As equity prices soar – and arguably become more dangerous – more Americans are looking to diversify into other asset classes by opening a Self-Directed IRA. These are IRAs that enable them to think beyond Wall Street financial products like stocks, bonds and mutual funds and get into alternative asset classes like gold, silver, direct ownership of real estate, closely-held corporations, partnerships and LLCs.
There are loads of advantages to doing so: A Self-Directed IRA can help diversify your portfolio and may help protect you in the event of a stock market decline, a sudden increase in interest rates or bond yields, or a major spike in inflation that would devastate paper assets. But there are some things to understand before you make your first actual Self-Directed IRA transactions:
- Your Self-Directed IRA cannot transact with certain family members.
You cannot use IRA funds to engage in self-dealing, nor to enrich certain immediate family members. Specifically, your Self-Directed IRA may not buy or borrow from, nor sell or lend to, yourself, your spouse, your descendants or ascendants or those of your spouse, an advisor who services your IRA account or provides advice on it in the role of a fiduciary, nor can you transact with any entities any of these individuals control.
If you do so, you will violate prohibited transaction rules, and the IRS may disallow the transaction and potentially revoke the tax-preferred status of the entire Self-Directed IRA. This would potentially result in a significant current-year income tax hit. It would also potentially expose you to penalties, if you are under age 59½.
- You need a specialized third-party administrator or custodian. You cannot run a Self-Directed IRA on your own, because IRA rules prohibit you from taking direct personal possession of assets. You will need to partner with an independent firm to hold assets and conduct transactions for the Self-Directed IRA on your behalf.
Few traditional banks or Wall Street firms will do this for alternative asset classes. They do not get any revenue streams if your Self-Directed IRA buys a rental property down the block. Generally, you will need to enroll the services of a company like American IRA, which specializes in handling Self-Directed IRA assets, and executing, recording and reporting transactions in a way that is compliant with the law and with IRS regulations.
Additionally, while these companies do not provide individualized investment or tax advice, they may be able to identify potential compliance pitfalls such as prohibited transaction rules and obvious signs of potential fraud.
- You can buy almost anything, but not
The Self-Directed IRA is a remarkably versatile vehicle. You can use the Self-Directed IRA structure to invest in nearly anything whether it is publicly traded or not. You can also use it to conduct transactions with nearly any private party, as long as they are not on the list of prohibited counterparties, above, or if doing so would violate U.S. sanctions against foreign governments and other entities.
The only things you cannot own within a Self-Directed IRA are life insurance contracts, collectibles, art, jewelry and gemstones, alcoholic beverages and certain forms of gold or bullion that is of insufficient or uncertain purity and provenance.
If you have any doubts about a possible investment, call us today at 866-7500-IRA (472) and speak with one of our compliance professionals. We cannot advise you on the suitability of the investment for your portfolio, but we can tell you if the investment may cause a compliance issue.
- Do your due diligence. At American IRA, our clients are naturally attracted to alternative investments that are usually unregistered. This means that the investor is taking on much more of the burden for due diligence. There are often no financial statements vetted by a third party as there are with publicly-traded companies in the United States. It is up to you to secure financial statements and other material information and weigh their accuracy prior to investing.