Self-Directed IRA’s can be a way to invest in more sophisticated investments

One of the stories to hit headlines recently were the allegations that serial entrepreneur and Venture Captial Investor Peter Thiel has a Roth IRA balance of $5Billion. Many have begun to question how this is possible with only a $6,000 maximum contribution for those under 50 and an additional $1,000 for those over 50.  The part that is especially important to note is that as long as Thiel waits until he is 59.5 or older, he can take money out of that Roth IRA completely tax free. I recently shared my thoughts on Roth IRA’s with Laura Saunders in this Wall Street Journal article recently: HERE Thiel started his Roth IRA with $1,700 and invested in Paypal several years before the company went public. However, private company investments are not possible in a regular Roth IRA.

Self-Directed IRA’s are most commonly used to invest in real estate.  Peter Thiel is not the only one to have benefited from the added investment options of a Self-Directed IRA. Famously, Mitt Romney also capitalized of the flexible investment options of a Self-Directed IRA. Through his Private Equity firm, Bain Capital, Romney was able to amass over $100M in his IRA.  Romney was able to use investments in companies alongside Bain Capital.  This can only be accomplished through a Self-Directed IRA.  Here is a quick overview of what a Self-Directed IRA is and what it can be invested in.

Overview

This form of IRA varies from other IRAs because these portfolios may possess a variety of different alternative investments that are excluded from other IRAs. Real estate is the investment that is most commonly used for Self-Directed IRA’s. This is a great way to defer the gains on real estate that is sold until the money is withdrawn from the account.

The investments available in Self-Directed IRA’s include: real estate, private companies, cryptocurrencies, debt notes, and more.

These IRAs can be classified as either a traditional IRA or a Roth IRA

Additionally, the account is also managed by a trustee or custodian, but hence its name, is self-managed by the account holder, meaning that the holder can choose to sell and buy these investments themselves.

Risks

If the holder lacks experience with portfolio management, they put themselves at risk of a lower return or loss money all together.

Moreover, if the holder breaks a rule, whether knowingly or unknowingly, they can be held liable for these rules and it may make all of the money in the IRA taxable. There is a strict list of rules that must be followed within these accounts and they oftentimes can lead to audits.  

Benefits

If the holder does have experience in investments that are not publicly traded this can be a way to invest in those companies on a tax deferred basis. This can be a great way for real estate investments to buy and sell properties and shield the gains from taxes either until the money is withdrawn or completely within a Roth IRA. This can also be used for private companies, startups and crypto currencies. These can supercharge returns but also adds significantly more risk. 

The holder may also invest in companies that are not publicly traded, meaning that they could further diversified their investments as well as increase their market for potential high-growth securities.

Opening an Account

Although the account is by its name, “self-directed”, the account still requires a custodian to sign off on the account

Most often, brokerage firms can act as custodians for IRAs. However, most big name custodians do not offer Self-Directed IRA’s. Here is a list according to Investopedia of 6 firms that offer Self-Directed IRAs. 

 

Investors should always do their due diligence on a self-directed IRA company before moving funds into it. Not only do these accounts have more stringent IRS rules, but the industry also attracts fraudulent companies that prey upon investors.

 

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