6-Point Checklist For Self-Directed IRA Owners

Check out Jeremy’s latest podcast on self-directed IRAs by listening on “Apple Podcasts” or “Google Podcasts” or read below for 6-Point Checklist For Self-Directed IRA Owners.

#68 – Do you wish to have more control over what your individual retirement account (IRA) invests in?

If yes, then consider starting a self-directed IRA (SDIRA).

Self-directed IRAs also broaden your investment options by allowing you to invest in several alternative asset classes!

In this episode, Jeremy Keil speaks with Mindy Gayer, Southeast Region Business Development Manager at The Entrust Group. Mindy debunks the common misconceptions around self-directed IRAs and explains everything you need to know before starting your SDIRA account.

Mindy discusses:

  • Three crucial things to keep in mind about SDIRA transactions
  • Different ways to fund your SDIRA and diversify your retirement portfolio
  • Major responsibilities of an SDIRA owner
  • How to use your SDIRA to achieve your ideal retirement and support your beneficiaries
  • And more

6-Point Checklist For Self-Directed IRA Owners

1) Don’t Confuse “Self-Directed” With “Self-Managed”

A self-directed IRA (SDIRA) is a retirement account that allows you to select the types of assets you’re going to invest in inside of that account. In other words, it gives the account holder complete control over the investments.

When clients ask us about self-directed IRAs, we often find that the account they are referring to is actually a self-managed IRA.

While both of them give you control over your investments, they differ in the types of assets you might be allowed to invest in.

What is the difference between them? A self-directed IRA allows you to invest in several alternative assets, such as real estate, start-up companies, and cryptocurrencies. The spectrum of what you can invest in is very broad!

On the other hand, you might be limited to stocks, bonds, and mutual funds in a self-managed IRA. You get to choose which stocks, bonds and mutual funds you invest in, as opposed to a professional choosing on your behalf – but don’t confuse it with the actual ‘Self-Directed IRA’ that allows you to choose alternative assets.

2) Know the Different Types of Self-Directed Accounts

The self-directed option is not limited to traditional IRAs. There are seven different types of plans you can choose to self-direct.

They are Traditional IRA, Roth IRA, SEP-IRA, SIMPLE IRA, ESA, HSA, and solo 401(k).

Most of the characteristics of these accounts remain the same even if you choose to self-direct your account and manage your investments.

It’s important to do your research before selecting the type of account for your portfolio.

3) Know the Rules

When it comes to the types of allowable transactions inside a self-directed IRA, there are three main rules you need to follow:

  1. What your IRA cannot invest in

You can’t invest in life insurance, collectibles, and S-corporations through a self-directed IRA.

Some examples for collectibles include rug collections, an alcohol collection, a gun collection, or even a coin collection (unless it is IRA approved).

Note that assets for investment purposes may be allowed inside an SDIRA. For instance, if you buy alcohol for a winery business, it’s considered an allowable investment – but don’t think your wine collection counts!

  1. What your IRA can invest in

As long as the asset is for investment purposes only, is not disallowed in the tax code,  and is administratively feasible by the custodian, you’re allowed to invest in it.

If you want to invest in real estate, it can be commercial real estate, a single-family home, a REIT, or even just a plain parcel of land. You can also leverage to buy real estate. However, it must be a non-recourse loan.

If you want to invest in precious metals, they must be IRA-approved. (The dealer should know what’s IRA approved and what’s not.)

If you want to invest into a business, make sure you are very familiar with the next section.

  1. Who your IRA cannot do business with

There is a group of individuals that the IRS has established as “disqualified persons.” Your IRA is not allowed to do business with a disqualified person.

A disqualified person includes yourself, your spouse, your lineal ascendants (parents, grandparents, great grandparents, and so on), descendants (children, grandchildren, great-grandchildren, and so on), their spouses, financial advisors, managers, beneficiaries, or any entity where you or any disqualified person hold at least 50% ownership.

There must be no buying, selling, transferring ownership, or providing goods/services between your IRA and any disqualified person.

However, your IRA is allowed to partner with a disqualified person at the initiation of the purchase, but never after the fact.

Remember, you can get in trouble with the IRS if you fail to follow any of the above rules!

That’s why it’s so important to learn the rules yourself, and work with a custodian who knows what they are doing, as well.

4) Fund Your Self-Directed IRA

There are several ways to fund a self-directed IRA.

First, you can simply transfer money from your existing IRA, which could be with another custodian, to your self-directed IRA. You can either transfer the entire IRA or do a partial transfer. You can also transfer from multiple accounts at the same time.

If you have money in any type of qualified plan, you can roll over that money. For example, a 401(k), 457, 403(b), or a TSP.

Keep in mind that if you’re still employed with the company where you have your retirement plan, you might not be able to roll over that money. Contact your plan administrator to know what their regulations are.

Finally, you can also make an annual contribution, provided you’re allowed to make a contribution based on what you’re contributing to other retirement accounts during that year.

5) Understand Your Responsibilities as the Account Holder

As the account holder of a self-directed IRA, you have many responsibilities.

The most important one is that you must conduct your own due diligence on the assets you invest in. You are your own fiduciary. The custodian only acts as your record keeper in this situation.

You’re also responsible for complying with the IRS rules regarding prohibited transactions. Your custodian can only inform you about the different regulations. Ultimately, it’s your responsibility to follow them.

At the end of every year, you might also need to submit a fair market valuation (FMV) form. As your record keeper reports to the IRS on the values of your assets, they require updated and accurate values of your retirement accounts.

6) Prepare to Exit

Many investors don’t have a plan to take their money out of the account. But the exit strategy is an important part of your long-term investment plan.

You can pass on your assets to your beneficiaries. The rules that apply to regular IRA accounts about transferring wealth also apply to SDIRAs.

Selling the asset is also a great way to liquidate your account.

If your asset is illiquid and selling is not an option, consider an in-kind distribution. It can be partial or full. It means that you’re taking the value of your asset as your distribution, having it retitled and reregistered in your name personally.

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To learn more about self-directed IRAs, check out the resources below!

If you have any questions, feel free to contact us or connect with our guest Mindy Gayer through the information provided below!

Resources:

Connect With Mindy Gayer:

Connect With Jeremy Keil:

About Our Guest:

Mindy Gayer leads The Entrust Group out of the Nashville, Tennessee office which serves the Southeast Region. She joined Entrust with over 11 years of sales and relationship management experience, seven years of banking experience, and five years of retirement industry administration experience. Mindy holds a Bachelor’s Degree in Business Management from Southern Illinois University in Carbondale, Illinois, and takes a lot of pride in her business and financial background. The retirement industry has always been of interest to Mindy. She feels that it is very important to offer education to all individuals on their options for diversifying their retirement portfolios using alternative investments through a self-directed IRA.

Disclosures:

Entrust does not endorse, recommend or advise on any investment product or service. Rather, Entrust provides the administration, information, and tools to make self-direction straightforward and compliant.

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