By J.P. Dahdah | Founder & CEO of VantageIRAs

When someone first learns about Self-Directed IRAs, there is a period of time in which the individual investor saving for retirement undergoes what I call the “validation process.” The validation process is the amount of time that the newly informed individual needs to go through to verify that the information being shared with them is in fact accurate and credible. It is natural to be curious and have a lot of questions when you are given information about something that contradicts the validity of the knowledge you felt you had about a topic, in this case, Individual Retirement Accounts (IRAs). Most of us have been led to believe by financial professionals and the financial institutions they represent that our retirement accounts have rules preventing us from investing outside the stock market without incurring tax consequences and penalties. That information is simply not true. So, when we learn that there are accounts called “Self-Directed IRAs” that enable us to have total control over our retirement savings and diversify freely (and without taxation) into real estate and other alternative assets in the private market, we inherently feel the need to “fact check” the information for ourselves. 

Below are the Top 10 Commonly Asked Questions by clients Vantage has guided through their validation process. If you are reading this article and are unfamiliar with Self-Directed IRAs, or perhaps recently heard about them and are currently in your own validation process, we hope the answers to these questions help you gain a new understanding of the fact that your retirement savings CAN be used to invest outside the stock market and into your next real estate deal tax-free! 

1. What is a Self-Directed IRA? A Self-Directed IRA is the name given to a retirement account that allows you to have total control over your retirement savings compared to traditional Brokerage IRAs (i.e., Charles Schwab, Fidelity, Vanguard, etc.) With a Self-Directed IRA, you can invest in a virtually unlimited array of alternative assets beyond the stock market. The most popular assets held within Self-Directed IRAs are real estate, promissory notes, private funds, and private entities (i.e., LLCs, LPs, etc.). 
2. Why haven’t I heard about Self-Directed IRAs and the ability to use retirement funds to invest outside the stock market without tax or penalties until now? Individual Retirement Accounts (IRAs) were created by Congress in 1974, and believe it or not, the IRA rules have allowed account holders to invest outside the stock market since its inception. The reality is that almost all IRA custodians and administrators are in the stock market business, so they have no financial incentive to allow their clients to invest in alternative assets that they don’t offer or make money on. A key point to highlight is that there is a big difference between what the Government’s regulations allow IRA holders to invest in and what your IRA custodian’s corporate regulations permit. This is the genesis of where the misinformation began. For nearly the past 50 years, when Americans have asked their Wall Street-based brokerage IRA custodian if they can use their IRA to invest in real estate, the answer has been “No, you can’t” but what they should say is “Not with us, but it is permissible with a Self-Directed IRA provider that specializes in alternative asset custodial services (i.e. Vantage). Unfortunately, this misinformation has been peddled by traditional financial institutions so much and for so long that only 2% of the $35 trillion saved inside retirement accounts in the United States are alternative assets beyond the stock market. 
3. What investments can I make in a Self-Directed IRA? When the Government created IRAs, they figured it was easier to define what investments are prohibited from purchasing inside a retirement plan versus outlining all the assets you CAN invest in. The reality is that there are only two investment restrictions within IRAs, which are 1) life insurance contracts and 2) collectibles. Other than these two types of investments, an IRA can be used to diversify into any alternative asset strategy you wish. Self-Directed IRAs offer immense flexibility, allowing you to diversify your nest egg into whichever real estate strategies you prefer, without having to pay capital gain taxes while you grow your retirement wealth. 
4. Are there restrictions on Self-Directed IRA investments? While Self-Directed IRAs offer a broad range of investment options, they do come with rules and restrictions. For example, you cannot use your Self-Directed IRA to engage in transactions that involve disqualified persons, such as certain family members. Any transaction, direct or indirect, between your IRA and any disqualified persons or related parties as defined by the IRS is considered a “prohibited transaction.” The prohibited transaction rules are found under Internal Revenue Code (IRC) Section 4975. Feel free to visit www.IRS.gov to validate this information.
5. What are the benefits of a Self-Directed IRA? The benefits of a Self-Directed IRA include greater investment diversity, the potential for higher returns, increased control over your retirement portfolio, and the ability to invest in alternative assets that may not be available in traditional IRAs. For those of us who prefer to invest in the private market versus the stock market, the benefit of a Self-Directed IRA is that you can invest in the assets you know, understand, and feel most comfortable with. 
6. Can I transfer or rollover funds from an existing IRA into a Self-Directed IRA? Yes, you can transfer or rollover funds from an existing traditional IRA or 401(k) into a Self-Directed IRA, as long as you follow IRS rules and procedures for such transfers. You can transfer as much or as little as you choose into your Self-Directed IRA from your existing IRA.
7. How do I maintain compliance with IRS rules and regulations? To stay compliant, educate yourself on IRS rules, work closely with your custodian or trustee, avoid prohibited transactions, and consider consulting a tax professional or financial advisor with expertise in Self-Directed IRAs. Vantage has been an AZREIA Business Associate for 19 years and we are always available to help members get answers to any questions they may have about Self-Directed IRAs. 
8. Can I transfer my traditional Brokerage IRA or previous employer 401(k) into a Self-Directed IRA? Yes, you can transfer any amount of money you choose from an existing Brokerage IRA held with a traditional custodian into a Self-Directed IRA by what is known as an IRA-to-IRA transfer. If you have money in an old 401(k) plan with a previous employer, you can transact what is known as 401(k) rollover into a Self-Directed IRA. Again, you can choose to roll over whatever amount of money you want. In addition to these two methods of funding a Self-Directed IRA, you can make an IRA contribution into the account up to the annual contribution limit of the type of IRA you are funding.
9. Are there any balance minimums to open a Self-Directed IRA? No, you can establish a Self-Directed IRA with zero funds in it. However, we do encourage our clients to consider the impact of the account fees on their IRA balance. You want to make sure that you are making enough money on your investments above the fees you are paying to have an account.
10. Which types of retirement accounts can be “Self-Directed” and used to invest outside the stock market? All of them. Every single type of IRA and Qualified Retirement Plan (i.e., 401K) can be used to fund private market opportunities. Remember, the key is to establish your Self-Directed IRA account with a company that specializes in alternative asset custodial services, such as Vantage! 

Hopefully, the answers to these questions helped you increase your comfort level about the veracity of the IRA rules established by the Government, not the restricting policies established by traditional custodians seeking to keep your money invested in their products and under their management.

For more information about Self-Directed Real Estate IRAs, please visit www.VantageIRAs.com and be sure to ask for your $25 AZREIA member discount when you open your Vantage IRA account!