Getting Started Investing with a Self-Directed IRA

Self-directed IRAs are used by those who want to control their own investing funds and decisions. A large number of alternative assets are permissible in these plans, and individuals are encouraged to invest in what they know best to secure successful futures.

What is a Self-Directed Retirement Plan?

These plan structures offer the same tax-deferred benefits as any retirement plan does. The only difference is that account owners choose their own assets instead of relying on third party brokers or investing managers to choose for them. These plans are able to hold traditional stocks, bonds, and mutual funds, but account owners are more interested in acquiring alternative investments (like real estate), which provide diversity in portfolios as well as potential stability against the ups and downs of the stock market.

Types of plans that can be self-directed include:

  • Traditional and Roth IRAs
  • Health Savings Accounts (HSA)
  • Education Savings Account (ESA)

How to open a self-directed account:

Choose a self-directed plan administrator that allows the types of investments you wish to acquire. Not all permit the same assets, but Advanta IRA does allow most alternative holdings.
Choose the type of account you want to use.
Fund the account by making a contribution, or transferring or rolling over funds from an existing IRA or 401(k) plan.

Once you’ve completed the easy steps above, all that remains is for you to choose the investments you are interested in, perform due diligence (to ensure viability and protect against fraud), and start investing!

Understand Disqualified Persons and Prohibited Transactions

It’s important to understand that you are in total control of your account when you self-direct. Not only does that require the work of due diligence on your part to fully vet potential assets, you’re also responsible for knowing the rules set forth by the IRS that govern retirement plans.

For example, you are not allowed to use your IRA to transact with disqualified persons. If your IRA purchases a home or condo for the intent of renting it out to earn retirement income, you (or any other disqualified person) are not able to vacation in that property. Additionally, your IRA cannot purchase real estate from or sell any assets to disqualified people or entities.

Another example is the fact that your self-directed IRA is unable to invest in collectibles or life insurance contracts. Don’t worry, though—there are plenty of other assets to choose from!

Who is considered a disqualified person?

  • The account owner and his/her spouse
  • The account owner’s children and their spouses, and account owner’s grandchildren
  • The account owner’s parents and grandparents
  • Investment advisers, managers, and fiduciaries
  • Any corporation, partnership, trust, or estate in which disqualified persons have a 50 percent or greater interest
  • Anyone providing services to the IRA

Performing the aforementioned acts with any of these individuals/entities would be considered a prohibited transaction, which can cause penalties, taxation, and even disqualification of your tax-sheltered account. For detailed information about these regulations, read IRC 4975.

What are different types of alternative investments?

The list of the different assets that can be held in self-directed plans is vast. While plan owners do have the freedom to choose, it is always advisable to consult with other professionals to ensure your choices are compliant with IRS standards.

Advanta IRA does not sell investments or give investing, tax, legal, or other advice. However, we can offer a short list of assets permissible in these accounts that may be of interest or at least help you wrap your brain around the myriad of possibilities available:

  • Real estate (commercial and residential/rental property, raw land, timberland, farm land, tax liens/deeds, etc.)
  • LLCs, LLPs, and trusts
  • Precious metals
  • Crowdfunding options
  • Futures and forex trading
  • Private equity and stock options
  • Livestock
  • Oil and gas
  • Rights and warrants
  • Accounts receivable
    …and much more…

As a self-directed retirement plan administrator serving clients across the nation, Advanta IRA frequently holds complimentary seminars and webinars for individuals who wish to learn more about self-direction. Please visit our calendar for upcoming events.

If you have questions about this article or wish to learn more about self-directed plans, please contact us.

About Jack Callahan

Jack proudly earned his bachelor’s degree in finance and multinational business from Florida State University and his law degree from the University of Florida College of Law. He established Advanta IRA in 2003 and has steadily nurtured and grown the company and the team every year since. Prior to founding Advanta IRA, Jack delivered specialized counsel to real estate investors, small business owners, and real estate professionals on tax, legal and financial matters. As an industry expert, Jack is a frequent speaker on self-directed retirement plans. He is an accredited continuing education instructor for the Florida and Georgia Bar Associations, Florida and Georgia Real Estate Commissions, and The American Institute of Certified Public Accountants.