Browse: Home / FAQs

FAQs

Self Directed IRA FAQs

1. Is it legal to purchase non-traditional assets using my IRA?
2. How come I haven’t known about this?
3. Are there a lot of people who have self-directed IRA accounts?
4. My (CPA, attorney, broker, friend, other person) said that buying and selling real estate in my self-directed retirement plan was illegal. Why?
5. How do I open a self-directed IRA?
6. How much should I have in my account to get started?
7. Can I transfer my current retirement funds to a Self-directed Administrator?
8. Can I consolidate my IRAs?
9. Are there different tax rules for self-directed IRAs?
10. I have a 401(k) plan with my former employer. How can I self-direct the funds?

1. Is it legal to purchase non-traditional assets using my IRA?

The answer is yes! The Employee Retirement Income Security Act (ERISA) of 1974 passed the responsibility of retirement saving from the employer to the employee. Created in 1975, IRAs provide individuals a chance to direct where their retirement funds are invested.

The IRS code, instead of distinguishing which investments are allowed, identifies which investments are not permitted under these laws. Under both ERISA and IRS Codes, there are only two types of investments excluded: life insurance contracts and collectibles such as works of art, rugs, jewelry, etc. Refer to Internal Revenue Code Section 401 (IRC § 408(a) (3)).

2. How come I haven’t known about this?

It’s a common misconception that the only investments allowed in a retirement account are stocks, CD’s, and mutual funds. The truth is that broader investment options have been available to the public since the inception of the IRA in 1975.

The retirement industry has been dominated by large transaction-driven custodians who have focused on a narrow universe of investments. While these kinds of accounts may be right for some, they don’t offer the kind of freedom that a self-directed qualified retirement plan offers.

To fully maximize your investment options, you need to have a retirement plan that allows you to select your own investments. A fully self-directed retirement plan allows you the freedom to invest in many types of assets — assets that are not prohibited by the Treasury Department regulations and the Internal Revenue code.

3. Are there a lot of people who have self-directed IRA accounts?

The self-directed industry is growing very strong and is expected to see around $2 trillion enter the market in the next two years. There are over 45 million IRA holders, and less than 4% of those are held in nontraditional assets. This number is expected to grow significantly over the next 5 years as more individuals and their financial advisors attain a greater awareness of self-directed IRAs.

4. My (CPA, attorney, broker, friend, other person) said that buying and selling real estate in my self-directed retirement plan was illegal. Why?

This has been a long-lived myth. Neither the IRS nor the Department of Labor has ever published a list of legal investments. However, there is a list of Prohibited Transactions and Disqualified Persons that deal with what is not permitted. Real estate and other investments are permitted provided you follow the rules.

5. How do I open a self-directed IRA?

Source offers a proven method for self-directing your IRA. The primary focus is education. Once you understand the process, you can choose your third party administrator or allow Source to make recommendations through our Strategic Alliances. The process is simple once you understand it.
Once you educate yourself and make the decision to self-direct, you will fill out a few forms and authorize the transfer of your existing IRA or you can open a new account with your contribution this year.

6. How much should I have in my account to get started?

While there is no minimum amount, the amount you should start with depends on the nature of the deal or investment you plan to make. Keep in mind that if you make a cash contribution to your account, check the contribution limits for that account type.

By educating yourself via the Source Method and selecting the types of investment opportunities that fit your needs, you will determine how much money you’ll need in your account or with the purchase of your investment.

7. Can I transfer my current retirement funds to a Self-directed Administrator?

Yes, your Source representative will assist you with the transfer paperwork and documentation needed to transfer or roll over your existing accounts to a qualified administrator.

8. Can I consolidate my IRAs?

Yes. You can consolidate:

  • Your traditional and SEP IRAs into a single traditional IRA
  • A SIMPLE IRA to a traditional IRA after two years
  • Multiple Roth IRAs to a single Roth IRA

Your third party administrator will assist your in processing the transfer paperwork.

9. Are there different tax rules for self-directed IRAs?

The unique thing with IRAs and 401(k)s are the tax advantages. Most contributions are either tax deductible as is the case of a Traditional IRA or 401(k), or the distributions are tax free as in the case of a Roth IRA or Roth 401(k). There are no unique rules for self-direction.

10. I have a 401(k) plan with my former employer. How can I self-direct the funds?

You can self-direct the funds by rolling over your account into a traditional IRA or a qualified plan (if you are eligible to have a qualified plan) that permits complete self-direction. Contact your former employer’s plan administrator or benefits department to determine what, if any, special procedures may be required.
If you are still employed, check with your current plan administrator to determine if self-direction is currently allowed within your plan or if this option can be added.