Though self-directed IRAs (SD IRAs) are gaining more attention from savvy investors, there is still some confusion surrounding SD IRAs and how they can provide more investment diversification. Custodians, like STRATA, are demystifying the IRA rules and alternative investment options.
Here’s five of the most often misunderstood IRA rules.
- A Self-Directed IRA is a type of IRA. Self-Directed IRA is simply a designating term. A self-directed IRA may be a Traditional, Roth or even a SEP (Traditional) or SIMPLE IRA and is subject to the same rules and regulations as any IRA. The main difference with a self-directed IRA is that the IRA owner makes the investment decisions and directs their IRA custodian on how to invest their funds.
- Investing in alternative assets is allowed in a Self-Directed IRA. Self-Directed IRAs, often called alternative IRAs, allow a wide array of options including: real estate, crowdfunding, precious metals, private equity and more. The confusion lies in that the Internal Revenue Code doesn’t spell out what you can invest in, only what you cannot – life insurance policies, collectibles and stock in an S-corporation, etc.). This leaves the door open to alternative assets, which offer more investment options and more control for today’s investor. It’s up to the IRA custodian to determine the types of assets it will custody – so make sure you check with your custodian before you open an IRA or begin an investment transaction.
- It’s important to understand and avoid Prohibited Transactions. When it comes to deciding what investments you would like to make in a self-directed IRA, there are certain transactions that the IRS deems as Prohibited Transactions. Often referred to as “self dealing”, you’ll want to be familiar with Internal Revenue Code section 4975, know who is considered a “disqualified person” and the types of transactions that should be avoided in an IRA or other qualified retirement plan.
- Single member LLCs may add some additional protection but may create additional risks. While a single member LLC structure may provide some additional legal protection for the IRA owner, it’s also one that carries high potential for a Prohibited Transaction. Single member LLCs are over-promoted by some IRA providers that simply do not understand the potential pitfalls and risks to an IRA owner. Single member LLCs when held in an IRA should require a third party, like a CPA or attorney, to serve as the LLC manager and not the IRA owner. Because single member LLCs require more oversight by a custodian, STRATA does not allow the holding of single member LLCs.
- Understand the differences between an IRA administrator and an IRA custodian. IRS rules require that an IRA be held by a bank, trust company or an IRS-approved custodian. While there are a lot of IRA providers that can open and hold an IRA, not all of them understand alternative investments and the potential risks of prohibited investments. Moreover, providers that operate as IRA administrators are not directly regulated by state or federal banking authorities for safety and soundness – which could put your retirement assets and funds at risk. Custodians, like STRATA, are directly regulated by state or federal banking authorities for safety and soundness in the same way that banks are.
STRATA is dedicated to helping empower investors to leverage a wider range of investment options for greater control and flexibility while enjoying tax-advantaged growth – without a complex or confusing process. We know there is a better way to alternative investing.
You can read more about other IRA misconceptions and how to unlock more investment options at www.StrataTrust.com. You may contact us at 866-928-9394 or Info@StrataTrust.com for questions you may have about opening or investing with a self-directed IRA.
ABOUT STRATA TRUST COMPANY
When alternative IRA custody is this easy, the possibilities are endless.
Founded in 2008, STRATA Trust Company has built a reputation delivering streamlined and straightforward custody. Our service-driven team has helped thousands of investors and investment professionals unlock opportunities in self-directed retirement accounts across a wide range of alternative investments. Formerly known as Self Directed IRA Services, Inc., STRATA has strategically realigned to support a broad range of investment professional partners in growing their IRA asset base – always with an eye on the future.
With offices in Austin and Waco, Texas, STRATA operates as a Texas-chartered trust company with direct oversight by the Texas Department of Banking. Led by a seasoned team with over 350 years of collective experience, 33,000+ investors empowered and over $1.8 billion in assets under custody, our customers experience a clear difference in our approach to IRA custody.
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