A self-directed IRA is an IRA that gives clients the option to choose their own investments. Typical IRA administrators only allow you to invest in traditional assets such as stocks, bonds, and mutual funds. With a self-directed IRA you have the freedom to diversify and expand your retirement portfolio. Many plans are available to be self-directed. The major benefit is that your retirement funds are in a tax-sheltered account.
A traditional IRA is a popular tax-deferred retirement savings plan for individuals. Contributions and earnings are only taxed when distributions are taken from the account. Former employer plans such as an old 401(k) can be directly rolled into a traditional IRA without any tax consequences. A Roth IRA is a retirement savings plan for individuals based on taxed contributions. Instead of paying taxes when you take a distribution you pay the taxes on the money you contribute. The earnings are tax-free once distributions begin provided the IRA owner is over the age of 59 ½ and has had a Roth IRA for at least five years.
Individuals that are the employer or who are self-employed can open a Simplified Employee Pension (SEP) IRA. This allows the plan holder to make larger retirement plan contributions into a traditional IRA established in the employee’s name. Employers with 100 or fewer employees that would like a plan for both employer and employee contributions can open a Savings Incentive Match Plan for Employees (SIMPLE) IRA. This is similar to a 401(k) plan. Qualified plans such as employer 401(k), 403(b), profit sharing plans, or individual 401(k) accounts for the self-employed can also be self-directed in many cases.
Other plans that qualify to be self-directed are Health Savings Accounts (HSA) and Educational Savings Accounts (ESA). A HSA is the only type of savings plan that offers three tax advantages; a deduction for contributions, tax-free earnings, and tax-free withdrawals. ESAs are savings accounts for your child’s (or grandchild’s) higher education. The money you put into this account is taxed but the earnings are not taxed.
All of the plans above qualify to be self-directed and have the option to invest in a wide array of assets. Real estate is a highly invested in asset within a self-directed IRA. Investors can purchase a piece of property using their IRA funds and all gains inside the account are tax free! Self-directed IRA holders can also be the bank. Many clients use their IRAs to lend money to third parties. All loan payments flow back into the IRA, tax-deferred. Individuals who would like to partner with other investors can form partnerships and LLCs within their IRAs. This is great for investors wanting to combine funds to make a purchase.
Private placements and private stock are also permissible in a self-directed IRA. Often, many local community banks or start-up companies seek to raise capital by offering stock. Your IRA can be used to purchase these shares. Investors looking for added control can form a single-member LLC, also known as checkbook control. This is an investment strategy in which the IRA owner elects to form an LLC to be entirely owned by his/her IRA account, and the IRA owner manages that asset. This allows the IRA holder to write checks without requesting one from Midland Trust. Self-directed IRAs can also be used to set up brokerage accounts with a futures or foreign exchange trading company. They can also invest in precious metals such as gold bullion, U.S. treasury coins or palladium. Some other investments that can be held in a self-directed IRA are tax liens/certificates, foreign property, structured settlements, farmland, oil and gas options, and more.
To start investing or to learn more, call Midland Trust at (239) 333-1032.