Saving for retirement in a tax-efficient manner is an important goal, and individual retirement accounts (IRAs) are an established tool for doing so. In contrast to conventional IRAs, which you would usually open with a brokerage or bank, self-directed individual retirement accounts (SDIRAs) require a custodial company.
SDIRAs are becoming increasingly popular, especially among those who want more control of their financial future. This article will answer some of the frequently asked questions about self-directed IRAs so you can feel empowered to choose the right retirement strategy for you.
Understanding Self-Directed IRAs
An SDIRA is an account for investing in alternative assets and conventional securities. Here’s what you need to know.
What Is a Self-Directed IRA?
An SDIRA is an individual retirement account that allows you to invest in non-traditional investments. The IRS specifies four primary types of IRA that can be self-directed:
- Traditional IRA
- Roth IRA
- SIMPLE IRA
- SEP IRA
While traditional and Roth IRAs are for individuals, SIMPLE and SEP IRAs are for small businesses and self-employed business owners. When you choose a self-directed IRA, it allows you to invest in any investment permitted by law.
Why Would Someone Invest in a Self-Directed IRA?
While a standard IRA typically limits investments to stocks, bonds and mutual funds, a self-directed IRA offers the flexibility to diversify into a wider range of assets, including hard assets like real estate and select precious metals. The appeal of these physical investments lies in their tangibility and potential for long-term value. While all investments carry risk, hard assets can provide a sense of security and stability within a diversified portfolio.
Can Anyone Open an SDIRA?
According to self-directed IRA rules, anyone can open an SDIRA with a qualified custodian. Even minors can have accounts opened for them by a guardian.
Setting up a Self-Directed IRA
Now that you understand the basics of SDIRAs, the next step is exploring how to open one or convert an existing IRA into a self-directed account.
How Do I Open a Self-Directed IRA?
To set up a self-directed IRA for your retirement money, you need a qualified custodian. So, the first step is finding a brokerage firm or custodian that accommodates SDIRAs. Trusted organizations like Accuplan can help you make investments that often can’t be done with other firms, such as real estate, cryptocurrency, private equity, gold and silver, and other alternative investments.
Can I Convert My Existing IRA to a Self-Directed IRA?
Yes, generally you can convert your existing IRA to a self-directed IRA. There are two main ways to do this:
- Direct rollover: A direct transfer is the simplest and most common way to move funds into a self-directed IRA. You request that your current IRA custodian transfer the funds directly to your new self-directed IRA custodian. Your new custodian will provide the necessary paperwork to initiate the transfer. Because the funds are transferred directly between custodians, you never take possession of the money, and there are no tax implications.
- Indirect rollover: The indirect rollover method entails asking your current IRA custodian to send you the complete balance of your account. You’d then have 60 days to deposit those funds into your new self-directed IRA. This method is only allowed once a year and is riskier because if you miss the 60-day deadline, the funds will be considered a distribution and subject to taxes and penalties.
What Is the Rollover Rule Loophole for Self-Directed IRAs?
Another way to use a rollover is for a short-term loan. The 60-day rollover rule loophole is an easy way to temporarily borrow money from your IRA. It can be a good move if you only need funds briefly and can redeposit the full amount within 60 days. If you don’t repay the full amount within the time limit, though, you’ll owe taxes and penalties.
Eligible Investments and Rules for Self-Directed IRAs
Once you know how to set up your SDIRA, learning about the investments it unlocks can help you decide what you’d like to include in your retirement portfolio. If you’re interested in the benefits of these accounts, you must also be familiar with self-directed account rules and regulations to avoid penalties or disqualification.
What Can I Invest in With a Self-Directed IRA?
One of the advantages of a self-directed IRA is the wide range of alternative assets it unlocks. As well as the typical stocks, bonds and mutual funds that define typical IRAs, an SDIRA allows you to invest in:
- Real estate
- Private loans
- Oil and gas rights
- Private equity
- Intellectual property
- LLCs
- Pre-IPO companies
- Cryptocurrencies
- Hedge funds
- Select precious metals
- Livestock
What Are the Rules for a Self-Directed IRA?
Firstly, when self-directing your retirement account, it’s essential to understand prohibited transaction rules and restrictions, including:
- Collectibles: Collectibles such as artwork, antiques, stamps, gems and most coins are prohibited.
- Life insurance contracts: Life insurance contracts are not permitted investments for SDIRAs.
- Real estate: While real estate is permitted as an investment, neither you nor any disqualified persons can use it for personal use. It must be for investment purposes only.
- S-corp stock: IRAs, including self-directed IRAs, are prohibited from owning S corporation stock. If an IRA becomes a shareholder, the S corporation can lose its S-corp status and face tax consequences.
- Transactions with disqualified persons: You are not allowed to use IRA funds for doing business with yourself, your family or other disqualified persons.
It’s also necessary to understand the disqualified persons category so you don’t include them in prohibited transactions or investments. In addition to yourself, these are the other disqualified persons:
- Your spouse
- Your children or their spouses
- Your ancestors or their spouses
- IRA administrators
- Paid investment advisors
- Anyone who is a fiduciary for your IRA
- Anyone with authority or control over the assets in the IRA
Whether you understand IRAs or are just beginning to learn, it’s best to connect with a tax or legal professional. Experts can answer your self-directed IRA questions, help you remain compliant with IRA rules and regulations and get the most out of your SDIRA.
Explore Opening a Self-Directed IRA With Accuplan
A self-directed IRA will allow you to take control of your retirement savings and diversify into a wider range of assets. While there are many benefits to opening an SDIRA, there are also challenges. Choosing the right provider can help you make informed decisions and navigate the process with confidence.
At Accuplan, we offer plan administration for several types of self-directed savings accounts. Our experts can help you set up and manage individual accounts, business accounts, investments and health savings accounts (HSA). Our team members are world-class at what they do, and we tailor our services to your needs.
If you’re ready to get started, fill out an application for the account of your choice today. You can also contact us with questions or for more information about our services.
Our information shouldn’t be relied upon for investment advice but simply for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax or investment advice.
