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Is a Self Directed IRA a Good Idea for You?

You Have Heard The Buzz, But is a Self Directed IRA Truly Ideal For You?

 Video Highlights:

[0:11] How can I set up a self directed IRA account?

[0:44] The first thing you should invest in is something you know and understand.

[1:34] Here’s why you should consider how much money you have to invest!

[2:00] Why do opens in a new windowself directed IRA custodians charge a fee?

[2:44] Not everyone is a good fit for self directed IRA investing.

[3:07] Another important thing to consider is the time involved in managing your IRA.

[3:22] What’s the difference between a mutual fund and a rental property?

[4:12] Managing a self directed IRA takes more work than an IRA at a brokerage house or bank, so make sure if you decide to self direct your retirement you understand the rules and how the investment vehicle works.

Is a Self Directed IRA a Good Idea for You?

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You’ve set some realistic goals for your retirement and sketched out what your retirement plan might look like. Now, it’s time to decide whether a self directed IRA is right for you.

Is a self directed IRA a good Idea

Need help determining whether a self directed IRA a good Idea for you? Reach out for help!

What is a self directed IRA?

Understanding what is a self directed IRA and whether it is a good tool for you depends largely on you, your specific investment objectives and your experiences. The self directed IRA model holds the account holder directly responsible for their retirement’s outcome.

As with anything, self directing an IRA has its advantages and disadvantages.

Whether a self directed IRA is good for you depends largely on educating yourself and ensuring your investment objectives are in alignment with the effort required to be successful.

If you have the time, energy, determination, and know-how, a self directed IRA investment vehicle is most often unparalleled.

However, if your mindset is simply to make a quick buck, outrageous returns on your money or you are not prepared to complete your own investment due diligence whether it is to review contracts, negotiate, etc…, then a self directed IRA probably isn’t your best investment vehicle for you.

Who can have a self directed IRA?

When investing with a self directed IRA, you’re in control. The more time and hard work you put into your self directed investments, the likelihood is more earnings you’ll see.

Self directed IRAs are a great investment vehicle for the right person.

However, keep in mind that they are NOT a perfect fit for everyone or for every situation. Just like all of your investments, you must do your due diligence. Take a few minutes and ponder over the following questions and decide if non-traditional investing is right for you and your situation.

Here are a few things additional items to consider:

Do I know anything about the investment(s)?

Do you understand the ins and outs of the investment you are planning on getting into?

Have you done your due diligence or have you ever worked in that particular industry?

For example, are you a realtor or have you ever worked or invested in real estate? If so, perhaps investing in real estate through your self directed IRA is a good option for you. If not, then you might want to reconsider or put the right team of advisors together ahead of time to increase the likelihood of investment success.

Often, clients will hop on an investment bandwagon (e.g. bitcoin investing) without thoroughly understanding the advantage and disadvantages of what they are investing. Without the appropriate amount of experience or objective professional advice, investors are surprised when unforeseen circumstances arise, which they weren’t prepared to handle.

How much does a self directed IRA cost?

Make sure you know what you’re being charged and what you are earning inside your IRA. Make the effort to calculate the yield and understand if it’s meeting your retirement goals.

For example, if you have $10,000 and the custodian charges an annual fee of $275 that would be 2.75% of your holdings.

Let’s say you’re earning 10% on your investment, right off the bat it’s lessened to 7.75%.

Now, let’s take that same 10% interest and apply it to an account with $100,000. The annual fee is still the same at $275, but now it’s only 0.275% of your yield instead of 2.75%.

Let’s say again you’re earning 10% on your investment, right off the bat it’s lessened to just 9.9725%.

Knowing how custodian fees are charged and how they impact your ROI is something you can learn in our related article… Learn How to Compare IRA Custodial Fees – 3 Pricing Models Explained 

Do you have the time to manage your IRA Account?

Self directed IRAs can also be a lot of work for a novice investor. Unlike mutual funds or investing with a broker, self directed IRAs can take some time and legwork.

If you’re the type of investor that wants to keep your stress and responsibility to a minimum, I would recommend finding a broker you trust to handle your investments.

If you find yourself in that category, then it’s most likely that a self directed IRA would be nothing more than a headache for you, but if you have the time and energy, then a self directed IRA could offer you opportunities that aren’t typically available.

Other Circumstances When a Self-Directed IRA Maybe Ideal For You

When you’re changing jobs.

401(k)s are eligible to be rolled over into self-directed IRAs, but the problem is that most corporate 401(k) plans do not allow for in-service distributions.  An in-service distribution is when a plan allows you to move all or a portion of the 401(k) out of the plan into another type of qualified retirement plan.  When you terminate employment you are required to roll the plan over to another qualified retirement plan.  Many people just choose to roll it into an IRA investing in the stock market or to roll it into their new 401(k) plan when they find a new employer.  Changing jobs often provide a great opportunity to roll those 401(k) funds into a self-directed IRA without any penalties or restrictions.

When you have the opportunity for a good long-term investment, but you do not have cash.

Self-directed IRAs are often a good way to fund an investment when you don’t have any personal cash.  If you have money sitting in an old 401(k) from a previous employer or in an IRA with another custodian, you can roll that money into a self-directed IRA to do the investment.  It’s often better if they are long-term investments because you cannot touch the money until you reach age 59 ½, but it could work with short-term investments as well.  Please keep in mind that you cannot do any investments in your IRA that involve disqualified parties to your IRA.

When you have a job that gives you access to investment opportunities that are not available to the general public.

A good example of this would be a realtor.  They often are in the loop when it comes to real estate investing and learn about unique investment opportunities that the general public might never know about.  Another example would be someone who has access to new start-up companies that are looking for investors.

Once you have a significant amount of money in your IRA or 401(k).

It is not impossible to start a self-directed IRA from scratch and make it successful, but it is far more difficult.  You are allowed to have debt in your IRA, but all loans must be non-recourse loans.  This makes them more difficult to find and the interest rates are often much higher than conventional loans.  For this reason, it’s often better to pay cash for your investments.  Once your IRA has accumulated $75-100k it is a lot easier to purchase assets such as real estate and begin growing your self-directed IRA.

If you’re frustrated with the uncertainty of the stock market and are tired of waging bets in the Wall Stree Casino.

The stock market is currently reaching near record levels, but we all remember what happened just a few years ago.  Is the economy really making this much of a recovery or is there something else going on that’s inflating the stock market?  If you’re tired of the uncertainty of the stock market and would rather own tangible assets then a self directed IRA might be right for you.

Make sure to speak to a competent financial profession, either a CPA or tax professional before making any investment decisions.

Video Transcript:

Hi! Welcome to another Tuesday at Two. My name is Terry White, CEO of Sunwest Trust. During the month of January, we’re starting anew because people set a lot of goals and the New Year is just a great time to get started. We talked about setting goals last week. Do you have goals for your IRA and is your IRA going to meet those goals? Do you have a path to get to where you want to go? Do you actually know where you want to go?

This week, I want to talk about self-directed IRAs. Do you even need a self-directed IRA or what’s called a ‘self-directed IRA’?

The first thing to think about is do you know about investing in something? Let’s say, I always use the example of a realtor, do you know about investing in real estate? If you’re a realtor, you know that. So that might be a perfect option for you to invest your IRA in real estate-related products because you understand and you know the real estate industry.

One thing I see a lot is people having someone pitch an investment to them and it’s a great return, they think it’s great and so they jump into it, only to find out that they don’t know anything about it. If it doesn’t work out the way they planned, they don’t know why. Sometimes, they’re frustrated because they didn’t understand the investment from the onset.

Make sure you understand enough about investing and alternative investing so that you feel comfortable with what you’re doing.

The next thing is how much money do you have to invest? If you have an IRA, if you’re young and you’ve just started your IRA and you’ve got $5,000 in it, you need to take into consideration the cost of a self-directed IRA. You can go online and Google ‘self-directed IRAs’ to find a dozen other companies out and all their fees are going to be different. But, regardless of the difference of those fees, every one of the self-directed custodians charges a fee for their service because we don’t sell anything and therefore, we don’t earn commissions on anything. We simply charge for the service of acting as custodians for your IRA.

At Sunwest Trust, we currently charge $225 a year (as of 2017 $275), if you have $10,000 in your IRA and we charge $225, if my math is correct, that’s about 2% of the balance that you have in your IRA. Right off the bat, you have to subtract 2% from whatever yield you’re going to receive. If you have something that’s going to pay you ten, you subtract two, which puts it down to eight.

You may not be a candidate if your balance is small and if what you’re going to invest in doesn’t have a large enough return to cover the cost of having a self-directed IRA — that’s something to keep in mind.

The other thing is that a lot of self directed IRA custodians charge a fee based on the asset value. Therefore, the more asset you have, the more they charge you–take that into consideration. I think a lot of times people just see a return on an investment, or they think they can get a return on investment, and they don’t take into consideration the cost incurred – not only the monetary cost of what they have to pay the custodian, but there’s time involved too.

Here at Sunwest Trust, we have a 401k that goes into a mutual fund, well, I don’t have to do very much with that investment. We have a guy that comes out once a year or twice a year and shows us how our investments are done and says, “Pick from these mutual funds. Which one do you want?” As old as I am, I don’t go for growth funds; I opt for something a little more stable. If I were young, I might go for a growth fund, but I make that decision twice a year.

If I own a piece of rental property in my IRA, there are things that I have to take care of on a monthly basis. I need to check and make sure that my renter pays, I need to check to make sure that my taxes are paid, I need to drive by and make sure the trash is not all over the place and maybe hire somebody to clean up the trash or trim the bushes.

A self-directed IRA is going to require more work than an IRA that you might have at a brokerage house or a bank. So keep that in mind. Are you willing to pay that price? Although it may not be a monetary price, it’s a mental price, as you have to think about it and deal with it as you go along.

Those are some of the things you need to think about as you decide whether you want to have a self-directed IRA here in January of 2015. Do I want an IRA? Do I want to start one now? These are some of the things you should keep in mind.

Next week at Tuesday at Two, we’re going to talk about inherited IRAs and that will then segue into February. We’re going to talk about taking care of your loved ones, which will include beneficiaries and that kind of thing during the week of February.

Thank you, I look forward to seeing you again next week at Tuesday at Two.

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.