The Self-Directed IRA 101
Do you have clients who want to startup or buy a private business, and they end up taking money out of their IRA to invest in this venture? Do your clients contribute less than the annual maximum to their IRA so that they can use that money to buy rental properties? If so, then you as their advisor might want to read this to learn how your clients can benefit from your newfound knowledge.
What is a self directed IRA?
If you are a financial advisor, then you will be familiar with what an IRA is. However you may not be familiar with the term “self directed IRA”. A self directed IRA is identical to the types of IRAs you have been managing for your clients. The rules and regulations are no different. In fact if you look up the term self directed IRA in the Internal Revenues code, you will not find it. The reason is that all IRAs are self directed.
The term self directed IRA was created by an enterprising financial services firm to describe the difference between an IRA, which invests in traditional investments such as stocks, bonds, and mutual funds, and an IRA , which invests in alternative investments such as rental property, tax liens, private mortgages, gold coins, franchises or private businesses, horses, and more. The choices for investment are virtually unlimited.
Can I invest in anything with my IRA?
If you read the Internal Revenues Code (IRC), you will not see what you can invest in. Rather you will see what you cannot invest in. The investments which are not allowed in an IRA are collectibles, life insurance (on yourself) and S-corps. Except for these few investment types, the choices are only limited by your imagination.
I hope this opens up your mind to the virtual endless possibilities for investment inside your IRA. While this is a great tool to use in your investment portfolios, you should be aware that there are a number of other rules and terms which need to be observed. Terms such as disqualified persons, prohibited transactions, UBIT, UBTI, UDFI are important to understand if you want to make sure the IRA remains compliant.
What can you do with this information to help your clients?
If you are an advisor, and you want to learn how to use this with your clients, you will have to undergo an extensive learning curve. While investing in a mutual fund in an IRA may be quiet simple, investing an IRA into a piece of rental real estate can be quite a bit more complex. If you are only going to engage in one of these transactions one or two times, it may not be worth all the time involved to get up to speed on the rules and regulations.
Alternatively, you can take a shortcut and work with an advisor who already has this expert understanding of self directed IRAs and alternative investments. We have created a program called, Advisor Assisted Alternatives, for just this reason. Most financial advisors don’t have the time to learn all of the pertinent rules and regulations and case law changes. Innovative Advisory Group has set up a program which allows other advisors to outsource this knowledge to us, while retaining the relationship with their client, similar to the setup of a SMA. To learn more about self directed IRAs or Innovative Advisory Group visit our website.