Self directed IRA

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A self directed IRA is a way to invest your retirement funds without being restricted to stocks, bonds or whatever other investments your broker makes available. It allows you to invest in specific real-estate or in small companies.

Self directed IRAs require a custodian although there is a way to maximize the control you have by setting up a checkbook IRA LLC and making yourself the manager of the company.

In reality a self-directed IRA is no different than a regular IRA. Your IRA has to be managed by a custodian. Generally this is investment company or broker that you've chosen to open the IRA with. In reality this broker could invest in a number of things other than the stocks or mutual funds that they make available to you.

Most brokers do not offer these services because they're difficult to manage. They tend to focus on stocks and mutual funds and bonds. However there are many more investments that they could allow you to invest in if you choose to. A self-directed IRA basically allows you to invest in all these other types of investments by setting things up with the broker or rather a custodian who will oversee the account.

A checkbook IRA LLC is set up so the custodian creates a limited liability corporation and then makes you the manager of that corporation. This means you can manage the way your money is invested without having to go back and forth to the custodian all the time.

Here are some of the investments you can make with a self-directed IRA:

Prohibited transaction[edit]

THe IRS Publication 590 says, “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 or your family (spouse, ancestor, linear descendant, and any spouse of linear descendant).”

So basically you can't use the money in a way that benefits yourself or a relative before you are able to take the money out of the IRA at retirement. You can't have any "self-dealing".

Prohibited investments[edit]

Instead of listing the types of investments that are allowed, the tax code lists the investments that aren't allowed. Everything else is fair game.

There are certain types of investments that IRAs are prohibited from taking part in:

  • Artwork
  • Gems
  • Antiques
  • Coins
  • Life Insurance Contracts
  • Rugs
  • Metals
  • Alcoholic Beverages
  • S Corporation Stock

Self Directed IRA FAQ[edit]

Must a self-directed IRA be a traditional IRA or a Roth IRA
It can be either. However, if you expect to significantly increase the value of your IRA, it probably is better to do it with Roth funds that will not require you to pay taxes on the increase in value at a later point.
Can I buy a house for myself using my IRA funds?
You can buy a house and rent it out. Then when you get to retirement age you can take the house as a distribution from your IRA. However, you cannot benefit from the house until you are at the right age to take a distribution from the IRA without incurring the same type of penalties you'd have for taking an early withdrawal from the IRA.