Not everyone is content to open an Individual Retirement Account (IRA) retirement account and then hand it over to a retirement or financial planner to manage. While this can be a reasonable option if you have limited knowledge of how investments work, it does place your financial future in someone else's hands. If you are one of a growing number of people who want more control in managing retirement funds, a self-directed IRA may be what you need.
Identification
Individual Retirement Accounts, or IRAs, came into being in 1975, after the passage of the Employee Retirement Income Act. Of the many types of IRA's, only the self-directed IRA allows you to make investment decisions yourself. You are in charge of researching options, choosing and diversifying the investment mix. In a self-directed IRA, however, Internal Revenue regulation 408(a) (2) requires that you choose a trustee, or custodian, to help you administer the account. Tax advantages are the same as for other IRA retirement accounts, and most investments remain tax-free until you begin making withdrawals.
Options
Investment options include traditional and non-traditional investments and rollovers from other types of retirement accounts. Traditional investments include stocks, bonds and mutual funds. Non-traditional investments include real estate, loans, notes, limited partnerships and tax certificates. The only prohibited investment types include life insurance and collectibles. Collectibles include items such as art, antiques, rugs, coins and stamps, according to IRS Publication 590. Rollovers can include traditional, Roth and SEP IRA's, 401 and 403K's, some annuities, profit sharing plans, Coverdell Education Savings accounts.
Restrictions
While the IRS places few restrictions on the types of investments you can make, there are strict regulations to prevent what the IRS and U.S. Department of Labor view as "conflict of interest." Preventing conflict of interest is one reason for the trustee requirement. According to NuWire Investor, investments can only be for the benefit of the retirement account. They cannot benefit you or someone else in a direct way. IRC code 4975 (e) (2) describes this regulation in more detail, and identifies disqualified persons and prohibited investment transactions. Examples of disqualified persons include you, your spouse, blood relatives or a business partner. Disqualified transactions can include purchasing investment property and renting it to a disqualified person and using an IRA investment as collateral for a loan.
Fees
Self-directed IRAs include fees you do not see in other IRA types. The custodian you choose will charge fees that include asset, transaction and holding fees. They may include special or miscellaneous fees as well. An asset fee is a percentage of the total value of the IRA. Transaction fees occur any time you make a buy or sell request. Holdings fees are account maintenance fees, usually charged quarterly. Special or miscellaneous fees can be anything from a wire transfer fee to a fee the custodian charges for expediting a transaction.
Warning
While most IRA investments are tax-free, if you invest in a business or real estate you could become liable to pay tax at "trust rates." This regulation is in place to prevent your investment from an "unfair advantage" over other business owners. While rental property does not qualify as a business, if you get financing in addition to investment funds to pay for the property, the financed portion is taxable.
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