- A Self-Directed Roth IRA allows retirement investors to make traditional and alternative investments.
- If you wish to make alternative investments, like real estate, establish your account at a Trust site – not a bank or financial institution.
- Alternative investments are growing in popularity due to the volatile stock market.
In this article, we will explain the secret of the Self-Directed Roth IRA and why, if you’re a retirement investor, you should use the Self-Directed Roth IRA to make to have the freedom to make virtually any type of investment, tax-free.
Roth IRA vs Self-Directed Roth IRA
A Roth IRA allows IRA holders to enjoy tax-free distributions. This is because the Roth IRA was funded with after-tax dollars, meaning you don’t receive an upfront tax-break, but all income and gains on your investment will be tax-free when you take a qualified distribution (in order for a Roth IRA distribution to qualify, the IRA must be opened for at least five years, and the IRA holder must be age 59 1/2 or older).
Many retirement investors use their Roth IRA to purchase traditional investments, like stocks, bonds, CDs, mutual funds and the like. The breadth of investments you can make with your IRA is typically determined by the company that holds the account. For example, if your Roth IRA is held by a bank or financial institution, you will most likely only be limited to make tax-free traditional investments.
Self-Directed Roth IRA
If you establish your Roth IRA at a trust company, such as IRA Financial Trust, you can self-direct your Roth IRA. With a Self-Directed Roth IRA, you can still make tax-free investments, but your scope of investments are no longer limited to just traditional investments; you can also make alternative investments, like real estate and cryptocurrency, with a Self-Directed Roth IRA – tax-free.
The Self-Directed Roth IRA in a Nutshell
A Self-Directed Roth IRA is popular because investors are able to make almost any type of investment, including traditional investments if they wish to do so.
A Self-Directed IRA can be either Roth or traditional. With a Self-Directed IRA, you decide what types of investments to make. Additionally, you determine when you want to buy and sell. All decisions are truly yours, hence the name “self-directing.”
With a Self-Directed Roth IRA, if you qualify to make contributions, all distributions are tax-free. This includes the investment returns as long as the distributions meet certain requirements. Unlike a traditional IRA, you can contribute to a Roth IRA as long as you earn income. With a traditional IRA, you can’t make contributions after you reach 70 1/2.
Self-Directed Roth IRA for Alternative Asset Investments
You can make almost any type of investment with a Self-Directed Roth IRA. The only investments that you cannot make are those the IRC prohibits, which are very few. Find out the prohibited investments with a Self-Directed Roth IRA.
The primary advantage of using a Self-Directed IRA is the ability to make alternative asset investments. The term “alternative assets” generally includes any non-traditional asset class. It covers investments that do not trade publicly on an organized exchange. This includes investments outside of public stocks, bonds, money markets or cash.
Typically, alternative investments are complex, illiquid, and more difficult to value than traditional assets. They usually offer the opportunity to earn investment returns in excess of those generally available in the traditional financial markets.
So if you dislike the obligatory investments in stocks or mutual funds, or you have an investment that you want to actualize with your Roth IRA funds, then the Self-Directed Roth IRA LLC is your solution.
The Self-Directed Roth IRA LLC Solution
A Self-Directed Roth IRA gives you the best of both worlds. You receive the benefits of a Roth IRA, such as tax-free profits, tax deductions, asset protection and estate planning. But you also benefit from investing in assets you know and understand.
Aside from life insurance, collectibles and certain “prohibited transaction” investments, a Self-Directed IRA can invest in most commonly made investments.
The self-directed Roth IRA LLC, similar to a Self-Directed IRA LLC, allows the IRA holder to:
- Use the same Self-Directed Roth IRA LLC to purchase domestic and foreign real estate, private mortgages, gold and stocks, bonds and mutual funds inside the same plan and generate profits tax-free.
- Purchase real estate foreclosures and tax liens on the spot, or make personal loans by simply writing a check.
- Buy your retirement home now at today’s prices, rent it out, and then move in tax-free at the age of 59 1/2.
- Purchase a vacation home now at today’s prices anywhere in the world, rent it out, and then use it tax-free at the age of 59 1/2.
- Invest in an office building now at today’s prices, rent it out, and then move your business in tax-free at the age of 59 1/2.
How to Make Investments
We’ll explain how you can use your Self-Directed Roth IRA to make investments in a few easy steps.
1. Establish a Self-Directed Roth IRA LLC with a Self-Directed IRA custodian, such as IRA Financial Trust.
2. Your IRA assets/cash can roll over to IRA Financial Trust tax-free.
3. A special purpose LLC will be established that your IRA owns. Hence, the IRA assets/cash will transfer to the LLC tax-free in exchange for 100% interest in the LLC.
4. You, as manager of the LLC, will open a bank account for the LLC at any local bank. IRA Financial will draft LLC Operating Agreement identifying you as manager of the LLC and the IRA as the sole member.
5. As manager of the LLC, you will then have “Checkbook control” over all the assets/funds in the IRA LLC to make the alternative asset investment.
6. Because the IRA owns the LLC, it will be treated as a disregarded entity for federal income tax purposes. No federal income tax return is necessary to be filed. All income and gain from the real estate investments will flow back to the IRA without tax.
Self-Directed IRAs Growing in Popularity
A Self-Directed IRA is the most popular vehicle to buy alternative assets. Self-Directed IRAs have grown significantly in the last several years. This increase is largely due to a number of factors, including:
- The shaky performance of the stock market
- The growth of the real estate market
- The lack of liquidity in the small business loan market
- The increase in media coverage by the Wall Street Journal, CNBC, The New York Times, Forbes, and some of the other major financial media companies
However, it’s not unusual for investors not to hear about Self-Directed IRAs from a tax or financial advisor. Traditional financial institutions make money when their clients make traditional investments.
The benefits of self-directing are unmistakable. For example, many financial experts believe that self-directing an IRA creates great diversification to a retirement portfolio. Additionally, you receive some protection from inflation by investing outside of the Stock Market.
Alternative Assets Growing in Popularity
According to a McKinsey & Company report, The Mainstreaming of Alternative Investments, global alternatives have reached record levels of $6.5 trillion by the end of 2011. Thus, it has grown at a five-year rate of over seven times that of traditional asset classes.
According to a variety of respected researchers, including those from the Federal Reserve Board, the IRS, and the National Association of Government Defined Contribution Administrators, they expect to have 28 percent of their portfolios allocated to alternative investments by 2013. This is up 26 percent from 2010.
The numbers are even higher today.
Advantages of the “Checkbook Control” Self-Directed Roth IRA LLC
- Invest in what you know and understand tax-free, such as real estate, precious metals, tax liens, hard money loans, private businesses, and much more.
- Take control of your IRA assets and make investments from a local bank account.
- Making an investment is as easy as writing a check or executing a wire transfer
- Save on custodian fees – no transaction or annual account balance fees.
- Invest with limited liability protection.
- Asset & creditor protection.
The IRA Financial Group will take care of the entire setup of your Self-Directed Roth IRA LLC “Checkbook Control” structure. We can handle the process in a way that’s most convenient for you: phone, email, fax or mail. It will typically take between 7-21 business days to complete, however the time largely depends on the state for formation and the custodian holding your retirement funds.
New Rules for Converting Traditional to Roth IRA
For tax years starting in 2011, the $100,000 modified adjusted gross income limit for conversions to Roth IRA is eliminated. Married taxpayers filing a separate return can now convert amounts to a Roth IRA.
Individual retirement accounts, or IRAs, exist in many forms. If you have an income from working for yourself or someone else, you may set up and contribute to an IRA. The major advantage of using a traditional IRA is that contributions are tax-deductible. However, a Roth IRA offers tax-free income and gains. Furthermore, you can use IRA funds for any purpose.
- Investing in real estate
- Tax liens
Get in Touch
Do you still have questions about the Self-Directed Roth IRA that we didn’t cover in this article? Contact IRA Financial Group at 800-472-0646. Or fill out the form and speak with an IRA specialist.
Did you know?
Investing in yourself and your retirement is always an admirable goal, especially during uncertain times like these, with COVID-19, economic upheaval, and civil unrest, and it should definitely be a priority. And with a Self-Directed Roth IRA, as long as you qualify to make contributions, all of your distributions are tax-free. And what’s more, unlike a traditional IRA, you can continue to contribute to a Roth IRA as long as you earn income. Contact us to find out more.