Understanding the Self-Directed IRA
As an IRA investor, you know that you can only establish an IRA with a bank, financial institution or authorized trust company. These entities will establish and administer your individual retirement account. However, not all IRA custodians will allow you to invest in alternative assets, such as real estate.
You most likely know the essentials of an IRA. You know that:
- It’s a retirement account by Congress to encourage people to save for retirement.
- You can contribute some of your income each year to the IRA account for investments.
But do you understand the concept of tax-deferral and that retirement funds can invest in assets other than stocks or mutual funds? You can make alternative asset investments with a Self-Directed IRA. Income and gains from your investments are tax-deferred, meaning you only pay taxes once you make a distribution at the age of retirement.
Of course, if you choose a Self-Directed Roth IRA, you pay taxes before, therefore the income and gains on investments are completely tax-free.
What IRA Custodians DON’T Tell You
At this point, you’re probably thinking: “I’m an IRA investor. Why don’t I know that I can make alternative asset investments with a Self-Directed IRA?” It’s not because you, or the majority of Americans are indifferent or incurious. It’s because most IRA custodians choose not to tell you about Self-Directed IRAs.
It isn’t in the financial interest of traditional IRA custodians to encourage you to use your retirement funds to make alternative asset investments. They make money when you invest in their financial products. With alternative investments, you’re essentially taking your money from the financial institution to invest in assets that don’t make IRA custodians money.
They want you to keep your money there for a long time, whether through highly profitable trading commissions or by leveraging the power of your savings. They don’t receive commissions if you use your retirement funds to invest in something like Bitcoin. Additionally, they lose access to your money.
Are Non-Traditional Assets Legal?
Non-traditional assets, like real estate and cryptocurrency are perfectly legal investments. The IRS has allowed investors to use their retirement funds to invest in such assets since 1974. And the best way to do this is through the Self-Directed IRA. A Self-Directed IRA allows you to invest in a wide-range of assets and diversify your portfolio. The most commonly held alternative investments in an IRA include:
- Real Estate
- Hard Money Loans
- Private Companies
- Precious Metals
- Traditional Assets such as Stocks, Bonds and Mutual Funds
- Private Equity and Venture Capital Investments
While some alternative investments are more common, with a Self-Directed IRA you can invest in just about anything.
Learn More: Alternative Investments in an IRA
*While IRA Financial allows customers to invest in an extensive range of alternative investments, some Self-Directed IRA Custodians only allow individuals to invest in precious metals and cryptos. Hence, it is important to do your research before deciding to open an account with a Self-Directed IRA Custodian. Furthermore, it is also important to ask Self-Directed IRA Custodians about their fee structure. Some Self-Directed IRA Custodians charge an asset valuation fee. At IRA Financial, we charge a flat annual fee, so you will never have to worry about paying an asset valuation fee.
Responsibilities of a Self-Directed IRA Custodian
The majority of all Self-Directed IRA custodians are non-bank trust companies. The Self-Directed IRA custodian or trust company will typically have a banking relationship with a bank who then holds the IRA funds in a special account, or omnibus account. It offers each Self-Directed IRA client FDIC protection of IRA funds up to $250,000 held in the account.
An example of this is IRA Financial Trust, a non-banking IRA custodian, that partners with Capital One Bank, one of the most respected private banks in the world to offer clients a safe and secure way to make Self-Directed IRA investments.
Basics of a Self-Directed IRA Custodian:
- IRS approved
- Can hold and custody IRA and 401(k) plan assets
- Subject to state regulation by the state division of banking
- Performs administrative record-keeping regarding the Self-Directed IRA
- Performs administrative review of the Self-Directed IRA assets
- Assists in opening & funding your IRA account
- Makes investment(s) on your behalf
- Makes distributions & pays expenses per your request
- Provides you with quarterly statements
- Answers questions about your account and the IRA custodian’s procedures
- Reports information the IRS and other governmental agencies require such as:
- IRS Form 1099R – Distributions from your IRA
- IRS Form 5498 – Contributions to and Fair Market Value of your IRA
Learn More: The Basics of Self-Directed IRA Custodians
Self-Directed IRA Custodian vs. Third-Party Administrator
IRA custodians, banks, financial institutions and approved trust companies are regulated entities. Additionally, the IRS authorizes these entities to act as an IRA custodian. Because an IRA custodian is directly approved by the IRS, it is the only entity in this group that can physically hold retirement assets.
IRA custodians are necessary in order to make investments using IRA funds. As a result, they are regulated by federal and state banking authorities.
However, an IRA administrator cannot hold or custody IRA assets. Furthermore, IRA administrators are not approved or overseen by the IRS or any state banking regulators. An IRA administrator essentially acts as an intermediary between the IRA owner and a partner custodian.
Read More: How to Correctly Diversify Your Portfolio
The Importance of Working Directly with a Self-Directed IRA Custodian
IRA administrators are not subject to any IRS or state audit or reviews. Accordingly, they are not subject to ongoing oversight, especially in the area of prohibited transactions. This is very important in order to keep your Self-Directed IRA in full IRS compliance. Whereas, an IRA custodian is subject to quarterly state banking division audits and reviews, as well as IRS audits, which help to keep your IRA safe from prohibited transactions and fraud.
Get in Touch
Do you still have questions about an IRA custodian, and the importance of using a Self-Directed IRA custodian for alternative asset investments? Contact IRA Financial Group at 800-472-0646. Or fill out the form and speak with an IRA specialist. You can also download the app to begin the process of diversifying your retirement funds.