Self-Directed IRAs: All You Need to Know

In addition to stocks, mutual funds, stocks, and other common investments associated with regular IRAs, self-directed IRAs (SDIRA) offer many more opportunities. With SDIRA, you have a wide range of investment choices, including, but not limited to, the following:

• Real estate – local or international
• Precious metals
• Cryptocurrency
• Private businesses
• Tax liens
• Private equity 
• Trust deeds and mortgages
• Limited partnerships
• Livestock 
• Oil and gas interests 
• Franchises
• Farmland

Benefits of Self-Directed IRAs

Three key benefits of self-directed IRAs include the following:

Tax benefits

All income, profit and appreciation from an investment in a self-directed IRA return back to the IRA. You don’t pay taxes on the income from the self-directed IRAs until you withdraw the earnings. But you have to pay a 10 percent penalty if you withdraw the money before the age of 59 1/2. We encourage you to discuss this with your tax services provider.

Diversify your investment portfolio.

Your investment opportunities go beyond the stock market, giving you many more lucrative options so you can hedge your portfolio against market volatility.

Better control of your financial future

A self-directed IRA gives you the freedom and flexibility to invest in your most profitable options. Like a traditional IRA, it’s not tied to an employer; it’s your individual retirement account.

In addition, you gain direct access to your IRA funds, pay reduced custodian fees, and leave behind a tax-advantaged legacy for your loved ones or charity.

Opening a Self-Directed IRA

There are dozens of custodians, which are often companies, including banks and trust firms, offering self-directed IRAs. Choose a custodian that allows investment in the assets you’re interested in. Fees for opening a self-directed IRA can be structured as follows:

• Flat fee
• Per-asset fee
• A certain percentage of the account’s value
• A combination of the above

You can open two types of self-directed IRAs:

1. Custodial self-directed IRAs 

The IRA owns each investment individually, and the custodian handles all funds and assets of the IRA. The custodian must approve, execute and fund every single transaction. This type of self-directed IRA can involve large fees and administrative delays.

2. Checkbook self-directed IRAs

The IRA can only purchase a 100 percent interest in a limited liability company (LLC) which you manage. The LLC may own multiple assets and have its own checking account controlled by you. As the LLC manager, you can make decisions on the company’s behalf, which reduces the involvement of the IRA custodian and reduces fees.

For a self-directed IRA with checkbook control, you must:

• establish a manager-managed LLC in your state
• open a business checking account in the name of your LLC
• open a self-directed IRA account with a custodian
• fund your self-directed IRA account
• direct the custodian to invest your IRA funds in your LLC
• find and purchase an investment for your LLC self-directed IRA

How to Invest with Your Self-Directed IRA?

Obviously, investing in alternative assets is riskier than bonds, mutual funds, and stocks. However, rewards can be greater. 

So, you’re encouraged to consult with an investment professional with specialized knowledge in a niche market you want to invest in. They can help you make an informed purchase decision.