Investing in a Self Directed IRA
The Self Directed IRA: What Can an SDIRA Do For You?
A Self Directed IRA can offer a highly tax-efficient investment vehicle where you’re in full control of your investments. But how do they work, what can you invest in and who can you trust with something as precious as your retirement?
As well as the how what and where, we look at some of the most popular “alternative” assets for SDIRA investment – focusing on precious metals and cryptocurrencies.
How do Self Directed IRAs Work?
Which Self Directed IRA Investment?
Self Directed IRA with Precious Metals
What is a Self Directed IRA?
Although the term Self Directed IRA could apply to any Individual Retirement Account where you have say in buying and selling assets, it has come to mean something entirely more specific.
When we refer to a Self Directed IRA (SDIRA) we’re actually talking about a type of IRA where account holders have complete control – and full responsibility – both in terms of making investment decisions but also in having access to a far wider basket of investments than those available to a “regular” IRA.
While this full control and range of investments available makes SDIRAs one of the most flexible ways to buy tax-advantaged investments, you’re also wholly responsible for the management of your assets, for legal compliance, plus any research and due diligence needed before making decisions. SDIRA custodians cannot give any financial or investment advice, so the buck stops with you.
While you may be on your own – the reality is that there’s a lot of help available in terms of information and advice from intermediaries such as bullion dealers and gold investment companies.
Although they will have a vested interest in you investing in gold, silver or even bitcoin in your IRA[links] the best dealers have teams of genuinely expert advisors who know the market inside out and can offer something close to impartial information.
If free expert advice normally costing $100s and tax-advantaged wealth-protecting assets set up for growth sound like a great combination, then a self-directed IRA could be right up your street.
Where a regular IRA is limited to paper investments – most commonly mutual funds, annuities and company stocks – SDIRAs can hold an incredibly wide and diverse range of alternative assets. Rather than giving an exhaustive list of acceptable assets, it’s easier to say what cannot be held.
The IRS simply gives a short list of prohibited investments:
- No antiques or collectibles
- No life insurance
- No high-risk derivatives and
- No real estate for personal use
Anything outside of that list is likely to be acceptable, although the most commonly held alternative assets in SDIRAs are commodities, limited partnerships, real estate, tax lien certificates – and of course precious metal bullion bars and coins.
But aren’t precious metals and coins on the IRS collectibles list?
While the IRS specifically mentions antiques, gems, stamps, metals and coins as being collectibles – there are special exemptions for specific types of investment-grade bullion bars and coins.
The exemption allows for bullion bars and coins that meet certain purity and manufacturing standards, provided they are valued solely on their precious metals content with no additional premium for age, rarity, beauty or any other factor which cause them to be considered collectibles.
To summarize, a self directed IRA gives investors a powerful and highly tax-advantaged investment tool, being able to invest not only in common paper assets, but in practically anything the investor wishes.
The true power of a self directed IRA cannot be overstated – few investment tools come close.
But with great power – comes great responsibility
SDIRAs are intended for investors who already know something about alternative assets. After all it’s your retirement funds you are staking on your choice of investments.
Making rash decisions on non-traditional investments could work out very well for you, but unless you’re investing on the back of great advice or personal experience you’re essentially taking a gamble.
The difference gold brings to a self directed IRA is simple. Gold is no gamble.
Gold is a tried and tested hedge, and diversifier protecting generational wealth for millennia. We cover gold’s benefits and historical successes here – looking at how it can withstand market crashes, recessions, depressions, war and more, not only protecting assets but growing year on year.
Provided you don’t start dabbling in high-risk assets, using an SDIRA solely to allow the addition of precious metals to your retirement plan isn’t only a smart move for growth, but a move that could save your account should we see the next crash sooner rather than later.
How do Self Directed IRAs Work?
Like any IRA, self directed IRAs come in traditional and Roth flavors. Investors can either make tax-deductible contributions (traditional SDIRA) or receive tax-free distributions (Roth SDIRA)
Whether you want to save money at the front end allowing you a bigger initial investment, or at the back end when you come to start taking distributions is a choice you’ll need to make based on your circumstances.
What is for certain, is saving tax at either end is surely a better decision than not.
There are of course other differences between a traditional IRA and Roth IRA including income limits, required minimum distributions and early withdrawals – and these are best discussed with a tax specialist who can advise on which is better for your situation.
Whether IRA or Roth, every SDIRA will consist of as a minimum two parties:
- You the investor – making the investment decisions and supplying the funds
- A custodian – an individual or company third party who’s sole job is to hold your assets at arms length from you
This is because when you’re investing in a self directed IRA, the IRS requires there to be a qualified party acting as the legal custodian for any investments you hold within the account.
As an example a precious metals IRA custodian should be IRS authorized as a service provider for precious metals IRAs and it is their duty to care for your account, to track metals values and total account values, all individual transactions you make and of course taxation issues. The IRS may give you full control but it’s not a free-for-all!
Outside of you and the custodian there will be additional third parties, intermediaries and facilitators.
For a precious metals IRA these third parties will include:
- Bullion dealers or metals brokers, who provide the physical bullion and who may help with advice
- Shipping services – high security transportation services experienced in carrying high-value assets
- Vaulting companies – metal depositories approved by the IRS for secure vaulting of IRA bullion
You as the investor don’t typically need to deal with all of these individual moving parts because professional gold IRA companies like Goldco will do all of this for you, working with the best in the business to bring you a fast, secure and efficient service.
Working directly with your custodian, they act on your buy and sell requests, arrange money transfers, shipping and vaulting, ensuring everything is in full compliance with often complex IRA tax legislation.
This is why it’s essential to work with both the right bullion dealer and custodian – because left to do everything yourself there are a lot of variable, each with the potential for costly mistakes.
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Which Self Directed IRA Investment?
As we’ve mentioned there are a LOT of possibilities when it comes to making an investment in a self directed IRA. Alongside the most common paper assets – the ones regular IRA and 401k plans hold – you can add almost anything as long as it’s not collectible, life-insurance or a super high-risk derivative.
You could in theory go wild – adding tracts of land, real estate investments, tax-lien certificates, certain companies: basically as long as it’s not on the IRS prohibited assets list it’s fair game.
Provided you don’t take a personal gain from the asset – such as real estate rental payments paid into your bank account, or living in a home owned by your IRA you’re good. This is because taking personal benefit from any type of asset owned inside your IRA is explicitly prohibited by the IRS. It’s called self-dealing.
Apart from this, you’ll want your assets to be diversified, their volatility, risk and potential for growth coupled with a degree of stability and reliability that you’re comfortable with.
Only you can decide the levels of risk you’re willing to take in order to make large capital gains, or whether you’re happy riding with the market alongside the masses.
By all means the latter is a wise move in part – as the paper markets do rise consistently over time: provided you make allowances for a 50% or worse drop every 9 to 11 years, thanks to the cyclical boom and bust system our markets seem to be set up to provide. Stocks and shares are buoyant – until they’re not.
Other low-risk investments like certain certificates and bonds may also rise slowly over time and be less susceptible to cliff-like drops, but unless you added them 20 or 30 years ago will they alone provide enough for your retirement?
Which brings us to precious metals and what many are hailing as the new gold – bitcoin.
Self Directed IRA with Precious Metals
Precious metals are proven wealth protection tools, used by the richest 1% to ensure their assets survive financial crises and market upheaval for generations.
With the IRS relaxing what can and can’t be held in an IRA, we finally have opportunity to take advantage of these useful tools for protection and financial gain – all inside a tax-advantaged account.
Whether you’re looking for stability and growth or volatility with potential for large gains gold and silver inside a self-directed IRAs can add a whole new dimension to your investments.
Gold in an SDIRA
How will gold help protect your IRA? Gold isn’t just a long-term solid performer averaging a 9% yearly increase over the past 45 years – but it’s a proven wealth preservation tool, used to protect generational wealth and the finances of entire nations.
Gold’s protective power in IRA accounts was most notable in our recent banking crisis when a global crash and deep recession tore the values of millions of retirement plans down by 50%. Because gold tends to run in the opposite direction to stocks – the yellow metal saw a stratospheric rise while everything else including real estate fell through the floor.
The difference between those with and without gold in their IRAs was felt strongest by those nearing retirement. For soon to be retirees invested primarily in paper stocks and bonds they saw their retirement plans and with it their lifestyle plans cut in half. Those with gold were comparatively unscathed, even making a small overall profit thanks to gold’s actions.
If you agree with a growing number of highly-paid experts that our world seems on the brink of something potentially far worse than 2008, even adding a small amount of gold, such as 5% of your IRA’s value, could help if they’re right – and benefit you with it’s average 9% yearly growth if they’re wrong.
Silver in an SDIRA
Acting much as a Gold IRA will during times of market stress, a silver-backed IRA also brings silver’s built-in potential for huge price increases, if you’re an investor for whom market-beating capital gain is just as important as protection from inflation and crises.
This couldn’t have been better demonstrated during the financial meltdown in 2008.
Between it’s 2008 low to 2011 high, we know that gold gained 116% helping boost IRA accounts – however silver’s more volatile nature saw investors reap an incredible 448% profit as the paper markets burned putting silver IRA accounts well into profit terrirory at a time when company stocks were bombing.
Market analysts also state silver is hugely undervalued. It currently costs between 80-85 ounces of silver to buy an ounce of gold – a ratio which is at a historic high. Considering it’s average value across the 21st century was 45:1 then at current prices, silver should be selling for $32/oz. And the thing about averages is we also drop below them. 2011 saw the ratio at 35:1 – if we were to return to this ratio today we’d have a potential for silver to reach $51/oz – matching it’s 1980 high.
And considering the ratio was as low as 15:1 in the late 1960’s and 1970’s there’s room in there for significant gains.
Nothing is ever guaranteed – but with these possible near-future values it makes sense to add silver for the potential it can offer your SDIRA.
Self Directed IRA with Bitcoin
Bitcoin and other selected cryptocurrencies are now able to be held inside of self-directed IRAs, bringing both extremely high volatility coupled with huge potential for gain – and loss – into retirement accounts.
Bitcoin captured the market’s imagination in 2017 when it’s price rose from $900 to $20,000 in a single year – before falling like a stone in 2018. The crypto wasn’t without it’s past so this drop shouldn’t have come as a shock, given it had already swung up and down like a seismograph across it’s volatile history making over 300,000% in some years and dropping 80% in others.
But when it started rising in 2017 it seemed like the only way was up – and millions of retail investors with no market knowledge bet the proverbial farm on continued gains and as more piled in we saw a climb of over 2000% on the year.
Of course as we know now it wasn’t to last and 2018 and much of 2019 were to be the wilderness years for many. Those late to the party saw their investments cut by as much as 70% as badly burned investors sold up at any cost.
But that was then, and the market seems to have stabilized with new money coming back in as respected analysts are predicting a return to $15-20,000 in the next couple years. Less volatile, with flighty FOMO investors long gone Bitcoin is starting to look like a good investment both for short term flash gains and longer term growth.
Much more of a gamble than precious metals, Bitcoin and other cryptos can offer those who are more open to risk, a big potential win even if you only turn over a small percentage to the asset.
We cover Bitcoin in much more detail in our Bitcoin section with an area focused entirely on Bitcoin IRAs
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Self Directed IRA Rollover
What is a Self Directed IRA Rollover? An SDIRA Rollover is the process where funds are rolled over from an existing traditional retirement account into a new self-directed IRA. Although these funds are typically distributed to you, the reinvestment process if done correctly and in the correct timescale doesn’t trigger any taxable events.
As an example you may want to move funds from an old employer-sponsored retirement plan into a new self directed IRA. A rollover will preserve the tax-deferred status of the assets in your old retirement account, without paying current taxes or any early withdrawal penalty at the time of transfer.
In all cases it’s essential that the funds are reinvested into the new account within 60 days otherwise the IRS will consider you to have taken a distribution and you’ll be taxed and even penalized accordingly if it’s an early distribution.
So how does a Self Directed IRA Rollover work?
Step #1: Select a Custodian to Accept Your Rollover
There are many custodians and trustees out there, only some of whom regularly work with physical precious metal or bitcoin investments. By working with a professional IRA provider specializing in these fields, they will have direct and regular contact with the best of any suitable IRA custodians.
The regular business this precious metals IRA dealer sends the custodian will also result in a smoother and quicker process – and in some cases may also come with financial benefits in terms of reduced fees.
To get started you fill in a simple form to create a suitable new self-directed IRA account with your chosen custodian. These days you’re just as likely to fill in digital forms for faster processing than you are older paper forms sent by post – meaning your new self directed IRA can be active in 2-5 days, sometimes even sooner.
Step #2: The Rollover of Funds
Now comes the time where you make a distribution from your existing retirement plan, into your new plan. This is the actual rollover.
The administrator of your old plan could issue your distribution in the form of a check or direct deposit made payable to your new trustee (this would be an IRA transfer), or to you (an IRA rollover).
No matter which route your payment takes, the important aspect is that there are no taxes withheld from your rollover and provided the rollover reinvestment happens within the correct time frame of 60 days or less there is no taxable event.
If you go beyond 60 days however, it counts as a taxable distribution and this is why it pays to work with efficient specialists.
Step #3: Buying Your New Assets
If you’re working with a precious metals IRA specialist for example , you will most likely already have discussed the metals you’re looking to buy. Specialist IRA gold dealers help advise you on the best investment metals most suited to your needs.
For example some metals portfolios can be built on their potential for capital appreciation as well as wealth protection – others may simply look at gold or silver’s hedging action to safeguard riskier assets.
With your investment metals chosen, your dealer will lock the prices at a market rate you’re happy with – at which point your new trustee wires the funds to the dealer as payment for the precious metals.
Your bullion IRA then sees insured delivery directly into your chosen depository vault – and that’s the rollover complete. You now have tax-advantaged silver protecting your retirement funds should the worst happen – and provided growth matches the past 100 years, you could average 26% per year if it doesn’t.
Where to Start an SDIRA?
Federal Reserve research has recently shown 13% of Americans aged 60+ have absolutely no money set aside for retirement. For people in the 45-59 age bracket this figure increases to 17% and climbs to over 26% if you’re aged between 30-44.
For those of us under 30, almost half have no retirement plans or savings at all. Even if we do have savings, the survey showed half of the over 60s holding 401k and IRAs consider themselves substantially underfunded.
Small wonder the IRS has created a number of incentives to help deal with this retirement emergency – but to take advantage you’re first going to actually need a self directed IRA.
The first step in this process is finding a self-directed IRA specialist you’re happy to work with.
Many companies call themselves SDIRA specialists, but these are split into two camps:
- Those providing assets for use in SDIRAs
- Those providing custodial services for SDIRAs
Both camps tend to have counterparts they prefer working with – and this will be of benefit to any investor guaranteeing speed and efficiency – however custodians are not allowed to give any investment advice and so will not make recommendations.
This is why it’s easier to start with finding the company who provides the assets first as they will typically have a lot of experience working with one or two custodians – experience which has found the best custodian partners who make the whole investment process easier for their customers.
As an example Goldco is an IRA specialist who provides assets and vaulting for both precious metals and bitcoin IRAs and have arranged 10’s of thousands successful self directed IRAs for satisfied clients. In this time they’ve established an excellent working relationship with the custodians Equity Trust – and vaulting services with Delaware Depository Services Company, Brinks, and International Depository Services Group.
No matter which company you go with to provide your gold, silver or any other assets, the following companies are all considered excellent custodians:
Self Directed IRA Companies
Equity Trust, established 1974 and based out of Ohio are one of the leading IRA custodian services in the US and as such are used by several of the top bullion dealers in the country. Known for their quality of service, efficiency and excellent value fees – they currently have over $25 Billion in assets under custody and administration and see 1.2 Million transactions a year.
New Direction IRA
New Direction IRA are based in Colorado and have been providing IRA custodial services nationwide since 2004. Holding over $2.2 Billion in assets across almost 18,000 accounts, New Direction services a wide range of real assets from Real Estate to Precious metals.
GoldStar Trust Company
Established in 1989 GoldStar Trust Company serves all of the USA from their base in Texas. With over $2 Billion in assets under custody and 37,500 self directed IRAs on their books, GoldStar specialize in alternative assets such as precious metals.
Now rebranded Strata Trust Company, the company has been providing IRA custodial services since 2009 from an office in Texas and currently has over $2 Billion assets under custody across more than 35,000 accounts.
The Kingdom Trust Company are a national IRA custodian service, founded in 2009 with their HQ in Kentucky and hold physical and digital alternative assets from precious metals and real estate to bitcoin.
Millennium Trust Company
Founded in 2000, Millennium Trust Company holds $27 Billion in assets across 1.5 million client accounts and offers rollover solutions, alternative asset custody, private fund custody, and advisor support services from their headquarters in Illinois.
Florida based Midland Trust provide IRA custodial services alongside professional advice and asset management services. Established in 1994 they currently hold over $2 Billion in assets across 26,000 accounts
The Entrust Group
Since 1982 The Entrust Group have been providing professional custodial services for self directed IRAs covering all of the US from their California base. With $3.6B+ assets under custody, Entrust work with over 22,000 accounts.
Vantage Retirement Plans
Established in 2008 Vantage Retirement Plans provide third party administration services for self directed IRAs including custodian services from their headquarters in Arizona.
Whichever SDIRA custodian you choose to work with you can be safe in the knowledge they will offer services in strict compliance with IRS regulations.
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