As someone who regularly structures truly self directed IRAs for clients, I find that there are a lot of misconceptions about IRAs in general and truly self directed IRAs in particular. Consequently, I thought it might be a good idea to generally discuss some of the misconceptions related to IRAs based on some recent feedback we have received.
Is An IRA An Investment?
An IRA, or an Individual Retirement Arrangement, is a financial instrument that allows you to create a tax-deferred shelter. It is not an investment in and of itself. It is just a investment vehicle you can use to hold your investment portfolio and build your retirement funds.
Who Manages An IRA?
All types of IRAs will require an administrator, who is referred to as a custodian. However, if you have a truly self directed IRA, you are in charge of your own investments. You will not have to deal with the constant intervention of the custodian for each and every transaction within the account. Learn the benefits of having a truly self directed IRA.
What Kind of IRAs Are There?
There are three basic varieties of IRAs:
• A standard IRA, which does not allow for alternative assets such as individual real estate investments, residential or commercial properties or tax liens.
• A self directed IRA, which has many of the features associated with a standard IRA, but also allows for a broader range of investments, including individual real estate investments and precious metals like gold and silver bullion.
• A truly self directed IRA, which gives you complete checkbook control and allows you to invest in a broad range of investments like, real estate, oil and gas, and investing in private businesses. Although, you don’t need to rely on your custodian to make investments, you are still required to report what assets exist within your account at least once a year. The purpose of this is to ensure that you stay within the rules of the IRA as stipulated by the IRS.
There is sometimes confusion between a self directed IRA and a truly self directed IRA. One way to distinguish between them is to understand whether the IRA set up allow you to write a check for or wire your funds from your bank account to buy an investment is truly self directed IRA. In other words, this particular type of IRA gives you checkbook control of your investments. This particular type of IRA is also known by other names like checkbook control IRA, checkbook IRA, or self directed IRA LLC.
Does Having an IRA LLC Allow Me To Be My Own Custodian?
Although, you will be set up to have full checkbook writing privileges within your IRA LLC, this does not make you a custodian for the account. The custodian is required and they are allowed to establish your IRA account and administers the account in compliance with the IRS code.
With A Self Directed IRA, A Custodian Is Not To Be Confused With A Financial Advisor?
Although in a standard self directed IRA account (meaning one you are not truly self directed), the custodian can buy assets and wire funds at the specific direction of the IRA holder and even take title to a property for the benefit of you the IRA holder, however, the custodian is not akin to a financial advisor and nor are they allowed to advise you or speculate, which assets will provide the best returns for your account. They are to remain objective 3rd parties to your self managed investment portfolio. They can; however, work with you to help you ensure, although this is not 100% guaranteed, that you are not making a prohibitive transaction and breaking the IRA rules within your account. They can’t foresee and they don’t have the responsibility, or the manpower I might add to evaluate whether you are making a good investment or one that will be profitable. This highlights again the simplicity of the truly self directed account. With this type of account, there is not any confusion as to who is calling the shots in the IRA — that person is you.