What is a Self-Directed IRA?
The Self-Directed IRA is an individual retirement account that allows participants to save for retirement in a tax-efficient manner. A Self-Directed IRA shares the same characteristics as a Traditional IRA, but it gives participants more investment options. Participants of the plan can make traditional investments (stocks, bonds, etc.) as well as alternative asset investments (real estate, precious metals, Cryptos etc.). Although Self-Directed IRAs have multiple benefits, the main benefit of a Self-Directed IRA is it allows you to invest in what you know.
How does a Self-Directed IRA work?
A Self-Directed IRA is a retirement account that allows you to purchase alternative assets. Traditional IRA’s are often limited to stocks, bonds, and mutual funds. A Self-Directed IRA allows you to diversify your portfolio by investing in alterative investments. While you can still purchase stocks, bonds and mutual funds, you can also purchase real estate, gold, precious metals, cryptocurrencies and more!
While financial institutions claim to offer Self-Directed IRA’s, many do not use a passive custodian. Self-Directed IRA’s that use passive custodians allow plan participants will be allowed to purchase almost any type of investment. This includes stocks, bonds, ETFs, real estate, cryptocurrency, precious metals and more. A Self-Directed IRA through a bank or financial institution limits plan participants to the financial products they sell, which only include stocks, bonds, ETFs and other traditional investments.
How long does it take to setup a Self-Directed IRA?
It generally takes anywhere from 7-12 days to set-up the Self-Directed IRA LLC structure. Our in-house retirement tax professionals will complete all the necessary IRA rollover or transfer paperwork in order to help transfer your existing retirement funds tax-free to the new passive custodian so that your funds will be available for investment in a matter of days.
If you interested it in setting up a Self-Directed IRA with IRA Financial Group, you can simply download the app and begin the process. IRA Financial Group is the first Self-Directed IRA Custodian to release an app that allows you to open accounts, monitor your investments, and more!
What is the best Self-Directed IRA custodian?
Review the fee structure of the Self-Directed IRA custodian. Is it a flat fee or based on assets? Ask if there are hidden fees you should be aware of. Determine whether there is a minimum balance requirement and if they allow for checkbook control to make investments without custodian consent.
Many Self-Directed IRA Custodians claim to have no fees. For instance, many Crypto IRA companies now claim to have free accounts. Despite these claims, many charge asset valuation fees, trading fees, etc. At IRA Financial, we offer a flat fee, no hidden fees and checkbook control. You will receive unlimited access to our qualified specialists, and our commitment to technology helps clients establish their account, rollover funds and perform investments quickly and seamlessly on a secure platform.
When choosing the best Self-Directed IRA Custodian, it is also important to ask about experience.
How much does a Self-Directed IRA cost?
The cost for establishing a Self-Directed IRA varies depending on the IRA custodian you choose
What can you own in a Self-Directed IRA?
A Self-Directed IRA allows participants to invest in what they know and understand. At IRA Financial, our Self-Directed IRA plan allows participants to make almost any type of investment. The Internal Revenue Service (IRS) only describes the type of investments that are prohibited, which are very few. The following are common types of investments that can be made with a Self-Directed IRA
What is the RMD age for a Self-Directed IRA?
The new RMD age for a Self-Directed IRA is age 72. This change went into effect when the SECURE Act was passed in late December, increasing the original RMD age of 70 1/2. This applies to all IRAs, including the Traditional IRA, SEP IRA and SIMPLE IRA.
Can I hold in gold with my Self-Directed IRA?
Yes we allows you to hold gold and certain precious metals in an IRA. Gold IRAs are often popular due to their stability, security, and price. In general, one, one-half, one-quarter or one-tenth ounce U.S. gold coins are approved. American Gold Eagle coins and other gold coins at least 99.5% pure are also approved. IRA holders can purchase any gold of a certain fineness that is in the physical possession of a trustee that meets the requirements for IRA trustees under Code Sec. 408(a).
Are all Self-Directed IRAs the same?
A Self-Directed IRA is a type of IRA structure that allows the IRA holder to gain control over his/her retirement funds. There are essentially three types of Self-Directed IRAs.
1. Self-Directed IRA offered by financial institutions
2. Custodian Controlled Self-Directed IRA
3. Checkbook Control Self-Directed IRA
While some may claim that all Self-Directed IRAs are the same, they are not. A true Self-Directed IRA allows you invest in alternative assets. For example, many companies now allow individuals to invest in Cryptos or gold, but do not allow them to invest in real-estate. At IRA Financial, we give you the freedom to invest in what you know.
What is a custodian controlled Self-Directed IRA?
Unlike a typical financial institution, most IRA custodians generate fees simply by opening and maintaining accounts and do not offer any financial investment products or platforms. The funds are generally held with the IRA custodian who, at the IRA holder’s direction, invests the funds accordingly. You can still make any type of investment, but you will need permission from the custodian to execute the transaction.
Do I need a custodian for a Self-Directed IRA?
If you have a Self-Directed IRA, you must have a custodian. Pursuant to section 408 of the Internal Revenue Code, a bank (Wells Fargo), financial institution (Vanguard) or authorized trust company (IRA Financial Trust) must establish and administer your IRA.
Why should I use an LLC to make Self-Directed IRA investments?
A Limited Liability Company (LLC) is a company that can be taxed as a partnership. This is beneficial because the LLC won’t pay any taxes on gains. Instead, the owner of the LLC will be liable for any taxes just as if they earned the money themselves. Because your IRA owns the LLC, there are no taxes unless you are running a business that is unrelated to the purpose of the IRA, using debt financing or taking a distribution from your IRA. In addition, the LLC offers limited liability and asset protection with respect to the assets of the IRA.
Is a Self-Directed IRA protected against fraud?
Retirement accounts are protected against fraud or theft if they are deposited in an FDIC insured account. FDIC insurance covers all deposit accounts. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. If an individual removes the funds from the FDIC account for any reason, the funds are no longer granted FDIC insured protection and would not be protected against fraud.
Are my Self-Directed IRA LLC funds FDIC insured?
Retirement funds of a Self-Directed IRA LLC (checkbook control) must be deposited first with an IRA custodian/administrator before they are sent to the LLC. The IRA custodian, which is an FDIC insured bank, would be the financial institution where the funds are deposited before they are wired to the IRA LLC. FDIC insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.
Can I partner with my Self-Directed IRA?
In general, co-mingling personal funds and IRA funds is a practice investor should avoid, but there are instances when using your IRA funds and personal funds to make a transaction is allowed. However, the IRA must exclusively benefit from the transaction. Learn more about partnering with your Self-Directed IRA.
Can I buy a house with a Self-Directed IRA?
You can use your Self-Directed IRA to buy a house, but you will not be able to live in the house until you reach retirement age. The IRS has always permitted real estate to be held inside individual retirement accounts and is fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA).
If my Self-Directed IRA LLC generates passive income, such as rental income, what happens to the rental income?
In general, all passive income generated by the Self-Directed IRA LLC goes back into the Self-Directed IRA LLC without tax. The Self-Directed IRA LLC offers the advantages of tax deferral, or tax-free gains in the case of a Roth, allowing you to invest your retirement funds in almost anything, including real estate tax free.
Can my Self-Directed IRA get a mortgage on a property?
A Self-Directed IRA can get a mortgage to purchase property, but it must be a non recourse loan. If the IRA fails to make the payments, the only recourse the lender has is the property itself.
When is a Self-Directed IRA real estate transaction subject to UBTI?
Determining whether a transaction or series of real estate transactions will trigger the Unrelated Business Taxable Income (UBTI) tax is based off the facts and circumstances. In general, the IRS and the courts will look at the following factors to determine whether the retirement account transaction triggered the UBTI tax
Can my Self-Directed IRA LLC make an investment in a “S” Corporation?
An IRA is not permitted to be an “S” Corporation shareholder. In order to be considered an “S” corporation, shareholders must be U.S. citizens or residents and must be natural persons, so corporate shareholders, partnerships, and multi-member LLCs are excluded.
Can my Self-Directed IRA LLC invest in an entity or business which is currently owned by a disqualified person?
The IRA and the IRA owner cannot invest 50% equally in a joint venture without triggering a prohibited transaction. However, various case law suggests that investing retirement funds in a closely held entity which is owned by a disqualified person who holds less than 50%, even as low as 10%, can trigger a prohibited transaction. It is good practice to not invest retirement funds into any closely held entity that is owned by yourself or a disqualified person.
Can I use my Self-Directed IRA to invest in a business?
You can use your Self-Directed IRA to invest in a business. However, there are certain transactions that are prohibited. If the IRA owner or any other disqualified person is not involved in the business, the IRA owner can use his/her Self-Directed IRA funds to invest in the business. However, any business regularly carried on or by a partnership or LLC of which the Self-Directed IRA LLC is a partner or member is an unrelated business and may trigger the unrelated business taxable income tax, which is close to a 37% tax for 2019.
Can I have multiple IRA accounts in my Self-Directed IRA LLC?
An IRA owner may have multiple IRA accounts in his/her Self-Directed IRA LLC, but each account must be a member of the LLC and have an interest in the LLC based on the amount contributed. Profits and losses would be allocated to the IRA accounts based on the accounts percentage interest.
Can I have a Traditional IRA and Roth IRA account in one Self-Directed IRA LLC?
IRA owners can have a Traditional and Roth IRA as members of the Self-Directed IRA LLC, but it is important to keep separate records for each account. The distribution and tax rules are somewhat different.
Can my spouse and I use one Self-Directed IRA to make investments?
You and your spouse’s IRA can co-invest in one Self-Directed IRA LLC entity. Each spouse’s IRA would own a percentage of the LLC based on the amount contributed. In some cases, it may make sense for each spouse to use a separate Self-Directed IRA LLC entity to make their investments. Instances such as investment disputes and/or divorce could end up complicating matters.
Can I use a Roth IRA in a Self-Directed Roth IRA LLC?
IRA holders may transfer a Roth IRA to a Self-Directed Roth IRA LLC “checkbook control” structure tax-free. By using a Self-Directed Roth IRA LLC structure, all gains are tax-free and any distributions taken after the age of 59 1/2 are tax-free so long as the Roth IRA has been opened at least 5 years.
Can I move my IRA to a Self-Directed IRA?
Yes, you can move your IRA to a Self-Directed IRA. Generally, rollovers are the most common way to fund a Self-Directed IRA.
What are the benefits of a self-directed IRA?
Benefits of a self-directed IRA include the tax-deferment of earnings on investments purchased by contributions to the accounts. Additional benefits include potential tax-deduction for contributions and potential tax-free distribution of earnings depending on the type of IRA. To receive the retirement tax benefits the account must be governed by a Trust document that contains the rules stated under the IRS. Investments must also be held by an approved institution for the IRA investor to avoid taxation, like Entrust.
Why haven’t I ever heard of self-directed IRAs before?
Typically, financial institutions offer investments under the umbrella of an IRA to attract investors to the investments they offer. Self-directed IRA providers, on the other hand, do not offer any investments. Instead, they offer the services of providing the necessary documentation, trust or custody services of the investments and perform the required government reporting for the IRA.
So, a self-directed IRA allows me the freedom to choose what type of asset I want to invest in?
Yes. It is up to the investor to locate, investigate and determine the investment that they choose to hold under their IRA. This platform allows for access to a broader range of investments available to the IRA holders and not be limited to the investments the financial institution offers. Some examples of popular investments chosen by IRA holders include real estate, mortgage notes, precious metals, private placements and other alternative investments.
What investments or assets are not allowed in a self-directed IRA?
There are only three types of investments that are not permitted within a self-directed IRA: life insurance contracts, collectibles (with some exceptions for coins and metals), and S corporations.
Are my self-directed IRA investments guaranteed?
Since Entrust does not offer, provide nor endorse investment, it is up to the client to conduct proper due diligence with the investments they choose. Entrust does not and cannot guarantee any investment.
How are self-directed plan assets valued?
To comply with the IRS reporting requirements, plan assets must be valued at fair market value, not cost. According to the IRS, the Fair Market Value (FMV) is value of a property or asset, based on what a knowledgeable, willing, and unpressured buyer would likely pay to a knowledgeable, willing, and unpressured seller in the market. Entrust being the custodian of the IRA requires different levels of asset valuation depending on what purpose the valuation is being used for.
Should I seek the assistance of a financial advisor before I make a self-directed investment?
It is always recommended to seek the assistance of a tax, investment or legal expert before entering into any transaction so that they can guide you through the information you need to know to make an informed decision. These professionals can help your source your investment, conduct proper due diligence and discuss risks and rewards. If you decide that self-directing is for you, The Entrust Group can help you get started.