How Do I Find Self-Directed IRA Investments?

Self-directed IRAs, or SDIRAs, are becoming increasingly popular because they allow account holders to choose from a world of investments. At New Direction IRA we’ve seen IRAs invest in everything from trailer parks to oil fields to Middle Eastern currency and more.

The sheer number of investments could seem daunting, but many investors view this as an opportunity to invest in what they know and trust. Here, we’ll go through the main alternative asset types and share how you might begin looking for investments.

Note that all due diligence is your responsibility and not the responsibility of the IRA provider, like New Direction IRA. (At NDIRA, we do not offer financial advice; we only service the investment that you choose.)

Real Estate

Real Estate investments come in all shapes and sizes. You can invest your IRA in commercial or residential real estate, fix and flips, rental properties, raw land and everything in between.

There are many options for real estate IRA investing

You may find it beneficial to search for investment property by contacting a realtor, driving around the area you in which you want to invest or attending real estate investment groups. What’s important to remember is that you can invest in nearly any real estate as long as it follows disqualified persons rules.

Disqualified persons to an IRA include the IRA holder, his spouse, his parents and grandparents, his children and grandchildren, their spouses, certain fiduciaries and any entity owned or operated by a disqualified person. So, for instance, you couldn’t buy a rental property or vacation property and let your kids live in it.

You can, however, partner with both disqualified and non-disqualified persons. You’ll have to be diligent about paperwork and incoming/outgoing funds but the flexibility afforded by the IRS to maximize your funds opens your investment options even further. You can even take out a non-recourse loan to mortgage investment property. For more information on funding, visit http://www.newdirectionira.com/real_estate_ira.html

Precious Metals

Your IRA can invest in gold, silver, platinum and palladium products. There are certain fineness requirements for each and you cannot invest in many collectible coins, but there are simply many options for a precious metals investment. For a full list of acceptable coins and metals, visit http://www.newdirectionira.com/gold_iras.html.

In an SDIRA, you find the dealer from which you want to buy metals and determine the terms of the deal with him. You send the terms over to your IRA provider and they will send money where needed. At New Direction IRA, you can then choose your depository (where your metals will be stored) and the dealer will ship the metals directly to the depository.

Performing due diligence is necessary for all investments, especially precious metals. Make sure you are comfortable with the dealer and depository and the terms of the sale.

Private Equity

Finding private equity investments often requires more leg work than real estate or precious metals investments.

Where you can often find listings of property or scores of dealers offering metals, private equity offerings require greater diligence. There are several website cropping off that seek to match investors to companies and individuals seeking investments.

You can also invest your IRA in entities that may be launching a new product or certain groups that are preparing to make large investments. As above, disqualified persons apply and full details can be found at http://www.newdirectionira.com/private-equity.html.

The best way to find private equity investments is to get involved. Visit investment groups, research companies, search for startups and find an investment opportunity that fits your IRA investment goals.

What is a Self-Directed IRA? What are Alternative Assets?

The term Alternative IRA, which has been in the news so much recently, is frequently misunderstood. It is often thought to be an IRS designation that signifies an account type that is different from a traditional IRA or a Roth IRA, which are designated IRS account types. It is also not unusual for people to be under the impression that self directed means that the IRA owns an LLC which holds the IRA assets. Neither of these is the case.

“Alternative” as well as “Self Directed” are descriptive terms, not legal distinctions, and are used largely as marketing tools. ( In fact, terms such as “Rollover IRA”, “Real Estate IRA”, and “Gold IRA” are also descriptive and used primarily for marketing.) The only consistent meaning that alternative IRA might have is that the assets held by the account include something other than stocks, bonds, mutual funds, etc. And the
meaning of self directed IRA is basically that the IRA holder will have some choice in terms of what assets the account will hold. That may be a choice between two or three publicly traded stocks or bonds or funds, or it may be the ability to choose real estate, gold, private lending, investment in private companies, and more. IRA providers are not bound by the IRS to offer any particular suite of assets. It is incumbent upon the IRA holder to choose a provider that services the desired asset types.

The IRS, which governs IRAs, allows two basic tax arrangements for retirement accounts:

1) With a Traditional IRA, the IRA holder contributes money to the account “pre-tax”. While that money is in the account, it performs tax-deferred, meaning that the increase or decrease in its value does not have an effect on the IRA holder’s personal annual taxes. The only time that the IRA holder’s personal taxes are affected are when they make a contribution or take a distribution. A contribution will decrease the amount of earned income that the account holder declares for a tax year. And when a distribution is taken, the amount of the distribution is then added to the person’s annual income for that tax year and taxed accordingly.

2) In a Roth IRA, contributions by the IRA holder are “post-tax”; the investments in the account perform without tax consequence; and then can be distributed tax free to the IRA holder after the age of 59.5. These two basic arrangements, along with the associated rules for contributions and distributions, are the same for all IRAs, alternative or not, self-directed or not. For example, if a person opens a traditional IRA that is self-directed with a provider like New Direction IRA, which handles a wide array of alternative asset types, that account holder could have that IRA invested in a couple of rental houses and some gold bars. The rental income and appreciation of the real estate and the appreciation of the gold would constitute the performance of the assets. Regardless of what the assets were, the IRA holder could continue to make contributions per IRS regulations.

With any IRA, there are two dynamics occurring that affect the account’s balance. The first is the pattern of contributions and distributions. These are governed by IRS rules and the IRA holder’s strategy. The second is the performance of the money/assets that are in the IRA. This is governed by the economic factors associated with each particular asset. In other words, was it a profitable investment or not. The two dynamics are only related in that they are functions of the same account and are guided by the IRA holder. These dynamics are not affected by whether an IRA is self directed or not and whether the assets are publicly traded securities or alternative.

In the case of IRA terminology, it may be that marketing attempts to make the consumers’ options more understandable have back-fired and actually created less understanding. It can be helpful to remember 3 categories of terms:

1) IRS designations are account types (Traditional, Roth, or an employer plan). These account types have rules associated with them about taxation and contributions/distributions.

2) Asset terms are simply that, the type of asset in which the IRA is invested: real estate, gold, loans, stock (public or private), etc.

3) Descriptive terms are used to help lead the consumer to the service that they desire (i.e. an IRA that has gold or real estate or an IRA that results from a 401(k) rollover) and do not affect tax status.

All of the current conversation regarding “Alternative” and “Self Directed” IRAs, may seem confusing unless one is familiar with the terminology. Whether it is the success of Mitt Romney’s IRA or the Jean Chatzky report on the Today Show that is fueling interest in retirement investing, what is certain is that IRA account holders are becoming more and more aware of the choices that they have when it comes to their retirement funds.