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We Answer Your Top 17 Self-Directed IRA FAQs

Every day, investors become increasingly aware of the many options available to them. One of the most common things we get asked about is self-directed IRAs. This kind of retirement account is very appealing for many reasons, not least of which is the amount of financial control it puts into investors’ hands. Here are the answers to the 17 questions we are asked most frequently.

1. What is a self-directed IRA?

A self-directed IRA is very similar to a traditional IRA, except that:

  • you decide what you invest in
  • a custodian handles the transactions instead of a traditional brokerage account
  • you have a much wider range of potential investments

2. Can I change an existing IRA to one that’s self-directed?

Yes. In fact, this is the usual way in which investors get into a self-directed IRA. Once you choose a custodian for your self-directed IRA, they can take care of transferring your funds and converting the IRA to self-directed. typically, all you’ll need to do is sign some paperwork and you’ll be ready to go.

3. What can I invest in with a self-directed IRA?

A self-directed IRA offers you the option to invest in alternative investments as well as traditional investments. Some of the instruments you can invest in include; CDs, stocks, bonds, mutual funds, tax lien certificates, real estate, hard money lending opportunities, digital currency, precious metals, structured settlements, business enterprises, and much more.

4. Is there anything I can’t invest in with a self-directed IRA?

You can’t invest in anything that’s categorized as a collectible, according to the IRS. This includes antiques, sculptures, collectible coins (as differentiated from precious metals), works of art, gemstones, stamps, alcoholic beverages, furs, and life insurance instruments. There may be more restrictions than are listed here. Please consult with your tax professional for details.

5. Are there any restrictions with a self-directed IRA?

The IRS governs the use of self-directed IRAs just as it does the use of 401ks and regular IRAs. There are several restrictions about how a self-directed IRA must be managed, including several about the handling of the related funds. There are harsh financial penalties for failing to abide by the IRS regulations. Restrictions include using a licensed custodian to handle (not control) the fund, not purchasing property for personal use, and not investing in collectibles. Other restrictions apply. Your custodian and/or tax professional can further advise you.

6. Can my self-directed IRA custodian help me make investment decisions?

Your custodian is not a licensed financial advisor. Therefore, they are not able to offer advice about finding or getting involved in any particular investment opportunity over another. For that, you’ll find that you will want to consult with a licensed investment advisor or work with a company you trust who offers solid investment opportunities.

7. If self-directed IRAs are so great, why doesn’t everyone do them?

Self-directed IRAs require more involvement from the investor than a traditional IRA. Many people don’t feel comfortable or knowledgeable enough about investing to handle the decisions themselves. The self-directed IRA is simply another option for those who wish to have more control over where their money is invested. Additionally, many people do use self-directed IRAs, but you may not hear about it. After all, how many people discuss their personal financial arrangements with others?

8. How much control do I really have with a self-directed IRA?

As a matter of fact, you have total control. Even your custodian cannot tell you whether or not to invest in a particular asset, or when to buy or sell an instrument. All the decisions are yours, which is why a self-directed IRA is so exciting to savvy investors. The only one telling you what you can and cannot do with your self-directed IRA is the IRS, which governs all financial dealings. Now, certain self-directed custodial companies do restrict what you can invest in, but in those cases, that’s not a true self-directed account. Be sure the custodian you chose has no such restrictions above and beyond what the IRS allows.

9. Can my current broker manage my self-directed IRA?

Traditional brokerage houses do not typically offer self-directed IRA custodial accounts. Therefore, you would need to transfer your funds and covert the account from a traditional IRA. Your new custodian can take care of that transfer and conversion process for you.

10. How is a self-directed IRA income taxed?

Profits you gain from your investments from a self-directed IRA are taxed the same as profits from a traditional IRA. In other words, they are tax-free or tax-deferred, depending on your exact situation. Your tax professional can assist you with any tax questions you have about your self-directed IRA profits.

11. Why can’t I act as my own custodian?

The IRS has set very specific ground rules regarding the use of a custodian for your self-directed IRA. Individual investors are not permitted to handle, control or even touch funds related to the IRA. At no time must the funds from your IRA, self-directed or otherwise, pass through your hands until such time as you make a withdrawal. if you were to violate this rule, those funds would no longer qualify as tax-free or tax-deferred, which would jeopardize your financial position.

12. Can I make an international investment with my self-directed IRA?

Yes, you can. Apart from the list of prohibited investments, there’s nothing preventing you from investing in foreign instruments. Be aware, however, that it may be more difficult to find, track and ensure U.S. federal compliance in the case of foreign investment assets. If compliance is questioned, it may also be more challenging to prove the nature of the asset, should you be asked to do so.

13. Can I borrow money with my self-directed IRA?

You most certainly can. For example, say you would like to purchase a piece of real estate for your self-directed IRA account. You can use money from your self-directed IRA for the down payment and get a mortgage or another kind of loan to buy the investment property.  However, the loan must be a no-recourse loan (such as a traditional mortgage). Further, a portion of the IRA could be taxed for “unrelated debt-financed income tax.” Your tax advisor can provide further details on this type of transaction. Even with the tax, many investors feel that the benefits of being able to purchase their first big investment property offset any initial tax implications.

14. Can I switch back to a regular IRA if I don’t like self-directing?

Yes, technically. If, after working a self-directed IRA you find that it’s not to your liking, you can switch back to a traditional IRA. Most people find that they would never go back, but if you want, the option is there. There will be some transaction details to take care of, as well as some paperwork. For example, many traditional IRA brokerages may not accept alternative investments like real estate, digital currencies or business enterprises. In all likelihood, you would need to divest your portfolio of certain assets before switching back to a traditional IRA. In doing so, you could lose money. That’s one reason why it’s so important to take your time and conduct all your due diligence before committing to a self-directed IRA. While there are many benefits to having a self-directed IRA, it’s not for everyone. Your self-directed IRA custodian can assist you in making the transition should you decide to convert back to a traditional IRA.

15. What are the downsides of a self-directed IRA?

Like every other financial dealing, there are some downsides of a self-directed IRA. For one, you need to be very involved in your investments. Your self-directed IRA custodian is not commissioned with advising you on investments, You would either need to do all your due diligence yourself, including finding the investments, hire another professional to help you, or work with a quality investment advisor partner. For another thing, ensuring that all your investments comply with IRS regulations is not automatic. For every investment you make, you need to confirm that it aligns with government regulations for individually-directed qualified plan accounts. Finally, if you decide to reverse your decision, you may be in a position where you have to divest some of your assets in order to convert back to a traditional IRA.

16. Where can I find a custodian that handles self-directed IRAs?

You can find self-directed IRA custodian services online. Before you choose one, be sure to carefully vet their services. Self-directed IRA custodians are required to be licensed in this country. According to the IRS: “The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian…” Call any company you’re interested in to ask questions and evaluate their professionalism and responsiveness. Be sure to confirm that they do not restrict your investment options beyond what the IRS allows.

17. I have a lot more questions. Where can I find answers?

For more information about self-directed IRAs, you can speak to a tax professional or a company that specializes in acting as custodians for self-directed IRAs. You can also call American Real Estate Investments and we can give you a few recommendations for a self-directed IRA custodial company. The final decision is yours, however. There are lots of online resources for finding out about self-directed IRAs, including the IRS website.

There’s a lot to like about self-directed IRAs, which is why more investors are turning to them. In the past, where and how your retirement money was invested was largely controlled by nameless corporations. With the power of a self-directed IRA, you can become self-determinant in your own financial future. For more information about self-directed IRAs, or for information about investment opportunities, please contact us today.