Self-Directed IRA

Jun 11, 2012 by

IRA manager at work

Are You Self-Directed IRA CEO Material?

Maybe I’m too pessimistic or risk averse, but I’m not keen on the investment climate for stocks, bonds, commodities, or other conventional assets. (I am coming around to the point of view that the time may be right for U.S. real estate investing. Warning: Based on my track record, one friend uses my bullish calls as a sell signal.) I admit to being still spooked by the 2008 meltdown (and an array of other Wall Street shenanigans); consequently, a big chunk of our IRAs is invested in safe, and so very low return, instruments. I know that’s a losing proposition, both with respect to keeping pace with inflation and building a proper nest egg, but for the past few years I haven’t been able to talk myself into taking more risk.

Another Option: The Self-Directed IRA

Almost everyone keeps their IRA money with a management firm like Vanguard, Fidelity, or E*Trade and makes investments in mutual funds, stocks, bonds, ETFs, etc. Many prefer the “set it and forget it” approach of spreading IRA money among a few broad-based investments in different asset categories and then letting it run. There’s nothing at all wrong with this approach (assuming you’re mostly choosing very low cost index funds), but if you’d like to get your hands dirty and directly make investments and get under the hood managing your IRA money, a self-directed IRA is worth considering.

The main benefit, to my way of thinking, of a self-directed IRA is the broadening of the sorts of investments I can make, on my own volition, with my IRA funds. For example, with a self-directed IRA I could invest my IRA money in:

  • A rental property
  • Gold or other precious metals
  • A herd of cattle
  • A small business
  • A tropical island

In short, you may invest your self-directed IRA funds into anything except IRS-specified prohibited transactions, which are:

Set Up a LLC for a Self-Directed IRA

Self-directed IRAs are set up through a custodian, which must process individual IRA transactions, among other duties. To speed processing and cut fees, you can set up a Limited Liability Corporation (LLC) for your self-directed IRA and tell the custodian to invest your self-directed IRA funds into the LLC. Then, as manager of the LLC, you may make transactions at the LLC level, without the involvement of the custodian. It’s sort of like setting up your own miniature Berkshire Hathaway, and you’re Warren Buffet!

Due Diligence Very Important!

Just 2% of all IRA money is invested in self-directed IRAs, and probably for a very good reason: Time and skill. Before embarking on the self-directed IRA course, ask yourself: Are you ready—with respect to time, knowledge, and experience—to manage your own company? With a self-directed IRA, you become CEO of your IRA, and investing its capital wisely and managing the investments becomes your responsibility.

Self-Directed IRA Resources

If your interest is piqued, you’ve got a research project ahead of you. These resources will get you started:

Would You Self-Direct Your IRA?

I know there’s a lot more you’d need to learn about self-directed IRAs beyond the introductory information in this article, but do you think you might be interested in self-directing your IRA? Are you unhappy with the investment options you can make with your conventional (Traditional or Roth) IRA?

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  1. I’ve seen quite a few self-directed IRAs and I don’t think they’re a terrible idea although, as you mentioned, you need to know what you’re doing.

    The problem with Real Estate in a self-directed IRA really comes when it’s time for RMDs. There is some gray and confusing areas on how the government establishes a value for your real estate (which in turn tells them how much you need to be drawing down your IRAs). It’s very confusing and I’ve seen some people get in a bind when that comes about.

  2. John @MarriedWithDebt

    I’ve read about these and how to use them creatively to invest in things like farms, etc. I’m like you: worried about the global market. Pimco told its employees to cancel their summer vacation plans to prepare for a Lehman-style event in Europe. That scares the crap outta me.

  3. frugalportland

    Say that you just went ahead and bought that rental property (or sure, yeah, the island). Isn’t that the same sort of thing, just not called an IRA?

  4. Jason – thanks for your valuable input. Another reason to stick with traditional and Roth IRAs: Keeping life simple.
    John – Wow, I have a lot of respect for William Gross and PIMCO–that’s some scary stuff. I think I’ll keep resisting for a while the urge to chase yield and take on more risk.
    Frugal P – if I understand your question, the benefit of ‘doing business’ in a self-directed IRA vs. outside of one is that profits and gains would accrue tax deferred.

  5. My IRA is self directed.  I’m glad I did, but most of it is still invested in just plain old stocks!

  6. It sounds like real estate will be difficult to manage in the self directed IRA. Do you just sell everything when you retire? I definitely need to learn more about self directed IRA. 

  7. If I had any extra money, I’d definitely NOT go this route. Too scary! Maybe once I have a bit more knowledge and go get my series 65 I’ll look into this, but for now, I’ll stick with my traditional investments, thank you! 🙂

  8. I have heard of the term “self-directed IRA” but never really knew what it meant.  Thanks for a great explanation.  I definitely need to put in a lot of time to educate myself before even considering an option like this.  Now I have a place to begin!

  9. I’ve always dreamed of “playing” the stock market. Alas, I feel that by the time I have the time to make such an effort, I’ll be looking for lower risk investments. Still, I’ll have to keep a self-directed IRA in mind for potential future investing.

  10. Its funny that as a Canadian I can follow this entire post after reading so much about them. Personally self-directed scares me.

  11. Self directed IRAs are something I’ve always been fascinated with, but have never done. I’m always afraid that I’ll miss some little spot and have an unfriendly visit from the IRS….

  12. Christian

    Nice comments . I was fascinated by the facts , Does someone know if my company could find a blank IRS 8825 copy to edit ?

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