Tim Schmidt's Guide to Self-Directed IRAs (2024)

FAQs

Is self-directed IRA worth it? ›

Advantages of a self-directed IRA

Your success (or failure) depends on the investment selections you make. Potentially higher returns. If you know a way to profit that's a bit off most investors' radar, you can take advantage of it and may earn higher rewards than in traditional investments.

Compliance Officer from San Diego, California. Yes, self-directed IRAs can get audited. The IRS has specific reporting requirements for self-directed IRAs, particularly concerning hard-to-value assets.

Self-directed plans can invest in alternative assets off the stock market. Traditional IRAs are typically restricted to conventional stocks, bonds, and mutual funds. Self-directed IRAs can use alternative assets like real estate, private equity, gold, private lending, and much more.

It is important, however, to always remember that the SDIRA is the owner of the LLC. No income made from the investments in the LLC can be paid into your personal accounts, and all the expenses paid out for the investments in the LLC must be paid for by the SDIRA.

You may be able to take advantage of a rollover rule loophole, which gives you 60 days to use the money as a short-term loan. If you don't pay it back on time or trigger other restrictions, you will lose the tax-favored status of the account and be subject to a penalty, too.

Cons of a Self-Directed IRA

That's something you don't typically face with a standard IRA holding stocks, bonds or funds. Additionally, there's a higher potential for fraud or misuse of funds without proper due diligence, and the lack of professional guidance could lead to risky investment decisions.

Whether you've just made it to retirement or you are drawing up your long-term goals, eventually, you will be able to take distributions from your self-directed IRA. After years of saving, you may be eager to start reaping the benefits; on the other hand, you may want your assets to continue to grow beyond retirement.

Remember, SDIRAs that generate UBTI or UDFI are required to pay income tax. If your account qualifies, you'll need to file a separate tax return with Form 990-T for the IRA. This form requires an EIN.

The most important details of a self-directed Roth IRA include: An annual contribution limit of $7,000 for 2024 ($8,000 if you're 50 or older) and $6,500 for 2023 ($7,500 if you're 50 or older). Contributions that are not tax-deductible. Qualified withdrawals that are 100% tax-free.

After choosing your custodian, you can open your account and fund it like any IRA. Custodians won't offer financial guidance or investing advice, so you'll be on your own when it comes to due diligence and selecting investments.

What transactions are prohibited in a self-directed IRA? ›

Yes. However, your IRA must pay all expenses associated with a property that it owns, including renovations.

Self-Directed IRA Fees FAQs

Fees for self-directed IRAs vary. At IRAR the flat annual fee is $199 for one asset, $274 for two assets. Other SDIRA custodians can range from $199-$2,000. Fees also depend on your strategy and how many assets you hold.

With a self-directed IRA, there will usually be a custodian involved to make sure that the IRA is managed correctly, and the custodian will acquire an EIN for the IRA. But other than this most IRAs are never going to need an EIN, and will continue to report under the person making contributions.

You can partner your IRA funds with your personal funds, with another IRA, entity, or person (including a disqualified person or entity). Partnering funds with another party can help avoid the need for non-recourse financing, which can be difficult to get for your IRA.

The major difference between a Solo 401k and Self-Directed IRA is the ability to borrow from your solo 401k for your business, whereas this isn't possible with a self-directed ira. Both have pros and cons, so choosing the one for yourself is all about what benefits your current and future needs.

Is managing your own IRA right for you? Self-directed investing, whether it's a general investing account or self-managed IRA, could be appropriate if you're interested in doing your own research when investing, feel confident in your investing or investment knowledge and can withstand the ups and downs of the market.

Some advantages of self-directed IRAs include: Tax-deferred or tax-free profits. Investment diversity (it is possible to invest in an array of assets in your retirement account) Potentially building wealth for future beneficiaries.

Self-Directed IRAs

The answer is Yes. You have the potential to earn interest and grow your retirement savings through alternative investments. These can include real estate, private equity, precious metals, and even cryptocurrency. You're not limited to stocks, bonds, and mutual funds.