FAQ: Self-Directed Individual Retirement Accounts
What is a Self-Directed IRA?
A Self-Directed IRA (SDIRA) is a type of individual retirement account that allows you to invest in a wide range of alternative assets beyond traditional stocks, bonds, and mutual funds. These can include real estate, private equity, precious metals, cryptocurrencies, and more.
How is a Self-Directed IRA different from a traditional IRA?
While traditional IRAs are typically limited to stocks, bonds, and mutual funds, SDIRAs allow you to invest in alternative assets, giving you greater control over your retirement portfolio.
What types of investments can I make with a Self-Directed IRA?
You can invest in a wide variety of assets, including:
Real estate (rental properties, raw land, commercial properties)
Private equity and startups
Precious metals (gold, silver, platinum)
Cryptocurrencies (Bitcoin, Ethereum, etc.)
Tax liens and deeds
Private loans and mortgages
What investments are prohibited in a Self-Directed IRA?
The IRS prohibits certain investments, including:
Collectibles (art, antiques, stamps, coins, etc.)
Life insurance policies
S-corporations
Transactions involving disqualified persons (e.g., yourself, your spouse, or lineal descendants)
What is a disqualified person in a Self-Directed IRA?
A disqualified person includes the IRA owner, their spouse, ancestors, lineal descendants, and any entities they control. Transactions between the IRA and a disqualified person are prohibited.
Can I use my Self-Directed IRA to buy a vacation home?
No, you cannot use your SDIRA to purchase a vacation home or any property for personal use. All investments must be for the benefit of the IRA and not for personal enjoyment.
Can I manage my Self-Directed IRA myself?
Yes, you have full control over the investment decisions in your SDIRA. However, you must work with a custodian or trustee who specializes in self-directed accounts to handle the administrative and compliance aspects.
What is the role of a Self-Directed IRA custodian?
A custodian is responsible for holding the assets in your SDIRA, ensuring compliance with IRS rules, and processing transactions. However, they do not provide investment advice.
Can I use my Self-Directed IRA to invest in my own business?
No, you cannot invest in a business you own or control, as this would be considered a prohibited transaction with a disqualified person.
Are there contribution limits for a Self-Directed IRA?
Yes, the contribution limits for SDIRAs are the same as for traditional and Roth IRAs. For 2023, the limit is 6,500∗∗(or∗∗6,500∗∗(or∗∗7,500 if you are age 50 or older).
Can I roll over funds from a traditional IRA or 401(k) into a Self-Directed IRA?
Yes, you can roll over funds from a traditional IRA, 401(k), or other eligible retirement accounts into a Self-Directed IRA without incurring taxes or penalties.
What are the tax benefits of a Self-Directed IRA?
The tax benefits depend on the type of SDIRA:
Traditional SDIRA: Contributions may be tax-deductible, and earnings grow tax-deferred until withdrawal.
Roth SDIRA: Contributions are made with after-tax dollars, but qualified withdrawals (after age 59½) are tax-free.
Can I use a Self-Directed IRA to invest in real estate?
Yes, real estate is one of the most popular investments for SDIRAs. You can purchase rental properties, commercial real estate, raw land, or even participate in real estate crowdfunding platforms.
What are the risks of a Self-Directed IRA?
The primary risks include:
Lack of liquidity (some assets, like real estate, may take time to sell)
Potential for fraud or scams in alternative investments
Complexity of IRS rules and potential for prohibited transactions
Can I take a loan from my Self-Directed IRA?
No, you cannot borrow money from your SDIRA, as this would be considered a prohibited transaction.
What happens if I violate IRS rules with my Self-Directed IRA?
Violating IRS rules, such as engaging in prohibited transactions, can result in the disqualification of your IRA, making the entire account taxable and subject to penalties.
Can I use a Self-Directed IRA to invest in cryptocurrencies?
Yes, some custodians allow you to invest in cryptocurrencies like Bitcoin and Ethereum through a Self-Directed IRA. However, these investments are highly volatile and come with significant risks.
What are the fees associated with a Self-Directed IRA?
Fees vary by custodian but may include account setup fees, annual maintenance fees, and transaction fees. Be sure to compare custodians to find the best fit for your needs.
Can I use a Self-Directed IRA to invest internationally?
Yes, you can invest in international assets, such as foreign real estate or businesses, as long as the investment complies with IRS rules and is not a prohibited transaction.
What happens to my Self-Directed IRA when I pass away?
Your SDIRA will pass to your designated beneficiaries. The tax treatment of the account will depend on whether it is a traditional or Roth IRA and the age of the beneficiary.
