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Would you ever consider relinquishing financial or management control of your company
to someone you’ve never met or never even speak to? It sounds like an inconceivable and
even ludicrous idea, yet we do it with our IRAs every day. As the annual deadline for IRA
contributions rapidly approaches, it is an opportune time to consider a surprising and
beneficial alternative to the traditional manner in which we have been taught to set up our
IRAs. This alternative is referred to as a self-directed IRA.
To understand the unique characteristics of a self-directed IRA, let us first examine the
IRA offerings typically provided by brokerage firms such as Schwab, Fidelity, and a myriad
of other similar trading institutions. Although these companies provide a wide variety of
investment options for your IRA account, they are limited to the following investment
types: mutual funds, individual stocks and bonds, certificates of deposit, and money
market accounts for cash reserves along with a selection of proprietary mutual funds
offered exclusively by the firm itself. Once you have set up and funded an IRA, it is true
that you can choose to allocate your money among these offerings. However, since the
mutual funds are managed by a fund manager, you as the investor, really have no voice in
the strategy or management of each of your holdings. For this reason, these types of IRAs
are not truly self-directed. Yet, millions of people are dependent upon this method and
these services to build their retirement nest egg.
Self-directed IRAs have been available since 1981, yet they are not widely known and are
often misunderstood by those unfamiliar with this alternative investment solution.
“Investors are usually surprised to learn they no longer have to settle for mediocre returns
from big brokerage firms. They can take their hard earned retirement dollars and see the
double-digit returns with self-directed IRAs.” says Jay Pearson, the IRA Coach® and
renowned expert on self-directed IRAs. The power of self-direct IRAs lies in the investor’s
ability to take active, direct control of them by finding and researching investment
opportunities outside the realm of those offered by the aforementioned types of
companies. These vehicles include real estate, real estate options, mobile homes, tax liens,
promissory notes, equity positions in privately held companies and private placements for
new business launches. Mr. Pearson further states, “People like the idea of investing in
assets they understand, such as real estate and promissory notes. Very few people truly
understand the stock market.” With a virtually limitless array of investment choices, you
can now place your self-directed IRA money in a broader variety of investments that
potentially offer greater returns than what mutual funds yield.
All types of IRAs, both traditional and Roth, as well as qualified pension plans are eligible
to become self-directed IRAs. In the self-directed model, an account is set up with a
company that provides this service. This company becomes your custodian and is
responsible for overseeing that account activities and transactions comply with federal
guidelines. Once the account is open, your annual contribution can be deposited directly
into it and balances from existing IRAs can be rolled over into it. Once the money is in
the account, the fun begins! When you locate an investment that appeals to you, simply
direct the custodian through instructions specified on a Buy/Sell Direction Letter to make
the transaction on behalf of your self-directed IRA. The custodian will review and file the
proper documentation and wire the funds. Your IRA is now the proud owner of either a
piece of real estate, a promissory note or whatever you have chosen to purchase.
It is also critical to understand and adhere to these limitations that govern self-directed
IRAs.
• Business with Yourself
Self-directed IRA rules prohibit you from conducting business with yourself under
any circumstances. This means that you cannot use self-direct IRA monies to buy
or sell businesses or assets that you control or partly own. For example, if your
self-directed IRA invests in a condominium, you cannot live or vacation in that
condo. On the business side, it is forbidden for you to invest your own selfdirected
IRA funds into your own business as a cash infusion or equity position.
• Family Members
It is also off limits to do business with immediate family members including your
spouse, children or parents. You may, however, engage in transactions with
siblings’ companies provided that they have documented legal control of the
business.
• Works of Art
A self-directed IRA cannot purchase or sell precious gems, art, wine or other
specified collectibles. A comprehensive list of prohibited goods is available from the
IRS or from your self-directed IRA custodian.
Be sure to obtain clear, written guidelines for clarifications of all restrictions to avoid
penalties.
Partnering with your IRA is an excellent strategy for extending your financial reach. For
example, if an investment is attractive and meets your criteria but is too expensive for you
to consider, you can partner with your self-directed IRA to make the purchase. Partnering
means that you put in some of the money personally, and fund the balance through your
self-directed IRA, so that you both own your respective percentage of the asset. When
employing this strategy, all expenses and profits must be divided proportionally as dictated
by the percentage of ownership retained by each partner. The partnering concept can also
be applied with another individual. If, for instance, you have decided to purchase a piece
of property, but don’t have enough money in your self-directed IRA to do so, your selfdirected
IRA can purchase a portion of the property and the other party, using personal or
self-directed IRA funds, can purchase the remainder. Again, all profits and expenses that
originate from the IRA must go back into the IRA.
Using self-directed IRAs is a creative way to gain control of your IRA and to leverage
opportunities to fast-track results. With this control comes the responsibility of
performing rigorous due diligence on potential investments to ensure alignment with your
risk tolerance and financial objectives. Mr. Pearson encourages investors by saying, “Selfdirection
requires some self-sacrifice – mostly of your time. However, the rewards can be
incredible.”
By Irene Eraklidis
Wealth Roadmaps, LLC
Irene@ wealthroadmaps.com
(415) 309-8855
wealthroadmaps.com
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