Your Self-Directed IRA Questions Answered

Your Self-Directed IRA Questions Answered

Self-directed IRAs, or SDIRAs, are becoming a more common vehicle for investing than ever before. These retirement accounts offer investment opportunities that regular IRAs or 401ks do not, making them an ideal choice for the investor who’s looking for something other than stocks and bonds, and also wants more control over their investment.

But even with this growing popularity, many investors still have a lot of questions about SDIRAs and how they can be used to build their portfolio and increase their wealth.

So let’s answer some of them!

• What types of investments are allowed with a SDIRA?

There are many assets classes you can invest in with a SDIRA. In fact, the IRS doesn’t tell you what you can invest in – only what you can’t. Some of these prohibited assets include: life insurance, art, alcohol, gems, antiques, and many types of collectibles such as stamps and most coins. Some of the assets most commonly invested in are stocks, bonds, mutual funds, real estate, tax lien certificates, and CDs.

• What are the benefits of a SDIRA over other retirement accounts?

Get ready, because there are a lot! Like other types of IRAs, SDIRA holders benefit from tax advantages that can result in substantial wealth-building, such as deferments on investments and deductions on contributions. Another benefit is the control you have over your investments in a SDIRA. Unlike traditional IRAs, you can invest in assets, like real estate, that allow you more direct management over the investment. This ability to invest in alternative assets is an advantage in and of itself, as well. Finally, with a SDIRA, you also have the option of passing the account and its holdings to your children or other beneficiaries, tax-free.

• What kind of rules are there?

Like other retirement plans, the IRS has determined a set of rules that account holders must follow. In addition to the prohibited assets, some of which were listed above, certain transactions with the SDIRA are also prohibited. For instance, you cannot invest in real estate and then use it for your own purposes (i.e., live there, use it as an office, use it as a vacation home, etc.). The IRS has also declared a list of “disqualified individuals”, which mostly consists of family members. Your SDIRA cannot be used to assist any disqualified individuals (i.e., buying a property and allowing a family member to live there). These aren’t the only rules, but they are the major ones. Failure to comply with any of the IRS’s rules can result in closure of your account and immediate taxation on the assets within it, as well as a penalty fee.

• How do SDIRAs work?

The process for investing inside a SDIRA is relatively simple. I’m going to use real estate as an example, because that’s what many investors choose and it’s also what I’m most familiar with. Once you have the SDIRA set up, the process for investment goes like this:

1. Locate an investment property
2. Decide where you will use cash or financing to pay for the property
3. Locate a lender who will work with a SDIRA
4. Instruct the SDIRA custodian to purchase the property
5. Manage the property post-purchase

It’s not a whole lot different than a traditional real estate investment, except that the property is owned by the SDIRA and not you personally. The process remains much the same as a traditional purchase.

• How do I set up a SDIRA?

Setting up a SDIRA is easy. The first step is finding a provider to work with, and this can be a bank, credit union, or brokerage firm. Review the institution to make sure they’re backed by the IRS and that you’re comfortable with their fee structure. Once you’ve selected a provider, all that’s left is providing the appropriate documentation to establish the account. Once the paperwork is done, funds are wired to the SDIRA and you’re ready to go!