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I recently learned of self-directed IRAs.

Here is how it works:

  1. I open a self-directed IRA account with a company that acts as a custodian of my account (here is a short list of such companies).
  2. I transfer or deposit funds to my self-directed IRA account.
  3. I direct the custodian to make purchases from my account.

One of the advantages of a self-directed IRA is the variety of investments that can be made. The following can be purchased from a self-directed IRA account:

  1. Real-estate. Actual homes, condos, or commercial real estate. My relatives and I cannot, however, use any of the real estate that is purchased from the IRA.
  2. Foreign real estate.
  3. Ownership in a business. If I was interested in buying into a business I could do it with funds from my self-directed IRA.
  4. Precious metals (gold, silver, and platinum). This is what piqued my interest in self-directed IRAs. I cannot take delivery of the metals. The metals must be stored by some other party. If I purchase coins they can only be US metal coins. One idea I had was to purchase bullion bars from the Perth Mint.

The custodian charges an initial fee (around $50) to setup the account and an annual fee (around $250 - $300) to maintain the account. Seems like it would take a fairly large (above $200K) IRA to justify the annual fee. The custodian usually charges a fee for every transaction (around $50) - definitely don't want to be making a lot of moves in this account.

Does anyone have experience with self-directed IRAs?

What are other advantages/disadvantages to self-directed IRAs?

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    They have precious metal ETFs (gold, silver, platinum, palladium) that trade on regular exchanges and should be available from most brokerages' IRAs. Any reason those won't do for your commodity speculation needs? – user296 Dec 14 '10 at 16:27
  • I have purchased some metals through ETFs. I don't think all the ETFs, however, have all the gold, silver they say they do. Just my irrational suspicion. When I buy metals I want my little purchase to be allocated and stored just for me. JPMorgan was recently investigated for having large naked short positions in silver. Who is the custodian for the SLV ETF? JPMorgan. – Muro Dec 15 '10 at 16:26
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There is nothing wrong with self directed IRA's the problem is that most of the assets they specialize in are better done in other ways.

  1. Real estate is already extremely tax advantaged in the US. Buying inside a Traditional IRA would turn longterm capital gains (currently 15%) into ordinary income taxed at your tax rate when you withdraw this may be a plus or minus, but it is more likely than not that your ordinary income tax rate is higher. You also can't do the live in each house for 2 years before selling plan to eliminate capital gains taxes (250k individual 500k married couple). The final problem is that you are going to have problems getting a mortgage (it won't be a conforming loan) and will likely have to pay cash for any real estate purchased inside your IRA.

  2. Foreign real estate is similar to above except you have additional tax complexities.

  3. The key to the ownership in a business is that there are limits on who can control the business (you and maybe your family can't control the business). If you are experienced doing angel investing this might be a viable option (assuming you have a really big IRA you want to gamble with).

  4. If you want to speculate on precious metals you will probably be better offer using ETF's in a more traditional brokerage account (lower transactions costs more liquidity).

  • Good point about the tax treatment. I would be better off purchasing real estate outside of the IRA since I will only be taxed on the gains. If I purchased the real estate in my IRA, held onto it, and then sold it, I would be taxed on the entire amount of the value of the real estate when I withdrew the money from my IRA - not just the gains - since it would be income. The only thing you failed to consider was the IRA could be funded with pretax dollars versus purchasing real estate with after tax dollars. I don't think this makes much of a difference however. – Muro Dec 15 '10 at 17:49
  • If I created a self-directed Roth IRA then it would be worth purchasing real estate in the IRA since the money will not be taxed as income when I withdraw it from the IRA. – Muro Dec 15 '10 at 17:58
  • I only mentioned the gains because they are the part that would be different inside an IRA (the potential for a higher tax bill). Another consideration is depreciation which lets you essentially defer taxes on rental properties until you sell them (it is little more complex but the net is deferred taxes on investment real estate). There isn't any way to take depreciation inside an IRA (which could be good or bad depending on your perspective and tax situation). – stoj Dec 16 '10 at 6:12
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This type of account will sell you just enough rope to hang yourself.

Gold is at $1400 or so. Were you around when it first hit $800 in '79/'80? I was. No one was saying "sell" only forecasts of $2000. If you bought and held, you've still not broken even to inflation let alone simple market returns.

  • Who says I was putting all of my money in gold? I have some money invested in the market. Some in harder assets. I was researching ways to move some of my assets into gold and silver - not all my assets. I will sell my gold and silver when I feel it is overvalued and interest rates are somewhere north of 20% (like the '80s). I don't see that happening anytime soon. – Muro Dec 15 '10 at 11:31
  • I was also thinking about using the self-directed IRA to purchase a rental property in a couple of years. I believe in a couple of years real estate will bottom out and be a good time to buy. – Muro Dec 15 '10 at 11:32
  • "Who says I was putting all of my money in gold?" uh, not me. I was addressing one of the many bad reasons to use such an IRA. – JoeTaxpayer Dec 16 '10 at 5:12
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Our company does a lot of research on the self-directed IRA industry. We also provide financial advice in this area. In short, we have seen a lot in this industry.

You mentioned custodian fees. This can be a sore spot for many investors. However, not all custodians are expensive, you should do your research before choosing the best one. Here is a list of custodians to help with your research

Here are some of the more common pros and cons that we see.

Pros:

1) You can invest in virtually anything that is considered an investment. This is great if your expertise is in an area that cannot be easily invested in with traditional securities, such as horses, private company stock, tax liens and more.

2) Control- you have greater control over your investments. If you invest in GE, it is likely that you will not have much say in the running of their business. However, if you invest in a rental property, you will have a lot of control over how the investment should operate.

3) Invest in what you know. Peter lynch was fond of saying this phrase. Not everyone wants to invest in the stock market. Many people won't touch it because they are not familiar with it. Self-directed IRAs allow you to invest in assets like real estate that you know well.

Cons:

1) many alternative investments are illiquid. This can present a problem if you need to access your capital for withdrawals.

2) Prohibited transactions- This is a new area for many investors who are unfamiliar with how self-directed IRAs work

3) Higher fees- in many cases, the fees associated with self-directed IRA custodians and administrators can be higher.

4) questionable investment sponsors tend to target self-directed IRA owners for fraudulent investments. The SEC put out a good PDF about the risks of fraud with self-directed IRAs.

Self Directed IRAs are not the right solution for everyone, but they can help certain investors focus on the areas they know well.

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The main advantage and disadvantage I can see in a scenario like this are - how savvy and good an investor are you? It's a good way to create below-market average returns if you're not that good at investing and returns way above market average if you are...

protected by Chris W. Rea Jan 31 '18 at 20:35

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