and directing the activity within your Self-Directed IRA. You are also responsible for confirming that each investment complies with applicable rules and does not involve a prohibited transaction.
Investments held in a Self-Directed IRA may require ongoing oversight and annual fair market valuations. Depending on the type of IRA, required minimum distributions may also apply. Failing to follow these requirements may result in taxes or penalties.
Violating Self-Directed IRA rules can jeopardize the account’s tax-advantaged status. Before completing a transaction, consider consulting a qualified tax or legal professional who is familiar with Self-Directed IRAs.
Start by comparing Self-Directed IRA custodians and trust companies, including their services, experience, and fees. Third-party administrators and promoters are generally not custodians. Instead, they may work with a separate trust company or custodial institution to hold the account’s assets. It is important to understand the role of each company before opening an account.
Many traditional IRA providers and brokerages limit investments to stocks, bonds, mutual funds, and similar assets. They may not support alternative investments such as directly owned real estate.
An IRA must be held by a qualified trustee or custodian. When comparing Self-Directed IRA custodians, consider their experience with alternative assets, regulatory history, fees, processing times, and customer service.
The custodian should also support the types of investments you plan to hold, such as real estate or private placements. IRAR is a South Dakota-chartered trust company regulated by the South Dakota Division of Banking.
Use this custodian fee comparison template to evaluate providers and determine which one fits your investment goals.
Once you choose a custodian, you can open a Self-Directed IRA by completing a new account application.
Several account types are available. Individual investors may consider a Traditional or Roth Self-Directed IRA. Small business owners may consider a SEP IRA, SIMPLE IRA, or Solo 401(k). A qualified financial or tax professional can help you determine which account type fits your retirement strategy.
You can fund a Self-Directed IRA by transferring funds from an existing IRA, rolling over funds from an eligible former employer plan, or making contributions within the applicable annual contribution limits.
A trustee-to-trustee IRA transfer is generally not taxable because the funds move directly between custodians. Funds from an eligible former employer plan, such as a 401(k), may be moved through a rollover. The requirements and tax treatment depend on the accounts involved and how the funds are moved.
Once your account is funded, you select the investment and submit instructions to your IRA custodian. The custodian completes the purchase on behalf of the IRA, and the asset must be titled in the name of the IRA rather than your personal name.
Expenses associated with the investment must generally be paid from the IRA, and income generated by the investment must return to the IRA. If the asset is sold, the proceeds must also return to the account.
You can generally begin taking IRA distributions without the additional early-distribution tax after age 59½. Required minimum distributions may begin at age 73 or 75, depending on your date of birth and account type. Assets may be sold to provide cash for a distribution or, when permitted, distributed in kind. Review the IRS rules for required minimum distributions or consult a qualified tax professional before taking a distribution.
Start by deciding which type of retirement account fits your goals. Each account type has different eligibility requirements and tax treatment.
A Self-Directed Roth IRA may be worth considering if you expect to be in a higher tax bracket during retirement. Contributions are made with after-tax funds, and qualified distributions are tax-free. A Self-Directed Traditional IRA may offer tax-deferred growth, with taxes generally due when funds are distributed. Eligible business owners may also consider a Solo 401(k), SEP IRA, or SIMPLE IRA.
Your intended investments should also shape your strategy. If you plan to invest in real estate, consider the property types you want to pursue, the amount of capital required, expected expenses, and how the investment may generate income.
You may also consider whether an IRA-owned LLC with checkbook control fits your investment approach. This structure can provide more direct control over certain transactions, but it also creates additional recordkeeping and compliance responsibilities.
If your IRA does not have enough funds to purchase an investment outright, financing through a non-recourse loan may be an option. An IRA may also partner with other investors or retirement accounts, provided the arrangement complies with prohibited transaction rules.
Before investing in alternative assets, consider consulting qualified financial, tax, and legal professionals who are familiar with Self-Directed IRAs.
Specializing in real estate and private equity transactions in self-directed individual retirement accounts, our employees each have nearly a decade of industry experience and a passion for educating clients. That means we share what we know with you as soon as we know it, so you can always make the best investment decisions possible.
We also keep our transaction fees low so you can save for retirement and build trust that we have your best interest first.
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