SDIRA 101: Your Self-Directed IRA Basics

By The Entrust Group, Jul 03, 2019 , in What is a SDIRA?, Benefits of SDIRAs, Getting Started

Estimated reading time: 4.5 minutes

If you’re new to the world of retirement planning, you may or may not be familiar with Individual Retirement Accounts (IRAs). The name is straightforward; the purpose of an individual retirement account is to accrue the savings and investments that will fund your life after work.

What A Self-Directed IRA Is

A Self-Directed IRA (SDIRA) is quite simply, an IRA. All IRAs abide by the same laws and possess the same capabilities. What separates a Self-Directed IRA from the rest is merely this: access and control – as a person with a SDIRA, yours are unlimited.

Why It’s Great

Control: with a Self-Directed IRA, you are the master, commander, and captain of your retirement account. While your account does require a custodian/administrator to do the recordkeeping for the assets in your account, nothing moves in or out of it without your say so.

You decide how much, when, and most of all, what to invest in. You have the freedom to invest in the things that interest you and can pass on anything that doesn’t. A Self-Directed IRA gives you the opportunity to build a truly diversified (thus, more resilient) portfolio, and take advantage of alternative investments.

What You Can Invest In

Any investment opportunity that is legally allowed can be held in your SDIRA. If the law allows the investment, your SDIRA can hold it — period. No other retirement plan or account can claim the same. Most of all you can source, vet and decide which investments you choose to hold within your IRA. You will not be limited to the investments a given financial organization might offer since Self-Directed IRA providers do not offer investments.

Rather than insist on particular investments and restrict access to others (such as alternative assets), a Self-Directed IRA cracks the concept wide open to give you access to its full potential.

Examples of what a SDIRA can invest in:

Private equity

Private placements

Limited Liability company (LLC)
Limited partnership (LP)
Joint ventures
Venture capital
Startups
REITs

Developed or undeveloped land
Single-family homes
Office building
Shopping center
Parking garage
Hotel
Retirement home
Industrial building

Mobile home park
Farm
Condominium
Mortgage notes
Performing or non-performing notes
Micro loans
Oil and gas investments

Livestock
Crowdfunding
Hedge funds
Precious metals such as gold, silver, palladium or platinum
and more

The ability to invest in alternative assets in addition to standard ones such as stocks, bonds, and mutual funds can help you weather market upsets and losses (per the diversification we mentioned in the previous section). See investment restrictions here.

Responsibility

With great power, comes great responsibility – the phrase is more of a truism than a cliché, especially here.

As we’ve discussed, with a SDIRA the power you have to control your retirement account is unmatched. The flip side is however, that you are now entirely responsible for whatever occurs within it.

While the account must be administrated by a custodian or administrator, due diligence is the responsibility of the account holder, not the custodian/administrator. Knowing and abiding by the laws surrounding IRAs is also the account holder’s responsibility.

It is highly recommended that IRA holders consult with their legal and/or tax advisors before entering into any transaction.

Avoiding Prohibited Transactions

Knowing what transactions are legally prohibited is essential to Self-Directing your IRA.

IRS Publication 590 defines a prohibited transaction as any improper use of your IRA by you, your beneficiary, or any disqualified person.

Types of prohibited transactions:

Sale, exchange or leasing of a property between an IRA and a disqualified person. Example: Your IRA purchases a home, which you lease to your daughter.

Extension of credit or cash loan between an IRA and a disqualified person.
Furnishing goods, services, or facilities between an IRA and a disqualified person. Example: Hiring your son-in-law to paint the walls of a condo owned by your IRA.

Picking the Right Track

As an individual investor, you have two IRA tracks to pick from: Roth and Traditional. The two are very similar, but differ in their retirement tax benefits. Investors who are business owners have options such as SEP IRAs, SIMPLE IRAs, and solo 401(k)s.

A Traditional IRA is tax deferred account which allows for the earning to grow untaxed until distributed. Contributions made to a Traditional IRA are typically made on a pre-tax basis for individuals who qualify for the benefit of tax deduction; taxes are collected when the account holder takes a distribution (withdraws funds from the account).

As for scheduling, a Traditional IRA has required minimum distributions due upon attainment of age 70 ½. You must take a minimum distribution annually after reaching age 70 ½ to avoid penalties, at which point you are no longer allowed to make contributions to a Traditional IRA.

A Roth IRA is taxed upfront, thus contributions can’t be used as a tax deduction. The funds grow tax-deferred, and can be distributed tax-free after all requirements have been met. Roth IRAs are not subject to required minimum distributions, so no distributions are required when you turn 70 1/2. Roth IRAs allow you to make contributions as long as you have earned income; there is no cut off due to age. However, there is an income limit.