In order to answer the question of “how does a Self-Directed IRA work”, first we have to determine what kind of Self-Directed IRA is under discussion.
There are two basic models for Self-Directed IRAs: one that uses a Trust model and one that uses a checking account. Both allow the investor to diversify his/her assets, but they do so in two very different ways.
Self-Directed IRA: The Trust Model
Let’s look at the Trust model first. The model is best compared to a little kid who has a bank account. Theoretically he/she can buy whatever they want, but in order to do so they have to ask their parents to take out the money for them. And of course you know how that turns out. Here’s a sample time line:
- Sally wants to buy a new doll car. She asks her father to take out $35 so she can do so.
- Her father says he would love to do so… when he gets around to it.
- After a long while of nail-biting nervous tension, Sally’s father finally gets her the money. She goes to the store and buys the doll car.
- When she gets home and opens the box, she realizes that the car needs batteries.
- Sally asks her father if he can take out $5 so she can buy batteries.
- Her father says he would love to do so… when he gets around to it.
Frustrating, right? Now imagine that Sally couldn’t ask her father straight, but instead had to fill out a long form detailing the amount of money and specific intended purchase. And imagine further that Sally’s father told her that there was going to be a transaction fee for every form she submitted. How quickly would it take to become frustrated to the point of tears?
Now imagine that the transaction fees were significant and soul crushing, and you have a pretty good idea of how a Self-Directed IRA works with the Trust model. The Self-Directed IRA custodian acts as the father and imposes forms and fees on every transaction you make. Which might make you want to consider an alternative route.
Self-Directed IRA: The Checkbook Control Model
Checkbook Control is the killer app for your Self-Directed IRA. It gets rid of the fees, it gets rid of the forms, and it get rids of the frustration. So how does the magic happen? At this point let’s get to the answer of ‘how does a Self-Directed IRA work?’
When you call up Broad to set up a Self-Directed IRA, there are two steps involved in beginning the process.
- The first is establishing a new account at a Self-Directed IRA custodian.
- The second is setting up a LLC for the Self-Directed IRA.
This LLC is key as it allows the investor to open a checking account for the IRA at the bank of their choosing. Once the checking account is open, the investor may now place any investment by writing a check.
Let’s repeat that. The investor may now place any investment by writing a check. No forms, no calls, no authorizations, no aggravation, and no fees! By using a LLC and a checking account as the investment platform for your Self-Directed IRA, you have effectively cut out the middle man custodian. With checkbook control, you have finally achieved complete investment freedom.