The term self-directed IRA sounds simple enough, right? Isn’t it about gaining freedom over your own destiny? Well maybe not so simple! When you call self-directed IRA providers you find many different strategies, restrictions, fees and organizations, all of which seem to claim they have exactly what will suit you. Sound familiar? In an industry where it is imperative to rely on experts to guide you through all the tax code, regulations and restrictions, it gets confusing – especially when you get so much conflicting information.
So what is a self directed IRA?
Simply put it is “an Individual retirement account that is directed by the IRA owner”.
Here’s the funny thing that I have discovered – most people who think they have a self directed IRA actually don’t. In fact, most IRA owners are indoctrinated to rely on information provided from the very institution(s) which hold their accounts. But let’s not be naïve — they don’t have any incentive to send you elsewhere.
Consider these two scenarios:
A – You have a “self-directed IRA” with XYZ Broker Trade and you want to invest in a publicly traded security offered on their platform. Is this a self-directed IRA? Yes
B – You have a “self-directed IRA” with XYZ Broker Trade and you want to invest in a private company that is not offered on their platform; therefore, you can’t make the investment. Is this a self-directed IRA? No
In these two scenarios the IRA was ONLY self-directed when you choose to buy from a select list of products offered by the IRA custodian, XYZ Broker Trade. So why don’t they call it a broker assisted self-directed IRA? It may not sound as appealing but at least it’s honest. Sadly most custodians are similar in this regard and it is just easier to hide behind a generic term that doesn’t differentiate between all the different IRA products and providers.
Self-Directed IRA Rules
There are two types of IRA arrangements: those that are housed with a trustee (IRC 408 (a)) and those that are housed with a custodian (IRC 408 (h)). The requirements to be an IRA trustee or custodian are basically the same — you must be a bank defined as:
(WARNING TEDIOUS READ AHEAD)
bank or trust company incorporated and doing business under the laws of the United States…..which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under authority…..having supervision over banking institutions. Such term also means a domestic building and loan association…..an insured credit union (within the meaning of paragraph…..and a corporation which, under the laws of the State of its incorporation, is subject to supervision and examination by the Commissioner of Banking or other officer of such State in charge of the administration…..(whew)
Since trustee administered accounts are managed by a trustee, they are not self-directed. IRA Custodial accounts all have the potential to be a self-directed IRA but, as you can see by my example with XYZ Broker Trade, most IRA custodians merely allow the IRA participant to pick from a list of investments that conform to their business model.
General IRA rules simply state that an individual cannot continue receiving the tax advantages of an IRA if they: use the account as security for a loan, invest in life insurance and collectibles, or cause the IRA to make a transaction that is “self-dealing” or benefiting a party of interest. We cover those specific rules more in depth here. In the most simplistic explanation of IRA rules: the purpose of an IRA is to save money for retirement, so as long as you stay in line with that purpose you can continue receiving the tax advantages an IRA has to offer.
Surprisingly the rules for an IRA are consolidated to a very small list of disallowed investments/transactions rather than a large list of permissible transactions/investments. This allows an individual retirement arrangement to be timeless and have the freedom to grow in the ever changing world of investments.
Being in the business of true self-directed IRAs I hear many common misconceptions out there:
You can’t do it, you shouldn’t do it, you’ll get in trouble, that’s frowned upon, the IRS will get you, it’s safer at a bank, you should leave it to the “professionals”, you’ll get taxed, you’ll get red flagged, you can’t touch it, you can’t look at it.
Most of which are double standard statements that are fed from executives in a skyscraper down to bankers and brokers who echo it onto the streets for the general public. Don’t be naïve, banks and brokerage firms are not interested in YOUR investments – they are in the business of either holding your deposit, or selling you THEIR products. Relying on fear tactics will only ensure that your IRA stays parked in a shiny expensive building whose sole purpose is to soak up profits — not distribute them.
In a multi TRILLION dollar industry it’s no surprise that IRA providers are found in nearly every town in the United States. The big players have been around since before ERISA was enacted and their in-your-face “Starbucks/McDonalds” strategy of posting up on every street corner has worked for decades. This is how trillions of dollars get funneled from Main Street to Wall Street — every time an investment is made, they get paid. But does this machine make any sense in a self-directed environment, where individuals choose to take control over their own destiny?
The Truth About Self-Directed IRAs
If you actually read them, the rules are not that complicated to understand. They are not hard to find and they are made available to the public by congress.
Einstein once said “reality is an illusion, albeit a very persistent one”. The persistence of those who control this multi trillion dollar industry shapes the reality for 99% of IRA holders. We should all ask ourselves” Am I self-directed?, Is this my money and am I free to receive the lions share?, Who is taking the risk and who is reaping the rewards?, Will a stranger really allocate the same amount of time and resources towards my money that I would?
Captain Obvious Says:
A self-directed IRA is not about buying into someone else’s philosophy on savings and investments. It’s not about picking a custodian who happens to find your particular investment strategy “administratively feasible”.
A self-directed IRA is about individuals exercising their full rights under the law and taking control over their own destiny.
A self-directed IRA is not for everyone, but if you are seeking to gain the benefits and freedom of a self-directed IRA, it should be TRULY self-directed.