Self-directed IRAs are the best way to plan for retirement at your own pace, with the freedom and flexibility to choose where your money goes and how it will grow. Instead of being restricted to the handful of investment options suggested by your broker or banker, you choose where and how to invest your savings, and reap the maximum benefit.
Why let someone else behind the wheel when you can handle your retirement planning the way you want? With a self-directed IRA, you’re in complete control. At the same time, you still enjoy the tax breaks, asset protection and other advantages of government-sponsored retirement plans, for an all-round “win-win”.
You can decide whether to invest in stocks, bonds and mutual funds (the traditional options), or opt for real estate, promissory notes, tax liens, annuities, private businesses, currency and other asset classes in the modern investment market. The options are almost unlimited!
But don’t get mad – get educated. Welcome to Self Directed Retirement Plans – let us teach you about The The TRUE IRA!
- What is a Self Directed IRA
- How does a Self Directed IRA work?
- What Rules affect a Self Directed IRA?
- Funding of Self Directed IRA’s
- Advantages of a Self-Directed IRA
- Self-Directed IRA Investments
- Did You Know You Can Invest in Real Estate with Your IRA?
- Checkbook Control
- What does it mean if a retirement account is “Self-Directed”?
- Setting up a Self-Directed IRA
- IRA Rollover Process
- Self-Directed IRA Facts and Secrets
- Contribution Limits
- Pros and Cons of a Self-Directed IRA
An IRA is an Individual Retirement Account which most financial institutions and investment firms offer. With a self directed IRA, you may choose from a variety of investment products BUT you are generally limited to the choices provided by the particular custodian. Although these IRA’s are self-directed, the situation is similar to going to a Ford dealership and making a decision from the choices available. At the end of the day though, you still are forced to buy a Ford.
A true self directed IRA allows the client to “step outside the box” and invest in all the asset classes that are legally available. Now you can look at commercial and residential real estate, tax liens, loans – both hard money and regular, private placements, Trust Deeds, and precious metals just to name a few. At Self Directed Retirement Plans LLC, we specialize in these types of self directed IRA’s. Every IRA has to have a custodian, so the choice of custodians is very important. We use a “passive” custodian, they don’t have products to sell and realize their clients wish to be in the “alternative investment world.”
There are two main ways to employ a self directed IRA.
The first is to send instructions to the custodian to send a check or wire and purchase the investments in the name of the IRA. This is how most custodians prefer because it allows them to continuously charge for activity fees etc.
The second and preferred way is to use an underlying LLC. At Self Directed Retirement Plans LLC, we establish state approved LLC’s for each client. The LLC’s are “owned” by the self directed IRA and become the investment arm for the IRA. Our clients open a checking account for the LLC at a bank of their choice. We assist them to transfer the funds from the IRA (at the custodian) to the new self directed IRA LLC checking account.
Now they have a truly self directed IRA with checkbook control. When an investment opportunity arises, they simply write a check and immediately take advantage. There isn’t any waiting for permission etc.
For a technical answer, you can refer to the Internal Revenue Website at www.IRS.gov and request Publication 590 – specifically pages 40-41.
Generally, as long as you don’t violate the prohibited transaction rules and the disqualified person rules, you should be on the safe side of the IRS. We ask our clients to always call or email if they have any questions about these rules.
Prohibited Transactions – a self directed IRA cannot invest in collectibles such as works of art, rare automobiles etc. Also prohibited are life insurance contracts and shares of S corporations.
Disqualified Persons – these are persons the plan is forbidden to “do business with”. A more detailed list can be found on our site.
Transfers and new contributions are the main funding vehicles for self directed IRA’s.
Transfers can come from the following:
|Traditional IRA’s||Roth IRA’s||SEP IRA’s|
|Coverdell Education Acct’s||Profit Sharing Plans||Keoghs|
|Money Purchase Plans||Gov’t Eligible Deferred Compensation Plans|
A self directed IRA allows for “alternative” investments. The traditional investments offered by most financial institutions revolve around “the market”. These include but are not limited to stocks, bonds, mutual funds, reits etc. Most investors in these types of self directed IRA’s make their annual contributions not really knowing the intricacies of a mutual fund, classes of stocks, hidden fees etc. etc.
A TRUE self directed IRA allows the client to continue to invest in the traditional way but opens the investments to a whole new world – the “alternative” world.
Below are some of the asset classes available to a true self directed IRA.
A true self-directed IRA can invest in a myriad of allowable asset classes outside of the normal traditional investments.
Some of the allowable alternative investments are but not limited to:
- Real Estate – residential and commercial – condos, mobile homes foreign
- Raw Land
- Trust Deeds/Mortgage and Mortgage Pools
- Private Notes and Loans – e.g. Loans to a non-disqualified person for a car etc.
- Private Stock Offerings – also referred to as PPM’s
- Limited Liability Companies – LLC’s
- Limited Partnerships – LP’s
- Tax Certificates – Tax Liens
- Commercial Paper
- And MANY other investments
Prohibited Investments are but not limited to:
- Collectibles – Artwork, Rugs, Antiques, Metals, Gems, Stamps, Collectible Coins
- Stock in a S-Corporation
Disqualified Persons to a Self Directed IRA are:
- The IRA holder and his or her spouse, ancestors, lineal descendants and their spouses.
- Investment Advisors and managers.
- Any corporation, partnership, trust or estate in which the IRA holder has a 50% or greater interest.
- Anyone providing services to the IRA such as a trustee of custodian.
Everyone wants to invest in real estate. We have all seen our IRAs and 401Ks drop as the stock market continues it’s roller-coaster ride. How many of us would invest our retirement funds in real estate if we could? The answer; a lot!
What if you could get bank financing on those real estate purchases? Then it’s even more likely that you would want to buy real estate with your IRA.
Now, you can tap into that $3 Trillion retirement market and see your retirement income and your investment capital soar. Would you like to take advantage of investments like rental properties, lease to purchase transactions, fix-up real estate, or even commercial property? You may even be able to have YOUR OWN IRA purchase your dream retirement home right now!
It is a little-known fact that if you structure your IRA correctly, you can have 100% control and checkbook access to your assets to make the investments that are important to you; including real estate.
What is checkbook control? Simply stated; checkbook control allows the IRA holder to make investments decisions, write a check and take charge. Checkbook control eliminates the need for a Third Party Administrator or TPA. Most custodians adhere to the TPA model because it is very profitable. Imagine having to “ask” a custodian permission to invest your own money. Not only is it expensive but very time consuming. Compare that with the ability to immediately make a decision, write a check and adding assets to the self directed IRA!
Many custodial companies are using the term “Self-Directed” to describe the IRA and 401(k) products that they market. Unfortunately, what these companies aren’t telling you is that, when used to describe retirement plans, the term “Self-Directed” can actually have either of the following meanings:
These typically offer only limited investment options for plan owners (stocks, bonds, and mutual funds). You “Self-Direct” your account only in the sense that you choose your investments from a very limited list of stocks and mutual funds offered through your account custodian.
If you have an Ameritrade account (or similar), you have this kind of “Self-Directed” account.
These expand the investment options from stock and mutual funds to also include real estate, tax liens and a host of other potentially higher-yielding investments. Although this is a step in the right direction, owners of these Traditional “Self-Directed” IRAs soon learn that there are some significant drawbacks to this type of “Self-Directed” plan:
- Who’s The Boss? – Custodial “Approval” is required before you are allowed to make an investment. (Why should you need to get someone else’s approval to invest YOUR funds?)
- Delays – Ready to invest? GREAT! Now fill out the paperwork and WAIT up to a week or longer! (Say goodbye to time-sensitive investment opportunities!)
- Interest on Uninvested Funds – Uninvested funds are held in an account at the custodian that pays you little or no interest. (Shouldn’t you be the one making the interest on YOUR uninvested money?)
- Fees – Typical fees include a yearly “Maintenance” fee (usually based on a percentage of the market value of the assets in the plan), fees for buying AND selling assests, and fees for every little service from document safe-keeping to cashier’s checks and faxes.
Traditional IRA’s have been available since the mid 1970’s whereas Roth IRA’s are relatively new and not really understood by many people. Both are IRA’s and must adhere to the disqualified persons rule and the prohibited transaction rule and contributions must be from earned income.
Contributions to a Traditional IRA are made “pre-tax” meaning they are tax deductible. Contributions to a Roth IRA are made with “after tax” dollars, not tax deductible.
So what is the difference? It can be a huge difference. For example, someone 30 years old contributes $10,000 into a Traditional IRA. The $10,000 is tax deductible and may or may not produce a tax refund. The IRA invests wisely and is worth $200,000 and the person is now 60. The entire $200,000 is TAXABLE at the client’s personal tax rate. Using the same example but employing a ROTH IRA, the entire $200,000 is TAX FREE!! An easy way to think about this is: The IRS taxes you on the “seed” money but lets you have the “harvest” tax free.
A traditional IRA is subject to RMD’s – Required Minimum Distributions. The year after a person turns 70 and half, they are REQUIRED to begin taxable withdrawals. Even if you don’t want or need the money, you have to take the distributions. A ROTH IRS is not subject to these required distributions. Therefore a Roth IRA can be left for future generations in a tax free manner.
At Self-Directed Retirement Plans LLC, we assist and guide the client through every phase of establishing a true self directed IRA. Educating the client is a large part of our service. In many cases this is a new and sometimes scary world the client is entering and we do our best to inform the client and make them comfortable with their decision.
Below is a brief description of the steps we take to establish a self directed IRA.
- Establish the new self-directed IRA account.
- Assist the client to transfer their funds.
- Create a new state LLC that becomes the investment arm for the SD IRA.
- Using a SS4 IRS form, we obtain a new EIN for the LLC.
- We create a proprietary operating agreement for the LLC.
- We co-ordinate with the custodian all the required documents, such as transfer requests, Direction of Investment Letters (used to fund the LLC), LLC operating agreement, banking instructions etc.
One of the most important things we do is make ourselves available to answer all the client’s questions along the way and especially down the road. Nothing beats years and years of experience.
Funds can be rolled over or transferred from a previous custodian to a new self directed IRA. Although they accomplish the same goals, they have different rules.
A client cannot rollover funds if he has done so in the previous twelve months. Not knowing this rule could be disastrous. Transfers do not have that restriction.
We help the client fund their new self directed IRA using traditional rollover or direct transfer.
Fact – Ten thousand Americans are turning 60 EACH day. Many of them are eager to take control of their retirement dollars but don’t know where to turn.
Fact – Only 3 percent of retirement accounts are invested in real estate! Why?
Fact – Over 80% of retirement accounts are invested in the traditional market!
Secret – is your stockbroker going to take the time to educate you about true self directed IRA’s? Does he or his firm want assets walking out the door?
Secret – Whose ads do you see when you read through financial magazines?
Answer – traditional investment firms and mutual fund companies
Secret – Self Directed IRA profits are UNLIMITED
Too Good to Be True?
Sounds too good to be true? That’s only because these options aren’t well-known. The San Francisco Chronicle put it best when they said, “The reason you haven’t heard about them [these investment alternatives] is that there is little profit incentive for financial institutions, which primarily sell stocks and bonds to IRA accounts.” [Source: San Francisco Chronicle, January 6, 2003]
Your Banker or Stock Broker Is Not Telling You the Whole Story!
This is one of the little-known insider’s secrets that only a few of the Top Professionals across various financial professions have known for years. But it’s not enough to know this secret – the real impact comes from working with a qualified professional who knows how to grow your IRA or 401(k) assets by leveraging these secrets to make money for you by rapidly growing your asset base. And that’s why Self Directed Retirement Plans can serve as a tremendous asset to you.
Traditional and Roth IRA’s have certain restrictions. Contributions can be limited or eliminated depending upon a client’s AGI – adjusted gross income and/or contributions to company sponsored retirement plans.
Generally, contributions must come from earned income and the limits are:
$5,000 per year if you are under 50 years of age
$6,000 per year if you are 50 yeas of age or over
The pros certainly outweigh the cons. The pros of course are the ability to have total checkbook control and take immediate action when an investment becomes available. The con would simply be – you are now your own “investment” advisor and decision maker.