Believe or not – the IRS does not define what a self-directed IRA is. There is no specific definition of what a self-directed IRA is. In fact, a self-directed IRA is not a term of art and you will not find it anywhere in the Internal Revenue Code (“Code”). A self-directed IRA simply refers to an IRA account which is permitted to be invested in traditional assets, such as stocks, but also alternative assets, such as real estate or even cryptocurrencies. In the last several years, the number of self-directed IRA accounts has grown significantly.
There are approximately 50 million IRAs totaling about $9.3 trillion dollars. The self-directed IRA alternative asset market is valued at approximately $250 billion. Using a self-directed IRA to make investments with your retirement funds can prove to be a great way to better diversify one’s retirement portfolio as well as gain the opportunity to invest in hard assets you know and understand. However, one should consult with their investment advisor or tax professional for more specific information on this subject.
Most people mistakenly believe that their IRA must be invested in bank CDs, the stock market, or mutual funds. Few Investors realize that the IRS has always permitted real estate to be held inside IRA retirement accounts. Investments in real estate with a Self-Directed IRA LLC are fully permissible and have been allowed since IRAs were established since the 1970s.
The two main advantages of using a self-directed IRA to make investments is that one can invest in what they know and understand and that all the income and gains are tax-deferred or tax-free in the case of a Roth IRA.