The Basics — Self-Directed IRAs

What is an IRA (Individual Retirement Arrangement)?

While there are many types of IRA, an IRA is simply a savings plan that allows you to put away money for retirement, all done through a tax advantaged arrangement.   Further, the IRS defines an IRA as: 

“a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements…”

Other IRAs

In addition to a Traditional IRA, other types of IRAs include:

Roth IRA

SIMPLE IRA

SEP IRA

3 Different Types of Self-Directed IRAs (well, you may still consider it 2!)

Other than there being different types of IRAs, an IRA is an IRA as far as the IRS is concerned. There are Prohited Transactions that govern how the IRAs must be established and operated. What is surprising to many, the IRS permits an IRA to invest into more assets (e.g., real estate) other than what your brokerage firms offer you. An examples of self-directed options you may utilize are:

Option 1 

Many of you have seen commercials where brokerage firms talk about a “self-directed” IRA. Yes, these IRAs provide you greater control of your investments you make within your IRA.

However, in this type of structure, the additional “offering” of investments are still traditional-type assets offered by the brokerage firm. This type of account does not really meet a broader definition of “self-directed”, and these type of accounts certainly do not allow you to invest directly into assets such as real estate, hard money loans, etc.

Option 2

The next type of self-directed IRA definitely meets the definition of self-directed that most of us would consider being self-directed. In this model, your IRA is held at a “passive” custodian that does not sell you investments, but rather serves as the IRS-approved custodian for your IRA.

In this type of IRA, you do not have checkbook control of your IRA and you must rely on the custodian to process all investments for your IRA. While they operate at your direction, you are handcuffed to their procedures for making the investment, time delays and higher (typically) fee structures. 

The upside of this type of structure: the IRA custodian making the investment on behalf of your IRA will/should greatly reduce the risk of running afoul of IRA Prohibited Transactions. The downside:

  • Time delays;
  • Lack of control (with the IRA account owner); and
  • Potential higher fees

Option 3

Finally, the 3rd option, while not accounting for the greatest number of self-directed IRAs, is gathering more and more interest from IRA account owners. Most companies only offer the IRA LLC, we offer both the IRA LLC and IRA Trust. Different structures, same end result…having what is marketed as “checkbook control” of their IRA.

With this structure, an IRA custodian permits the an IRA account owner to capitalize the funds of the IRA into an LLC or Trust structure…that the IRA account owner manages (i.e., Manager of LLC, Trustee of Trust). Greater possibility of the IRA account owner possibly violating IRS Prohibited Transactions…without question. However, for the individual who can make sure they adhere to IRS Prohibted Transactions rules, the self-directed vehicle is very popular and becoming more and more popular. 

PGI can assist our clients with either Options 2 or 3.

Learn More — The advantages of establishing a Self-Directed IRA!

IRA LLC — Establishment, Structure and Utilization