Category: Self Directed IRA

After deciding on their favorite retirement vehicle, whether a 401(k), traditional or Roth IRA or Self-Directed IRA, the next step for smart investors could be to consider how to allocate those funds.

There are several topics to consider when deciding the best avenue for a retirement portfolio asset breakdown including but not limited to:

• Age
• Desired allocation percentages
• Risk tolerance
• Alternative assets
• Retirement goals

Armed with this information, investors can develop their top asset allocation strategy and then research the best avenues for their retirement accounts.

Traditional Asset Allocation

Traditional retirement portfolios, like an IRA or 401(k), often allocate assets based on a percentage of stocks and bonds. That type of mix has been considered safe to take investors through a variety of market risks.

Pros

The old proverb of retirement portfolio breakdown of 60/40 stocks and bonds worked because it was successful. The theory holds that stocks create growth potential while bonds provide stability.

Investors who favor security and are a little risk-averse might prefer to consider traditional allocation as a safety net because of its historical success.

Cons

The drawback to the old way of investing is that we’re not living in an old-world economy. Higher stock prices and fluctuations in interest rates have adjusted the new-world look at the “traditional” method.

Savvy investors who prefer stocks and bonds may consider a different percentage of asset allocation — like 85/15 — and hedge their bets using mutual funds instead of stocks and bonds.

Alternative Asset Allocation

Investors can hold many more options in a retirement account other than stocks, bonds, and mutual funds. Alternative assets include apartment buildings, homes, cryptocurrency, gold and more.

Nerd Wallet reports that nearly 60% of Americans are contemplating alternative asset investments, ranking real estate, commodities and crypto as some of their top considerations. A Self-Directed IRA gives investors the power to put their money to work through alternative investments.

Pros

Alternative investments allow smart investors to try to avoid the wild swings of the stock market. While stocks and bonds can change wildly, the value of peer-to-peer lending, for instance, isn’t typically based on market adjustments.

Just as with other investment options, alternative investments can be funded through pre-tax monies, and they may avoid the volatility of traditional public investing.

Cons

The cons to alternative investing depend on the investment selection. Some investment options have higher entry rates than traditional investments, while others create concerns about illiquidity because they are private investments.

Investors can try to hedge against some of these concerns by utilizing alternative investments as a smaller allocation investment. To avoid the traditional 60/40 asset allocation, what’s right for a riskier investment might look more like 15-20% in alternative investments.

Finding Other Investments

With a Digital Trust Self-Directed IRA, investors have the power to find alternative investments for their retirement. This technology-driven, self-directed approach to developing a driven retirement portfolio breakdown can help bring peace of mind to investors.

Recent market adjustments might have a lot of investors questioning: “What can they do today?” Alternating investment strategies to include alternative investments, like gold, crypto or real estate, provides an answer. An account with Digital Trusthttps://digitaltrust.com/ allows investors to control their retirement all in one place.

Sign up with Digital Trust today.

Smart investors are keenly aware that the Fed has raised interest rates in an effort to fight inflation. The rate hike is expected to encourage savings in the short term, so how do these higher interest rates impact long-term investments held in your retirement account?

The affect that interest rates can have on a retirement portfolio often depends on the assets within the portfolio. Because some investments are more likely to benefit from higher interest rates than others, a diversified portfolio can be a safe option to make a retirement account rate-hike proof.

How Higher Interest Rates Affect Retirement Portfolios

Understanding how interest rates work is essential to realizing how an increase can affect different investments. Interest rates are essentially the cost of borrowing money. So retirement accounts that contain more savings investments are more likely to see a rise with an increased interest rate. Meanwhile, portfolios with stocks, bonds or mutual funds may see an immediate dip as the market adjusts to the higher rate.

Savings accounts

Savings accounts are more prone to benefit because higher interest rates for lenders often translate to higher rates for savings accounts. This means that options like money market funds, bond mutual funds, and certificates of deposit are more likely to see improvements.

You may find that some savings options allow for more investment flexibility than others. For example, many money market accounts have no fees for early withdrawal, while terms for a CD typically range from three months to five years, and investors will be penalized for early withdrawal. Some investors may choose to utilize short-term CDs while interest rates rise.

Stocks and bonds

In retirement portfolios that are heavier in stocks, the effects of higher interest rates often vary. For example, immediately after an interest rate hike, stocks are more likely to fall as sellers take advantage of the increase. However, the long-term effect is often an increase in returns.

Investors should evaluate their retirement goals when considering a portfolio of stocks. An investor who is 30 years away from retirement will likely have different objectives than someone who is three years away.

Diversification with Alternative Assets

Diversifying a retirement portfolio with alternative investments can help hedge against interest rate changes. Alternative options include real estate, physical commodities like gold, pieces of companies, various notes, cryptocurrencies, and much more.

While inflation will also affect these assets in different ways, diversification outside of the traditional investment markets could be more likely to shield investments against wild market fluctuations.

How to Invest a Retirement Portfolio in Alternative Assets

Digital Trust offers investors a way to diversify outside mainstream markets—giving customers the ability to access assets usually reserved for the ultra-rich and financially savvy.

This powerful platform offers many straightforward approaches to alternative investing, making it easy to access and understand. For investors who may be concerned about how market conditions might affect a retirement portfolio, see how Digital Trust can bring peace of mind today.

Sign up with Digital Trust today.

The self-directed IRA has been allowing retirement savers to invest in alternative assets since 1997 when Congress lifted diversification restrictions.

While there are still restrictions on some types of investment vehicles, the Taxpayer Relief Act of 1997 opened the door to a whole new world of retirement investing, like gold, real estate, and now crypto. So how do investors take advantage of this opportunity now to put alternative assets in their IRAs, and what does that look like?

Opening a Self-Directed IRA

The first step to tax-advantaged alternative investing is to open a self-directed IRA. The process can be as easy as opening an individual retirement account (IRA).

First, investors should find a custodian, like Digital Trust, to hold the assets and ensure that IRA rules are followed. Next, they can roll other retirement accounts into the new IRA or use newly contributed funds.

Once the self-directed IRA is opened and the funding process is complete, investors can choose from a variety of investment options — like gold, real estate, LLCs, private equity and cryptocurrency — to add to their new IRA.

Precious Metals in Your Self-Directed IRA

Some experts suggest investing about 5-10% of an IRA in precious metals. Like some stocks, gold and silver prices tend to increase over time, but they can be volatile.

Gold and silver can be considered safe-haven investments, as they often increase in value when investors sense trouble in other markets. The primary rules around precious metals are that the IRS requires them to meet certain standards and they must be stored at a depository (not in your home). For example, to hold gold, it needs to be 99.5% pure, or 99.9% for silver. Meanwhile, some products like American Eagle coins are not as pure but are still considered acceptable investments.

Real Estate as a Retirement Investment

Real estate can be a viable investment vehicle in a self-directed IRA because of the potential tax benefits. Investors should keep in mind real estate is often a larger investment, so it may take up a more significant portion of an IRA than a precious metals investment.

This category has a few rules to remember compared to other types, too. One rule that easily trips up most people up is self-dealing. Self-dealing occurs when IRA owners make investments or loans that benefit themselves or family members.

One example of this includes self-funding the down payment for a property. A buyer will need their custodian to take care of all transactions surrounding the property. Another example comprises directly renting space to family members for specific purposes.

If you decide to put a rental property or other types of property into an IRA, consider consulting with someone knowledgeable about the rules and regulations behind what can be done with the property.

Cryptocurrencies as a Retirement Investment

Cryptocurrencies are a relatively new asset class and are becoming increasingly popular as retirement investments. Generally, investing in crypto for retirement is easier with a custodian that offers crypto trading, like Digital Trust.

When a custodian does not offer crypto trading, the self-directed IRA owner will likely need to open an LLC to make trades. Using a custodian that offers crypto trading eliminates this step, making it a less expensive endeavor.

Cryptocurrency investments in your IRA are similar to investing in stocks or precious metals as far as risk and suggested allocation size. But on the other hand, crypto can be a great way to add to your diversification strategy.

Why Digital Trust?

Digital Trust offers a variety of retirement account options, including traditional, Roth, SEP, SIMPLE and Solo 401(k)s. Our platform offers investors the ability to invest in a wide variety of alternative investment options for self-directed retirement accounts, including real estate, stocks, mutual funds and cryptocurrencies. Digital Trust is the one-stop-shop that gives self-directed and professional investors endless opportunities.

Sign up with Digital Trust today.

It can be challenging for investors to wade through all the tips and suggestions from friends, family, co-workers, and the internet regarding planning for retirement. Although you may have been told 1,001 things you should and shouldn’t do, there’s a good chance that some of these ideas aren’t true.

In fact, some of these ideas might significantly harm your goals or the outcomes you may have envisioned for a peaceful and abundant retirement lifestyle. Here are five retirement planning myths for you to consider

Myth 1: I can wait to save for retirement.

Daily or monthly financial planning isn’t always the easiest task, especially for a young adult who may have other priorities. Sometimes, the thought of it may even feel  depressing, having to withhold 6% of your income when you have rent and credit card bills to pay as well as student loans, anda night out with friends. Juggling bills and other financial priorities may lead some young adults to think, “it will be fine to wait until I make more.”

While this line of thinking might afford you some reprieve at the moment, it may also put a damper on retirement goals over the long run.

For example, you can only contribute a limited amount of money to a tax-deferred retirement account each year. So, you may be limiting the total amount of tax-deferred earnings you can contribute to your retirement, even if you choose to only contribute a fraction now compared to what it will be later when you might be making more money.

Putting off retirement contributions also means that more money will need to be contributed later. It may end up that it is not easier to contribute larger amounts later.

Myth 2: My tax bracket in retirement will be lower.

Investors may assume that their income will be lower in retirement. This understanding leads people to think that they may need less money in retirement to cover things like income taxes. At the start of retirement—before investors may have to take Required Minimum Distributions (RMDs)—they may find that navigating a lower income is possible. On the other hand, once RMDs are incurred, there is the possibility of making more money than you had while working.

Some investors choose to offset potential tax-bracket changes by opening after-tax retirement accounts like a Roth IRA rather than a traditional tax-deferred IRA. Another option to consider would be investigating qualified charitable distributions, and other solutions when the time rolls around.

Myth 3: I can rely on Medicare when I retire.

Medicare often pays about 80% of medical costs. Therefore, some retirees choose to pick up supplemental or gap insurance or pay out of pocket for the remaining expenses.

Planning for these costs out of pocket might seem scary if you are far from retirement because it could be possible for medical care inflation to run higher than the average inflation rate. Today, Fidelity estimates that a healthy retired couple could plan to spend $300,000 on additional medical costs.

Myth 4: I can hit my retirement goals with my home equity.

There are many ways to use your home equity as part of your retirement plan. Still, it isn’t easy to gauge precisely how much equity you will have accumulated the further you are from retirement.

The housing market is just like any other market and can experience volatility with unexpected dips or surges. It is difficult to anticipate a bubble, a bust, or even accurately predict how the real estate market will change the value of your home at retirement age.

Myth 5: My spouse, social security, or inheritance is my retirement plan.

Relying on others for your future may seem like a comforting or convenient idea, but know that it may not always work out as planned. For example, if you are waiting for an inheritance from your parents, it’s possible that something may come up that could cause them spend the money on something else, such as their own medical bills or other care before it reaches you. In addition, it’s important to note that social security alone may not cover all of your future needs or retirement goals.

Prudent future planning is best done when you actively participate in the solution.

Planning for Your Retirement

DigitalTrust* offers a multitude of ways to help you begin planning for your future. This technology-driven, self-directed approach to retirement portfolio diversification can help bring peace of mind to investors, who seek to learn what their options are when it comes to traditional and alternative investments, while planning for their golden years.

Sign up with Digital Trust today!

* Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The accountholder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. This letter shall not be construed as investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.

During the Global Financial Crisis from 2007-2009, the mechanics of the underlying market began to change. Central banks implemented quantitative easing (QE) programs worldwide to keep banks afloat and the markets on the up and up.

These programs worked wonders initially, spurring a long-standing bull market that was met with continued QE any time the market threatened to pull back. The most recent QE program was initiated as the 2020 pandemic settled in.

While other sources can cause temporary market downturns, there is no question about it; the world revolves around money. So, what happens when unprecedented amounts of cash are poured into the system to solve relatively small problems compared to what the world faces today? The answer is volatility and high asset prices.

How Volatility is Driving Alternative Retirement Investment Options

Simply put, the more volatile a market, the more diversification your portfolio may require. Volatility can introduce risk in the form of price fluctuations. So, retirement portfolios holding the traditional 40/60 ratio of bonds to stocks may be at risk of losing more money in a downturn than ever before. The mechanics behind this added risk can be complicated and may involve the flood of money into these traditional assets, raising their prices, and increasing their volatility.

One way to think about the situation is if a share of the S&P 500 was valued at $2,000, a 1% move would change the value of $20; and, if a value of the share reaches the $4,000s, a 1% move would be twice that amount. So, a $100,000 investment in the S&P 500 today may be more likely to lose twice as much as it would just a few years ago in a standard 5-10% correction. Then, if you take into consideration the volatility factor, it could potentially be a recipe for disaster in a retirement portfolio.

Alternative Retirement Investment Options

While some investment advisors continue to make the recommendations they have been pushing for decades, more investors are learning that alternative investment products can be invested in IRAs and other tax-advantaged¹ accounts.

In an effort to reduce the risk of being involved in the volatility, many people are moving money out of the stock markets and into alternative retirement options, like real estate, precious metals, private equity, cryptocurrency, and other growth vehicles.

Unlike the S&P 500, a real estate investment is less likely to get a 50% haircut if you are invested in a sought-after area. Additionally, by moving your assets away from the traditional market structure, you may be able to diversify your holdings further.

An option you may want to consider is asset diversification. Using alternative retirement options can serve as a good way to hedge your portfolio against the likelihood of a market downturn that may not resolve itself in time for retirement.

For example, your portfolio could include options like timber rights. Commodities tend to do well when the market goes south; should tech stocks plummet, the income that could be made off of timber rights could potentially increase with the price of lumber.

There are so many ways to get creative with your portfolio using alternative retirement options. Digital Trust offers a range of alternative retirement plan options, including self-directed IRAs and solo 401(k) plans for self-employed business owners with no employees. Plus, easy sign-up options help you begin pursuing alternative investments to diversify your IRA².

Sign up with Digital Trust today!

¹Some taxes may apply. We recommend you consult your tax, legal, and investment advisor.

²Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The account holder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. This letter shall not be construed as investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.

Portfolio diversification is a popular topic that has different meanings to different people. What most people can agree on, though, is that the aim of a diversified portfolio is to maintain overall positive growth through market fluctuation.

So now you may be wondering how to diversify your retirement portfolio. Typically, one could start with an S&P 500 index fund that provides exposure to 500 stocks because that number may feel like diversification. The catch is that S&P 500 holdings are weighted. The largest index weighting is information technology, making up 28.7%—meaning that almost 30% of your portfolio would be invested in tech.

These “weighty problems” may be avoided by thinking beyond the Index. Consider these five tips that will help you manage your own diversified retirement portfolio.

1.  Think beyond stocks and bonds

The traditional diversification mantra postulates the best investing formula as a 60/40 split between stocks and bonds. But there are many other ways to spread and grow one’s wealth. For example, in the realm of non-tangible assets, one may look to invest in money markets, REITs, convertible notes, crowd investing, cryptocurrencies, non-fungible tokens, peer-to-peer loans, and much more.

Some investors like to invest chunks of their portfolios in tangible items, like real estate, precious metals,  and more. The point of thinking beyond stocks and bonds is that it moves parts of a portfolio outside of one specific financial class. By diversifying asset classes, investors can try to avoid the impact of negative swings that can happen within the market.

2.  Consider correlations

Assets with prices that move similarly are considered highly correlated. If every asset inside a retirement portfolio is moving up, that’s great, but realize that they could potentially all move down together as well because of their correlation.

When seeking diverse investments, you may want to look for assets that do not move in conjunction with one another. You can start by researching various assets to get a better understanding of intermarket relationships. Then, you could look intoto investment products that do not trend in tandem.

3.  Don’t get too personal

Believe it or not, one’s employment and location can affect his/her portfolio diversity. Let’s say your company offers and matches your contribution for stock options. You may want to consider your sector when you start your research for diversification. For instance, if you work for Amazon, your portfolio is already heavily exposed to tech, so you may want to evaluate other asset classes or alternative investments.

Other factors you may want to consider are possible events that could have either a positive or negative portfolio effect in the geographical locations of your investments. For example, the number of companies on the S&P 500 that tagged “wildfire” as a risk factor has jumped in the last decade due to the increased frequency of fires in California.

4.  Expand your horizons

The U.S. is a great place to invest, but it’s a big world out there. You can consider investing in some global or regional index funds. Countries grow at different rates. Thus, you may want to consider taking advantage of high growth periods in other countries, while also diversifying the risk of any negative impact events occurring in the U.S.

5.  Stay dynamic

Keep in mind that markets and assets are constantly evolving and that they very rarely travel in a straight line. Planning and reallocating money is critical to making the most of a retirement portfolio. Rebalancing can be especially important after significant growth in one portion of a retirement portfolio.

For example, investors could consider which sectors will provide the next round of big growth after a stock boom. And you may want to weigh in on how you’d like the money made from the boom to be reallocated to new locations to take advantage of new growth in other areas.

How to diversify your retirement portfolio

There are many ways to diversify your retirement portfolio. One option may be to start by telescoping out and thinking about your actual risk exposure. From there, you may be able to formulate a plan to achieve better diversification and seek out platforms and services that fill those needs. Digital Trust allows retirement portfolio investors one easy place to hold, track, and trade alternative assets within a self-directed IRA.

Open up a retirement account with Digital Trust* and start diversifying your portfolio today.

* Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The accountholder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. This letter shall not be construed as investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.

Whether you’re just getting started or you’ve been investing with a self-directed account for years, being aware of upcoming tax dates and deadlines should help you stay ahead in the 2022 tax year. 

JANUARY 31 

Digital Trust mails all account owners the following: 

• Forms 1099-R, 1099-INT, 1099-Q, and 1099-SA (as applicable) 
• 2021 Annual Account Statements 
• Notice for Required Minimum Distributions (“RMD”) for Traditional, SEP, and SIMPLE IRA clients age 72 or older 

MARCH 15 

• Deadline for Partnership LLC and S Corps to set up and contribute to a Solo 401(k)* 

MARCH 31 

• Digital Trust electronically files the Forms 1099-R, 1099-INT, 1099-Q, and 1099-SA (as applicable) with the IRS 
• Last day to request corrections to your Annual Account Statement 
• Completed Fair Market Value (FMV) Forms and supporting documents due to Digital Trust for updates/corrections 

APRIL 18 

• IRS deadline to make contributions to your IRA for the prior year (Individuals in Maine and Massachusetts will have until April 19) 
• Deadline for Single LLC and C Corps to set up and contribute to a Solo 401(k) for 2021** 

MAY 31 

• Digital Trust electronically files Form 5498 and 5498-SA (as applicable) with the IRS and mails Form 5498 and 5498-SA to Account Owners/ Beneficiaries 

SEPTEMBER 15 

• Contribution recharacterization requests due to Digital Trust 

OCTOBER 17 

• IRS deadline to remove excess IRA contributions that occurred in the prior year (For IRA owners who timely filed their federal income tax return or otherwise received an extension of time to file) 

DECEMBER 1 

• Completed Fair Market Value Form requests due to Digital Trust for guaranteed processing for 2022 annual statements 

DECEMBER 15 

• Completed RMD requests due to Digital Trust for guaranteed processing for In-Kind RMD requests 

DECEMBER 19 

• Completed RMD requests due to Digital Trust for guaranteed processing for cash RMD requests 

If you have IRA questions, or simply want to learn more about how you can get started investing with a self-directed IRA, our team of experts are here to help. Call us today at (800) 777-9878 or email us at [email protected]. 

Disclaimers 

*If you request and receive an extension, you may have until September 15, 2022, or until you file your taxes. 

**If you request and receive an extension, you may have until October 17, 2022, or until you file your taxes. 

Please note: If a plan is adopted in 2022 for 2021 you cannot make pre-tax or Roth deferrals, but you can still make employer contributions. 

Recent upticks in the United States Inflation Rate have brought attention to the economic term: inflation. It’s easy to notice that everyday items like a gallon of gas and a loaf of bread cost more than they did a year ago, but what does that mean for a typical consumer’s investments? The inflation and investing relationship can get complicated as different investment vehicles price inflation in varying ways—begging the question, what is the inflation and investing relationship? 

What is Inflation? 

Inflation changes the prices people and businesses pay for goods and services. The government tracks consumer inflation and producer inflation through the CPI (consumer price index) and PPI (producer price index). During inflationary periods (economic growth), we experience a positive inflation rate, and during recessions (economic contraction), the inflation rate is usually reduced. Right now, the United States is in a high inflation environment not experienced since the 1980s.   

Economists consider a core inflation rate of 2% to be optimal for price and employment stability. When the inflation rate deviates from 2%, institutions such as the Federal Reserve step in to bring the rate back to normal. 

Sophisticated analysts use indicators like the difference between short-term and long-term future bond rates to gauge where the economy is headed and what inflation will look like in the future to invest accordingly. But how does the average investor protect their portfolio in the wake of the high inflationary environment we see today? 

How to Invest in a High Inflation Environment    

By searching “investing during inflation,” it’s easy to learn that real estate, commodities, and inflation-indexed bonds are common traditional hedges against inflation. The first two are tangible assets that, like goods and services, increase in value as inflation increases. Inflation-indexed bond returns rise with inflation because, like an adjustable-rate mortgage, the bond rate increases with inflation maximizing returns as inflation rises. The same goes for investment vehicles that contain adjustable-rate loans of any sort.     

However, it is important to remember that we live in an ever-changing world. What worked well 100 years ago may not work today. For example, the relationship between inflation and investment products has changed because the way the financial system works is very different from even 20 years ago. 

Right now, the rate of inflation is causing the Federal Reserve to step in and reduce accommodations provided for the pandemic and talk about increasing interest rates. This is causing large investors to pull money out of certain sectors, like tech.  

Historically speaking, high-tech stocks would be a great hedge against inflation because of their consistent growth. The problem today with that sector is the amount of low-cost funding it takes to keep companies afloat. As inflation rises, tech companies will have to pay more to borrow the money they need to carry on operations as normal, hurting their bottom line.  

For investors looking to diversify a portfolio for changes in inflation, it’s essential to understand how the sector of interest will react to those changes. And when it comes to today’s high inflation environment, investors have been moving money out of tech and into alternative investments, like real estate, precious metals, and other asset options, as well as utilities stocks, commodities. 

How Does Inflation Affect Saving and Investing 

In general, inflation affects the cost of goods, services, and money. Usually, inflation tracks around 2% on an annual basis. Under normal circumstances, the standard 60/40 model does well to account for inflation.  

However, under extraordinary circumstances, inflation affects markets differently. Diversifying an investment portfolio with real estate, commodities, inflation-indexed bonds, and alternative investment vehicles like cryptocurrencies can help to protect investment portfolio from the calamity of inflation. Digital Trust enables investors to keep and track many types of investments, including real estate, stocks, and cryptocurrencies, all in one place.  

Start building portfolio diversification and sign up with Digital Trust today.  

The world of self-directed investing with a SDIRA can seem complicated at first, but it can also be well worth the learning curve once your account is set up and running. Whether you’re just getting started or you’ve been investing with a self-directed account for years, it’s helpful to know the basics.

To better serve you, we’ve put together 10 of the most commonly asked questions we’ve come across regarding Self-Directed IRAs:

1. What is the difference between a Self-directed IRA (SDIRA) and an IRA at your local bank or brokerage?

Technically, there is no legal distinction between a self-directed IRA and any other IRA. “Self-directed” is simply a term used to help describe an account that allows the investor to have full control over his/her investment choices.

The difference between them is that with a truly self-directed IRA, investment options can seem almost boundless, just as long as you steer clear of the IRS’s prohibited assets. With an SDIRA, you’ll have access to alternate investments in addition to just the institution’s given selection of assets.

2. What are the benefits to utilizing a self-directed IRA?

There are many benefits when it comes to self-directed IRAs. First and foremost, are the tax protections that they can provide. Depending on the type of account you have, you can either defer tax (through a Traditional IRA) until you retire and take distributions or pay the tax up front (with a Roth IRA) and enjoy years’ worth of potential tax-free growth.

An SDIRA can encourage or even empower you to diversify your portfolio by expanding your investment choices beyond stocks, CDs, and mutual funds, providing you with more control over the investments you choose. This enables you to invest in the things you may know and understand as opposed to things you may not be as familiar with.

3. What types of IRAs are there?

Of the commonly asked IRA questions is the one regarding the types of IRAs available. There are several retirement account options available to you. While some offer larger annual contributions, others allow for potential tax-free distributions. Here’s a brief overview on how they differ:

Traditional IRA
In this type of account, contributions are typically tax-deductible because taxes on IRA earnings are not incurred until the account holder takes a distribution of funds from the IRA. At that time, IRA withdrawals are taxed as income.

Roth IRA
With a Roth IRA, contributions are made with after-tax funds, as they are not tax-deductible. Earnings and withdrawals are tax-free, however.

SEP IRA
A simplified employee pension (SEP) IRA enables an employer, usually a small business or self-employed person, to make retirement contributions through a traditional IRA that is in the employee’s name.

SIMPLE IRA
This type of IRA is similar to an employer-sponsored 401(k). It’s offered to small businesses, which lack a retirement savings plan. A Savings Incentive Match Plan for Employees (SIMPLE) IRA lets both an employer and an employee make contributions. Simple IRAs sometimes considered to be less complicated than 401(k) plans and also entail lower contribution limits.

Check out our Self-Directed IRA Plan Comparison chart  for more insight on how each type of IRA differs.

4. Which types of investment assets are prohibited in a self-directed IRA(SDIRA)?

Essentially, only the IRS can determine which assets are prohibited within an IRA.

Under current law, a retirement account is restricted from investing in the following:

• Collectibles such as: Art, stamps, coins, alcoholic beverages, or antiques (IRC 408(m));
• Life insurance (IRC 408(a)(3));
• S-corporation stock, (IRS Letter Ruling 199929029, April 27, 1999, IRC § 1361 (b)(1)(B));
• And, any investment that constitutes a prohibited transaction pursuant to ERISA and/or IRC 4975 (e.g. purchase of any investment from a disqualified person such as a close family member to the retirement account owner).

5. What are the most popular self-directed retirement investments?

As listed above, there are only a handful of asset types that account holders cannot invest in through their self-directed IRAs. Thus, these assets aside, you are left with a nearly endless array of investment options. The most popular assets with our clients are:

• Real estate & rental properties;
• Secured loans to others for real estate (trust deed lending);
• Private small business stock or LLC interest; and
• Precious metals, such as gold or silver.

6. Which supporting documents do I need to purchase an investment in my account?

The supporting documents needed to purchase an investment vary based on the type of investment being purchased. Here are a few examples that showcase the required documents for various types of assets:

Real Estate
All documents associated with the purchase of real estate: Purchase Agreement, Appraisal / Broker Opinion Letter, etc.

Limited Partnerships
Copy of Tax ID, Certificate of Limited Partnership, and Limited Partnership Agreement signed by all Partners

Private Stock / C-Corporation
Copy of Tax ID, Articles of Incorporation, By-Laws, Subscription/Stock Purchase Agreement; All original stock certificates must be physically held by Digital Trust

Promissory Note / Mortgage
Copy of Promissory Note/Mortgage and Security Interest; I.e., Deed of Trust, Deed of Mortgage, and Security Agreement

Limited Liability Company
Copy of Tax ID, Articles of Organization, and Operating Agreement signed by Members

Private Placement Memoranda (“PPM”)
A copy of the PPM, Operating Agreement, and Subscription Agreement

The investment possibilities with a Self-Directed IRAs are virtually endless. Take a moment to check out a wide variety of investment options that are available through a self-directed IRA.

7. Can I live in or work on a house that my IRA owns?

No, unfortunately not. You, or any other disqualified person, may not have any personal use or benefit of the property while it is held in your IRA account. The property is to be purchased for investment purposes only.

8. Can my account invest with other partners, including myself?

Yes, your IRA can invest with other partners and yourself, individually. However, it is important to consult legal counsel in these situations to be made aware of formalities and rules, such as Prohibited Transactions and Disqualified Persons, that may be associated with the shared investment.

9. What is a Prohibited Transaction?

The Internal Revenue Code Section 4975 defines a prohibited transaction as any improper use of your retirement account. Additionally, a transaction between your IRA account and a disqualified person is a prohibited transaction.

10. What is a disqualified person?

Disqualified Persons are defined to be the account owner, other fiduciaries, certain family members (lineal descendants and spouses of lineal descendants), and businesses under the account owners or disqualified person’s control. Generally, a “disqualified person” includes, but is not limited to:

• Yourself
• Your lineal ascendants and descendants
• The spouse of a lineal descendant
• Your spouse
• Any entity that is owned 50% or more by disqualified persons
• An entity that is controlled 50% or more by disqualified persons

Please review the code for specific information and definitions. Other useful IRS resources are:

• Publication 590-A – Contributions to Individual Retirement Arrangements (IRAs)
• Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs)
• Publications 560 – Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)

(Bonus) 11. Do I need an LLC to purchase investments in a self-directed IRA?

No, you do not need to create any LLC when using an IRA to invest. When using your IRA to purchase alternative investments, you can simply provide the custodian with the requisite purchase documents to let them know what asset you would like to purchase. Your custodian will then process the paperwork to purchase the investment in the name of your IRA.

Conclusion

While self-directed IRAs may not be the easiest thing to understand, at first, they can be with a little help and a bit more time. And after this article and perhaps, more articles like this, you can be better equipped to get started with confidence. That said, it’s important to have a knowledgeable investment professional or a certified IRA custodian/specialist that can help answer questions when needed!

Have more IRA questions in mind? Or if you’d like to learn more about how you can get started investing with a self-directed IRA, our team of experts are here to help. Call us today at (800) 777-9878 or email us at [email protected].