Self-Directed IRAs

What is a Self-Directed IRA?

A Self-Directed Individual Retirement Account is an IRA that allows the account owner to make investment decisions on behalf of their retirement plan.  A qualified trustee or custodian holds the IRA assets on behalf of the IRA owner and makes investments per the owner’s direction.  The trustee/custodian maintains the IRA records, files the required IRS reports, issues client statements, and performs other administrative duties on behalf of the self-directed IRA owner for the life of the account.  Self-directed IRAs are not limited to the normal group of asset types – stocks, bonds, mutual funds, etc.

The term ‘self-directed’ does not actually have any legal definition. It does not imply a different type of IRA, or a separate set of IRS rules.  When an IRA account is self-directed, the IRA owner makes all investment decisions and instructs the custodian to act.  Even this control, however, can vary greatly in degree.  For example, you may have a ‘self-directed’ IRA at a major broker dealer, but this account, while offering more hands-on control, will in most cases, limit you to a range of publicly traded investment options such as stocks, bonds, and mutual funds.

The phenomenon of a self-directed IRA that still limits you to a brokerage account has spawned the use of yet another industry descriptive – the ‘truly self-directed’ IRA – to mean the type of account that allows for non-publicly traded assets like real estate or private placements (pre-IPO stock, Limited Liability Company membership, Limited Partnerships, etc.) Whatever the terminology, the facts remain the same.  All IRAs must adhere to the same IRS rules.  The investment options available within an IRA are determined solely by the capabilities of the custodian sponsoring the IRA.

There are many possibilities for self-directed IRAs including mortgages, options, LLC’s, partnerships and more!  Studies and publications have suggested that all Americans should have approximately 25% of their retirement savings in real estate to increase their projected return and decrease their projected risk.  That would correspond to a huge growth of over 1,000% over the current 2% level of $4.6 trillion in IRA assets.  It is estimated that IRA assets will grow by as much as 500 million per year with the retirement of baby boomers.  The self-directed industry is on the rise.  BE A FAST MOVER AND JOIN THE GROWING MOVEMENT NOW!!! Call us for a free consultation 949.748.7447 and learn how to unlock the power of your Traditional IRA, Roth IRA, SEP IRA, or even your Defined Benefit Plan.)

What Type of Real Estate Can You Invest in Using Your IRA?

An IRA can be invested in any type of real estate: rental homes, apartment buildings, commercial property, raw land, partnerships, construction projects, mortgages, etc.

Is This New?

No, this is not a new concept.  Since their inception IRAs have been able to own a wide variety of investments.  Most IRA custodians such as the larger brokerage houses are not equipped to handle “alternative investments” such as real estate.  They prefer to deal in assets such as money markets, CDs, bonds, stocks, mutual funds, because they are easier and generate revenue for the firm.

What About Getting a Mortgage?

An IRA can buy property using debt financing under certain circumstances, although in some cases UBIT (unrelated business income tax) may apply.

For more Questions and Answers see our Frequently Asked Questions tab.