Self-directed IRAs give you more options than you could ever hope for when it comes to investing. These retirement accounts provide access to alternative assets like private equity, tax liens and real estate investments.
However, these investments come with greater risk and the IRS has regulations — such as prohibited transactions — which must be strictly observed or else you could face stiff penalties. It would be advisable to seek the guidance of an advisor when navigating these guidelines and regulations.
What is a Self-Directed IRA?
People like having options, whether it’s clothing or food. Self-directed IRAs provide people with access to investments not available through traditional financial assets like stocks, ETFs and mutual funds.
Self-directed IRA accounts allow individuals to invest in alternative assets, including real estate, promissory notes, private lending agreements, precious metals and cryptocurrency. While such investments offer the possibility for greater returns than more conventional options, they also come with their own risks that must be carefully researched prior to investing.
Furthermore, these accounts must abide by a variety of rules and regulations, which must be strictly observed. Account holders cannot use their IRA to purchase personal property or lend money back to themselves and must avoid engaging in what are known as “prohibited transactions.” Therefore it’s essential that one works with an experienced custodian who can guide them with these matters.
How do I open a Self-Directed IRA?
Self-directed IRAs differ from traditional bank and brokerage firm IRAs in that their investments can include nontraditional assets like turnkey real estate, private equity investments, precious metals and even cryptocurrency such as Bitcoin. Custodians who have the knowledge and infrastructure for administering such investments may include banks, trust companies or entities dedicated to managing them.
Self-directed IRAs offer many advantages, but require significant commitment on your part to find and manage investments or assets. Furthermore, you are solely accountable for not engaging in prohibited transactions which could incur IRS fines and penalties. To protect against potential pitfalls when opening one yourself it would be advisable to consult qualified financial or tax professionals when opening an IRA account and have an in-depth knowledge of all rules pertaining to any specific investments you are making.
How do I transfer my IRA to a Self-Directed IRA?
Due to complex IRS rules, many IRA custodians and banks do not provide SDIRAs; it’s therefore vital that you conduct thorough research on any provider you are considering before investing your money with them. Pay particular attention for red flags such as new companies with no track record, claims of unreasonably high levels of return or lack of third party oversight.
Once you find a provider offering SDIRAs, the first step will be deciding between Traditional, Roth, or SEP IRA accounts to open. After funding it with either an existing IRA rollover, or contributions scheduled over time or both – alternative assets like real estate investments, private equity holdings, tax liens notes loans can all be added through SDIRAs – ideal for hands-on investors willing to research and vet investments themselves as well as diversify your retirement portfolio through non-traditional options.
How do I invest in a Self-Directed IRA?
Self-Directed IRAs allow you to diversify your retirement portfolio with alternative investments that can offer higher returns than traditional assets, but it’s essential to familiarize yourself with its rules and regulations, including any prohibited transactions and distribution guidelines before investing.
Choose a custodian who specializes in SDIRAs and compare their fees, services and experience before opening an IRA account and depositing your desired investment amount into it.
Once your IRA has received funding, you can instruct its custodian to set up an LLC in its name and invest directly through checks or wire transfers into it. As manager of the entity’s checking account in its name, you can take control of expenses and income related to investments directly within it and help reduce custodian fees accordingly. However, be mindful that withdrawal rules still apply – including taxes due on distribution before age 59 1/2 – in this situation as with any IRA account.