Advanta IRA is one of the nation’s leading self-directed account administrators. We often encounter questions from people who want to know how to take control of their retirement funds and investing decisions. Below are 10 of the most frequently asked questions about how a self-directed IRA (SDIRA) works with alternative investments, including types of accounts, a list of common assets, and how to fund a new account.
In today’s economy—combined with an erratic stock market—investing in alternative assets is a smart strategy. Alternatives to the stock market like real estate, gold, and private equity provide diversity and the potential to produce higher returns than some stocks, bonds, and mutual funds. Alternative investments often have a low correlation with stock market performance and have the potential to produce positive returns even when the stock market is down and when inflation is high. This is why the SDIRA is becoming more popular with savvy investors just like you.
Top 10 Frequently Asked Questions about a SDIRA
1. What is a SDIRA?
Self-directed IRAs and solo 401(k)s are powerful plans that create diversity in retirement portfolios and allow owners to capture tax-advantaged earnings just like any other retirement plan.
The only difference is that self-directed plans allow alternative investments that don’t depend on the stock market’s performance to produce potentially better than average returns.
Additionally, plan owners make investment decisions, not third-party administrators or work-place plan custodians. You’re in control of your retirement funds and investing decisions—and that’s why these plans are becoming more widely used by savvy investors.
2. Can I self-direct another plan besides an IRA?
There are several types of self-directed retirement and savings plans you can use.
Plans for individuals:
Plans for small businesses or self-employed individuals:
Other plans that can be self-directed:
Traditional IRAs, SEP, SIMPLE, and solo 401(k) accounts allow pre-tax contributions. Distributions are taxed at retirement age when you begin making withdrawals from your account. SEP and SIMPLE IRAs and solo 401(k)s offer a post-tax Roth contribution component that is beneficial to retirement savers.
Roth IRA contributions are made after tax, providing tax-free growth and withdrawals when you begin taking distributions, if you are 59 ½ years old and have had the account for at least five years.
Each plan has varying requirements pertaining to eligibility, annual contributions, and distributions. Understanding the rules for all accounts can help you make the decision that suits your needs.
3. What kinds of alternative investments are available for an SDIRA?
There is a vast pool of alternative investments to the stock market you can hold in self-directed plans. A few of the more popular assets include:
- real estate
- real estate syndications
- tax liens
- private mortgages and notes
- precious metals
- private equity
- oil and gas options
- futures and forex trading
- and much more…
4. What investments are not allowed in my self-directed account?
The only investments the IRS prohibits in these accounts are life insurance contracts and collectibles. Internal Revenue Code 4975 states: collectibles include works of art, rugs, antiques, metals (other than certain approved gold, silver, and palladium bullion), gems, stamps, coins, alcoholic beverages, and other tangible personal property as may be defined by the Secretary of Treasury.
5. How do I fund my account?
After you open an account with a self-directed IRA services provider like Advanta IRA, funding your account is easily accomplished in the following ways:
- Make a cash contribution (within the annual contribution limits of your plan)
- Transfer or rollover funds from an existing IRA or old 401(k)
6. Can I invest with limited funds?
Yes. There are plenty of opportunities that don’t require hundreds of thousands of dollars to invest. Tax liens, mobile homes, private lending, and some private equity and real estate investment syndications are examples of assets you can acquire with limited funds.
7. Can my SDIRA partner with others or with myself to invest?
Your IRA can partner funds with your personal money and other investors and entities to invest. It can even partner with other IRAs to invest. Income and investment-related expenses (if any) are distributed and paid commensurate with each partner’s percentage of ownership.
8. What IRS rules for SDIRAs do I need to know to use a self-directed account?
Self-directed plans are governed by the same rules as any other retirement or savings plan. But self-directed plan owners must understand prohibited transactions for IRAs and make sure your IRA does not transact with disqualified persons or entities. Prohibited transactions, whether committed unknowingly or not, cause your IRA to suffer penalties, taxation, and even disqualification of its tax-sheltered status.
Disqualified persons include:
- The IRA holder and his or her spouse
- The IRA holder’s lineal ascendants, lineal descendants, and spouses of lineal descendants
- Investment advisors and managers
- Any corporation, partnership, trust or estate in which the disqualified person maintains control as a president, manager, etc.
- Anyone providing services to the IRA, such as the trustee or custodian
9. What are some examples of prohibited transactions for a self-directed plan?
Examples of prohibited transactions include:
- You or a disqualified person vacationing in property owned by your IRA
- Purchasing a property from your own IRA
- Selling an asset you or a disqualified person owns to your IRA
- Lending money from your IRA to yourself or a disqualified person
For more explicit rules regarding prohibited transactions and disqualified persons, read IRC 4975. Consulting with a certified public accountant or other financial professional is advised to ensure your account is compliant with IRS regulations.
10. How do I learn more about self-direction and alternative investments?
Advanta IRA offers weekly webinars at no cost for individuals to learn how to take control of their own retirement accounts and build tax-free or tax-deferred wealth for retirement using SDIRAs.
We also host a virtual investor marketplace and networking event called Pitch, Promote, & Prosper. This lively online forum occurs twice a month and allows investors to connect and pitch their own investment deals and services to each other.
You can check out Advanta IRA’s Alternative Investing Advantage podcast that covers the latest market updates and features guests who discuss investment strategies for beginner and sophisticated investors.
Contact Advanta IRA if have questions. We do not sell investments or give advice, but our team of experts enjoy educating people about self-directed strategies and the wealth-building opportunities alternative investments present.
Take control. Build your own wealth. Secure your own future. Open a self-directed IRA today.