In this article on self directed retirement plans let’s discuss some of the traditional thinking as well as expanding our thought a bit. There are many advantages to the self-directed approach for those willing to spend the time and effort to educate themselves a bit.
I want to state that I am not giving any advice or recommendation in regard to these types of retirement plans. I am not qualified to do so. I am sharing research of have done for myself with you.
Also, we are much better able to delegate this function to a financial custodian with greater confidence when we have some background knowledge. Let’s get going and explore this subject.
Self Directed Retirement Plans — Some Background Info
This is an individual retirement account called a Self-Directed IRA (SDIRA). The advantage of this type of investment vehicle is that you have a greater degree of control and diversification over your retirement savings and investments. With vehicles managed by brokerage firms and banks, you are more limited as to what to invest in (mutual funds, stocks, bonds),
It is actually a type of traditional or Roth IRA that is tax-advantaged with the same IRA limits on contributions. The main difference with a Self-Directed IRA (SDIRA) is mainly the type of assets that you have in your account. Not being limited to stocks, bonds, and mutual funds, you have available alternative investment vehicles such as real estate, gold, LLCs, and limited partnerships.
This gives you the opportunity not to have to rely on others in the investment community to direct and manage your funds. You are able to take the reins of your retirement planning.
The Benefits of Self Directed Retirement Plans
With a self-directed benefit IRA or SDIRA, there are many benefits to be gained. Let’s review a few.
- Diversify your portfolio — you are able to be better protected against the ups and downs of the economic climate when you invest in alternative assets such as precious metals and real estate. These act as a viable hedge against the fluctuations and volatility of the market.
- Future Wealth Advantages — over time having your funds invested in a self-directed vehicle allows for tax-free or tax-deferred growth
- Greater Potential for Growth — when you hold these type of alternative assets you have the flexibility to determine the risk you want to take and thus increase your potential for higher rates of return
- Maximize your Control — with this type of self-directed vehicle you are able to maximize your knowledge and experience you have gained in a specific market or niche. You are able to make investment decisions that are industry-specific with your understanding and knowledge contributing positively to the growth of your retirement savings.
The nice thing about a self-directed retirement vehicle is that while building your retirement savings you get some very nice tax advantages.
Self Directed Retirement Plans — The Key Difference
When considering the various retirement options available it can get quite confusing. Also, the selection of a qualified and competent financial planner, fiduciary, or custodian can be quite challenging as well. But when it comes to considering self-directed retirement plans, the main advantage is the increased flexibility that you have in all of your investment options.
“Whether you are just entering the workforce or nearing retirement age, planning for the future is critical.”
— Ron Lewis —
Once you have a self-directed vehicle in place you can then invest in practically anything that you want. This is much different from being limited to the offerings of any one custodial group.
You have numerous options that include secured and unsecured notes, private equity placements (startups, land trusts, hedge funds), real estate (mortgage notes, commercial property, single-family homes), energy-oil-gas (renewable energy sources), precious metals, and many other alternatives such as:
- life settlements
- tax lien certificates
- like and unlike exchanges
- tangible asset deeds
- accounts receivable financing
- limited partnerships
- building bonds
- limited liability companies (LLCs)
- commercial paper
- joint ventures
- contracts of sale
- improved or unimproved land (leveraged or unleveraged)
- foreign sales corporation stock
- equipment leasing
For example real estate is a popular option among these alternative choices. Mortgage notes, office buildings, and single-family homes are common investments. You are able to get either tax-free or tax-deferred earnings. You have many options within the real estate realm, and many folks invest in areas with which they have some knowledge and experience such as rental properties, condos, or office buildings.
Investments that are not allowed under this type of retirement vehicle are S corporations, life insurance contracts, and any transaction involving a disqualified person such as children, parents, spouse, and a few more. Exact details are available from any custodian that handles these type of plans.
Now to get yourself set up properly and ensure you comply with all legal guidelines it is imperative that you spend the time and energy to locate a qualified company that has the infrastructure and expertise to handle these types of investments. Make sure you do your due diligence on this if this is the direction you choose to go.
Understand the Rules regarding Self Directed Retirement Plans
Although the rules and guidelines around Self-Directed IRA (SDIRA) accounts are similar to other plans, it’s important to know the specific regulations and rules as you do your due diligence in this area. Let’s take a look.
* IRA Distribution Rules — although withdrawals or IRA distributions of an asset or cash can be made any time, be aware of the criteria to determine if there are any taxes or penalties involved. A Required Minimum Distribution (RMD) kicks in at age 72 where you have to withdraw a certain amount each year and the amount varies depending on the type of IRA you have.
* IRA Contribution Limits — enforced by the IRS, each type of IRA has maximum yearly contribution amounts. These amounts may change, but currently traditional (tax-deductible) and Roth (not tax-deductible) IRAs have a max of $6000/year (under age of 50), and $7000/year (50 or older). SEP IRA employer contribution up to 25% of compensation or max of $58,000 (cost of living adjustments for later years). Simple IRA limits for under age 50 is $13,500 (50 or over has a $3000 catch-up elective). Individual 401 (k) for an employer is 25% of compensation (up to the allowed limit) for profit-sharing contribution. The employee has a salary deferral based on earned income (up to the allowed limit). Education Savings Account (ESA) has a limit of $2000 per year to the beneficiary. Health Saving Account (HSA) has a limit of $3600 for singles and $7200 for family coverage ($1000 catch-up for over age 55).
* Fair Market Value (FMV) Reporting — annually or when there is a distribution you need to perform a valuation of your assets. This is used to change or assign the value of an asset.
* Prohibited Transactions and Disqualified Persons — certain transactions are prohibited. It is important to know who you cannot make a transaction with (disqualified person) in order to avoid tax penalties.
Setting Things Up
There are a few things to keep in mind when setting up a self-directed retirement plan.
First, do your homework. Understand the basics of how these plans work. Don’t leave it all in the hands of your custodian. They are there to help you structure your plan and ensure it is set up correctly, but you want to be familiar with the rules, benefits, and investment options.
Second, choose your investment strategy. You can invest in almost any alternative investment so do your homework and select the one (s) that work best for you based on your specific needs and risk tolerance.
Third, choose your account type. Based on your goals, you have many choices such as tax-deferred or tax-free, small business accounts, or individual plans.
Fourth, open and fund the account. Cash contributions, rollover your 401 (k), or transfer your IRA from its present custodian.
Now when getting things set up there are fees involved that you will pay your custodian. There will be fees for getting things set up, transactions, record keeping, and termination.
Let me once again emphasize that I am not qualified to make any recommendations in the financial area. I am merely presenting some research I have done for myself, and I wanted to share it with you.
In any event, this is good information to have and use as a base to do further research if you have an interest in this area of investment.
A custodian is needed for any type of IRA. With a self-directed IRA, you need to pick a custodian that is approved by the IRS. Since this is a rather technical field, in order to avoid penalties and other challenges it’s important to have things set up and managed correctly.
Although this type of retirement vehicle has many advantages in terms of flexibility in choosing from a greater variety of investments, always keep in mind that there is risk involved. Spend the time and effort to do thorough due diligence before making any decisions about this or any other type of investment vehicle.
When we are inexperienced, having more to choose from can seem like a disadvantage. Here are Five Questions provided by the United States Securities and Exchange Commission that will assist you through your due diligence process. Then you can assess the opportunities with this type of investment vehicle with greater confidence.
Also, remember that part of your due diligence process is selecting an appropriate custodian as well. Make sure that any potential financial company you consider passes the test in terms of fees, insurance, servicing times, investment options, disclosure, data protection, and expertise.
I look forward that this has increased your knowledge in terms of what is available as to options for retirement investments. It is always good to know what is available so that you can maximize your choices.
All the very Best,
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