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The Beginner’s Guide to Self-Directed IRAs

Discover how easy it is to get started with a SDIRA.

Posted on August 10, 2022


IRAs are popular with Americans, there is no question about that. As of 2020, over 47.9 million Americans, or about 37.3% of households own a Traditional IRA (Investment Company Institute). The financial perks of these accounts are obvious, and each year more and more people open their own IRA to take advantage.

Traditional IRAs are Restrictive, But Not SDIRAs

Banks and discount brokers that act as IRA custodians allow you to only invest in stocks, bonds, mutual funds, and the like. These restrictions are used by custodians not to benefit you, but as a form of protection for themselves. Fortunately, it doesn’t have to be this way. There is a much freer, albeit less popular, option: The Self-Directed IRA. While only making up 3-5% of IRA accounts (FINRA), the Self-Directed IRA offers limitless potential. If they have so much utility, then why are they so few and far between? Unlike regular IRA accounts, a Self-Directed IRA requires more involvement on your part. You are the captain of the ship, and it is up to you to make or break the bank. Now this may sound scary, but with a little bit of education you will confidently be able to coast to a secure and fruitful retirement. 

What is a Self-Directed IRA?

The difference between a Self-Directed IRA and other IRA accounts are the type of assets you can own. With other IRAs, you can buy assets you can usually buy with licensed brokers, like bonds, stocks, mutual funds, and similar investments.  These restrictions are designed to limit risk to you and the broker, at the cost of higher returns. This so-called risk that these brokers are afraid of is not that impactful, in fact, the restrictions on types of assets is just selfish protectionism. To the broker, across thousands of accounts and billions of dollars, transactions that prove to be a few percentage points riskier translate to millions of dollars lost for them, but to the individual these trades are virtually indistinguishable from the traditional transactions from traditional brokers. At Quest Trust Company, we act as a custodian only, charging you for processing and holding, and do not have any incentive to direct your financial journey. This is where the term “Self-Directed” comes into play. You have the power to choose from a large assortment of alternative assets to invest in.

What Assets Can I Buy with a Self-Directed IRA?

  • Real Estate, including debt-financed and foreign real estate
  • Deeds of Trust
  • Real Estate Options
  • Lease Options
  • Oil and Gas Interests
  • Small, non-publicly traded corporate stock
  • Limited Liability Companies
  • Limited Partnerships
  • Apartments
  • Security Agreements and Notes
  • Tax Lien Certificates
  • Unsecured Notes
  • Foreclosure Property
  • Joint Ventures
  • Racehorses
  • and more…

It is important to note; however, that with added freedom, comes additional risk, so due diligence is essential in making sure you make an informed decision.

Real Estate Investing with a Self-Directed IRA

Investing in real estate with a self-directed IRA can be done in a few easy steps.  The contract will name Quest Trust Company as the buyer FBO (for the benefit of) you. When people think of investing with IRAs, they only imagine long-term profit that they can enjoy when they are retired. But investing in real estate allows for the potential to earn in the more immediate future. While you and prohibited parties – your direct ascendents, descendants, spouse, and the manager of your IRA - cannot receive any money from the account, there are ways to utilize the cash you earned from your real estate endeavors. You can use any earned money to pay any workers or contractors that you hired to rehab the property, or you can flip those profits to buy even more real estate! Real estate investing with Self-Directed IRAs is just like property investing in your name, but you must keep the money under the jurisdiction of your IRA until you turn 59½ like any other IRA transaction. 

Note Investing with a Self-Directed IRA

A promissory note is contract where one party agrees to pay other after a certain amount of time. This is a common financial tool used often, and if you have taken out a loan, usually you have signed one of these. With a Self-Directed IRA, you become the bank. The IRA would loan out the money on your behalf, and any income generated from these investments would be granted to your IRA tax-free! Again, it is important to be aware of prohibited transactions, since cannot lend money to any disqualified persons.

Private Equity Investing with Self-Directed IRAs

The options to invest in private equity with Self-Directed IRAs is virtually limitless. You can gain ownership in any entity from your local mom and pop shop to million-dollar private companies. The possibilities are limited to you and your due diligence. With the proper research, you can make fruitful transactions that can bolster your retirement fund. Whether you invest in pooled vehicles and funds, like venture capital funds or private equity funds, or directly into companies, you can make dividends tax-free! 

Crypto Investing with Self-Directed IRAs

One of the newest assets that you can hold with a Self-Directed IRA at Quest is Crypto. Over the past two decades, cryptocurrencies have grown exponentially. They started as small, experimental financial tools and grown into massive household names, holding trillions of dollars in market value. Common Cryptocurrencies, like bitcoin, Litecoin, and Ethereum, all can be held with a self-directed IRA with Quest trust company. Using the ErisX platform we made investing in this lucrative assets fast and easy, so you can capitalize on the massive growth of these new technologies. 

As you can see, the potential for investing is vast, and it’s never too early to start saving for retirement.  When investing in a vehicle like a self-directed IRA that could be more comfortable to you, you can greatly help grow your wealth faster and greater. Though we’ve only listed just a few investment examples here, the other benefits beyond diversification are endless. If you ever have questions about how to get started with a Self-Directed IRA at Quest, call us at 855-FUN-IRAs or schedule a free consultation with an IRA Specialist 

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