Self-Directed IRAs

There are three kinds of self-directed IRA (SD-IRA) accounts on the market. In the tax code an IRA is an IRA, there is no separate IRA called a self-directed IRA. Instead, both Traditional and ROTH IRAs can be self-managed. The three types of SD-IRA accounts differ in the degree they allow you to manage your own retirement account.

Some brokerage firms offer an account they call a SD-IRA. These accounts give you more control over the investment choices than is typical in a retirement account. However, you will find that all of the investment choices are investments offered by that firm. This type of account will not allow you to invest in real estate or other types of investments outside what that account offers.

A second type of SD-IRA is an account where the IRA account takes title to all assets. For example, if real estate is purchased in this type of SD-IRA the IRA Custodian issues funds for the purchase and title is issued to the IRA. These accounts typically do not allow private placement investments. The upside of this kind of IRA is that, by the design of the account, prohibited transactions and taxable events are practically eliminated. These accounts are best for someone who does not have the time or expertise to be in charge of their own funds. Investors rarely need an attorney involved if they create this kind of IRA account as the Custodians handle everything.

The third type of SD-IRA is the least common. Some custodians allow clients to invest their retirement funds into an LLC that the client manages. While the most flexible of the three types, the SD-IRAs place clients in the position of being able to trigger prohibited transactions or taxable events for the IRA. This actually places the Custodian at risk of filing false returns that are still their responsibility. These Custodians typically require that the client come to them through an SD-IRA promoter (dozens out there) or through an accepted fiduciary.

I am not an SD-IRA promoter. I offer legal advice to anyone involved in or wanting to be involved in a self-directed IRA.

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