Never heard of a self-directed IRA, you’re in good company. After all, only 2% of the U.S. population has taken the time to open their own Self-directed IRA. Shhhhhh, the big boys on Wall street don’t want you to know you can invest in things other than those assets peddled in lower Manhattan. That’s right, rarely, if ever has there been an advertisement from custodians trying to convince you into opening a self-directed IRA. Let me explain why; custodians who specialize in self-directed IRA’s are a direct threat to the Ed Jones’ of the world, who want to get you as a client to sell you Wall Street products, i.e stocks, bonds and mutual funds. They make money by selling you products with the highest ‘load’ fee, as well as a fee to manage your portfolio, double whammy! I say phooey, this strict, rigid investing plan offered by the big ‘box’ brokerage houses are for those who wish to have a hands off approach to their retirement plans. As I have explained, this approach is not for me, I wanna be challenged to think outside the box, and I hope you do to!
So, as you know I am a fan of Self-directed IRA’s, in fact I opened one myself. I invest in cattle at the moment, with plans of investing in tax liens, real estate, promissory notes, heck maybe even parking spots. You bet its possible! I once heard of a guy in Chicago, who bought 2 parking spots with his self-directed ira for the sole purpose of renting them out. In fact, they cash-flow quite nicely, and likely will increase in value should he ever decide to sell. This is how a Self-directed IRA represents ‘freedom’, investing freedom that is. With a Self Directed IRA, the investing world in yours to choose from. Keep in mind, there are restrictions though, which prohibit you from investing in: Life insurance contracts, and collectibles. Everything else is fair game! There are other restrictions on who you can invest with. You cannot invest with yourself. Whadda you mean by that? Well, you cannot buy a property with funds from your self-directed IRA and sell it to yourself. You cannot invest with your mother or father. If pops is a cattle rancher, you cannot use your IRA funds to buy cattle for his operation. All investments must be made at arm’s length” from you.
How do I set up a Self-directed IRA.
There are custodians, sometimes referred to as trustees who are third-party vendors whom you can contract with to facilitate your account. I say facilitate because they simply put the pieces in place. Your money is held in a money market until you direct where you want to it be invested. Custodians/trustees do not provide advice on what to invest in, they simply manage your account to make sure you are following SEC rules and regulations. Once you set up your account, the custodian places the money in the money market, which is nothing more that a glorified savings account. Say, you decide to go into the lending business, you want to offer small loans of $10,000 each through the website kickstarter.com. Once you find someone willing to borrow from you at your specified interest rate, your custodian will have you fill out an investment directive form which authorizes them to send the funds to the specified borrower, and voila, you are in business. The custodians job is done, it is up to you to collect from the borrower. As the payments from the borrowers come in, they will be deposited into your account. In fact, it is best that the payments come directly to the custodian’s office, if possible. You do not want to touch this money, unless that is if you want to be taxed and fined for doing so.
What age can I pull the money out?
A self-directed IRA is much like a traditional IRA in that, you can take proceeds out without penalty at 59 1/2 years old. It is then taxed as ordinary income (the rate is based on the income tax rate of the year you take distributions). A self-directed IRA can also be set up as a Roth rather than a traditional IRA, the difference being the way in which it’s taxed. A Roth is taxed when you make contributions, and not when you take distributions. A Traditional is just the opposite. I think a Roth may be a better option, simply because taxes will always go up, why not pay the tax rates of today rather than those of 20 years from now.
How much can I contribute annually?
The guidelines for contributing to your self-directed IRA is identical to a Traditional or a Roth. If you are under 50 years old the max contribution is $5000 per year. If you are over 50, you can contribute an extra $1000 under the Catch Up Provision. I hope in the future these amounts increase. As pension plans slowly disappear, as well as the likelihood of the Social Security program going belly up, your IRA may be all you’re left with. So, please plan as if these ‘promises’ will not be here in the future. Get started today!
I’m an index investor so the typical Wall Street products work fine for us.
Still, I’m interested in learning more. I’m assuming the same $5,500 annual limit applies to all IRAs, including self-directed?
Also, how could you put pre-tax money in a self directed IRA? I’d be interested in doing so but have never heard of a good way to put money into the fund before it’s subject to income & payroll taxes.
Thanks Done by Forty, I think the max is $5000 for all IRA’s including self-directed. $6000 if you are over 50 years old. A traditional IRA uses pre-taxed dollars, and you pay taxes as ordinary income when you take disbursements. A Roth you pay the taxes now. When you open a self-directed IRA, you decide if you want it to be a Roth or a Traditional.
I get the concept of a traditional IRA, but how exactly do you put money into it before the government taxes it? That is to say, do you have to work with your employer so that it’s a pre-tax deduction?
Or, do you simply put money in post tax and try to reconcile at tax time (counting it as a itemizable deduction?)
Also, I think in 2013 they upped the total to $5,500.
I always get very confused about pre tax and post tax withdraw. This is something that I need to look more into.