A self-directed IRA is simply an IRA. The key distinction lies in the range of investments that you can hold in it. With other IRAs, you’re only able to invest in stocks, bonds, and mutual funds.
With a self-directed IRA, you have the flexibility to invest in a broader array of alternative assets including real estate, LLCs, mortgage notes, precious metals, and more. This opens up opportunities to diversify your portfolio and potentially explore new investments to further your financial goals.
An IRA from a bank or brokerage only allows investment in traditional assets like stocks, bonds, and mutual funds.
A self-directed IRA empowers you to invest in any asset that the IRS allows, granting greater potential for diversification, flexibility, and control over your retirement funds. SDIRAs allow those with a certain expertise to invest in assets they’re familiar with, such as real estate or private equity.
Additionally, self-directed IRAs are truly self-directed. You have complete control, and no transactions occur without your explicit direction.
A self-directed IRA offers several notable benefits, including:
While self-directed IRAs offer several advantages, it's important to be aware of the potential disadvantages:
It's essential to evaluate your risk tolerance, financial goals, and investment expertise before opening a self-directed IRA.
The main difference between a traditional IRA and a Roth IRA lies in how they are taxed. Here are the key distinctions:
*If certain requirements are met
Yes — in general, anyone can open an SDIRA with a qualified custodian, even those under the age of 18.
Documentation will vary depending on the asset being purchased. However, the documentation required will be the same as if you were purchasing the asset using your personal funds.
Keep in mind, you will not personally own any assets. Until a distribution is made, all assets are under the custody of the IRA. You will merely direct Entrust to purchase or sell investments on behalf of the IRA.
Take a look at our Forms page for a sneak peek into the types of documentation we’ll need from you.
Learn about your investment options, Self-Directed IRA rules, and much more!
While your SDIRA offers flexibility in investment choices, there are certain types of assets that cannot be held in an IRA:
Alternative assets represent a departure from traditional asset classes such as stocks, bonds, and cash. They offer unique risk-return characteristics and give investors additional investment opportunities to diversify their portfolios.
Unlike stocks and bonds, which are commonly traded on public markets, alternative assets are not typically found on major exchanges. Instead, they’re accessed through private markets or deals. Some examples include real estate, private lending, and private equity. These assets typically have a lower level of liquidity and may require specialized knowledge or expertise to understand and evaluate.
Performing due diligence before making an investment purchase is crucial to make informed decisions and mitigate risks. Here are some key steps to consider:
By performing thorough due diligence, you can gain a better understanding of the investment, its associated risks, and the potential returns. However, this list is certainly not exhaustive.
Consult with financial advisors, legal professionals, or other experts who can provide guidance and expertise. They can help analyze the investment, assess its suitability for your specific circumstances, and provide an impartial perspective.
Yes, an IRA LLC is often referred to as a checkbook control IRA. This structure combines the benefits of a self-directed IRA with the flexibility and control of a limited liability company (LLC).
In an IRA LLC, the self-directed IRA is the sole member of the LLC, and you, the IRA holder, act as the manager of the LLC. This structure grants what is commonly known as checkbook control, allowing you to make investment purchases quickly and easily. Rather than waiting on a custodian to fulfill your request for each transaction, you’ll be able to write checks or make electronic transfers directly from the LLC's bank account.
While an IRA LLC offers increased control and flexibility, it also requires careful adherence to IRS rules and regulations. It is essential to establish and maintain the LLC properly, follow self-dealing and prohibited transaction rules, and ensure that all transactions are for the benefit of the IRA and comply with tax regulations.
Consult with a qualified tax professional or financial advisor to ensure compliance with IRS guidelines.
Absolutely. Sometimes known as a “real estate IRA”, self-directed IRAs offer the flexibility to invest in a wide range of real estate options, including single-family homes, multifamily properties, commercial space, raw land, and more. With an SDIRA, you can enjoy tax advantages and the ability to grow and diversify your portfolio with real estate investments.
Download our 5 Steps to Investing in Real Estate Report to get started.
Some common examples of real estate investments allowed in an SDIRA include:
No, you cannot live in a property owned by your SDIRA. According to IRS regulations, you are considered a disqualified person in relation to your IRA. Certain individuals, including yourself, are prohibited from using or benefiting from assets owned by the IRA.
The purpose of an IRA is to provide tax advantages for retirement savings, not to provide personal benefit. If your IRA is involved in a prohibited transaction, the entire account may be disqualified in the year the offense is made. This could lead to a hefty tax bill and early distribution penalty.
It's important to keep your personal and retirement assets separate and ensure that any transactions involving your self-directed IRA comply with IRS rules and regulations.
When handling property maintenance, repairs, and expenses within your SDIRA, it's important to adhere to IRS guidelines and protect the tax-advantaged status of your account. Here are some guidelines to keep in mind regarding maintenance costs for properties held in your SDIRA:
Consult with a specialized tax advisor or financial professional to navigate specific rules and regulations pertaining to your SDIRA and property expenses.
No, your IRA cannot purchase a property that you or any disqualified persons already own personally.
Technically, the SDIRA holder is allowed to be the property manager of an asset held in the account. However, as a disqualified person, you cannot benefit from the investment, collect any rent payments directly, or perform any repairs or improvements by yourself. Otherwise, you risk jeopardizing the tax-advantaged status of the account.
Many real estate investors choose to hire and pay a property manager to avoid possible prohibited transactions.
Yes, although you cannot guarantee a loan with your personal funds or credit history. Instead, your SDIRA may take on a non-recourse loan to finance the purchase of an investment property.
In a non-recourse loan, the property itself serves as the collateral. The lender's only recourse in case of default is the property itself. Lenders often view non-recourse loans as riskier than a traditional mortgage. So, many will ask for a larger down payment or only fund multifamily real estate to mitigate risk.
If your SDIRA takes on a non-recourse loan, the account will be subject to unrelated debt-financed income (UDFI).
In lieu of a non-recourse loan, investors may consider partnering to stretch their investing budget. At the time of investment, your IRA may partner with anyone, including your own personal funds or those of a disqualified person.
No, you may not use an SDIRA to buy a second home. At least, not a home that you intend on living in any time soon.
Using IRA funds to purchase a personal residence is considered a prohibited transaction. If you or any disqualified person benefits from a transaction with your IRA, this would be considered self-dealing.
Learn how to invest in residential and commercial properties with your retirement funds.
Both “Gold IRA” and “Precious Metals IRA” are terms to communicate the fact that IRAs are capable of holding precious metals such as gold, silver, platinum, and palladium. However, the true umbrella term is in fact a self-directed IRA.
A self-directed IRA that allows precious metals investment requires a custodian who specializes in facilitating these types of investments. The SDIRA custodian provides information to help you navigate the process of purchasing and storing precious metals in a secure and compliant manner. This ensures the assets meet the IRS requirements for inclusion in an IRA.
The IRS requires that all IRA assets, including precious metals, be held by a qualified custodian. The role of the custodian is to hold the investment on behalf of the IRA holder and follow the rules prescribed under the Internal Revenue Code.
Not all precious metals may be held in an IRA. The eligible metals for inclusion in an IRA are typically gold, silver, platinum, and palladium in the form of specific coins and bars that meet certain purity requirements.
No. As the IRA is self-directed, you will need to negotiate the purchase price with the dealer without Entrust’s assistance. Entrust is not affiliated with any precious metals brokers.
No. As the SDIRA holder, you are not allowed to take physical possession of the precious metals held within your IRA until distribution. The IRS requires that the precious metals be held by a custodian or a depository on behalf of your IRA. Taking personal possession of precious metals owned by your SDIRA qualifies as a distribution and can be a taxable event.
While you cannot personally possess the metals, you still benefit from the potential growth and tax advantages of owning precious metals within your self-directed IRA. It's important to work with a reputable self-directed IRA custodian like Entrust, who can guide you through the process and help you understand the rules and restrictions associated with holding precious metals in your IRA.
Precious metals may be purchased from any dealer of your choice. Perform thorough due diligence on the vendor, including their business ratings, experience, security, affiliations, and more.
Conduct a proper review of the terms of the agreement and pricing. If the price is not competitive with other dealers, that may be a bad sign.
Note: Entrust does not sell or promote any products or vendors.
Each year, you will provide Entrust with the Fair Market Valuation of all assets held in your account. We submit this information to the IRS annually to ensure accurate and proper tax reporting.
Nothing else is reported, unless a distribution has occurred.
To contribute to an SDIRA, you must have earned income during the year. In the eyes of the IRS, this includes wages, salaries, commissions, and self-employment income, among others. However, this does not include passive income such as earnings from property (rent), interest and dividend income, pension or annuity income, deferred compensation, and income from certain partnerships.
All Roth IRAs are subject to income limits. If you earn above a certain threshold, you will not be able to contribute for the year. Further, while anyone with earned income may contribute to a traditional IRA, their contributions may not be tax-deductible. If you or your spouse have a retirement plan at work and earn above a specified amount, your contributions will be nondeductible.
If your income prevents you from contributing to a Roth IRA, you may still perform a rollover from a previous employer’s employer-sponsored plan’s Roth account or complete a Roth conversion.
Disqualified persons are individuals or entities prohibited from engaging in certain transactions with the IRA. They include the account holder, lineal descendants and ascendants (spouse, parents, grandparents, children, and grandchildren), spouses of lineal descendants and ascendants, fiduciaries and service providers, and certain business entities.
Engaging in prohibited transactions with disqualified persons can have severe tax consequences, including IRA disqualification.
A prohibited transaction is any transaction that is forbidden by the IRS. These transactions include:
Prohibited transactions can result in severe tax consequences, including IRA disqualification.
FMV stands for Fair Market Valuation. It refers to the value of an asset or property based on what a knowledgeable buyer and seller would agree upon in an open and unrestricted market.
To maintain IRS compliance, it is mandatory to submit an FMV for all assets held in an SDIRA each year, as well as for other specific transactions.
The five-year rule determines when distributions of earnings from a Roth SDIRA become tax-free. It states that at least five years must have passed since the first contribution was made to the Roth SDIRA, and the distribution must also meet one of the following criteria:
Adhering to the five-year rule allows individuals to enjoy tax-free withdrawals of the earnings generated by their Roth SDIRA.
Unrelated Business Income Tax (UBIT) applies to income generated by an IRA from an active trade or business that is unrelated to the IRA's primary purpose of providing retirement income.
For instance, if your IRA owns 100% of a successful pizza parlor, then it may take in a generous revenue stream each month. This income is considered trade or business income, rendered taxable by the Internal Revenue Code. Otherwise, the store would be able to price its pizzas at a much lower rate, creating an anti-competitive environment.
However, if your IRA sold 100% of the shares in that pizza parlor, then any capital gains would not be taxed by UBTI. Capital gains are considered related to the IRA’s primary purpose.
UBIT is calculated based on the net income generated by unrelated business activity, and the tax is determined by trust tax rates. If the gross income is $1,000 or more, the IRA must file IRS Form 990-T.
Unrelated Debt-Financed Income (UDFI) applies to income generated from a debt-financed property within an IRA. UDFI is a type of UBTI. For example, if an IRA uses debt or leverage to acquire an investment property, the portion of income attributable to the financed portion is considered UDFI.
For instance, if your SDIRA purchased a condo for $100,000, using a non-recourse loan to pay 50% of the purchase price, then 50% of the net income will be subject to UDFI tax.
Yes, it is generally possible to move your existing retirement funds to a self-directed IRA. This process is known as a transfer or rollover. Contact your plan administrator to move funds from an existing IRA or inactive employer-sponsored plan into an SDIRA.
However, if the majority of your retirement funds are in an active employer-sponsored plan like a 401(k), you may not be able to complete a rollover. Most employer-sponsored plans prohibit moving funds out while the plan is active.
Check with your employer. If they allow in-service withdrawals, you may still be able to roll over your funds into an SDIRA..
A transfer involves moving funds directly from one retirement account to another, such as transferring funds from one traditional IRA to another traditional IRA. In this process, the funds travel directly from one financial institution to another; the IRA holder never takes possession.
A direct rollover is similar to a transfer, although it involves a change in account type. For instance, if you’d like to move the funds from an account with a previous employer’s 401(k) to a traditional IRA, you would initiate a direct rollover with your prior employer. Again, you would never take possession of the funds, so the transaction is not reported to the IRS.
An indirect rollover involves taking a distribution from one retirement account, such as a 401(k) or traditional IRA, and then depositing it into another eligible retirement account within 60 days.
As of 2023, the annual contribution limit for a traditional or Roth SDIRA is $6,500 for individuals under the age of 50 and $7,500 for individuals aged 50 and above (considered catch-up contributions). These limits apply to the total combined contributions across all your IRAs.
Certain factors, such as your income and participation in an employer-sponsored retirement plan, will determine whether you’re able to make contributions to a Roth IRA or whether traditional IRA contributions are tax-deductible.
If you have a 401(k) from a previous employer, you are likely able to roll the funds into an SDIRA. Simply open an SDIRA, contact your 401(k) provider, initiate a rollover, and then you can invest the funds.
However, if your 401(k) is with a current employer, then you may not be able to move funds out of the account. Contact your plan administrator. If they allow in-service withdrawals, you may still be able to complete a rollover.
If you’re set on a specific investment, there are a few strategies you can employ to increase your purchasing power: partnering and non-recourse loans.
With partnering, you can pool your SDIRA funds with other investors or partners to collectively invest in larger valued assets. By combining resources, you can access opportunities that may be beyond your individual investment capacity.
Non-recourse loans are utilized for real estate purchases. These loans are secured by the property itself. This allows you to leverage your SDIRA funds and acquire larger assets while minimizing personal liability.
Yes, your SDIRA can partner with anyone, even disqualified persons, on a new transaction. In the eyes of the IRS, new transactions are not subject to the disqualified person rule. The new investment is owned by a third party, so a simultaneous investment by your IRA and your personal accounts is not considered a prohibited transaction.
This means you’re able to partner your SDIRA with other IRAs, non-IRA funds, or even a mixture of the two. However, once the initial transaction is complete, all standard rules concerning disqualified persons come into effect.
You can take a distribution at any time. However, you may be subject to an additional early distribution penalty of 10% if you are under the age of 59½.
Once you reach the age of 59½, you can take distributions from your SDIRA without incurring an early 10% withdrawal penalty. Additionally, there are certain scenarios that may allow you to take an early distribution without incurring a 10% penalty. This includes a first-time home purchase, disability, or death of the account holder, just to name a few.
If you have a Roth account, remember that your contributions have already been taxed. So, you’re able to withdraw your original contributions at any time penalty-free.
Note: This does not apply to earnings. Earnings may be distributed tax-free if you satisfy the five-year rule and are at least 59½ or meet one of the scenarios listed above.
Yes, barring some exceptions, you will have to pay a hefty penalty for taking a distribution prior to age 59½. The penalty is 10% of the taxable portion of the distribution amount, in addition to any applicable income taxes on a traditional SDIRA distribution.
If you have a Roth account, you may generally withdraw your original contributions at any time. However, you will pay taxes and penalties for a non-qualified distribution of earnings generated by the account.
When you take a distribution from a traditional SDIRA, the amount withdrawn is generally subject to income tax. The distributions are taxed at your ordinary income tax rate in the year they are taken.
Qualified distributions from a Roth SDIRA are tax-free. To be considered qualified, the distribution must meet two conditions: (a) the Roth account must have satisfied the five-year requirement, and (b) you must be at least 59½ years old, deceased, disabled, or using the funds for a first-time home purchase (up to a $10,000 limit).
Note: in satisfying the five-year requirement, the five years start as of January 1st of the year for which any contribution was made. For instance, if you make your first contribution on December 31, 2023, the five-year rule will actually be satisfied in just over four years.
If you’ve made only pre-tax contributions to your traditional IRA, the entire amount of the distribution is generally taxable as ordinary income.
If you made any after-tax (nondeductible) contributions to your traditional IRA, a portion of the distribution may be tax-free. The taxable portion is determined using the IRS Form 8606 and the pro-rata rule. Any earnings or growth within your traditional IRA are also taxable when distributed.
Qualified distributions from a Roth IRA are tax-free. You will only pay taxes on a Roth distribution if it’s nonqualified.
Here's an overview of how distributions are typically handled for IRA beneficiaries:
Taking an RMD with an SDIRA might seem difficult, but the process is actually fairly straightforward. There are two primary distribution methods:
Making a cash distribution is usually the simplest option. So, many SDIRA holders make sure to keep enough undirected cash in their account when an RMD is on the horizon.
If you don't have the requisite cash in your SDIRA and are not able to sell an asset, then you will have to make an in-kind distribution to satisfy the RMD.
Reach out to your SDIRA custodian or administrator. They will guide you through the process and provide the necessary forms or instructions. These forms will typically require information such as your account details, the distribution amount, and the desired method of distribution.
When choosing a self-directed IRA custodian, it's important to consider the following factors: reputation and experience, custodial services, fee structure, account access and technology, and compliance and security.
Look for a custodian with a well-regarded reputation and extensive experience in self-directed IRAs. Evaluate the range of services they offer, including support for alternative assets and real estate. Understand their fee structure and compare it with other options. Consider the ease of account access and the technology provided.
Lastly, ensure the custodian complies with regulatory requirements and maintains a high level of security for your investments.
When you open a self-directed IRA with Entrust, you can expect a range of services to support your investment journey. These services include account establishment and administration, custodial services for a variety of alternative assets, online account access, transaction processing, asset valuation, and tax reporting.
We also provide educational resources, such as webinars, blog posts, and comprehensive guides to help you navigate self-directed investing. Our experienced team is available to answer your questions, educate you on investment options, and assist with the smooth operation of your self-directed IRA.
Note: Entrust does not endorse, recommend or advise on any investment product or service. Rather, Entrust provides the administration, information, and tools to make self-direction straightforward and compliant.
Whether you're investing $20,000 or $2,000,000 in a self-directed account, our fees are carefully calibrated to reflect the level of administration required, ensuring you receive excellent service and affordable access to SDIRAs.
Plug your projected assets into our fee calculator to estimate your account maintenance fees.
The uninvested cash held in an Entrust account is placed only in government-insured institutions and is insured up to $5 million. However, keep in mind that the FDIC does not insure any investments (or non-cash assets).
All IRAs held at Entrust are under the custody of The Entrust Trust Company, which is regulated by the State of Tennessee Department of Financial Institutions. The company is chartered as a non-depository bank in compliance with 26 U.S. Code Section 408 Individual Retirement Accounts.
If you have any questions about how Entrust keeps client accounts safe, feel free to schedule a call with one of our experienced IRA experts.
With over 40 years of experience, we have been a leading provider of self-directed retirement plans and retirement planning education. We have facilitated countless successful transactions and have helped individuals diversify their portfolios through alternative investments.
11 Entrust team members have earned the Certified IRA Services Professional (CISP) designation. This recognition is only awarded to those who have demonstrated expertise navigating intricate regulations within retirement planning.
Our team of professionals is highly knowledgeable in self-direction and is committed to providing excellent service and support to our clients. We are proud of our reputation as a trusted and reliable provider in the self-directed IRA industry.
No. At Entrust, our role is not to provide investment advice or endorse any particular investments.
However, we can assist you with general information about self-direction and inform you of the possibilities available with an SDIRA.
We understand that self-directed investing can be complex, and we are dedicated to empowering our clients with the knowledge and tools they need to make informed investment decisions.
Visit our Learning Center to discover comprehensive educational materials, including articles, guides, and webinars covering a wide range of self-directed IRA topics. We are committed to supporting your self-directed investing journey every step of the way.
To begin self-directing your IRA funds, follow these three simple steps:
At Entrust, we are committed to helping you take control of your retirement funds and make informed investment decisions. Get started today to unlock the possibilities of self-directed investing.