If you’re not entirely familiar with the concept of a “self-directed” IRA, then you might be unclear on what exactly that type of individual retirement account is, and the ways it can be a strong foundation of your retirement savings plan. Here are some of the most commonly asked questions (and answers) about self-directed IRAs.
Just What is a Self-Directed IRA?
From a legal point of view, a self-directed IRA is the same tax-advantaged retirement savings vehicle as the IRAs you likely see advertised by discount brokers and your local banks. The legal structures of standard and self-directed IRAs, as well as the tax and retirement implications, are identical.
How is a Self-Directed IRA Different from a Standard IRA?
What makes a self-directed IRA unique is the custodian that safeguards your account. The most widely used custodians for standard IRAs are discount brokerages and banks, but these custodians only allow you to invest in a subset of the permissible investment types that are actually authorized by law. In contrast, self-directed IRA custodians like Quest Trust Company allow individual investors to invest their account funds in every permissible investment class. For example, by law, individuals can use their IRAs to invest in alternative investments such as real estate, private equity and private debt instruments, foreign currencies and precious metals.
So Why Doesn’t My Discount Broker Let Me Use My IRA to Make “Alternative” Investments?
Quite simply, the answer is probably that they don’t want to have to charge you for the additional services that come along with those types of investments. Make no mistake about it, buying an investment property is a significantly more complicated process than buying a stocks or bonds. And continuing to maintain and manage that process is even more involved. All of these services require the time and efforts of qualified professionals. In order to maintain their market position as “low cost” service providers, traditional custodians simply don’t offer custodial services relating to these types of investments.
Can I Use My Self-Directed IRA to Buy Myself a Vacation Home?
The short answer is yes, but not without some significant legal restrictions that come along with ownership. This is because there are broad prohibitions on what is known as “self-dealing” within an IRA. Your self-directed IRA therefore cannot make any investment or conduct any business that provides you or your family with any current benefits. So while you can use your self-directed IRA to purchase real estate, you can’t use that real estate yourself, even if you’re willing to pay rent back into the IRA.
Note that if you’re interested in a vacation or other property that you can eventually use once you reach retirement age, you can buy the property now with your retirement account and simply rented out to third parties in order to generate income for the self-directed IRA. Once you reach retirement age you can simply take a distribution of that rental property and use it however you see fit.
If you have further questions about the self-directed IRA structure, feel free to contact Quest Trust Company.
Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.