What is a Self-Directed IRA?
A self-directed IRA is not a term you will find in the Internal Revenue Code. A self-directed IRA simply refers to an IRA account which is can invest in traditional assets, such as stocks, but also alternative assets, such as real estate or cryptocurrencies. In the last several years, the number of self-directed IRA accounts has grown significantly.
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 you 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 stocks, bonds and bank CDs. Fewer investors know that they can invest in real estate, tax-liens, 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 IRA LLC are fully permissible.
The two main advantages of using a self-directed IRA to make investments are:
- You can invest in what you know and understand
- All the income and gains are tax-deferred or tax-free in the case of a Roth IRA
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.
Self-Directed IRA Services – The Passive Custodian
On the other hand, a Self-Directed IRA custodian, such a IRA Financial Trust allows IRA holders to engage in alternative asset investments. In addition, a self-directed IRA custodian (aka, passive custodian) doesn’t provide clients with investment advice. They do not sell investments, therefore is not treated as a fiduciary.
In other words, if you want to establish a self-directed IRA to invest in alternative asset investments, do not choose a bank or traditional financial institution. Instead, open an IRA at a self-directed IRA custodian, such as IRA Financial Trust Company.
Traditional banks and financial institutions do not allow you to make alternative asset investments, because they don’t make money from those investments.
Types of Self-Directed IRAs
A self-directed IRA can be established with a pre-tax (Traditional) IRA, Roth IRA, SEP IRA, or SIMPLE IRA. A self-directed IRA is a vehicle that allows you to use your IRA funds to make investments banks or traditional financial institutions don’t offer. This includes non-traditional investments, such as real estate. There are two types of self-directed IRAs:
Custodian Control Self-Directed IRA
A self-directed IRA with custodian control gives you more investment options than a financial institution. A custodian controlled self-directed IRA has a special IRA custodian, such as IRA Financial Trust Company, that serves as custodian of the IRA.
IRA custodians generate fees simply by opening and maintain IRA accounts. They don’t offer financial investment products or provide investment advice. With a custodian controlled self-directed IRA, the IRA funds are generally held with the IRA custodian. At the IRA holder’s sole direction, the IRA custodian then invests the IRA funds into traditional and alternative asset investments.
A custodian controlled self-directed IRA is popular with retirement investment who want to invest in alternative assets that don’t involve a high frequency of transactions. This includes purchasing raw land, or private fund investments.
Checkbook Control Self-Directed IRA
The self-directed IRA with checkbook control structure allows you to make investments quickly and easily. Simply write a check or execute a wire from a local LLC bank account. The self-directed IRA with checkbook control involves the establishment of a special purpose limited liability company (LLC). The LLC will be owned by the IRA and managed by the IRA holder (you).
As manager, you have the authority to make IRS approved alternative asset investments by writing a check. Your funds will be held at a local bank in the name of the IRA LLC. In order to make investment transactions, all you have to do is write a check from the IRA LLC bank account. You can also wire the funds from the IRA LLC bank account.
There is no need to ask the IRA custodian for permission on any investment tractions. As a result, you no longer have to deal with long delays and transactions fees.
Alternative Asset Investments You Can Make
As an IRA investor, you will not know what a self-directed IRA can invest in. This is because the Internal Revenue Code only describes what a self-directed IRA cannot invest in. According to Internal Revenue Code Sections 408 & 4975, you cannot engage in certain transactions with Disqualified Persons.
Generally, if the self-directed IRA does not purchase life insurance, collectibles, or engages in a prohibited transaction in IRC Section 4975, then you can make the investment.
The advantage of using a self-directed IRA to make alternative asset investments, like real estate and tax liens, is that it is perceived to provide a great way to diversify your retirement portfolio. Additionally, you gain some protection from inflation, and have the ability to invest in what you know, understand, and love.
Self-Directed Retirement Plans
A SEP IRA (Simplified Eligible Participants) is a retirement plan that an employer establishes. This plan is suitable for self-employed individuals, such as independent contractors, sole proprietorships or partnerships. It’s similar to a traditional IRA, but benefits self-employed individuals and small business owners.
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan that allows employers to contribute to traditional IRAs. A SIMPLE IRA is a great retirement plan for start-ups and small business owners with no current retirement plan.
A Solo 401(k), also known as the self-employed 401(k) is a traditional 401(k) plan. However, it only covers one employee. Eligibility requirements for this plan includes self-employment, or a small business owner with no full-time employees aside from his or her spouse.
Why Work with IRA Financial Group
Experience: Founded by top law firm tax attorneys, IRA Financial Group has helped over 13,000 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 seven 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.
Get in Touch
Do you still have questions about self-directed IRA services, such as custodian control vs. checkbook control? Contact IRA Financial Group directly at 800-472-0646. You can also fill out the form to speak with an IRA specialist who can provide you with a list of IRA Financial Group’s self-directed IRA services.