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Self-Directed IRA FAQ’s for Passive Investors

When I started self-directing my retirement funds in 2016 to invest in real estate, I had many questions.

I wish I had had a “go-to resource” to get my basic questions answered. That said, I’m pleased to provide you with a synopsis of my Passive Investing Masterclass episode with Scott Maurer of Advanta IRA to provide you with answers to some questions you may have.

What is a self-directed IRA (SDIRA)?

A self-directed IRA is a tax-advantaged plan that allows you to control what investments you invest in with your retirement funds beyond publicly traded assets. Just like a regular IRA, your SDIRA can be a traditional IRA (offering tax-deferred earnings) or a Roth IRA (where all earnings grow tax free). There are also solo-401K and SEP IRAs for those who own their own business. Be sure to partner with a self-directed custodian, like Advanta IRA, to find the best solution for your needs.

Regular IRAs may say you can “self-direct” (think Vanguard, Fidelity, and Schwab); however, they only allow you to invest in stocks, bonds, ETFs, and mutual funds.

What are the benefits of an SDIRA?

With an SDIRA, you have the flexibility and choice of how to diversify your portfolio by investing in alternative assets like real estate, private equity placements (think syndications!), IRA LLCs (this gives you checkbook control), private notes, precious metals, and much more to build retirement income.

Your SDIRA can also borrow money through a non-recourse loan to finance the purchase of an asset.

SDIRAs also give you greater investing flexibility as you can partner with your personal funds, another person, and/or entity.

What can’t you invest in with an SDIRA?

In short, you can’t use your SDIRA to invest in life insurance or collectibles (coins, stamps, air, wine, cars, etc.).

Naturally, the next question is “why?” In my conversation with Scott Maurer with Advanta  IRA, life insurance already has a tax-advantaged structure. Additionally, the life insurance policy is tilted to a person, not to the SDIRA account. The

reason you can’t invest in collectibles is that you can’t take possession or have a benefit from owning the asset (anyone want a glass of wine?).

The key here is the asset must be tilted to the SDIRA account and you can’t take possession of the asset.

Lastly, SDIRA funds can’t be lent to a “disqualified person.” That includes you, your spouse, your kids, or your parents.

I heard you can no longer have a “checkbook IRA” within your SDIRA… is that true?

The answer to this question lies in the response above. In December 2021, the courts handed down a decision in the case of McNulty vs Commissioner that stated that McNulty committed a prohibited transaction in her SDIRA by purchasing gold coins with her checkbook IRA.

On the surface, this would indicate that the IRS may be chipping away at the “checkbook IRA.” However, when you dig into the court case further, what landed McNulty in hot water was that she purchased the coins in her personal name using  her checkbook IRA funds, then took physical possession of them, violating the two principles stated above. Had she “titled” the coins properly to the IRA and not taken physical possession of them (stored them in a vault), she would not have been found to have committed a prohibited transaction.

How much money can I put in an SDIRA?

There is no limit to how much you can move from one retirement account to an SDIRA. If you have an existing IRA or old 401K, you can move all or part of the funds. There is a limit to how much you can contribute annually. This limit is set by the IRS and differs based on what kind of SDIRA you set up (i.e., traditional, Roth, solo-401K, SEP, etc.).

How do you open an SDIRA?

There are many SDIRA providers out there (one of our favs is Advanta IRA). The process to open an account is fairly straightforward.

1. Research SDIRA custodians and contact them to get your questions answered.

2.    Complete the custodian’s application process to open your account (you will need to provide a government ID).

3.  Fund your account. (If you are rolling over funds from another provider, allow for a couple of weeks for this to happen. No company likes handing over money.)

4.  Start investing!

How do you invest in a syndication or fund with your SDIRA?

Each SDIRA provider has a slightly different process to invest. However, the basic steps are the same.

1. You identify an asset to invest in.

2. Confirm you have enough funds to make the investment.

3. Send the private placement memorandum (PPM) forms to your SDIRA custodian to review and/or

complete. Each SDIRA custodian will have their own internal process for completing the PPM forms. Be certain to follow their process accurately and in a timely manner. This step alone can take 2-3 weeks, depending on the custodian.

4. Return the completed PPM forms to the operator you are investing with.

5. Fund your investment. Again, each SDIRA custodian will have their own internal process to follow.

Wrapping Up

Remember, your SDIRA custodian is NOT a financial advisor and they do not complete due diligence on any asset. Due diligence falls to you as the investor.

Summing up, SDIRAs can be a great solution for you to take greater control of your retirement funds and invest in alternative assets that can generate true passive income and wealth. Yet, with greater control, comes greater responsibility. As of today, I’ve made over 15 investments through my self-directed IRA accounts in various real estate-backed assets and I wouldn’t have control any other way!