Self Directed IRA – What is it?

self directed ira
Most Americans that have been employed for any length of time know about retirement plans. They know that they can start a 401(k) or 403 (b) at their place of employment if offered by their employer.

What generally happens is that people leave one employer and during their lifetime go to other employment. In many cases, they have worked for 2 to 10 different employers during their working years.

When that happens they can roll over their pre-retirement dollars into an existing Individual Retirement Account (IRA) or establish a new one at a bank, credit union, brokerage account or even an annuity with an insurance company.

These entities are called the custodians of the IRA. For the most part, the investments inside the IRA are controlled or managed by any of the institutions mentioned above.

Sometimes, it would be prudent to start to combine these various retirement accounts into only one or two well planned IRA’s. It is important to know that the IRA is just a title to an account, it is not the investment.

The investment would be any of the assets that the IRA through a valid custodian invests in that are not prohibited transactions.

The investments available to the IRA participant are limited to the offerings of the entity that is the custodian. A bank or credit union typically will offer money markets or time deposits.

A brokerage account can offer stocks, bonds, mutual funds; Real Estate Investment Trusts and similar fee-based or commissioned investments. The insurance company offers annuities with surrender charges.

None of those options are necessarily bad, but they are limited to the wide array of investment opportunities that are available and allowed by the Internal Revenue Code.

A self-directed IRA would be any custodian that will offer the additional alternative investments such as direct investment into real estate known as real property, a Limited Liability Company, tax liens, promissory notes, and so forth.

So why is this important to know? It allows you the flexibility to manage and invest directly into your own investments, even your own real estate ventures if you so desire. A self-directed IRA allows you to invest directly in gold, silver, and other alternative investments. As long as the investment is not a prohibitive investment, it is a legal investment.

The main rule of thumb is that you cannot invest in something that you directly control or own or directly benefits you today, before retirement distributions.  That is key and the most important thing to understand about the self-directed IRA.

To be clear, self-directed ira is an option for the savvier investor who wishes to control their financial investments.

Because IRA’s are considered “retirement accounts” and technically speaking the IRA participant does not actually own the investments in the IRA, the IRA owns them.

In addition to that, a valid IRA custodian is required to handle and manage the investable assets within the IRA. As a result, there are a few more terms you should understand.

You will need to educate yourself on what the following terms are:

  • Prohibited transactions and investment
  • Disqualified Individuals
  • Indirect Investments
  • UBIT- Unrelated Business Income

So where does someone go to educate themselves on a self-directed IRA? You would need to get solid advice and education. Most likely your financial advisor or banker will not be able to advise you properly or educate you on this. Mainly because there is no fee-based, commission based or interest to be earned and commissioned to them.

However, a good place to start would be Equity Trust Corporation. They specialize in self-directed IRA’s. They have the education and IRA custodial capabilities to educate you. They can be found at Equity Trust Corporation.

Author

BA in Accountancy, he entered the entrepreneurial world by starting his first online marketing business in 2004. Passionate about personal finance, the stock market and a digital marketing addict. I also love to read books on entrepreneurship and technology and always on the lookout for new opportunities. I'm an avid golfer and currently a 15 handicapper.

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