Expanding Investment Choices Through a Self Directed IRA

As with most things in life, today, investors are seeking more choice. Gone are the days of simply investing for retirement with just a few stocks, bonds, and mutual funds. While there are virtually thousands of choices for investing in equities, investors are still not able to obtain the true combination of diversity that they need for growth and safety of principal.

Over the past few years, savvy investors have started to add more gold and precious metals to their retirement portfolios. This has allowed these individuals to successfully add the opportunity for growth and value to their asset mix, while at the same time hedge against inflation and protect against a potential market downturns.

Investing in metals within a regular investment account can provide investors with ample benefit. Yet, doing so within a self directed IRA account can truly explode returns because along with the other advantages, investors are also able to obtain the tax related benefits that IRA investing allows them.

What is a Self Directed IRA?

Throughout the years, many investors have made their annual IRA (Individual Retirement Account) contribution and chosen what they thought were diversified investments within their accounts. Yet, most investors have been unaware that tangible assets such as gold and silver are also allowed to be placed inside of these tax advantaged retirement accounts.

In fact, many investors have been led to believe that a self directed IRA account is one in which they can choose a diversified mix of different stocks and mutual funds. However, this is not necessarily the case. In fact, a truly self directed IRA will allow investors to place a much wider mix of assets – both tangible and intangible – into the account.

Just some of these asset choices may include:

  • Gold and certain other IRS approved precious metals
  • Real estate – both residential and commercial
  • Currency
  • Private mortgage notes

How Are Self Directed IRA Accounts Different?

In their actual account structure, self directed IRAs are not really any different than regular IRA accounts. What actually makes these accounts unique is the element of control that they provide to their owners – along with the vast amount of additional investment options that they allow.

When an investor owns a self directed IRA account, it is the investor himself or herself – not the brokerage or financial institution – that makes the decisions in terms of what types of investment vehicles will go into the IRA account.

In addition, a self directed IRA may also be able to provide even more benefits to its owner by using something that is referred to as “checkbook control,” along with the ability to invest via a Limited Liability Company (LLC).

An IRA LLC is a type of self directed IRA account that is created along with an LLC. In setting up an account in this manner, the investor can invest his or her IRA funds and other discretionary funds into one single venture.

Once the IRA LLC has been set up, the account is able to start buying investments – either directly or through its custodian – as long as the account has checkbook control. This means that the IRA account owner can write checks directly from the IRA LLC when they purchase investments within the LLC.

A big advantage to doing this is that the account owner has no need to go through an intermediary to purchase the investments. It also means that the account owner may not be required to report the transaction to the IRA administrator.

Funding a Self Directed IRA

There are several ways to fund a self directed IRA account once it has been opened. One way to do so is to make an annual cash deposit. Each year, investors – within certain guidelines – can make an annual cash contribution into a traditional or a Roth IRA account.

In addition, funds may be transferred or rolled over into a self directed IRA account as well. When doing so, however, it is important for investors to note that the IRS (Internal Revenue Service) has very strict rules that pertain to IRA rollovers.

For example, should the investor take receipt of the funds rather than having the funds be directly rolled over from one financial institution to the other, the funds may be subject to immediate taxation.

In addition, the funds may also be subject to an “early withdrawal” penalty of 10 percent if the investor is under the age of 59 1/2. Oftentimes, the investor can avoid this penalty by having the funds placed into the new account within 60 days of the start of the rollover transaction.

Additional Things to Consider

While there are many advantages to owning a self directed IRA account, it is also important to note that the IRS mandates very strict rules and regulations with these types of accounts. With this in mind, there are a number of prohibited transactions in which account owners are not allowed to take part.

Some transactions that a self directed IRA account owner is not allowed to do include the following:

  • Borrow money from the account
  • Sell property to the IRA account
  • Receive any type of compensation for managing property that is owned by the IRA account
  • Live in a property that is owned by the IRA account
  • Use self directed IRA funds to pay for personal expenses
  • Use IRA funds as security for a personal loan
  • Provide services to an IRA owned investment such as property

Getting the Proper IRA Advice

Any time investors are considering moving money from one retirement plan to another, it is essential to get the proper advice. Otherwise, it is possible to end up with substantial – and unnecessary – taxes and penalties.

In order to avoid this, finding and working with a reputable and reliable self directed IRA custodian is extremely important. When considering moving funds to a gold backed IRA, for example, seeking out those custodians that have top ratings with the Better Business Bureau and TrustLink is a good way to start the search. In addition, industry reputation and customer service is also key.

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