Self-Directed IRA Definition
A Self-Directed IRA — sometimes referred to as an “Alternative IRA”, “Self-Managed IRA,” or an “SDIRA” — is a retirement platform that allows the investor to diversify his or her savings beyond Wall Street, into real assets like real estate, private placements, and more. With the addition of a Checkbook Control feature, you gain the flexibility and freedom to invest your own wealth, in real time, with no extra paperwork and no transaction fees.
If you’re ready to diversify your savings out of volatile Wall Street stocks, bonds, and mutual funds, and you’re interested in driving your own retirement account, this is the account for you.
Advantages
The advantages of a Self-Directed IRA go beyond increased investment opportunities. What are your retirement funding fears? A volatile stock market? Too many fees? This type of account provides peace-of-mind for the IRA owner in three primary ways:
| True diversity | Confidence in your investments | Maximum wealth for retirement |
| You can diversify your retirement savings into numerous options beyond Wall Street, including real estate, private placements, and more. A stock market crash won’t decimate your retirement savings if you truly diversify and invest your money in more than one place. | Invest in areas where you have personal knowledge and understanding, instead of relying on bank or brokerage firm’s choices. After decades of building your wealth in your area of expertise, shouldn’t you be able to continue building your retirement there as well? | Checkbook control and no transaction fees is exactly what it sounds like: You can directly manage your investments without having to go through your custodian for each and every change. Additionally, this arrangement will eliminate many maintenance and custodial fees. |
For a closer look at what you are missing out on without Checkbook Control, you can visit this page: Disadvantages of a Self-Directed IRA Without Checkbook Control
One of the great benefits of a self-directed IRA is that fewer fees keep more of your savings in your retirement plan. Here is a quick look at standard fees in three models: the standard IRA, the self-directed custodian IRA, and the self-directed IRA with Checkbook Control.
Standard IRA Fees
Fees on a standard IRA include set-up, custodian, asset, termination, commission, transaction, load, management, surrender, special asset management, and wrap or advisory fees. These fees vary according to the specific provider, but basically anytime your account changes in any way (deposit, transaction, etc.), it will be pinged with a fee.
Additionally, there will be general fees that are often tied to the size of the account, or are included to cover overall operating expenses. Over the course of a career, the constant loss of investment capital can mean a significantly lower payout at the end.
Self-Directed Custodian IRA Fees
The custodian model gives investors the ability to invest in alternative assets, but it retains many of the fees of a standard platform. The most notable of these is the transaction fee.
When investors move to self-direction, it is because they want to take a more active role in their retirement funds. The direct consequence is more transactions, which result in more fees paid to the custodian (and more paperwork to fill out). This makes the self-directed custodian model a big win for the custodian, but a big loss for the investor.
Checkbook IRA Fees
The Checkbook Control model is able to do away with most IRA fees by cutting out the custodian from the investment process, and putting the power back in the hands of the investor. Setting up an LLC (see “How the Ultimate Self-Directed IRA Works,” below) eliminates virtually all management and transaction fees.
The fees that remain are only the initial setup fee and a low annual holding fee, which are both fixed. You’ll know from the beginning exactly how much you will be paying in fees, and you’ll never see an increase due to account activity or size.
Additionally, self-directed IRA custodians may structure fees based on transactions or on asset value. For a complete, side-by-side comparison of these fee structures, along with a Checkbook IRA fee structure, see our guide, Self-Directed IRA Fees: A Full Comparison.
Account Eligibility Requirements
Any taxpayer earning an income is eligible to open a Self-Directed IRA and earn the tax benefits.
Tax-advantaged retirement plans focused on alternative investments are especially valuable to IRA investors with experience and expertise in fields suitable for retirement investing, such as real estate, business, etc. Don’t let your investment options be limited to what your employer or brokerage firm offers. Translate your personal knowledge and experience into your retirement savings, and use your unique insight to drive your IRA investments in nearly any asset.
Frustrated by the limitations of your traditional IRA? Find out why you need to make the switch to Self-Directed in order to maximize your investment expertise and potential here: Why Can’t You Get a Self-Directed IRA on Fidelity?
How it Works: A Custodian and an LLC
Setting up your account with Broad Financial is easy.
- Broad sets up a new account. We start the process by facilitating a new Self-Directed IRA. Our partnership with Madison Trust Company as the IRA custodian means investors pay a flat, low fee, and get the kind of customer service and confidence that Broad Financial prides ourselves on.
- We help you invest in, or rollover funds to, your new SD IRA. With the new SD IRA in place, funds from previous retirement accounts—IRAs, 401(k)s, Roth IRAs, SEP IRAs, 403(b)s, and profit-sharing plans like Keoghs—can be rolled over. The account can also be started with an initial contribution.
- We set up an LLC. A lot of Self-Directed accounts stop with the Self-Directed IRA at a custodian, but Broad takes it a step further in order to give you the added benefit of Checkbook Control. We set up a Limited Liability Company (LLC) for you, which will serve as the investing platform for the plan. Each LLC is customized to correctly adhere to the laws and regulations which govern SD IRA investment platforms.
- The custodian is then instructed to invest the IRA into the newly formed LLC, also known as ‘capitalization.’ Essentially, you use the IRA funds to purchase the new LLC as an alternative asset investment. It’s the only investment that will go through the custodian.
- You open a new checking account. Finally, the custodian sends you a capitalization check, and you open a checking account at the bank of your choosing, in the name of your LLC. You now have an IRA LLC with Checkbook Control, and you are the manager of the LLC.
Both traditional and Roth IRAs are available.
Once your new IRA bank account is open, you can start investing immediately. You simply write a check from your new LLC’s checking account for whatever investments you would like to make. Because the LLC is owned by the Self-Directed IRA, the assets you purchase are also, then, owned by your SD IRA. They become part of your retirement portfolio.
From Real Estate to Commodities: Acceptable (and Prohibited) Assets
Your life experience is unique. The things that you have seen, done, and researched can benefit your retirement if you are able to invest where you recognize value. With our services, you can make any type of investment that fits your expertise in a lot more areas than the narrow range of brokerage-selected stocks, bonds, and mutual funds (though your SD IRA can include those choices as well).
The investment options available to you include:
- Real estate (both directly owned and public and private REITs)
- Foreclosures
- Mortgages
- Private businesses and private equity
- Private loans
- Private placements
- Commodities
- Intellectual property like movies, books, and songs
- Stocks, bonds, and mutual funds
- Tax liens
There are, however, two classes of prohibited assets:
- Collectibles (like baseball cards, stamps, and art)
- Life insurance contracts
With Wall Street as unpredictable as ever, and custodians charging fees for every transaction, there’s never been a better time to diversify with alternative investments. You’ve spent years growing your own wealth, shouldn’t you be able to grow your own retirement?
Prohibited Transactions
In addition to prohibited assets, there is also a short list of prohibited transactions. Your SD IRA cannot:
- Purchase property that either you or an immediate family member personally owns (this is particularly prevalent since real estate in an IRA is the most common alternative investment).
- Purchase property from any persons who provide a service to your IRA plan, including investment advisors.
- Lend money to a disqualified person (see below).
- Do business with an entity in which a disqualified person owns 50% or more.
Neither can you personally guarantee a loan for a real estate purchase. Because your retirement funds are being set aside on a tax deferred basis to benefit you in the future, they cannot be used to benefit you—or anyone close to you—in the present. Disqualified persons include:
- You
- Your spouse
- Your parents
- Your grandparents
- Your children (and their spouses)
- Your grandchildren (and their spouses)
- Your investment advisors
- Anyone who provides a service to your retirement accounts
A purchase that benefits you or your loved ones today is considered a withdrawal from your retirement account and is subject to taxes and penalties.
(Check out more in-depth material on real estate rules and investment guidelines, as well as which platform caters to your specific plans when pursuing the best SD IRA for real estate.)
Taxes and Legalities
All IRAs are subject to two potential taxable situations:
- Unrelated Business Income Tax (UBIT)—When your SD IRA invests in a business, and that business produces a profit, that profit is taxable.
- Unrelated Debt-Financed Income (UDFI)—If your SD IRA borrows money to invest in real estate, the percentage of profit from the borrowed funds is taxable.
Self-direction has been the intention for IRAs since congress created the retirement platform in 1974. However, banks and brokerage firms that made IRAs available were only set up to deal in Wall Street-style investments, so that’s all they’ve ever offered.
The stock market’s struggles in 2008 alerted many Americans to the importance of true diversification, and truly Self-Directed retirement platforms began to gain popularity.
If your accountant or lawyer questions the legality of the Checkbook IRA or suspects any alleged Checkbook IRA problems, you can point him or her to any of the following:
- IRC §4975
- Swanson v. Commissioner 106 T.C. 76 (1996)
- IRS Field Service Advisory 200128011 (April 6, 2001)
- Ellis v. Commissioner (2015)
A Dynamic, Self-Determined Road To Retirement
A Self-Directed IRA offers the best of both worlds. You have the power and freedom to make your own investment decisions, and the support of an experienced, registered SD IRA custodian.
With personalized service and a streamlined process, a specialist will first assess your situation and goals to see if a Self-Directed IRA is right for you. He will then guide you through the set-up process and be available for ongoing support.
If you are ready to quit riding the Wall Street waves, this kind of account puts your retirement back into your own hands. Contact Broad Financial at (800) 395-5200 today—or use the short form in the sidebar—for an expert evaluation of your current financial plan and your future goals.
Do your due diligence when selecting a Self-Directed IRA company. Make sure customer support is among their highest priorities. Check out some reviews from Broad Financial’s very own clients!
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