An Introduction To Self-Directed IRA Investing

house for rentThere are actually eight different retirement accounts which can be used separately or combined and used in self-directed investing, traditional and non-traditional. These accounts include Traditional and Roth IRAs, SIMPLEs, SEPs, 401(k)s and the newly created Roth 401(K)s plus the HSAs (Health Savings Account) and the Coverdell Education Account.The aforementioned accounts can be self-directed in ways unheard of my most traditional retirement fund managers including in the investment of foreign and domestic real estate. These accounts can also be used in the investment of a start-up business, buying foreclosures, lending and investing in an existing business looking to expand, optioning, building houses or commercial building for resale or rental, buying land to be deforested for profit, the purchase of farm land or hunting land, and the creation of joint ventures with other IRA owners – and the above are just a few of the millions of examples of how your retirement money can be infused into real assets and not just paper assets on the stock market. As for what investments are not allowed for your IRA, the IRS only prohibits three kinds of investments. These are:

  1. Investing in collectibles (ie: stamp collections, artwork, etc)
  2. Purchasing a life insurance policy
  3. Investing in an S Corporation.

The rest is fair game, though it is subject to the “disqualified party rules” which state very simply that you can’t invest your retirement funds in a self-serving manner with yourself or other family members. That means that you can not use the money to buy a timeshare for yourself or to invest in your relative’s new business startup, which are perfectly understandable conditions.

Self Directed vs. “Truly” Self Directed

As for the difference between self-directed retirement accounts and the so-called “truly self-directed” retirement accounts, there is no definitive difference on the books at the IRS. That being said, certain IRA custodians spell the difference by restricting certain types of investments, meaning that while large firms may offer what they call self-directed IRA accounts, their choices of investments are limited to merely stocks, bonds and money market accounts chosen by the firm. Another caveat to this is that most large firms and brokers are unaware of the fact that IRA funds can be used to invest in real estate. That means that in order to make truly self-directed non-traditional investments, you must make a non taxable transfer of all or a portion of your IRA funds to another Custodian specifically chartered to procure non traditional investments for IRA account holders.

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