We are strong advocates of investing through self-directed IRA's. We personally have been utilizing this strategy for many years and a growing number our investors invest through a self-directed IRA as well. The stock market has been quite volatile lately and we feel it is a good time to take a closer look at your retirement account allocation and consider other investment options. What is a self-directed IRA? A self-directed IRA (SDIRA) is different than a traditional IRA in that it allows you many more investment options while maintaining the tax free or tax deferred advantages of a retirement account.
A traditional IRA is typically limited to investments in stocks, bonds and treasuries where a self-directed IRA allows for one to invest in alternative investments such as real estate, private equity, private placements, mortgage notes, franchises, businesses, precious metals and much more.
What Are The Benefits?
Retirement Growth – A SDIRA allows you to decide which assets and investment options to invest in and if your goal is creating cash flow and growth for retirement this can be a very profitable wealth building tool. For example, investing in a syndicated real estate opportunity often provides quarterly distributions of cash flow. When done in a SDIRA, distributions of cash flow and profits are deposited back into your retirement account tax free or tax deferred. Savvy investors understand that reinvesting these gains time and time again results in exponential retirement account growth.
Control and Diversification – Opening a SDIRA and transferring capital into it from your current retirement account allows you take control of your retirement investments by “directing” them. The investment choices and options available to a SDIRA are expansive with few limitations. Having the flexibility to invest in many different opportunities, markets and asset classes, can greatly assist in achieving true portfolio diversification. A SDIRA may be an optimal choice when investing with the goal of achieving control and diversification.
Asset and Creditor Protection – assets held in a self-directed IRA offer strong asset protection and are generally protected from creditors by state and federal laws which can include a creditor coming after you personally. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides protection to retirement plans which are considered an exempt asset in the case of bankruptcy.
What to Watch Out For?
Avoid Prohibited Transactions - Prohibited transactions include using IRA funds to buy a property for personal use or loaning money to yourself from your IRA. IRS Publication 590 defines a prohibited transaction as follows:
"Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant)."
UBIT (Unrelated Business Income Tax) - If your IRA owns an asset or interest that produces unrelated business taxable income (UBIT), your IRA may be subject to an unrelated business income tax (UBIT). Nobody likes surprises so be sure to speak with your tax preparer or attorney about UBIT when selecting an investment in your SDIRA.
Fees and Paperwork - Self-directed IRA’s are not for everyone. They are highly regulated and do have fees and paperwork that one needs to be prepared for. Usually the fees are charged based on the number of transactions or the total value of the account. There are an abundant amount of resources and knowledge centers that are readily available to assist in getting you self-directing. Let us know if you are considering opening a self-directed IRA, we’d be happy to point you in the right direction to ensure you are taking full advantage of this extremely beneficial tool while maintaining compliance with the IRS!