Self-Directed IRA

What is a "Self-Directed IRA"? A self-directed IRA is technically no different than any other IRA (or 401k). A self directed IRA is unique because of the available investment options. Most IRA custodians (the company that manages your IRA) only allow approved stocks, bonds, mutual funds and CDs. A truly self directed IRA custodian allows those types of investments in addition to real estate, notes, private placements, tax lien certificates and much more.

What are the advantages of a "Self-Directed IRA"? One of the main advantages of a self-directed IRA is that it allows the account holder to achieve diversification; account holders can make both traditional and alternative investments within self-directed IRAs. If there's any lesson to be learned from the crash the stock market went through in the late 1990s, early 2000s, and in recent days, it's that having all your eggs in one basket can be problematic. A Self-Directed IRA allows you to diversify into many different assets, but also to be flexible with following the market trends. A self-directed IRA is for investors who want an active role in selecting their investments and having control over their portfolio diversification. Self-directed IRAs provide tax deductions and tax deferred or tax free compounding growth for the creation of wealth.

Why haven't I heard of this before? While the concept of investing in real estate and other assets in retirement plans has been around for more than 30 years, the concept hasn’t received large attention because most custodians who offer IRAs (banks and brokerage firms) focus on mutual funds and CDs because they have vested financial interests in you selecting those investments from them. Because the majority of custodians focus on stocks and CDs there is a misperception that it is your only investment option for retirement plans, which is not the case.

What can I invest in with a "Self-Directed IRA"? The following types of investments are available to you through a Self-Directed IRA. Certain restrictions apply, so please consult with a qualified custodian to learn more.

Residential real estate—including apartments, single family homes, and duplexes
Commercial real estate
Undeveloped or raw land
Real estate notes (mortgages and deeds of trusts)
Promissory notes
Private limited partnerships, limited liability companies, and C corporations
Tax lien certificates
Foreign currencies
Publicly traded stocks, bonds, mutual funds
Private stock offerings, private placements

How does it work? The first step is to establish an account with a custodian that offers Self-Directed IRAs. This usually requires transferring your existing IRA funds into a new account with a different custodian that offers a Self-Directed option. The second step is to identify an asset and purchase it using your Self-Directed IRA funds. The asset will be titled in your IRA's name. All profits and expenses will then be paid to and from your IRA account with IRA funds.

Can I use leverage? One great benefit of a Self-Directed IRA is the ability to use leverage. The whole idea of using leverage in an IRA is the same as using leverage outside the IRA. For instance, if an account holder wished to buy real estate with their Self-Directed IRA, a bank would typically require a 40 to 50% down payment. Therefore, if the account holder had $100,000 in their retirement plan, they could effectively purchase $200,000 in real estate, allowing the account holder to achieve larger potential gains.

How do I get started? In order to invest using a Self-Directed IRA, your IRA must be held with a qualified trustee or custodian that offers a "Self-Directed" option. Check first to see if your current IRA custodian has such an option. If not, there are many custodians from which to choose. Several of our investors have established accounts with Equity Trust Corporation in Cleveland, Ohio. They offer excellent customer service and a reasonable fee structure.