Common Self-Directed IRA Questions, Part 2

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How does a self-directed IRA work?

A self-directed IRA works by choosing a qualified IRA provider that services all the assets that the IRS allows. The rules for the IRA type (Traditional, Roth, SEP, or SIMPLE) stay the same.  The difference between a traditional IRA provider and a self-directed IRA provider is the self-directed IRA provider knows how to perform the bookkeeping and administration for “alternative” or “hard” assets such as real estate, gold/silver, private equity, and private lending.

How a self-directed IRA works

The IRA holder rolls over or transfers their existing IRA or 401(k) to an IRA provider that offers accounts that can invest in a variety of non-publicly traded assets.  This can be done without tax or penalty.  The IRA holder then chooses the investments that they would like their account to purchase.

What are self-directed IRAs?

Self-Directed IRAs are IRAs (Traditional or Roth) that allow the account holder to choose which investments their account funds invest in.  A self-directed IRA is not an IRS account type.  In the common lexicon a self-directed IRA usually refers to an IRA that can invest in alternative assets like real estate, precious metals, private loans, or private equity.

Are self-directed IRAs legal?

Self-directed IRAs are legal.  While the IRS does put some restrictions on the investments that a self-directed IRA can purchase, they do not prohibit IRAs from investing in alternative or hard assets such as real estate, private equity, gold, or promissory notes.

Are self-directed IRAs a good idea?

Self-Directed IRAs allow investors to combine the tax advantages of their IRA with the investment types that they prefer.  Self-directed IRAs are one of the fastest-growing sectors of the retirement industry.  They are a good way to diversify one’s portfolio and take advantage of an investor’s personal expertise.

Are self-directed IRA LLCs legal?

Self-Directed IRA LLCs are legal in most configurations.  Having your IRA invest in a private entity (that is not owned or controlled by disqualified person(s)) like an LLC is not prohibited by the IRS.  However, it is easy to find conflicting legal opinions on whether a subset of IRA LLCs called “Checkbook LLCs” is an advisable strategy.

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