This brief review of what is a self directed IRA may help clear up some misconceptions about them. Also, if you have ever wondered about What is a Self Directed IRA? This is for you.
Technically, almost all IRAs are considered “self directed.” Why is that? Because almost all IRA investments are directly or indirectly selected by the IRA owner, even if the IRA owner has selected and authorized an investment counselor.
Therefore, the IRA Owner is individually directing the IRA investments. Even IRAs that are only invested in the saving accounts or certificates available at the IRA Custodian or Trustee, the IRA Owner, at least, selected the financial institution that best fits into their investment strategy; thereby they are also self-directing the IRA.
In a few instances, the IRA Owner may have given complete control over to a selected agent, but even then they are indirectly selecting the method of investment by the selection of the agent/broker. Therefore, it still falls into the self-directed category.
The Crazy Things You Can Invest Inside a Self Directed IRA
However, some time ago, the term “self directed” has come to mean something much more than just selecting investments and the financial institution. Now the IRA industry uses “self directed IRA” to refer to an IRA that is invested in something other than saving accounts/certificates available only at the financial institution of choice.
Self directed IRA now means an IRA invested in:
c. Mutual funds
d. Real estate – foreign and domestic
f. gold, other entities, etc.
Make sure after you finish this article read this one. Would you like to learn even more about investing in gold with your IRA?
Many IRA Owners, as well as IRA Custodians and Trustees, do not realize it just is NOT as easy as selecting different investments.
First, the IRA Custodian or Trustee must allow the types of alternative investments that the IRA Owner wants to select. Are you interested in opening a self directed IRA to truly diversify your retirement Sunwest Trust can help you?
NOTE: IRA Custodians or Trustees are NOT required to allow any investment even though it is a qualified IRS investment. The custodian can limit what types of investments they will administer.
Second, the IRA Plan Agreement and Disclosure Statement must allow the selected type of investment. And again, the documentation is NOT required to allow all types of investments. Both the IRA documents and the IRA Custodian or Trustee can limit what approved investments are acceptable.
IRA documents can be different from financial institution to financial institution. The IRA Plan Agreements and Disclosure Statements must be reviewed carefully because the documents can even differ from branch to branch.
IMPORTANT: The IRA Owner (and the IRA Custodian or Trustee) must carefully read the IRA Plan Agreement and Disclosure to make sure the selected investments can be administered appropriately. If the financial institution allows the selected investment, the IRA Plan Agreement and Disclosure Statement MUST also allow it.
Managing an IRA outside the language of the IRA Plan Agreement or Disclosure Statement could result in disqualification of the IRA with likely tax and penalty results. Still, have questions? Reach out to one of our IRA specialists.
What exactly is a self-directed IRA?
I decided to do a little research to give you the history of IRAs and then talk specifically about self-directed IRAs. So, it turns out that IRAs were created in 1974 under the Employee Retirement Income Security Act or what’s known as ERISA. Congress created self-directed IRAs or individual retirement accounts – they were originally called Individual Retirement Account – to give individuals not covered by retirement plans at work a tax advantage savings plan. And number two, to play a complementary role to the employer-sponsored retirement system by preserving rollover assets at job change or retirement.
So, if you leave a particular employee that’s got a 401k, the individual retirement account gives you a place to roll that over. The other thing that I thought was interesting is that. as of the first quarter of 2018. there were 9.2 trillion. That’s with a T. $9.2 trillion in assets that sort of the first quarter of 2018 and that IRA assets represented nearly one-third of the $28 trillion in the US retirement market. So, it’s a significant part of the retirement that we as Americans are planning on having when we get to that age that we want to retire assets held in IRAs have increased on average 10% per year over the last 25 years from $993 billion in 1993.
So, just to recap, the other thing that’s interesting in here is that an estimated 43.9 million US households or 35% owned IRAs as of mid-2017. So, almost 43 million IRAs in the United States. An estimated 35.1 million household owned traditional IRAs making it the most common type of IRA and a total of 24.9 million households owned Roth IRAs and 7.6 million US households owned employer-sponsored IRAs, which would include SEPs, SIMPLEs, and SARSEPs.
So, that’s a little bit of background about IRAs. I found that on the internet under Investment Company Institute. One thing I thought that was interesting is that they talk about where IRA owners invest their money. As of March 31st, 2018, an estimated 47% of IRA assets were held in mutual funds while the remaining assets were held at brokerage accounts or managed by banks or insurance companies. So. they don’t even mention what have come to be known self-directed IRAs which is what we’re going to talk about today.
So, I just want to let everyone know that IRAs, again, were created in 1974. At their very creation, the IRS did not tell you what you could invest in, but they told you what you could not invest in. If you look at Internal Revenue Code or referred to as IRC Section 4975 and Section 408, that gives you the bulk of the regulations regarding individual retirement accounts and that says that you cannot invest in life insurance or collectibles. Given that, the only other prohibitions are investing with what are known as disqualified parties and I have other videos out that talk about who disqualified parties are and what prohibited transactions are. So, if you’re interested in that, please look at some of the other videos on our YouTube channel, Sunwest IRA to get more information about that.
But today, we’re just talking about self-directed IRAs. Every IRA is self-directed. What I mean by that is it’s up to you to choose what you want to invest your IRA in. So, if you are with your bank or your brokerage company, they will allow you to invest in things that they sell – stocks, bonds, mutual funds, CDs. That type of thing.
Now, some banks and some brokerage houses will you to invest in other things, but it’s been my experience that they typically discourage you from investing in things other than what we would know as traditional type investments, and they sometimes do that to such an extent that they won’t even allow you to do it at their companies. So, the IRS allows the custodian to determine what assets they want to allow their customers to invest in.
So, for instance, here at Sunwest Trust, we’ve become known as a self-directed IRA custodian. And so, what that means is we will allow you to invest in all those other things that the IRS does not specifically prohibit. As I’ve said, many times before, we have people that invest in real estate we have people that invest in private notes, we have people that invest in small private businesses, people buy tax liens, people invest in precious metals. So, the things that you can invest in are just innumerable whatever you come up with. The thing you have to keep in mind is you cannot invest in life insurance, you cannot invest in collectibles and you cannot allow your IRA to do business with a disqualified party. So, keeping those things in mind, that gives you an idea of what you can do in your IRA and specifically in a self-directed IRA that tells you what you can invest in.
Now just because you can invest in things other than the traditional type – stocks, bonds, mutual funds – doesn’t necessarily mean that you should. I have always been careful to let people know that not everyone is cut out to be an investor of their individual retirement account. If you don’t know anything about investing, if you’ve never invested before, then I would exercise caution. That doesn’t mean that you can’t if you find something that you’re interested in. I would look into that and do a lot of research. We are so fortunate in this day and age that you have the internet and you can find out information about just about anything
So, if you decide that or if you’re already an investor and you’ve invested in other things, then a self-directed IRA where you invest in those non-traditional type assets might be the thing for you. So, if you decide to do that, I would say the best thing to do would be to research what you’re wanting to invest in. Once you find a specific thing, if it happens to be with another person or another company or entity, you need to be sure and do your due diligence to make sure that that is a legitimate company or entity or person. Again, today, it’s so easy to do that. You can google the person’s name. You can google the company if you see things that look questionable, I always think that you should err on the side of caution. Be careful and don’t invest in something that might have a chance of losing your money.
The other thing that I would say and I’m not a tax consultant. I’m not an investment advisor. I would strongly recommend that you build a team. I’ve talked about the teams that you should build on other videos, but you should build a team of professionals that you can depend on to help you make the right decisions regarding the investments in your individual retirement account. Along with that though, I also believe that you should do your own due diligence. You cannot and should not depend on the custodian to do any due diligence for you because that’s not what we’re paid to do. Most custodians charge a reasonably low fee that does not include the income that they would need to do due diligence on every investment that someone brings to us that they want to invest in. So, that is up to you as the owner of the individual retirement account that you’re deciding to self-direct into things other than stocks, bonds, and mutual funds.
I hope that this has given you some good information about self-directed IRAs. I would encourage you to come back and watch this video. We will very soon be creating a podcast called Sunwest IRA where I will get into more depth about things because hopefully, people will listen to those in their cars and stuff. And so, we have a little more time to go into more depth and explain various topics.
So, if you have a question, please feel free to call Sunwest Trust. Our number or my direct number is 505-938-3809. You’re welcome to call me directly. If I don’t have the answer to your question, I’ll get it and get back to you, I will always get back to you. Another thing that you’re welcome to do. If you have an interest in self-directed IRAs, I’ve written a book that is called “When All You Have is a Hammer”, meaning that if you only know about regular IRAs, then you can’t use that knowledge about a regular, traditional type IRA to invest in non-traditional assets. So, you need to realize the tools that you have within your individual retirement account to accomplish the goals that you’ve set out to do.
If you’re interested in knowing more about self-directed IRAs, this is a very simple, easy read. You can go to our website at sunwesttrust.com and you can look for this book. It’s on usually on the first page on the right-hand side. You can request this. We will send this to you right away. We won’t bug you a lot following up with things, but we’ll send this to you and you can read it. And if you have further questions, you can get back to us and we’ll help you in any way you can.
Thank you very much for watching this video. I would ask that if you liked it and you enjoyed it if you leave a comment. If you have a question, leave a comment. Also, subscribe because we’ll be putting out new informational videos, educational videos every week.
Again, I would encourage you to find a good team depending on what you’re investing in, an investment advisor that understands those kinds of investments, a tax attorney that can help you navigate through the things that you can and can’t do in your IRA and also a good CPA is always very valuable. So, take the time to find those people and I want to wish you all the luck in the world in your IRA investing and if there’s anything we can do to help you along that journey, feel free to reach out to us.