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Beginner’s Guide to Self-Directed IRA

Beginner's guide to self-directed ira

Beginners Guide to Self-Directed IRA

If you’re starting to learn about a Self-Directed IRA (SDIRA), begin by understanding what it entails. Foremost, a Self-Directed IRA, or Self-Directed individual retirement account, is an IRA that puts you in charge of your investments. With checkbook control, there is no custodian, except a passive custodian. Passive custodians offer no advice regarding your retirement funds.

Furthermore, a Self-Directed IRA allows you to diversify your retirement portfolio. You can do this by investing in alternative assets. These include real estate, tax liens, cryptocurrency and more. However, you can still make traditional investments. As you may know, these include stocks, bonds and mutual funds. Today, diversifying your retirement portfolio is one of the best and most secure investment strategy. IRA Financial allows you to diversify your retirement account all through our app for a flat fee.

Learn More: How to Open a Self-Directed IRA?

What are the Benefits of a Self-Directed IRA?

The majority of Americans wealth is invested in traditional equities and fixed income markets.  There are approximately 60 million IRAs worth approximately $12 trillion dollars. It is estimated that close 94% of IRA assets are invested in traditional investments, like stock.

Since the creation of IRAs in 1974, alternative investments such as real estate have always been permitted to be invested by IRAs. But few people seemed to know about this option until the last several years.   So why can’t you invest your IRA in alternative assets at a bank or traditional brokerage firm?

Not surprisingly, the answer comes down to money. Traditional brokerage firms make money and fees on your cash and from selling traditional investments, like stocks, mutual funds, and ETFs.  They do not generate any revenues or profits when your IRA invests in alternative investments, such as real estate.  Hence, it is not in their financial interest to publicize the fact that the IRS allows all IRAs to invest in alternative assets, such as real estate, precious metals, cryptocurrencies, private placements and much more.

Why Choose a Self-Directed IRA?

Using a self-directed IRA to make investments with your retirement funds can prove to be a great way to better diversify your retirement portfolio. Additionally, you gain the opportunity to invest in hard assets you know and understand.

Many IRA investors believe they must invest their IRA in stocksbonds and bank CDs. Fewer investors know that they can invest in real estate, tax-liens, precious metals, cryptocurrencies and other non-traditional assets. However, the IRS permits non-traditional assets to be held inside IRA retirement accounts. These investments with a Self-Directed IRA, or Self-Directed IRA LLC are fully permissible.

The main benefits of a self-directed IRA are:

  1. Investing in what you know and understand.
  2. All the income and gains are tax-deferred or tax-free in the case of a Roth IRA.
  3. Great flexibility in terms of the type of assets you can hold.
  4. The ability to diversify your retirement portfolio.
  5. The ability to invest in a real-estate IRA. Additionally, you can also use your self-directed IRA to flip houses. 

What Are Alternative Assets (Non-traditional assets)?

Alternative asset investments are one of the fastest growing segments of retirement market. The definition of an alternative asset is that it’s not one of the conventional investment types. Conventional investments include stocks, mutual funds, bonds and cash. Examples of alternative assets, are real estate, private placements, notes, cryptocurrencies, etc.

The IRA custodian has the right to choose what types of IRS approved investments its IRA clients can invest in. However, most banks and traditional financial institutions that offer IRAs only permit their IRA clients to invest in traditional assets.

What is the Difference Between an IRA and a Self-Directed IRA?

A self-directed IRA is not a legal term you will find anywhere in the Internal Revenue Code. A self-directed IRA is essentially an IRA account which is permitted to be invested in alternative assets, such as real estate or even cryptocurrencies.  In other words, a self-directed IRA follows the same rules as a Traditional or Roth IRA respectively from a contribution and distribution standpoint.  The only difference is that a self-directed IRA can invest in more than just equities and fixed income. Banks and traditional financial institutions are legally permitted to allow their clients to invest their IRA funds in alternative assets but for financial reasons they have elected to not do so. As a result, the self-directed IRA industry as flourished.

Many banks or brokerage firm, advertise themselves as offering a self-directed IRA, but what that really means is that you are free to invest in only the investments they offer, such as stocks, mutual funds, and ETFs.  The fact is the Internal Revenue Code does not describe what a self-directed IRA can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits “disqualified persons” from engaging in certain type of transactions, such as the purchase of life insurance, collectibles, and any transaction that directly or indirectly personally benefits a disqualified person.   The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.  Therefore, many self-directed IRA providers, such as IRA Financial, serves a growing market of retirement investors looking to better diversify their retirement portfolios and make alternative asset investments, such as real estate, precious metals, private business investments, private equity/hedge funds, cryptocurrencies, and much more.

Self-Directed IRA Advantages

The main advantage of a self-directed IRA is that one can use their retirement funds and invest in what they may know and understand, such as real estate.  There is a growing segment of retirement savers that don’t want to have all their personal and retirement savings tied into Wall Street exclusively and want the opportunity to diversify their retirement portfolio.  The self-directed IRA allows them to invest in assets outside of the financial markets, allowing many to diversify their retirement accounts in hard assets, such as real estate or emerging asset classes, such as cryptos.  In addition, there is an increasing amount of retirement savers that are familiar and comfortable with real estate as an investment asset, and using a self-directed IRA allows one to invest in assets they know and understand, such as hard money loans or precious metals.  Also, a self-directed IRA allows one to purchase hard assets, such as real estate, which is seen as a good option against inflation or a falling stock market.

What are Some Potential Disadvantages of a Self-Directed IRA?

Like any investment, whether it is stocks, mutual funds, real estate, or cryptocurrencies made with personal or retirement funds, there is always some risk.  No investment is guaranteed so it is important for any retirement investor regardless to do their diligence, understand how the investment works from a financial standpoint, potential risks vs rewards, the likelihood of fraud, parties involved, and of course work with a financial or tax advisor.  Do your research and don’t be afraid to ask questions… if something just doesn’t seem to make sense regarding the investment, better to ask prior to investing.

Starting a self-directed today is easier than ever. You can do everything online and never need to use a printer or even step in a bank. The best part of using a self-directed IRA is that you get to invest in what you know and understand.  In addition, self-directed IRAs are often considered a valuable diversification option and hedge against inflation.

How Does It Work?

Self-Directing puts you in the driver’s seat. However, you must choose the Self-Directed IRA with Checkbook Control. There is a second type of SDIRA, which is the Custodian-Consent Checkbook IRA. With both, you can invest in alternative and traditional investments. Yet each have different rules.

Custodian Control SDIRA: Some financial institutions will allow you to invest in alternative assets. Certainly not all. With this structure, the custodian generates its profits through annual valuation fees and transaction fees. In other words, you will be charged annual fees. Also, you will need custodian consent, which can delay investment opportunities. In some cases, the custodian can turn down certain investment opportunities. So as you can see, you are not in control.

Self-Directed IRA with Checkbook Control: As previously stated, one of the benefits of a Self-Directed IRA LLC is “checkbook control.” You benefit from this strategy because:

  1. You have full investment control
  2. Make direct investments – no custodian consent
  3. You establish an LLC, which is not subject to taxes
  4. Make all investment decisions

This is the option for IRA investors who want true investment control.

Learn More: Self-Directed IRA Questions & Answers

Prohibited Transactions

With your Self-Directed IRA, you can investment in practically any asset. However, it’s important that we clarify one important thing: certain rules do exist. These are the prohibited transaction rules. Your IRA cannot engage in any prohibited transactions. If it does, you can incur taxes and penalties. It may even lead to the disqualification of your individual retirement account. For this reason, you really should familiarize yourself with ins and outs of these transactions.

Read More: Self-Directed IRA LLC: Prohibited Transaction Rules to help you get started.

Why Work with IRA Financial Group

Experience: Founded by top law firm tax attorneys, IRA Financial Group has helped over 21,000 clients self-direct their retirement funds and invest over $3.8 billion in alternative assets, such as real estate.

Expertise: Former tax and ERISA attorney, Adam Bergman, is a leading voice in self-directed IRAs. He has written eight books on self-directed retirement plans and is a frequent contributor to Forbes.

Prestige: IRA Financial Group and its founders have been featured on:

  • CBS News
  • PBS Nightly Business Report
  • Over 100 major print publications (Forbes, Fox Business, the Wall Street Journal, CNN Money, and many more)

Compliance Focused: When choosing the IRA Financial Group, you will work with a self-directed IRA tax specialist to assist in establishing an IRS compliant Self-Directed IRA LLC structure.

Do You think a Self-Directed IRA is a viable option for your retirement plan?

Our specialists are available to answer any of your questions. We can also provide you with a consultation. Of course, this is when you’re ready to self-direct your IRA. When you are, we’re here to establish it for you. Contact an IRA specialist today or call us at 1-800-472-0646.


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