Self Directed IRA

What is a Self Directed IRA

Self directed IRAs (Individual Retirement Accounts) are the most dynamic type of retirement vehicle, allowing IRA owners unlimited possibilities and opportunities. All kinds of retirement accounts qualify for self direction. Investors can select from a broad range of assets permitted within a self directed account. Savvy investors know the power of a Midland self directed IRA.

Why should you self direct an IRA? All income and gains in an IRA account are tax-deferred until distributions are made. With a Roth IRA, all income and gains are tax-free.

Self Directed IRAs

The term self directed refers to the control that the IRA owner has to choose their investment options. Typically IRAs only allow you to invest in stocks and bonds. But with a self directed account, you can select alternative assets. Alternative assets include real estate, futures, private placements, private stocks, lending, and gold. The opportunities are endless. Self directed IRAs are invested solely at the discretion of the owner of that account. The account owner directs the account administrator, Midland, to purchase assets based on their authorization. The IRA owner is required to do all due diligence on all asset purchases.

Self directed accounts can include Traditional, Roth, SEP, and SIMPLE IRAs. Educational plans (ESAs), health savings plans (HSAs), and 401(k)s can also be self directed. Learn more about each type of self directed plan.

retired man with grandkids

Who Should Consider a Self Directed IRA

Anyone who wants to control their retirement investments or purchase a specific alternative asset should consider a self directed account. Typical IRA custodians only allow you to invest in the products they sell. With a Midland account, the possibilities are endless.

The IRS does not state which assets you can purchase in an IRA. The IRS does identify assets that cannot be purchased in an IRA. Click here for a list of self directed IRA prohibited transactions and parties. Midland does not sell products or offer financial advice. Therefore, we do not limit your investment decisions. Midland’s goal is to encourage people to understand their investment choices and take control of their retirement accounts.

Advantages of Investing With IRA Funds

There are three primary reasons why people invest using self directed IRAs:

1. Alternate source of funding

You may not realize that IRA funds can invest in real estate, private loans, private companies, and more. You potentially earn higher returns than you would by investing in traditional investments such as stocks, bonds, and mutual funds.

2. Looking for higher returns

Investing through a brokerage firm or bank offers limited investment choices. Investors who are unsatisfied with the returns these investments provide often look for alternatives. Using a self directed IRA allows investors to select assets they know and understand, leading to higher returns.

3. Tax-free or tax-deferred growth (time value of money)

When you invest using a self directed IRA, you defer capital gains taxes when selling your investments. Reinvest these tax savings in assets that produce higher returns. Create higher account values in shorter time frames. Generate more wealth in your retirement account; self direct your IRA today.

Investment Types Not Permitted Within a Self Directed IRA

The IRS prohibits two investment categories: life insurance products and collectibles, which include:

  • Works Of Art
  • Rugs
  • Antiques
  • Gems
  • Stamps
  • Coins
  • Alcoholic Beverages
  • Viaticals
  • Metals (other than certain gold, silver, and palladium)
  • Prohibited Transactions

Self directed IRAs provide a great deal of freedom, flexibility, and choice of potential investments. However, they are also governed by a set of rules self directed investors must be aware of and follow. There are also certain transactions (and, more specifically, individuals) that can disqualify an investment within your IRA. These prohibited transactions can defeat the tax benefits your IRA offers. They can subject the IRA to fines and penalties, as well.

Your retirement account should benefit you when you retire and not before. Transactions that can be interpreted as providing immediate financial gain to account holders are not allowed. Many of these arrangements are laid out in Section 4975 of the IRS code.

For example, IRA holders may not:

  • Borrow money from their IRA
  • Sell, exchange or lease property to their IRA
  • Receive compensation for managing property in their IRA
  • Use their IRA as security for a loan
  • Transfer plan income or assets to disqualified persons
  • Lend money to disqualified persons
  • Extend credit on their IRA to disqualified persons
  • Furnish goods, services or facilities to disqualified persons
  • Allow fiduciaries to obtain or use the plan’s income or assets for their own interest

Disqualified Persons

For most of the disqualifying arrangements outlined, the transaction involves the IRA and a disqualified person. Therefore, it is important to understand who is considered a disqualified person. These individuals include:

  • IRA holder
  • The IRA holder’s spouse
  • The IRA holder’s lineal ascendants, lineal descendants, and spouses of lineal descendants
  • Investment advisors and managers
  • Any corporation, partnership, trust or estate in which a disqualified person has 50 percent or greater interest or in which the disqualified person maintains control as a president manager, etc.
  • Anyone providing services to the IRA such as the trustee or custodian

Disqualified Parties Updated 2020

Documentation Involved in Purchasing an Asset With a Self Directed IRA

Real Estate

Documents required: contract and closing documentation.

Title as: “Midland Trust Company As Custodian FBO Client Name, Client Account Number.”

Note: the IRA owner must review and approve all closing documents before closing. Midland Trust signs on the IRA’s behalf.

Notes and Mortgages

Documents required: loan documents (including the mortgage or other agreement to secure collateral).

List as: “Midland Trust Company As Custodian FBO Client Name, Client Account Number.”

Note: Midland must review all loan documents. If the loan is not handled through an escrow agent (like an attorney or title company), Midland must have the original, pen-signed note before releasing funds.

LLC, LP, and Private Stock Investments

Documents required: operating/partnership agreement or subscription agreement.

List in subscription agreement as: “Midland Trust Company As Custodian FBO Client Name, Client Account Number.”

Note: Midland must receive approval for closely-held LLCs. Midland will sign the subscription agreement on the IRA’s behalf.

Other Investments

Midland requires paperwork or documentation proving the IRA is the owner of that particular asset with investments not listed above. Please contact Midland for any unique situations on how to title the asset correctly.