Why haven’t I heard about Self Directed IRA's before?

Since The Employee Retirement Income Security Act (ERISA) was passed in 1974 the big lobbyists for IRA’s were banks and investment firms, since then there has been a common misconception that IRA’s are only allowed to be invested in stocks, bonds, mutual funds, annuities and CD’s. Nothing could be farther from the truth. The main reason you might not have heard of this type of retirement plan is that none of these traditional custodians have an incentive to allow you to make your own investment decisions outside of stocks bonds mutual funds, annuities and CD’s. Since the downfall of the stock market in 2000 it has been individuals who have taken the initiative and utilized the benefits of self directed IRA’s.  They know the “secret”.

What is The Secret?

What is the secret that these informed investors know? It’s a section of the IRS code (IRS Code 4975). What is revealed in this code is what you are allowed to invest in with your retirement funds.  Actually, there isn’t a long list of what is allowed; instead there is a very short list of what is disallowed.

The IRS code "doesn't tell you what you can invest in. It tells you what you can't invest in."  The Wall Street Journal

The more you research this subject, the more you will find that the IRS allows an open field of flexibility with Individual Retirement Accounts and in fact, it’s not the IRS that frowns upon self directed IRA’s, it’s the investment firms that prefer to keep control of your money.

The most common question has always been, “can I invest in real estate with my IRA?” The answer is yes.

“Real estate has always been permitted in IRAs, but few people seemed to know about this option- until the stock market began to decline. Financial Institutions, meanwhile, had little incentive to recommend something other than stocks, bonds or mutual funds.” - New York Times

Where Can I Invest?

Here are some examples of investments that an IRA is allowed to invest in that you might utilize for higher returns then you are enjoying now.

Trust Deeds (www.CopperRiverFunding.com is one I use)

Residential Real Estate

Commercial Real Estate

Stocks, Bonds, Mutual Funds

Land

Deeds/Mortgages

Currency

Private Notes and Loans

Commercial Paper

Limited Liability Companies (LLC)

Tax Certificates

Limited Partnerships (LP’s)

Foreclosure Property

And more . . .

Many individuals have asked their broker about alternative investments and have been told that it cannot be done. What they are not being told is that they can make their investment; they just can’t do it with their current brokerage firm.

How does a Self Directed IRA Work?

With a Self Directed IRA (SDIRA) you will have a check book, debit card and all the tools that come along with a business checking account at your fingertips. All you need to know with a SDIRA are the few things that you can’t do; the rest is up to your imagination.

A SDIRA is a unique hybrid that utilizes a self directed IRA custodian and a specialized legal structure.

Here is how it works:

1 Your retirement account is moved to a self directed custodian who allows alternative investment vehicles that can pass their compliance procedures and withstand IRS scrutiny.

2 A customized entity is formed (usually in the form of a LLC) and submits it to the custodian as a private placement (this is not an ordinary LLC, you use a professional to create this structure otherwise your IRA may become disqualified, taxed and penalized).

3 You open a business checking account for this entity.

4 You submit an investment authorization form to the custodian instructing them to fund your new bank account via check or wire. After you complete the simple step by step SDIRA process you will have absolute control over this new structure and can direct your retirement funds into any investment you choose (keeping in mind that you still need to abide by IRS rules). Not only do you have the flexibility of cash which allows you to make a wide range of investments including the securities you are familiar with, but also solid asset protection.

What types of Retirement Accounts can be structured as a Self Directed IRA (SDIRA)?

As a rule of thumb, you want to make sure that your retirement plan can be rolled over or transferred to another custodian before moving forward in getting a SDIRA. Once you have established that you are eligible, most types of retirement plans can be converted into a SDIRA, here is a list of the most popular.

- Traditional IRA

- Roth IRA

- SEP IRA

- Keogh

- 401(k)

- 403(b)

What is the difference between buying real estate or any other investment for me or for my SDIRA?

When you make an investment with your SDIRA you will want to make sure that the asset is titled in the name of your entity. Make sure all the expenses come from the SDIRA and all the revenue flows to the SDIRA. Also, you will always want to make decisions in the best interest of the SDIRA because once you become manager of your IRA, you become a fiduciary. 

Do I need to ask permission to make an investment in my Self Directed IRA?

No. You are the manager of your SDIRA and all decisions are made by you, when you want to make an investment, you write a check, use your debit card, wire funds, ect… All contracts can be signed by you; if you want to hire another decision maker you can also do that. You will need to report to the custodian on an annual basis. Most custodians don’t have any formal documents to make this reporting, a simple letter will suffice; it is recommend to keep a balance sheet for your entity and sending that to the custodian annually. 

What if I need to borrow money to buy real estate?

Because you cannot extend credit to your IRA, and your IRA cannot be used as security, it makes borrowing money a little more difficult, however, as long as you get a loan that doesn’t take recourse against you or your IRA, you aren’t making a prohibited transaction. What most individuals do is use a property owned by the SDIRA as collateral, as long as the loan-to-value meets the right requirements, most banks will loan money to the SDIRA.

I purchase an asset that I currently own?

No. This is a prohibited transaction. If this is something you really want to do you might get a private letter ruling from the Department of Labor allowing you to make this investment. Private letter rulings can be very costly and may not be approved

How do I ensure my money will be safe?

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