A self-directed IRA (SDIRA) is a tax-advantaged savings account for retirement purposes. With a self-directed IRA, you make the decisions and can buy and sell assets like real estate, private equity, promissory notes, and more. These investments aren't typically offered or allowed at big banks or brokers like Fidelity, TD Ameritrade, and WellsFargo. But with a self-directed IRA, you can invest your existing savings in these assets classes and more.
A self-directed IRA lets you be in control of your retirement portfolio— you control what you to invest in. Unlike a typical retirement account at a big bank or brokerage firm, a self-directed IRA custodian does not offer a list of investments or have you pick from or investment advice. The investment options are for you to decide.
Although a lot of big banks offer "self-directed" accounts, the investment offerings are limited to their products: stocks, bonds, or mutual funds. These accounts aren't true self-directed IRAs— they're more like "self-managed" accounts. More often than not, big banks won't offer alternative investments like real estate or private stock at all. However, you can invest in these non-traditional assets by opening an account with a self-directed IRA custodian like IRAR Trust Company.
Self-directed IRAs are governed by the same rules and tax benefits as an IRA held at any major financial institution. For example, contribution limits, distributions, and required minimum distributions (RMD) are all treated the same in a self-directed IRA as they are in a typical IRA.
The term “self-directed” simply means that you have complete control over selecting and directing of your IRA investments— you aren't being directed by an account manager or picking from a limited list of approved stocks and bonds. With a self-directed IRA, you manage the account yourself and aren't stuck picking from a shortlist of pre-vetted investments to try and maximize your savings. You can buy real estate, notes, limited partnerships, commercial paper, and many, many other types of assets. Specifically, your IRA can invest in these assets— you direct and make decisions for your IRA, but you are not making the purchases and investments personally— your IRA is.
With a self-directed IRA, there's a lot of flexibility when it comes to investments— but there are some limitations as to who your IRA can do transactions with.
Your self-directed IRA can't engage in transactions with anyone the IRS considered a disqualified individual to the IRA. Otherwise, you lose the tax-deferred status of the account.
Additionally, though you can invest in almost anything, there are two things that IRAs can't invest in: collectibles (certain precious metals are allowed) and life insurance. It's important to understand and avoid prohibited transactions to keep your IRA compliant.
Besides being able to choose your investments, self-directed IRAs provide another, even greater benefit— you can take advantage of your existing expertise to build your retirement portfolio. You can invest in what you know.
For example, if you're a real estate agent, you already understand real estate transactions. You may come across deals firsthand that provide an investment opportunity to build wealth. The same is true for any other investment expertise you may have on assets that are allowed in IRAs.
Download our guide What You Need To Know To Get Started for more information.
SDIRAs are typically established to invest in real estate and other tangible assets with retirement savings. The process is simple: You open and fund your account, conduct due diligence on the investment, and then instruct IRAR to invest on behalf of your IRA.
Establishing a SDIRA at IRAR is easy, we just need a completed New Account Kit and copy of a government-issued ID (like a driver's license or passport).
If you already have an IRA you can transfer or rollover funds from your existing custodian.
If you have a 401(k) with a current employer, you may not be able to move your account— but it doesn't hurt to ask. An old 401(k) from a previous or past employer can generally be rolled over to a self-directed IRA with no issue.
If you do NOT have an IRA you can open an account and make a contribution. Continue making contributions regularly to grow your IRA and invest in the desired asset.
Setting up contributions is easy. Our clients set up recurring contributions by check or ACH. You can set this up through your bank. Contribution limits do apply— check the limits for your specific account.
Once your account is established and funded you can instruct IRAR to purchase the asset.
It's important to point out that when you make an investment, the assets need to be titled or vested in the name of the IRA. For example, if you're purchasing real estate, the deed would read:
IRAR Trust Company FBO client name, client account number
There are also creative strategies that you can take advantage of as a self-directed IRA investor. Your IRA can partner with other IRAs or individuals to pool funds. It can also get a non-recourse loan if you do not have enough funds to make the purchase outright. The IRA can also form an LLC to get full control of retirement funds and make investments. Just remember: do not engage in prohibited transactions when you choosing your strategy.
Read our guide Real Estate IRA Purchase to get step-by-step instructions.
All income and expenses from the asset are managed through the IRA, which is responsible for payment of all bills and income received. For example, if your IRA owned a real estate rental, the rental income would go back to the IRA, and all bills (like utilities, property taxes, and repairs) would be paid out of the IRA. You just have to instruct IRAR how to allocate the funds and when to pay the bill. IRAR does all the administration.
In the future, when the asset is sold, the income goes back to the IRA, TAX-FREE.
To learn more visit our Self-Directed IRA Resources page or give us a call— whether you have an investment in mind or not. Set up a free consultation at your convenience and pick the brains of our CISP-certified experts.