The Pros and Cons of a Self Directed IRA Revealed
A self directed IRA account is not really for everyone, but for some, it is an unmatched alternative investment tool for investing in your IRA retirement account.
Most of you have probably heard of a self directed IRA. It’s primarily an IRA, which not only allows you to make investments inside of the stock market but also outside of it too. When you set up a self directed IRA with Sunwest Trust, you are allowed to invest in non-traditional assets such as real estate, private notes, private stock in companies, precious metals and almost anything you can think of that’s not strictly prohibited by the IRS.
Yes, You Can Rollover a 401k, 403b, 457 Plan or Thrift Savings Plan Into a Self Directed IRA
Any qualified retirement account can be rolled over into a self directed IRA, so if you have an IRA with another custodian that allows you to only invest in stocks, bonds, or mutual funds, then those assets can be sold and rolled over into a self directed IRA account with Sunwest Trust. If you have a 401K from a previous company, a 403B, 457 plan or thrift savings plan, then all those qualified retirement accounts can also be rolled over into a self directed IRA.
However, all custodians have the discretion to limit further your alternative investment options based on different asset classes. For example, just as a standard IRA custodian may only allow you to invest in a myopic corral of investments options such as certain mutual funds, stocks, and bonds, some self directed IRA custodians may NOT allow you to invest in foreign real estate, a single member IRA LLC, bitcoin or cryptocurrencies whereas other custodians will allow you to make these types of investments.
Sunwest Trust, for example, allows clients to invest their IRA in foreign real estate, businesses, private notes, and in a single-member IRA LLC, but we do not allow SDIRAs to be invested in bitcoins or other cryptocurrencies unless however, the bitcoin investments are initiated in an IRA LLC. So, technically you can still make the bitcoin investment. However, you will have to set up an IRA LLC entity through an SDIRA advisor or a 3rd party IRA LLC facilitator.
A Note About IRA Prohibited Transactions
Assets to Avoid Placing into an IRA
Speaking of specific IRS prohibitions, there are only two items within the IRS guidelines that you cannot specifically invest in, and that is life insurance and collectibles (like artwork or jewelry). Other than those two things, you are allowed to invest in just about anything else you want.
Avoid Disqualified Persons
The only other situation you have to watch out for is you are not allowed to do any business with disqualified parties. This includes personally transacting business with your IRA, extending credit to your IRA to make an asset purchase, personally benefiting from your IRA and its assets or co-mingling IRA funds with yourself or disqualified persons or entities.
We’ve discussed excluded parties in several of our other post and videos, so if you need a refresher on disqualified parties or entities make sure to use our search feature on our site to find our blog and video content related to the subject.
A good rule of thumb to follow to stay within the IRA rules includes:
- Do not engage disqualified parties.
- Do not add sweat equity to your investment, as this is an unauthorized contribution to your IRA. You can only contribute cash to your IRA account. You are not allowed to contribute an ounce of sweat equity.
- Avoid paying yourself to either manage or sell the property.
- Don’t comingle your retirement funds with your non-IRA funds.
In the end, your IRA investment should be passive, and you should be an invisible bystander. Your IRA along with 3rd non-disqualified parties should do all of the work of making the investment profitable, so assemble your SDIRA investment team wisely, namely what you invest in, who you invest with and the team who can enhance your asset value are critical to your success as an investor.
Pros of a Self Directed IRA
The first advantage is it is easy to set up an alternative IRA account. Whether or not you decide to work with Sunwest Trust as your custodian, it’s a relatively straightforward process. The majority of non-traditional IRA custodians have a couple of IRA forms for you to fill out and will need a copy of your driver’s license, and other than that it’s pretty much a painless process.
Hard Money or Private Lending Option To Non-Disqualified 3rd Parties
The next benefit is there’s the opportunity to lend money and possibly receive higher returns on investments secured by real estate. That’s not always the case, and obviously, nothing in life is guaranteed, but we have some clients who have done well investing in real estate, lending money and investing in private stock in companies.
Custodial Fees & Low Administrative Costs
Next, there are no commissions paid to Sunwest Trust on IRA accounts. At Sunwest Trust, you are allowed to manage your IRA account for yourself and direct us to direct your funds to investments you wish to make. Our fee structure is based on a fee-based model rather than charging you on a percentage of the assets inside your account. We believe your investment success should be your success.
On the other hand, many brokerage houses charge fees based on a percentage of your assets. However, at Sunwest Trust, we feel this is unfair and burdensome to charge additional fees based on the amount of money you have in your account.
At Sunwest Trust, we offer a low-cost flat IRA custodial fee of $275 per year and charge just small additional fees based on the activity within your account (or more precisely, the number of transactions you make throughout the year). Therefore, if you don’t have any transactions and if you just have one asset that you’re holding in your IRA, then you just pay a flat custodial fee of $275 annually, and that’s it!
It should be noted. If you plan on acquiring and holding precious metals, and using Sunwest Trust as your IRA gold custodian, there is an additional $125 a year required to pay the gold IRA storage fee.
Some Possible Disadvantages To Having a Self Directed IRA
First, there is more pressure placed on the client or individual IRA holder. Self directed clients have to find their investment opportunities, track their investments and make sure that they aware of the IRS guidelines regarding IRAs to stay away from or committing prohibited transactions both directly or indirectly. Many believe that experience is the best teacher and in line with what we believe learning from the experience of others without incurring the cost of failure is quintessential to staying out of foul trouble with the IRS and your IRA. Take a moment to read our post on the Peek V. The Commissioner Case. The lessons covered here are priceless.
Custodians aren’t allowed to offer any investment advice. Therefore, you can’t look to them to help you analyze whether an investment makes sense for you and your retirement account. Also, we do not we sell any investment products or make referrals to specific investments to make.
If you are interested in what we do as a custodian and our role? Any investments our clients want to invest in have to be discovered and vetted on their own. Once the ideal investment has been identified, clients can direct us to purchase that through their IRA account.
Due Diligence Is A Must To Avoid Potential Investment Pitfalls
There’s quite a lot of legwork to be done by the client. Clients have to do all of their research and due diligence before directing us, as the custodian, to self directed the funds on the client’s behalf. IRA custodians do not provide any due diligence on any of their clients’ investments, so you’re going to want to research the company or individuals thoroughly you’re investing with and research any investment that you’re making before making an investment with your IRA. We always suggest speaking with a competent licensed CPA or tax attorney just to make sure you know what you’re getting into before you commit to any investment, whether you are investing with your IRA or not.
Beware of Fraudulent Investments
If you have not done your research and if you haven’t done the appropriate legwork required before investing, there is a chance you could you lose your money by investing in a fraudulent investment.
Let’s clear the air! The possibility of participating in a fraudulent investment or a shady investor scheme is not limited to the arena of self directed IRAs. Fraudulent investments and self directed IRA investing are NOT synonymous. Participating in self directed IRA investments, which are not prohibited by the IRS in and of themselves are not to be considered fraudulent investment activity.
However, the investments or the promoter of an investment you may select might be, so again do your due diligence. Make sure to thoroughly vet both the investment, contracts and the promoter of the investment you are thinking of partnering with before directing Sunwest Trust to allow your IRA funds because there isn’t any recourse if you make a poor investment decision.
Are My Alternative IRA Investments FDIC Insured?
When your IRA money is in an account at Sunwest Trust, and if it’s in cash, then it’s held in an FDIC insured savings account. However, once you authorize us through a signed direction of investment to invest your monies in an investment for you, it’s no longer FDIC insured, so you always want to be mindful of that. Once an investment is made for you on your behalf, there’s no FDIC Insurance to cover either an errant or fraudulent investment.
Avoid Prohibited Transactions and Disqualified Parties
And last, another con to be aware of is you always have to be wary of the prohibited transaction and disqualified party rules. The IRS Commission has a long memory and is not very forgiving when it comes to blatant violations of the Internal Revenue Code 4975. There are rules to having a self directed IRA. For example, you as the IRA holder canNOT invest with yourself, your spouse or any lineal family members. As we talked about earlier, there are certain things the IRS will not allow you to invest in, like life insurance and collectibles, so you have to be aware of prohibited transaction rules.
If you have any questions or want to ask us about something we’ve talked about in our previous videos, then you’re more than welcome to contact us here at the office. The phone number is 800-642-7167, or you can visit our website at SunwestTrust.com. As always, before you make any investments we always recommend that you speak with a CPA or a tax professional. Lastly, be sure to subscribe to our YouTube channel. We make videos every Tuesday at 2:00. Thanks again for reading. Stay tuned! Please share with your friends on your social sites.