A Self-Directed IRA is a proven way for investors to gain access to alternative asset classes not normally offered by most Wall Street investment companies. Most of them readily offer access to trade stocks, bonds, ETFs and mutual funds. Some of them also support trading in options on stocks and margin trading. But for the most part, if you want to diversify your portfolio into other asset classes in order to increase your expected returns, decrease your exposure to volatility, or both, while preserving the tax advantages of a retirement account, you are going to have to look at Self-Directed IRAs.
Self-Directed IRAs is it the right fit for you? Some people just do not have the skills or financial sophistication to take personal charge of their IRA investments, pulling them from the control of a money manager. They may need the assistance of a professional mutual fund manager or stockbroker to help them manage their portfolio. Or, they may simply not have time for managing investments, because they do not enjoy it.
Who is Ready for a Self-Directed IRA?
A Self-Directed IRA can be an excellent match for certain investment minded people. If the following criteria apply to you, you may be ready for a Self-Directed IRA.
1.) You have professional-level knowledge of real estate, precious petals, private equity, technology, small business or some other asset that gives you a meaningful competitive trading advantage over the market.
2.) You understand the different kinds of risk that could affect your investments, including, but not limited to, market risk, systematic risk, interest rate risk, inflation risk, legislative risk and company or investment-specific risk.
3.) You generally have an independent or entrepreneurial spirit.
4.) You know how to read a cash flow statement and a balance sheet.
5.) You understand the rules governing prohibited transactions and prohibited investments in IRAs.
6.) You want to save hundreds and possibly thousands of dollars in fees every year, compared to the high assets under management (AUM), wrap fees, expense ratios, 12-b-1 fees and other fees the Wall Street firms charge.
If all these apply to you, it may be time for you to consider a Self-Directed IRA.
There are some important things to understand before you invest:
Self-Directed IRA Rules
You cannot buy an investment in your own name, expecting to transfer it into a Self-Directed IRA later. The law prohibits your IRA from buying or selling to you, personally. Your IRA also cannot transact directly with your spouse, children, grandchildren, parents, grandparents, or any entities they control.
For example: John is an experienced real estate investor and finds a promising property that would make a great candidate for his first investment in a Self-Directed IRA. However, he does not have a Self-Directed IRA account set up with a custodian or third-party administrator. So he goes ahead and has his own real estate investment LLC buy the house. He cannot then transfer the house into his IRA. Since he controls the LLC, the IRS could disallow the entire investment, and force him to take a distribution on the entire value of the account. This would result in a big income tax bill and potential penalties for early withdrawal – plus a bunch of legal fees.
Making Your First Self-Directed IRA Investment
The correct way to go about buying your first Self-Directed IRA investment is to:
- Contact American IRA, LLC directly at www.AmericanIRA.com, or by phone at 866-7500-IRA(472).
- Fill out a couple of forms to open an account. You can choose to open a Traditional IRA, a Roth IRA, or if you have self-employed income or a small business, a SEP IRA, SIMPLE IRA or a Solo 401(k).
- Transfer funds from a qualified source into the account. If you qualify, you can make up to $5,500 in new contributions to an IRA or Roth IRA per year – and you have until April 15th to make IRA contributions for the previous calendar year. You can also roll over money from another IRA or qualified retirement account. In most cases, the best way to accomplish this is via a trustee-to-trustee transfer. This way, you will not take personal possession of the assets – and risk making a costly mistake. If you are transferring money from a 401(k), you also will not have to worry about your old 401(k) custodian withholding 20 percent to forward to the IRS to pay expected taxes.
- Identify the asset you want to purchase for your Self-Directed IRA (or other retirement account).
- Provide American IRA, LLC with detailed instructions on what to purchase, from whom, and for how much.
- Have any attorneys involved draw up the title naming your Self-Directed IRA as the owner, NOT YOU. Mistitling the assets in a Self-Directed IRA can lead to big problems down the road.
- Confirm the purchase is made correctly.
American IRA will log the transaction and ensure it is completed according to the law.
Note, American IRA handles the transaction. We do not determine whether the investment is appropriate for you or your portfolio. That is between you and your financial advisors. We work with your existing advisors to make sure your directions to us are handled promptly and accurately.
That is part of what it means to have a Self-Directed IRA: You take more direct and personal control of your retirement investments. You may hire some advisors to help you, but ultimately, you, and not some distant fund manager who does not know you or your goals, are in charge of managing your Self-Directed IRA portfolio.