What is a Self Directed IRA?

June 10th, 2014 at 9:44 AM

A self directed IRA is an individual retirement account (IRA)–classified as a Roth, Traditional, SEP, Inherited , or SIMPLE. Self directed allows the custodian to invest these funds into any investment allowed by law, typically:

  1. Real Estate
  2. Promissory Notes
  3. Precious Metals
  4. Private Company Stock

The typical reaction I hear from investors is ” Why haven’t I heard of the self directed IRA before, and why can I only invest my current retirement plan into mutual funds or stocks?” The reason is that the large financial institutions that administer most U.S. retirement accounts do not find it administratively feasibly to hold real estate or non-publicly traded assets in retirement plans.

Under current law, a retirement account is only restricted from investing in:

  1. Collectibles, such as art
  2. Coins
  3. Alcoholic beverages
  4. Antiques
  5. Life Insurance
  6. S Corporation Stock
  7. Any investment that constitutes a prohibited transaction to ERISA and or Internal Revenue Code Section 4975

The most popular self directed retirement accounts are:

  1. Rental Real Estate
  2. Secured loans to others for real estate
  3. Small business stock or Limited Liability Company (LLC) interest
  4. and Precious Metals such as gold or silver

What is an IRA/LLC

Many self directed retirement account owners, particularly those buying real estate, use an IRA/LLC as the vehicle to hold their retirement account assets. An IRA/LLC is a special type of LLC, which consists an IRA account owner investing its cash into a newly created IRA/LLC. This entity is managed by the IRA owner, and the IRA owner then directs the LLC investment; and the LLC takes title to the assets, pays the expenses to the investment, and receives the income from the investment.

There are many restrictions to the IRA owner being manager and many laws to consider, so please consult an attorney or informed CPA before establishing an IRA/LLC.

Are you overpaying your taxes?
Let's Talk