Thursday, July 30, 2009

When Are IRAs Truly Self-Directed IRAs

Talk continues regarding opening Self-Directed IRAs (SDIRAs) and managing or self-directing one's own Individual Retirement Accounts, including, but not limited to: 

  • Traditional IRA
  • Rollover IRA
  • Inherited IRA
  • Roth IRA
  • Roth Conversion IRA
  • SEP-IRA
  • SIMPLE IRA
  • Individual 401(k) Plan (or Solo-K) 

Self-Directed IRAs 

The term "Self-Directed IRA" is used somewhat loosely in the retirement industry today. The bottom line is that each and every IRA is "self-directed" because the investor chooses what financial institution to place it with, and if the investor does not like the product, investment or service, they can choose to move it via an IRA-to-IRA transfer to another IRA Custodian with no tax consequences as long as you follow the rules. 

IRA Custodians

The issue with Self-Directed IRAs is not whether you can "self-direct" your own IRA, but which self-directed IRA Custodian should you choose. You must first decide what type of investments you wish to invest in inside of your Self-Directed IRA before you begin searching for and evaluating possible self-directed IRA Custodians.  

Real Estate Related Investments

There are relatively few IRA Custodians that allow you to actually invest in promissory notes that are secured by deeds of trusts or mortgages, tax lien certificates, non-trade REITs, real estate, and much more, for example. You need to shop around, and once you have found the short list of Self-Directed IRA service providers you must carefully evaluate their service quality. This is what sets the various providers apart from one another.  Most self-directed IRA Custodians that allow "Alternative Investments" are trust companies.  

Real Estate Expertise and Experience 

Trust companies generally have expertise and/or experience in retirement account administration and trust company operations, but few truly have actual direct expertise and experience in buying, selling, exchanging, or owning investment real estate.  You need to make sure that the IRA Custodian you choose has expertise and experience in both retirement account administration and real estate transactions.