Self-Directed IRAs: Enhancing your retirement investments
| Self-Directed IRAs: Enhancing your retirement investments |
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Tom W. Anderson, CEO and Founder of PENSCO Trust Company What is a “self-directed IRA” and why are more and more investors and advisors becoming interested in them? A self-directed IRA is a descriptive term rather than a brand or specific product name. The name refers to IRAs that are able to invest in investments including but not restricted to market-traded investments such as stocks, bond and mutual funds. Although these publicly-traded investment vehicles have been the traditional investment for retirement accounts, and still remain attractive and logical choices for many, investors are increasingly becoming interested in the myriad of other investments that they can hold – tax-deferred– within their IRAs, permitting a greater diversification of assets. As investors become aware of all the allowable investment options, they become better able to manage their financial plans and meet their personalized investment goals. Although market-traded investments are thought of as “traditional”, in fact, American investors on average have a greater percentage of their net worth invested in real estate (including their homes and investment properties) and private equity (their businesses) than they do in market-traded investments. As a result, many people are more familiar with these types of investments and are subsequently very interested to use their existing knowledge and experience to invest in them within their retirement accounts and take full advantage of tax-deferred compounded growth. As many investors know, a greater diversity of investments can mean less short-term volatility and greater long-term returns, and what they are now realizing, is that diversification among different types of market-traded assets doesn’t really constitute true diversification. Potential returns aside, being able to ‘self-direct’ the assets in their retirement accounts allows investors to better customize their retirement holdings and gives them more flexibility in meeting both short- and long-term needs. Many investors ask, “Why haven’t I heard of this before?”, often followed by “Is this legal?” The answer to the second question is a resounding ‘Yes’. The rules governing what an IRA can invest in are exclusive—not inclusive—and have been in effect since IRAs were created in 1974. That is, the rules only specify where someone cannot invest. Therefore, there is an almost unlimited array of possible investments that fall well within the permissible boundaries. There are only three investments not allowed within IRAs: collectables, life insurance, and capital stock in an S corporation. The reason investors may not have heard about the opportunity is that most people hold their IRAs with financial institutions whose business models revolve around market-traded investments and not in investments like real estate, private equity and other “alternative” options. It is often not their primary focus to educate their clients about all of the available options, although this mindset is starting to change with financial planner and advisors. So how do investments work in a self-directed IRA? It’s easy, once the investor identifies an IRA custodian who handles self-directed IRAs--not all do. A little due diligence is recommended before choosing a custodian. As there are additional rules and regulations involved with self-directed investments, investors are advised to work with an established custodian who has knowledge and experience regarding self-directed investments. While there are only a few types of assets that are disallowed (see the three listed above), there are many ways for a novice to create what is called a ‘prohibited transaction’ by involving inappropriate parties. An experienced custodian generally will attempt to guide clients to avoid any accidental misdeeds through education and referrals to professionals with appropriate expertise when required. This may not be the time to shop for the low cost provider alone! Once the account with the custodian is set up and assets are transferred to the new IRA, the investor instructs the custodian to make purchases on behalf of the IRA. Any assets that are held in the IRA are owned by the IRA, not by the investor. So, for example, all fees involved with an investment (like property maintenance for real estate) must come out of the IRA and cannot be paid by the IRA owner. What other types of investments are available in an IRA? Here are just a few of the most common investments that can be bought inside an IRA:
The foregoing is a general discussion. It is not intended as, and may not be relied upon as, tax, legal, investment or other advice. Readers desiring such advice should consult their own advisors, such as F. Moore McLaughlin, IV, Esq., CPA at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or at 401-421-5115 x212. For over 18 years, PENSCO Trust has provided premier service in the custody and administration of IRAs and retirement accounts invested in non-traded assets, such as real estate and private placements. Contact PENSCO Trust for more information at (866) 818-4472 or online at www.penscotrust.com. Tom W. Anderson, President, Founder & CEO, PENSCO Trust Company Tom W. Anderson is CEO and Founder of PENSCO Trust Company based in Portsmouth, NH. Since 1989, PENSCO Trust has provided custodial services to thousands of clients who choose to diversify their retirement funds outside of the stock market to include asset types such as real estate, private equity, and private lending. PENSCO Trust is a regulated, non-depository trust company offering FDIC insurance on all client accounts. |
