Understanding Self-Directed IRAs … Is One Right for You?

Posted on Thu, Dec 07, 2017 ©2021 Drucker & Scaccetti

D&S Marketing_049.jpgBy: Svetlana Goldina, CPA


A Self-directed Individual Retirement Account ("SDIRA"), while like traditional IRAs and 401Ks, is an alternative approach to retirement investing, which allows the account owner greater control to choose a much broader range of investment options. In today’s post, we’ll help you understand them better so you can decide if one is right for you.


A major advantage of SDIRAs over traditional retirement accounts is SDIRAs give you the ability to invest in non-traditional assets such as rental real estate, mortgage loans, precious metals, foreign currency, business start-ups, and more. This provides an opportunity for SDIRA owners to use their expertise and experience to invest in assets and businesses in which they have significant knowledge.


While a SDIRA offers tremendous control and flexibility regarding selection of investments, several important IRS rules are involved with these plans:

  • A SDIRA cannot purchase property owned by the account owner or by any lineal family member of the account owner, although siblings are OK;
  • The SDIRA cannot invest in life insurance policies or collectibles;
  • No Self-Dealing – The account owner and his family cannot use the property held in the SDIRA or receive any benefits from the SDIRA;
  • Assets must be uniquely titled in the name of the SDIRA and not in the personal name of the account owner;
  • All income on assets held in the SDIRA belongs to the SDIRA; the same with expenses. The account owner can receive no income from SDIRA investments nor pay any expenses on behalf of the SDIRA;
  • The SDIRA must pay unrelated business income tax ("UBIT") on any income from investments that are debt financed, or if UBIT is reported to the SDIRA on any Schedules K-1 from partnerships, limited liability companies, or real estate investment trusts ("REITS").

With SDIRAs, it is important to select an appropriate IRA custodian.  Be sure the custodian is registered and regulated.  Ensure the custodian has adequate financial resources and a long track record in the financial industry. Always inquire if the custodian has errors and omissions insurance and if your account will be covered.  Ask the custodian to provide you with a copy of their audited financial statements.  Obtain information about the custodian's principals and their industry experience.  Most important, know your investments and with whom you are doing business.  Federal and state securities regulators have noted a spike in the amounts of promotors and unscrupulous custodians steering investors into fraudulent investments and they are using backing by SDIRAs to lend credibility to their schemes. 


The bottom line here is SDIRAs are attractive because of the control and flexibility offered, and they may be the right plan for the right person who wants the opportunity to diversify their retirement portfolio with a wider range of investment choices.  If you are interested in SDIRAs tread lightly and don’t rush to open one without carefully considering the significant IRS constraints involved, the importance of selecting the right IRA custodian, and thoughtfully weighing the various risks of alternative investments.  Given the significant dollars at stake and the rise in fraudulent schemes, SDIRA investors must be careful with their investment selections. 


As with all investments, talk to your team of advisors before making any binding decisions. The Tax Warriors® at Drucker & Scaccetti can work with you and your wealth advisors to help with sound retirement planning.  Call on us.  We are always prepared to help.

Topics: retirement, IRA, 401(k), Self-Directed IRA, REITS, SDIRA, investment, non-traditional asset, UBIT

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