Your Top 10 Most Common Self-Directed IRA Questions Answered!

Estimated reading time: 6 minutesLast updated on: June 18, 2021

Understanding how self-directed IRAs work can be some of the most lucrative and useful knowledge to have. When you know even just the SDIRA basics, you’ll find that there are many ways this information can help not only yourself and others around you as you continue to invest. So, what are some of the most common questions people ask about self directed IRAs? Below are the top 10 most common questions surrounding SDIRAs:

  1. What is the difference between a Self-directed IRA and a regular IRA? This is a great question and probably the most common question asked. The answer is actually simpler than it may seem. There is no legal distinction between a self-directed IRA and any other IRA. The difference is that with a truly self-directed IRA, the account agreement allows the broadest spectrum of investments. Legally, there is no difference between the two; self-directed is simply a term used to help describe that the account allows for the investor to have full control over their investment choices and the type of alternative assets than can be held. 
  2. What is the benefit of having a self-directed IRA? There are many benefits of using self-directed IRAs. Not only can you diversify your portfolio, moving beyond stocks, CDs, and mutual funds, but you can also have more control on the investments you choose. Unlike having a financial advisor that will trade and sell your stocks for you, when you have a self-directed IRA, you are truly getting to find the investment of your choosing. Everything is on your terms when you self-direct your account at a non-traditional custodian, because you choose the investment. This allows you to invest in the things you know and understand, as opposed to things you may not be as familiar with. Not everyone understands the stock market – or is comfortable with its current state, anyway – so, having the opportunity to invest in private assets like real estate, is a much better option.
  3. What type of accounts can be self-directed? There are many different accounts that can be self-directed. At Quest, we offer seven different types of accounts, all which can be self-directed. Because each account works a little bit different, it is beneficial to speak with someone like an IRA Specialist who can provide education about specific accounts.
  4. Can I have multiple IRA accounts? One of the great features of self-directed IRAs is that they don’t have to be used only on their own. Self-directed IRAs can work together by using a beneficial strategy called “partnering”. This term is used when one entity (or more) and an IRA come together to put up the funds for an investment. In this strategy, all parties have a vested percentage of ownership in the deal. When doing this, the percentage of ownership is decided at the beginning of the investment and must remain the same throughout the life of the investment. This means that any profit the investment receives is returned based on this percentage of ownership. Additionally, the IRA would be responsible for its percentage of any expense associated with the investment, too.
  5. Can I move a 401(k) to a self-directed IRA if I am currently still employed with my company? Typically, you cannot move your IRA until you have left your company or have some separation from the company that could allow you to move a portion of those 401(k) funds. This is not to say that you cannot have both an IRA and a company 401(k) at the same time. Many people have an IRA and make personal contributions to the account, you just may not be able to receive a deduction for your IRA contributions. In some cases, companies will allow for an “in service” rollover, meaning that some of the funds may be eligible to move to an IRA while still employed. 
  6. Is it possible to have a Roth IRA if I make too much money? One of the most common questions surrounds a certain type of IRA account – the Roth IRA. Many people believe that if you make too much money that you cannot have a Roth IRA, but this would be incorrect. Although it is true that if your modified adjusted gross income is over a certain limit you still cannot directly contribute, it would be false to assume this means you cannot have one at all. Check out our other articles about Roth conversions to learn more. 
  7. Is it possible to own real estate in an IRA? This is a very common question, and it is true that one can purchase and own real estate in an IRA. Due to the potential predictability and security of the asset, many people are making the decision to diversify their retirement accounts into tangible assets like real estate. With self-directed IRAs, you are able to invest in all types of real estate such as land, single family, multifamily properties, commercial properties, mobile homes and much more. When using an IRA to purchase real estate, your IRA is the purchaser and you make all the decisions about your investment and the profits grow in your IRA!
  8. What happens if I don’t have enough money in my IRA to purchase my investment? If you don’t have enough money in your IRA, don’t worry! There are other options available to you that can allow you to still use your self-directed IRA for the investment. You can:
  • Make your annual contribution if you haven’t made one for the year already.
  • Partner your IRA with another IRA or personal funds to make up the total cost of the investment
  • Utilize getting a loan from a private lender to help make up the remainder of the funds
  • Get a non-recourse loan from a qualified lender
  1. Can I live in or work on a house that my IRA owns? This is one of the most important common questions that involves IRAs. When you are using a self-directed IRA to invest, there are certain people that your IRA cannot participate in deal with. Certain disqualified people (you, your spouse, your lineal ascendants and descendants and any companies owned or controlled by those people) cannot do business with your IRA or else it will be seen as a prohibited transaction. If you are using your IRA to do business with a 3rd party, this can be done all day long! But this mean, you would not be able to work on or live in a house that your IRA owns. More about that here!
  2. Do I need an LLC to purchase investments in a self-directed IRA? No! You actually do not need to create any LLC when using an IRA to invest. When using your IRA to purchase alternative investments, you simply let your custodian know what you would like to invest in, and then your custodian will purchase the investment in the name of the IRA. 

Self-directed IRAs aren’t the easiest thing to understand, but once you’ve taken the time to ask yourself some of the most common questions, you’ll be able to understand them a little better. It’s important to have a knowledgeable investment professional or a certified IRA custodian/specialist that can help answer questions when needed! To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

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