Common Misconceptions About the Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: September 3, 2012)

As you research and review your various retirement savings options, you may hear mention of something called a “Self-Directed IRA.” There is a great deal of confusion surrounding this kind of retirement account, so it’s important to clear up some of the most widely held pieces of misinformation in order to understand exactly what a self-directed IRA is.

The IRA specialists at Quest Trust Company want to make sure you have the knowledge you need to make an educated decision about your options. They’ve put together the following list in order to help you know all the facts.

  • It’s Not a Separate Type of IRA. One of the most common points of confusion is that the self-directed IRA has a different legal status from a “traditional” IRA that someone might choose to open with a discount investment broker or local bank. In fact, a self-directed IRA and other IRAs are, legally speaking, the same type of account. The annual contribution limits are the same, the withdrawal rules are the same, and the permitted investment types are the same. The main substantive difference between a self-directed IRA and a traditional or Roth IRA lies with the custodian. Custodians for self-directed IRAs enable account holders to make the investment types that are legally permitted within an IRA, but which other IRA custodians usually do not permit.
  • Not Every Investment Type is Permitted. It’s true that self-directed IRAs allow a greater number of investment choices as compared to what most IRA custodians permit in their accounts. But this doesn’t mean that the self-directed IRA is a “free-for-all” or that an account holder can invest in absolutely anything they want. The IRS rules on prohibited investments still apply, and prevent a self-directed IRA holder from investing in various asset classes, including collectibles or life insurance policies.
  • Self-Dealing Rules Still Apply. The standard rules which prohibit self-dealing within an IRA still apply to self-directed IRAs to the same extent as other IRAs. For example, having a self-directed IRA will certainly make it easier to invest in real estate, but the account holder is not allowed to sell their own property to the account, nor is the account holder (or any prohibited parties directly related to the account holder) allowed to use that real estate for their own personal use.
  • You Can’t Get “Checkbook Control” Over Your IRA. One of the greatest points of confusion surrounding self-directed IRAs is whether you can ever access your account funds and quickly make investments through “checkbook control” over the IRA. The theory is that the account holder sets up a limited liability company, then the IRA purchases all of the LLC interests (while the account holder is still the LLC manager), thereby giving the LLC the power to invest those funds without having to go through the IRA custodian. Unfortunately, this investment technique has never been directly approved by the IRS, and there is a great degree of uncertainty in whether it would withstand a legal challenge.

When you have a clearer understanding of what a self-directed IRA is and is not, you may feel more comfortable with the account, and how it might fit into your overall retirement strategy. To help gain a better understanding, contact Quest Trust Company today at 800-320-5950 for a no-cost, no-obligation appointment. Their specialists can help you interpret your options with a self-directed IRA and put you at ease about your retirement planning decisions.