10 Commonly Asked Questions: Self-Directed IRAs

 |  General Self-Directed IRAs

By J.P. Dahdah, Founder & CEO of Vantage

When someone first learns about Self-Directed IRAs, there is a validation process. A period of time where the newly-informed person needs to verify that the information being shared with them is, in fact, accurate and credible.  

There is a standard set of knowledge around Individual Retirement Accounts (IRAs). Most of us have been led by financial professionals and institutions to believe retirement accounts are limited to the stock market. That we’ll face tax consequences and penalties for stepping outside traditional investments. 

This simply isn’t true. So when a person learns there are accounts called “Self-Directed IRAs” that enable us to have total control over our retirement savings and diversify freely and without taxation to alternative assets in the private markets, there’s an understandable need to “fact check” this information. 

At Vantage, we understand this need. And we’re here to help. 

10 commonly asked questions by clients we’ve guided through their validation process

1) What is a Self-Directed IRA?

A Self-Directed IRA is the name given to a retirement account that allows you to have total control over your retirement savings compared to traditional Brokerage IRAs (i.e. Charles Schwab, Fidelity, Vanguard, etc.). With a Self-Directed IRA, you can invest in a virtually unlimited array of alternative assets beyond the stock market. The most popular assets held within Self-Directed IRAs are real estate, promissory notes, private funds, and private entities.    

2) Why haven’t I heard about Self-Directed IRAs and the ability to use retirement funds to invest outside the stock market without tax or penalties until now?

Individual Retirement Accounts (IRAs) were created by Congress in 1974, and believe it or not, the IRA rules have allowed account holders to invest outside the stock market since day one. The reality is this: Almost all IRA custodians and administrators are in the stock market industry, so they have no financial incentive to direct their clients to invest in alternative assets they don’t offer or make money on. There is a big difference between what the Government’s regulations allow IRA holders to invest in and what your IRA custodian’s corporate regulations permit. This is where the misinformation starts. If you ask a traditional IRA custodian if you can invest in real estate with your IRA, they will say “no, you can’t” but what they should say is “not with us, but it is permissible with alternative asset IRA providers (i.e. Vantage).”

3) What investments can I make in a Self-Directed IRA?

When the Government created IRAs, they figured it was easier to define what investments are prohibited to purchase inside a retirement plan versus outlining all the assets you CAN invest in. In fact, there are only two investment limitations within IRAs, which are 1) life insurance contracts and 2) collectibles. Apart from these two types of investments, an IRA can be used to diversify into any asset strategy you want. Self-Directed IRAs offer flexibility, allowing you to invest in various assets such as real estate, private businesses, tax liens, cryptocurrencies, precious metals, and more.

4) Are there restrictions on Self-Directed IRA investments?

While Self-Directed IRAs offer a broad range of investment options, they come with rules and restrictions. For example, you cannot use your Self-Directed IRA to engage in transactions that involve disqualified persons, such as family members. The prohibited transaction rules are found under Internal Revenue Code (IRC) Section 4975. Feel free to visit www.IRS.gov to validate this information. 

5) What are the benefits of a Self-Directed IRA?

The benefits of a Self-Directed IRA include greater investment diversity, potential for higher returns, increased control over your retirement portfolio, and the ability to invest in alternative assets that may not be available in traditional IRAs. For those that prefer to invest in the private market versus the stock market, the benefit of a Self-Directed IRA is that you can invest in the assets you know, understand, and feel most comfortable with. 

6) Can I transfer or rollover funds from an existing IRA into a Self-Directed IRA?

Yes, you can transfer or rollover funds from an existing traditional IRA or 401(k) into a Self-Directed IRA, as long as you follow IRS rules and procedures for such transfers. You can transfer as much or as little as you choose into your Self-Directed IRA from your existing IRA. 

7) How do I maintain compliance with IRS rules and regulations?

To stay compliant, educate yourself on IRS rules, work closely with your custodian or trustee, avoid prohibited transactions, and consider consulting a tax professional or financial advisor with expertise in Self-Directed IRAs.

8) Can I convert a traditional IRA or 401(k) into a Self-Directed IRA?

Yes, you can usually convert a traditional IRA or 401(k) into a Self-Directed IRA by working with a custodian experienced in handling such conversions. The process involves transferring the funds into the new account.

9) Are there any balance minimums to open a Self-Directed IRA?

No, you can establish a Self-Directed IRA with zero funds in it. However, we do encourage our clients to consider the impact of the account fees on their IRA balance. You want to make sure that you are making enough money on your investments above the fees you are paying to have an account. 

10)  Which types of retirement accounts can be “Self-Directed” and used to invest outside the stock market?

All of them. Every single type of IRA and Qualified Retirement Plan can be used to fund private market opportunities. Remember, the key is to establish your Self-Directed IRA account with a company that specializes in alternative asset custodial services, such as Vantage!     

Hopefully these answers help increase your comfort level about the IRA rules as established by the U.S. Government. As always, if you have further questions, we’d love to talk with you. Contact us at vantageiras.com

Happy alternative investing!