A Self-Directed IRA is fairly easy to understand. It means that the investor takes control over the IRA, making decisions about what goes into the retirement account by working with a custodian who offers the service of being able to transact in alternative asset classes like real estate, precious metals, and more. But that introduces a new idea: the role of the custodian, or Self-Directed IRA administrator. What exactly is this role, and what are Self-Directed IRA administrators like in practice? Here’s what you’ll need to know.
Why People Use Self-Directed IRAs
Let’s start by explaining why people flock to Self-Directed IRAs in the first place. A retirement account is easy enough to understand—an investor can use a Self-Directed IRA to make tax-advantaged investments in a wide range of stocks and funds. Then, when the investor retires, they can use these funds to help with the costs of retirement. With the growth possible in a tax-advantaged account, people can leverage Self-Directed IRAs for all sorts of great retirement plans.
But what about that phrase “self-direction” makes it so much different from a traditional arrangement? In this case, self-direction refers to working with a third party who administrates the Self-Directed IRA. In other words, a third party serves as custodian of the IRA, handling paperwork on transactions like buying or selling within the IRA. This leaves the investor in charge of the IRA, but the IRA custodian still plays a critical role.
It’s through working with a custodian that investors can choose alternative asset classes within a Self-Directed IRA, such as precious metals, tax liens, and a variety of real estate investments. For investors who want the tax advantages of an IRA but also want to expand beyond stocks and funds, a Self-Directed IRA is a powerful way to plan for retirement.
What the Self-Directed IRA Administrator Does
An administrator, also known as a Self-Directed IRA custodian, does not offer financial advice on the account. Instead, they work as the third-party handling paperwork duties, making sure that the transactions go through as the investor intended. This means that the IRA administration firm you work with does not take an active role in investing, but simply maintains the account as directed by you, the investor.
What does this mean for the investor? The term “Self-Directed” isn’t just a partial accuracy. You truly are directing your own account. When you direct your Self-Directed IRA administration firm to make a purchase on the IRA’s behalf, it’s your decision. The administration firm simply carries it out in a way that makes sure all the paperwork is appropriately handled.
As a Self-Directed IRA investor, you are tasked with keeping your personal and retirement investments separate. This is a key distinction which helps ensure that you have the retirement benefits that you’re supposed to enjoy. By keeping these separate, you avoid taxes and penalties that come when the IRS deems that you’ve taken an early withdrawal on an account.
Once you know what this means, you’ll see that the Self-Directed IRA administration firm plays a critical role. It’s in working with an experienced IRA administration firm that you make the process of IRA investing easier and more intuitive. By working with a custodian, you can enjoy the tax benefits of retirement investing—while also potentially expanding your IRA portfolio to a wider range of retirement assets.