Regular IRAs usually house only stocks, bonds, mutual funds, and other relatively common investments. Self-directed IRAs offer much more possibilities. For example, you could invest in real estate or a private company. You'll just need to find a custodian who will accept the deal and you'll be ready to go.
With any IRA, you need a custodian or trustee to maintain the account in your name. Why leave your money at the mercy of the market? With a self-directed IRA, you can invest in specific assets, such as a private company or tax liens. But you can also invest in other non-traditional assets, such as real estate or an LLC, that have the potential to earn a higher rate of return. Plus, you don't have to transfer your entire account, you can leave your investment fund or other retirement assets in the hands of existing IRA providers.
You can choose between a self-directed Roth IRA, a traditional IRA, or, if you have a small business, an SEP IRA or a SIMPLE IRA might be the best. If a normal IRA seems more appropriate to you, here's a comparison between the brokers we've selected as the top IRA account providers. A common ruse is to say that the IRA depositary has examined or approves the underlying investment, when, as the SEC points out, custodians generally do not assess “the quality or legitimacy of any investment in the self-directed IRA or its promoters.” This can be complicated if you invest in assets that can't be easily redeemed, although there is a Roth IRA version of a self-directed IRA. Self-directed IRAs allow you to invest in a wide variety of investments, but those assets are often illiquid, meaning that if you're faced with an unexpected emergency, you may have difficulty getting money out of your IRA.
Often referred to as checkbook control, setting up a self-directed IRA with funds from an IRA allows the LLC to make asset purchases. With the self-managed IRA or the regular IRA found in most financial institutions, simply check a box to indicate the combination of stocks and mutual funds you want. Transferring funds from an existing IRA to a self-directed IRA is a simple process and is not a taxable fact. You can choose to open a self-directed IRA like a traditional IRA or a Roth IRA, with the same pre-tax and after-tax contribution rules.
Generally speaking, you can't hold unapproved assets in your IRA, borrow money from an IRA, sell properties to an IRA, use an IRA as collateral for a loan, or use an IRA to buy property for personal use. If you spend a single night in a rental property purchased with IRA funds, your entire self-directed IRA will no longer be considered an IRA starting the first day of that year. Advocates of self-managed IRAs claim that their ability to invest outside the mainstream improves their diversification, but a self-directed IRA can just as easily lack diversity as any other retirement account. It's the IRA that owns the property, not you personally, and your IRA doesn't pay taxes every year.
All investment expenses are paid from the self-directed IRA and all income is returned to the self-directed IRA. SDIRAs have the same tax benefits as IRAs offered by IRA companies, banks or brokerage firms, with the added advantages of being able to invest in more types of assets and choose, buy and sell the assets in your retirement account directly. A self-directed IRA is a traditional or Roth type of IRA, meaning that it allows you to save for retirement with tax advantages and has the same IRA contribution limits.