Are You Ready for a Self-Directed IRA?

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, 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.

Bitcoin, Is It Right for You?

The rise of cryptocurrencies is getting a lot of press lately, with Bitcoin – the largest of them by market cap – getting the lion’s share of the coverage. Do they belong in a Self-Directed IRA? Is there a place for a Bitcoin IRA? Or a Litecoin or Ethereum IRA? Or a Ripple IRA? Sure. But be very careful before you commit funds and try to actually add cryptocurrencies like Bitcoin to your IRA or other self-directed retirement account.

Let us consider Bitcoin and crypto in general from some different perspectives. Do cryptocurrencies such as Bitcoin warrant a place among other alternative asset classes as a way to help diversify a portfolio? A few months ago, people like Citigroup Chairman Jamie Dimon were dismissing Bitcoin as a fraud on the market. A Dutch tulip bubble waiting to happen.

On the other hand, a recent paper from a Johns Hopkins University professor and a Maryland pension fund officer is suggesting that it is time for pension funds and other institutions to consider cryptocurrencies like Bitcoin for their own portfolios.

Why? The answer lies in the volatility of the asset class: Cryptocurrencies like Bitcoin are subject to big price swings in short periods of time. Changes of up to 25 percent and more in a single day are not uncommon. In some currencies, they are routine.

They are also not yet closely correlated with any other asset class. A small event like Bloomberg adding a new cryptocurrency asset to its trading terminal can cause a massive price swing that has no effect on the rest of the market. A single big holder dumping shares can send prices plummeting – and again would have no effect on stocks, bonds, real estate, or anything else besides maybe other cryptocurrencies.

So someone with a Self-Directed IRA who is a big fan of Harry Markowitz and Modern Portfolio Theory might be very attracted to the idea: Adding a very small exposure of Bitcoin to your IRA – the paper’s authors recommend less than 2 percent – can potentially add a lot of alpha to a Self-Directed IRA portfolio without increasing the portfolio’s overall risk by much. Indeed, because the correlation between Bitcoin and other asset classes is so low, it may even reduce your Self-Directed IRA portfolio’s overall volatility.

Are Bitcoin IRAs legal? 

If you do it right, holding Bitcoin in an IRA is legal. The IRS only prohibits a few types of assets from being included in Self-Directed IRAs, and Bitcoin is not on the prohibited list.

But doing it right gets tricky very fast. Why? Because the law prevents individuals from taking direct possession of assets within their IRA. For example, you can own certain kinds of gold coins in your IRA. But you cannot keep them in a safe in your living room. If you do, and the IRS finds out, you could wind up losing not only the gold investment but also having the entire prohibited account distributed.

The same applies to cryptocurrencies. It is common, for example, for people to hold Bitcoin on a hard drive or digital “wallet” in their possession. But this would probably violate the law.

Chances are very good that a lot of people searching for “Bitcoin IRAs” now do not grasp this – and run the risk of making an illegal transaction.

Is Bitcoin or any other cryptocurrency a sound investment? Who knows? No one has a crystal ball, but its volatility and lack of any kind of ‘anchor point’ for its value suggests caution. But if you decide the risk is for you, and you want to hold it in an IRA, keep this in mind:

  • Cryptocurrencies are very young, and the rules and legal precedents for how they will be handled in an IRA have not yet been established.
  • You cannot hold the cryptocurrency directly. In practice, this probably means you can not hold the discs your cryptocurrency is stored on, directly, either.
  • Consider holding Bitcoin indirectly, through BIT (Bitcoin Investment Trust) or other intermediaries. You may need to be an accredited investor to invest. But it will eliminate the complication of holding it yourself. You can have American IRA, LLC handle the transaction, which will keep the cryptocurrency safely out of your personal possession.
  • Do not make any moves without a thorough understanding of prohibited transactions.
  • Be prepared to get a third-party valuation. This is especially important if you are subject to RMDs, or soon will be subject to RMDs.