What are the pros and cons of a self-directed IRA?

A self-directed IRA (SDIRA) gives you the power to invest in an almost endless list of alternative assets. However, because you are in total control over your investments, it requires the willingness and ability to do all of the necessary due diligence and account management that would usually be carried out by a bank or brokerage.

Who qualifies for a self-directed IRA?

The requirements for a self-directed IRA are the same as the IRA that you may have from a bank or brokerage. You must have earned income, be a U.S. citizen or permanent resident, and fall under any income limits as defined by the IRS (be sure to check with your financial advisor if you have questions about your eligibility).

What are the IRS rules associated with self-directed IRAs?

There are a few key IRS rules you must follow in order to maintain the tax-advantaged status of your self-directed IRA. The biggest ones are: avoid prohibited transactions, do not transact with disqualified persons, and follow investment restrictions (for example, you cannot invest in collectibles).

What are the tax implications of self-directed IRAs?

A self-directed IRA (SDIRA) enjoys the same tax benefits as any other IRA. A traditional self directed IRA can be funded with pre-tax dollars, lowering your current taxable income, whereas a self directed Roth IRA is funded with post-tax dollars; potentially allowing your income to grow tax free.

Self Directed IRAs in 2023: Benefits, Fees & FAQs

What is a Self-Directed IRA (SDIRA)?

A self-directed IRA (SDIRA) is an Individual Retirement Account (IRA) that gives you increased control and greater diversification over your investments and retirement savings.

An SDIRA is an IRA administered by a specialized financial institution with an infrastructure that allows you to invest in alternative investments. All IRAs are subject to the same laws and regulations, but unlike IRAs held at banks, brokerage firms, and other institutions, an SDIRA is not limited to stocks, bonds, or mutual funds. With an SDIRA, you can invest in everything from private equity to precious metals, real estate, and more.

At Entrust, you can self-direct several types of accounts, including a traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, HSA and ESA. Self-direction means that you, as the investor, manage the portfolio and perform the necessary due diligence for each investment. With Entrust as the administrator of your account, you can choose the investments that fit best with your retirement planning goals.

What are the Benefits of a Self-Directed IRA?

Potential for Higher ROI

Have the freedom to invest in almost any type of asset with a risk profile that fits your investment strategy, including assets that have the potential for a higher rate of return.

Take Control of Your Financial Future

Be in charge of how you grow your retirement portfolio by using your specialized knowledge and interests to invest in assets that fit with your values.

Diversify Your Portfolio

Greater investment options mean you can diversify your portfolio beyond stocks, bonds, and mutual funds and hedge your portfolio against market fluctuations and volatility.

Leverage Tax-Advantaged Retirement Accounts

Making the most of tax-advantaged accounts allows you to keep more of the money that you invest and earn.

What is the Difference between an SDIRA and a Regular IRA at a Brokerage Firm?

IRAs held at banks and brokerages offer limited investment options to their IRA holders because they do not have the expertise to administer alternative investments. As an investor, however, your options are not limited to stocks and bonds if you choose to self-direct your retirement accounts. That’s why an SDIRA can transform your portfolio.

Investors can self-direct their accounts, but the IRS requires that every self-directed IRA be administered by a registered and regulated custodian. They maintain custody of the assets in an IRA and are responsible for record-keeping and custodial duties only. They do not perform due diligence or make investment recommendations, and they are regulated by the IRS and other federal and state authorities.

Custodians specializing in self-directed IRAs will have appropriate staff, expertise, and capacity to maintain custody of the alternative assets typically chosen by investors. The first step in opening a self-directed IRA is to find a custodian that is specialized in administering accounts for alternative investments.

Self-Directed IRA

Pros

Greater control over your investment strategy
Power to choose investments that leverage your knowledge
Ability to diversify your investment portfolio
Potential for higher returns

Cons

Requires a specialized custodian
Account holder must do due diligence and avoid prohibited transactions
Physical assets have less liquidity than stocks or bonds

Regular IRA

Pros

Easy to find a custodian to administer the account
Receive advice from your IRA custodian for your investment strategy
No risk of committing prohibited transactions with traditional investments

Cons

Limited investment options
Lack of flexibility to manage your account your way
Inability to diversify your investment portfolio beyond traditional investments

What Are the Fees for a Self-Directed IRA?

Self-directed IRA providers charge recordkeeping and administrative fees. While some providers charge per asset, other providers charge based on the value of the account. Fees across SDIRA providers vary widely. It is important to carefully research fee structures to find one that fits your investment goals. When evaluating providers, it can also be helpful to investigate the additional services and features they offer, such as online account management, a mobile app, or an online investment marketplace.

The fee structure at Entrust is scaled to match the complexity of administering your account and make sure you have quality service and access to SDIRAs with transparent pricing.

What Can I Invest in with an SDIRA?

What Types of Accounts Can Be Self-Directed?

Investors have several account options for self-directing their retirement portfolio. Each account type has advantages to consider when designing your investment strategy. Check with your SDIRA provider to be sure that they offer the type of account you are interested in opening. And remember, in the eyes of the IRS, all IRAs are the same. SDIRAs simply empower account holders to invest in alternative assets.

Traditional IRA

A traditional IRA is a tax-advantaged retirement account funded with pre-tax dollars. Depending on annual IRS income limits, these pre-tax contributions may be tax-deductible. The investments in a traditional IRA grow tax-deferred, which means you pay taxes on the funds when you distribute them. That includes any interest, capital gains, dividends, or income earned from the original funds.

Learn more about Traditional IRA >

Roth IRA

A Roth IRA is a tax-advantaged account funded with post-tax dollars. The contribution is made with post-tax dollars, and it is not tax-deductible. The tax advantages of a Roth IRA are that all growth in the account can continue tax-deferred and may be withdrawn tax-free, if certain requirements are met.

Learn more about Roth IRA >

SEP

A Simplified Employee Pension (SEP) Plan IRA can be established by any employer to contribute to a retirement account for employees. Many businesses, regardless of size, including self-employed persons, are eligible to establish a SEP IRA.

Learn more about SEP IRA >

SIMPLE

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan that can be established by an employer who has fewer than 100 employees. Self-employed people are considered to be employers and can contribute to a SIMPLE IRA. Employers who establish a SIMPLE IRA cannot maintain any other retirement plan during the same tax year.

Learn more about SIMPLE >

Individual 401(k)

An individual 401(k), also known as a solo 401(k), is a tax-advantaged retirement account for owner-only businesses with no employees except a spouse or other owners. Business owners may decide to use an individual 401(k) because this plan provides many of the benefits of a 401(k) that are not available in SEP or SIMPLE plans.

Learn more about Individual 401(k) >

HSA

An HSA or Health Savings Account, is a tax-advantaged savings account you can use to pay for medical expenses, such as prescriptions, eye care, dental care, and some over-the-counter medications. Contributions are tax-deductible. The funds in an HSA roll over each year and continue to accumulate if they are not used.

Learn more about HSA >

ESA

An ESA or Education Savings Account, is a tax-advantaged custodial account set up to pay qualified educational expenses for a beneficiary. It is also known as a Coverdell Education Savings Account.

Learn more about ESA >

How Can I Fund My Self-Directed Account?

Once you’ve selected an account, the next step is to fund it. There are three ways to fund your self-directed accounts.

Transfer

A transfer moves funds or assets from a single type of retirement account to a new financial institution. You can easily transfer your funds or assets from a traditional IRA, a Roth IRA, or even a SIMPLE IRA from one institution to another.

Rollover

Rollovers are used to move funds from one type of account to another type of account, such as moving funds from a 401(k) to a traditional IRA. Rollovers can be both direct and indirect.

Contribution

Contributions allow you to add funds directly to your retirement accounts. They are subject to IRA contribution limits published each year by the IRS, and they must be cash. Contributions can be made via check, wire transfer, or ACH.

What are the Rules for Self-Directed IRAs?

The three main rules investors need to understand when they have an SDIRA are investment restrictions, disqualified persons, and prohibited transactions.

Investment Restrictions.

Although the investment possibilities are almost endless with an SDIRA, there are three types of investments that you are not allowed to invest in: life insurance, S corporations, and collectibles. Collectibles include items such as artwork, antiques, gems, and some metals and coins that do not meet the IRS requirements for precious metals.

Life insurance

Collectibles

S Corporations

Disqualified Persons

Transactions involving a disqualified person can incur penalties. The SDIRA holder, some members of the SDIRA holder's family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant), any IRA beneficiaries, investment advisors and managers, any corporations or partnerships (or estates in which the SDIRA holder has at least a 50% stake), and the SDIRA holder's trustee and custodian (or anyone providing services to the IRA) are all disqualified persons.

Disqualified persons include:

You
Your spouse
Your lineal descendants, ascendants, and their spouses
A beneficiary of the IRA
Investment advisers and managers
Any corporation, partnership (or estate that you have at least a 50% stake in)
Your trustee, custodian (or anyone providing services to the IRA)

Prohibited Transactions

Any transaction with a disqualified person constitutes a prohibited transaction. These transactions typically fall into four categories:

Selling, exchanging, or leasing a property
Loaning money or extending credit
Furnishing goods or services
Transferring IRA income or assets to benefit a disqualified person

To see more details and examples of prohibited transactions and self-directed IRA rules, you can download our Prohibited Transaction Flowchart.

Is an SDIRA Right for Me?

SDIRAs are often utilized by hands-on investors who are willing to take on the risks and responsibilities of selecting and vetting their investments and managing their accounts. Account holders must abide by SDIRA rules and regulations in order to preserve the tax-advantaged status of their account.

Self-directed accounts can also be great for investors who have specialized knowledge in a niche market that they would like to invest in.

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How Do I Invest with an SDIRA?

START

STEP 1

Select an SDIRA Provider

Research and select a SDIRA provider who specializes in holding alternative investments and offers the type of account you would like to open. You also want to make sure that they permit the assets you are going to invest in. Look for an SDIRA provider that has a long history in this market, substantial assets under administration, and a well-trained staff.

STEP 2

Select Your Account Type

Consider the different types of self-directed accounts, their tax advantages, and their rules. Choose the one that will help you meet your specific investment goals.

STEP 3

Open Your Account

Open your account online.

STEP 4

Fund Your Account

Depending on where you want to move the funds from, you’ll need to initiate either a transfer, rollover, or contribution. You can then start the funding process on our online portal.

STEP 5

Invest

You are now ready to invest in any alternative investment that you choose. Learn about the process for investing in each type of alternative asset with an SDIRA. Be sure to carry out thorough due diligence.

STEP 6

Things to know after you invest

Remember to always keep in mind the rules and regulations for self-directed IRAs. You can also check out our Learning Center for specific articles on everything from how to manage your self-directed IRA, ways to invest your retirement funds, and tax updates. And be sure to consult with your advisors before entering into any transaction.

FINISH

Why Should I Choose The Entrust Group?

Entrust has been providing self-directed, tax-advantaged investment plans for over 40 years. We’re serious about our mission to educate and empower investors.

We provide account administration and recordkeeping services, education, and tools to people who want control over their retirement investments. Entrust's staff is expertly trained and tested regularly on their knowledge of the industry. We also offer several services designed to make self-direction as efficient as possible, including our 24/7 online account portal, our myDirection asset management card, and our mobile app.

The Entrust Group is an administrator and recordkeeper, and we work with The Entrust Trust Company (TETC) as our custodian.

Frequently Asked Questions

I thought only stocks, bonds, or mutual funds were allowed in retirement accounts? Why haven’t I heard of this before?

Most investors are surprised to find out that investing in alternative investments with your retirement funds has actually been around since 1975. Most brokerage firms and banks offer investments, like stocks and bonds. For this reason, it’s not exactly in their best interest to talk about self-directed retirement accounts.

Can I move my 401(k) into a Self-Directed IRA?

Yes, consolidating accounts like a 401(k) into a self-directed IRA is a fairly simple process called a rollover. Methods for funding your account available at The Entrust Group include IRA Transfers, IRA Contributions, and IRA Rollovers.

Are there any disadvantages to a Self-Directed IRA?

With any investment comes risk, and self-directed IRAs are no exception, but investments also provide an opportunity for earnings. This is especially true for SDIRAs, where the assets you can invest in are virtually limitless. For inexperienced investors, this can sometimes be perceived as a disadvantage, as more options and freedom means greater responsibility. We encourage all investors to check out five questions to ask before you invest from the U.S. Securities and Exchange Commission.

Can you invest in real estate with a Self-Directed IRA?

Yes, Real Estate IRAs are one of our clients' most popular investment strategies. Clients have a vast amount of options with this investment strategy, including rental properties, undeveloped land, mortgage notes and much more. In addition, investors benefit from tax-free or tax-deferred earnings, depending on the type of IRA selected.

Can I invest in my own business with a self-directed IRA?

No, this is considered a prohibited transaction as it is a conflict of interest by involving a disqualified person (you).

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Make Tax Season an Asset

Ready to diversify your portfolio and enjoy tax-free or tax-deferred growth? An SDIRA could be the answer.

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Self-Directed IRAs

Investment Options

Professionals

Learning Center

About Entrust

Self-Directed IRA

What is a Self-Directed IRA (SDIRA)?

What are the Benefits of a Self-Directed IRA?

Potential for Higher ROI

Take Control of Your Financial Future

Diversify Your Portfolio

Leverage Tax-Advantaged Retirement Accounts

What is the Difference between an SDIRA and a Regular IRA at a Brokerage Firm?

Self-Directed IRA

Pros

Cons

Regular IRA

Pros

Cons

What Are the Fees for a Self-Directed IRA?

What Can I Invest in with an SDIRA?

Real Estate

Private Equity

Private Lending

Precious Metals

LLCs

What Types of Accounts Can Be Self-Directed?

How Can I Fund My Self-Directed Account?

Transfer

Rollover

Contribution

What are the Rules for Self-Directed IRAs?

Investment Restrictions.

Life insurance

Collectibles

S Corporations

Disqualified Persons

Prohibited Transactions

Is an SDIRA Right for Me?

How Do I Invest with an SDIRA?

Why Should I Choose The Entrust Group?

Entrust has been providing self-directed, tax-advantaged investment plans for over 40 years. We’re serious about our mission to educate and empower investors.

Frequently Asked Questions

Make Tax Season an Asset