Self Directed IRA Basics
You may have heard the terms Self Directed IRA, Alternative IRA, or Real Estate IRA before, but you are probably wondering: What exactly is a Self Directed IRA? What benefits does it offer? What kind of impact can a Self Directed IRA have on my retirement portfolio?
Self Directed IRA Definition
A Self Directed IRAs allow individuals to invest their retirement money into alternative assets such as real estate, private placements, promissory notes, cryptocurrencies, and much more.
WHY HAVE I NEVER HEARD OF THIS BEFORE?
The concept is a novel one to many, as the majority of Americans hold their IRAs in large brokerage houses. They automatically assume that IRAs can only be invested in stocks, bonds and mutual funds since those are the products offered to them. Brokerage houses do not accommodate alternative investments due to the administrative burden involved and loss in commission.
Benefits of Self Directed IRAs
Self Directed IRAs allows investors to diversify their retirement portfolios to include assets which are inaccessible in standard IRAs. Self Directed IRA custodians specialize in custodying privately held investments like real estate, private businesses, precious metals, all within a tax-advantaged account.
Self Directed IRAs encourage individuals to invest in what they are familiar with. It provides investors with the power to put money in investments which make sense for them personally. Different people have different strengths and expertise, and it makes sense that their investments should reflect those differences.
With a Self Directed IRA, one can move past the volatility of the stock market, and invest in products with a steadier and more reliable revenue stream, such as rental real estate, secured promissory notes, and tax liens.
IRAs can invest in a broad range of investments, with the exception of Life Insurance and Collectibles.
- Real Estate (rentals, commercial property, raw land, etc.)
- Private Placements (Private Equity Funds, Hedge Funds, LLCs, etc.)
- Promissory Notes (secured and unsecured)
- IRA LLCs
IRC Section 4975(a) states that an IRA owner may not take any personal benefit from his or her plan before the age of retirement. Dealings that violate this clause are known as “Prohibited Transactions.”
The formula that defines a prohibited transaction is:
“Retirement Plan Asset” + “Disqualified Person” = Prohibited Transaction.
Interested in learning more about self-directed IRA or investing with InfraShares?