A Self-Directed IRA (or SD IRA) is an account that gives you the ability to use your retirement funds to invest in “alternative investments,” i.e. investments off Wall Street (not just stocks, bonds, and mutual funds). The most common alternative investment is real estate.
Everything but collectibles and life insurance, which means almost anything. These include assets such as real estate, cryptocurrencies, tax liens, hard money loans, bridge loans, mortgage notes, private companies, startups, hedge funds and even “exotic” assets some of our clients have invested in like Arabian race horses, timberland, zoos, a treasure island, etc.
There are two basic SD IRA types: Custodial and Checkbook.
A Custodial SD IRA is where your money is held by a third party’s bank account (a “custodian”). All transactions and investments must go through the custodian.
A Checkbook SD IRA gives bypasses a custodian for transactions and gives you direct access to your funds. This is achieved by creating a specialized LLC (often referred to as an “IRA LLC”) which can even be opened at your local bank! In a Checkbook Plan, the custodian doesn’t hold your money; they only move it. Once you have full control over the funds the custodian has no control and no knowledge.
Custodial and Checkbook accounts (and their respective fees) cater to different types of investments.
For a Custodial Account, typically the setup fee is low. Custodians make their money on either asset-based fees or transaction fees, or both.
A Checkbook Account usually entails a larger setup fee. But once the funds have been moved to your IRA LLC (see above), you can then conduct transactions without a middle party – and without any transaction and/or asset-based fees.
Therefore, if your investment requires ongoing payments (for instance, real estate which requires weekly or daily payments for repairs, landscaping, utilities, property taxes, etc.), then a Checkbook Account is ideal. However, if your investment will only require a one-time lump-sum payment, then you may find a Custodial Account more cost-effective.
Yes! Broad Financial is unique in that we have our own custodian, Madison Trust Company. That means we can offer the plan that best fits you.
Other firms offer Checkbook Accounts but don’t have their own custodian, or they are Custodians that specialize only in Custodial Accounts. Such one-dimensional operations may try to steer you toward an SD IRA that works best for them. At Broad Financial, we are uniquely positioned to help you find the best plan for you and your specific needs in the most hassle-free way possible.
There is a significant difference between regular LLCs and an IRA LLC. Regular LLCs don’t have the ability to hold retirement funds. IRA LLCs, however, have been specifically crafted by ERISA attorneys (“Employee Retirement Income Security Act”) to properly conform with IRS retirement law.
Yes. Another option is a Self-Directed Solo 401K. A Self-Directed Solo 401K gives you the same direct access to your retirement funds as a Checkbook Account. However, to qualify for an SD Solo 401K, you must have at least a minimal amount of self-employment income and not have any full-time employees.
While the majority of SD IRAs are set up from traditional IRAs, another type is a Roth IRA.
The primary difference between the two is that in a traditional IRA, taxes are deferred until age 72.
In a Roth IRA, taxes are paid upfront. All profits from the investment will therefore be tax-free (not just tax-deferred).
No. IRAs can only be held by individuals (that’s what the “I” in IRA stands for). Spouses will require two separate plans if they each wish to roll over their retirement money into SD IRAs. However, it is possible to for SD IRAs to co-invest into one property or one asset.
As noted above, you can invest in anything besides collectibles and life insurance. “Collectibles” includes artwork, antiques, rugs, etc.
Also, you can’t invest in something you already own. For instance, your SD IRA (or 401k) can’t buy a property you already own.
You’re also not allowed to make personal use of something your SD IRA has invested in. Therefore, if you’ve used your SD IRA to purchase a condo you can’t sleep there even for one night. If you buy a building, you can’t make use of even one office in that building.
Finally, it’s important to be aware of “Disqualified Persons.” Such persons include your spouse, grandparents, parents, children, children-in-law, and grandchildren (lineal ancestors and descendants). However, siblings, cousins, aunts, uncles, nephews, nieces, etc. are not disqualified.
Yes, there are a couple ways this can be done. The first is through a loan – however, it can only be a non-recourse loan.
Another option is “co-Investing.” This is when you use money in your SD IRA/401k along with other, taxable funds.
For instance, say you want to purchase a property costing $100,000, but only have $50,000 in your IRA. You can combine that with $50,000 from your personal, taxable funds (or some other partner). In that scenario, all returns will be split in half: 50% will go back to your tax-sheltered SD IRA/401k account, and 50% will be taxable.
It’s imperative to know that co-investing must be set up at the time of the inception of the SD IRA account.
While you work at your current job, your employer retains the right to keep your retirement funds locked up in their plan. There are exceptions to the rule, so it’s worthwhile to ask your company.
No. Paying for anything using a credit card is a form of extending a personal guarantee, and making any form of loan from your IRA LLC to you personally (even in the form of simply paying for an expense with a credit card) is strictly forbidden.
You may, however, use a debit card to pay for any expenses related to assets that are part of your IRA LLC.
If you are unsure if your investment would be subject to UBIT, contact one of our specialists here at Broad Financial.
Regarding distributions (i.e. withdrawals from your retirement money), SD IRAs are subject to the same rules as regular IRAs. All taxes are deferred until you take a distribution. If you wish to take a distribution before the age of 59½, the funds you distribute will be subject to a 10% penalty.
At age 72, you will be obligated to start taking “Required Minimum Distributions” (RMDs). The amounts of your RMD will vary from person to person.
Yes. You can take an asset as a distribution (for instance, a property which you now wish to live in). Please call us for further details.
The Ultimate IRA®s two main upgrades – Self-Directed investing and checkbook-convenience, which enable you to invest in what you want, when you want – are not available in a regular IRA.
Here’s a basic list, for starters.
No IRA, of any type, is allowed to purchase “collectibles” (art, stamps, baseball cards, etc.), or life-insurance contracts. All other investments, alternative and traditional, are allowed. (However, investors should still be wary of Prohibited Transactions.)
Yes. You are a “disqualified person” as is your spouse, parents and grandparents, children and grandchildren (and their spouses), your investment advisors, and any persons who provide any service to your IRA. The logic is this: Your Ultimate IRA®s sole purpose is to provide you – at retirement – with enough money to live in a manner consistent with your wishes. Because the U.S. government allows you to invest tax-deferred funds into your Ultimate IRA®, those funds cannot be used – prior to your retirement – to directly benefit you or any person who is closely related to you.
With the Broad Self-Directed IRA you get a checkbook. When you want to make an investment, you simply write a check. This feature has two benefits – you can invest in what you want, and when you want. The process for activating the checkbook feature has several steps, which Broad Financial guides you through at the time you open up your account.
No. Back in 1974, the U.S. Congress created the IRA as a tax-deferred retirement vehicle. Its purpose – to encourage Americans to save for retirement. These original IRA’s were intended to be Self-Directed, allowed to make investments directly into real estate, businesses, intellectual property and other types of investments along with stocks, bonds and mutual funds. In practice, however, the banks and brokerage houses that originally offered the IRA’s were set up to only handle stocks, bonds and mutual funds, and over the years people were left with the misconception – and the practice – of investing only in these types of securities. Times have changed. More and more Americans are demanding choices, especially when it comes to how their retirement money is being managed and invested. This is why “alternative investments” play such a large part in The Ultimate IRA®.
Because until recently they had not been widely publicized. People, however, are realizing the importance of investing in what they want, when they want. The stock market’s difficulties in 2008 have also raised Americans’ awareness of the importance of truly diversifying their IRA’s into assets beyond the world of stocks, bonds and mutual funds.
Yes, they are. Refer (your accountant, or lawyer) to: IRC §4975, IRS Private Letter Ruling 8241079 (February 25, 1982), Swanson v. Commissioner 106 T.C. 76 (1996), & IRS Field Service Advisory 200128011 (April 6, 2001), or call us for additional clarification.
Wouldn’t mind at all. In addition to the “traditional” IRA, the list includes:
Special note: Most corporate 401k plans allow you to rollover funds into a new retirement account only when your employment with them ceases. Some plans permit you to rollover a portion of your account’s funds while still employed. If this form of rollover is what you are intending to execute, you need to contact your current 401k provider to clarify their rollover policy.
Think of it as taking a very active role in preparing for your retirement – of exercising control over your investments. Or operating by the Broad Financial philosophy of “Only investing in what you understand, and believe in”. Self-directed investing can also mean collaborating with others. We often recommend working with a Certified Financial Planner – or other financial professional.
Yes and no. Yes, in that you (or someone you delegate) – can make any investment decision you like as long as you are purchasing stocks, bonds, or mutual funds. No – in that the traditional IRA doesn’t give you the ability put money in “alternative” investments. Thus the traditional IRA doesn’t allow you to achieve full diversification nor the growth and safety potential inherent in true diversification. Once you become active in the alternative-investment arena, you’ll most likely find yourself thinking and acting about retirement with a lot more energy than before.
Yes, all IRAs are subject to two, potential, taxable scenarios. One is called UBIT (Unrelated Business Income Tax) and one is called UDFI (Unrelated Debt Finance Income). UBIT is triggered when profits are generated from an investment made in an active business (e.g. retail store, restaurant, construction company). UDFI is applicable when an IRA borrows money (also known as using leverage or debt-financing) to invest in real estate. The percentage of profits generated from the borrowed money is subject to UDFI tax. No tax is due from the portion that you invested from your Ultimate IRA®s funds.
Yes. The Ultimate Solo 401k® is designed for self-employed persons – entrepreneurs, therapists, contractors, free-lancers – anyone receiving income under a 1099 form.
Yes. Provided he/ she meets the eligibility requirements for the Self-Directed 401k – meaning he/ she is a self-employed person with no full-time employees (generally defined as working 1,000 hours or more per year).
More than likely, no. Since the bigger banks and brokerage houses deal only in stocks, bonds, and mutual funds, their administrative and systems capabilities are unable to buy and sell alternative investments.
One of the several registered Self-Directed custodian and trust companies that have the administrative capabilities to administer alternative investments for IRAs. Broad Financial only works with IRA custodians who limit the fees charged to Ultimate IRA® account-holders. Our clients are charged a flat low annual fee – regardless of how large your account is or how many investments you place during the year.
Any taxpayer, of any age, who earns income can open an Ultimate IRA®.
One Paragon Drive
Montvale, NJ 07645
Phone: (800) 395-5200
Mondays – Thursdays: 8:00 am – 6:00 pm EST
Fridays – 10:00 am – 4:00 pm EST