What are the Advantages of a Self Directed IRA?
From Tax Benefits to Control – is an SDIRA the Ultimate Vehicle?
Self Directed IRA and Tax
How Does a Self Directed IRA Work?
Self Directed IRA Vs 401k
What are the Main Advantages of an SDIRA?
Why are an increasing number of American opting to invest inside of a Self-Directed IRA as opposed to a standard IRA or even a regular investment portfolio?
Although there are a host of personal reasons which can make an SDIRA the obvious vehicle for your investments, SDIRA’s man advantages are Tax and Choice.
#1: Tax Savings
The number one advantage of a self directed IRA is shared with any IRA: Taxation.
IRAs offer investors a highly tax-advantaged method of using their investment money – designed by the IRS to increase the uptake of retirement accounts in a country facing a massive pension shortage.
Because American citizens don’t typically have enough savings to see them through their retirement years – the IRS introduced special allowances to help your money go further when initially buying an investment, or to keep more of your money when you come to sell.
To take advantage of these allowances you need to invest with a specific type of IRA, with a traditional IRA saving you money at purchase through tax deductions, and a Roth IRA saving money on your eventual distribution of the account thanks to these distributions being tax free.
Traditional SDIRA or Roth SDIRA?
Which option works for you best will depend on your circumstances but as an illustration let’s focus on a successful business owner in the 35% income tax bracket looking to invest $200,000 into an interest-bearing asset.
The asset pays 10% interest compounded over the 10 years the investment is held and it is distributed after retirement. One example uses a traditional SDIRA, the other a Roth.
Investment Amount: $200,000
Investment added to IRA: $270,000*
Total Investment after 10 years: $700,310
Tax Due: $245,108
Total After Tax: $455,202
*includes 35% tax saving
Investment Amount: $200,000
Investment added to IRA; $175,500*
Total Investment after 10 years: $455,202
Tax Due: $0
Total After Tax: $455,202
*after tax deducted
As you can see in this simplistic illustration both accounts are worth exactly the same after 10 years – however this is very unlikely in practice – especially if the investor moves between assets during the period. This is after all one of the perks or being “self directed”.
Had the traditional IRA investment been used to buy a new asset such as a cryptocurrency which saw a huge rise in the first couple of years, this would have a far greater impact on the traditional IRA account than it would on the Roth account with a starting balance almost $95,000 lower.
In an actively managed SDIRA, those crypto profits could have been taken out and moved into something else – and so on up until retirement. With careful distributions keeping the investors tax rate in a much lower bracket than their initial 35% – the traditional IRA owner would have been far better off overall.
Again this is something entirely at your decision and will likely be affected by the investments you look to buy, how active your account management will be and the level of income you wish to give yourself in retirement.
One thing IS certain – you’ll have saved tax either way versus a regular investment.
The second main advantage of holding an SDIRA is choice of investments.
Where a regular IRA is strictly limited to paper investments – and these are most commonly mutual funds, annuities and company stocks – a self directed IRA is able to hold a diverse range of alternative assets. Instead of giving an exhaustive list of acceptable assets which could take up hundreds of pages, the IRS instead offers a short list of prohibited investments:
- No antiques or collectibles
- No life insurance
- No high-risk derivatives and
- No real estate for personal use
Any assets outside of that list are likely to be acceptable, even if in reality the most commonly held alternative assets in SDIRAs are commodities, real estate, limited partnerships, tax lien certificates – and of course precious metal bullion bars and coins.
This expanded choice doesn’t come fully without disadvantages – in that many alternative assets can have higher risk and higher volatility than the traditional IRA’s paper certificates and bonds.
Self Directed IRAs are also clearly stated as not allowing for custodian advice, leaving the individual investor wholly responsible for asset choice and due diligence.
However for a savvy investor with specific market knowledge there is a far greater opportunity for profit than in simply following the standard blue-chip stocks or playing it safe in bonds.
The Bonus of Hedging
An added bonus of this expanded choice, is being able to hedge your paper investments with physical assets, proven to act as a safe harbor diversification during times of market stress – with investments such as gold and silver having outperformed many other assets in the aftermath of the 2007/2008 crash.
When precious metals rose 114% to 448% at a time when stocks were down more than 50% investors took notice.
SDIRA investors are also able to take advantage of new investments to market such as Bitcoin and other cryptocurrencies – investments which whilst highly volatile are capable of enormous gains – gains like Bitcoin’s rise from $9000 to $20,000 in the space of a year.
Depending on your risk/reward tastes, a Self Directed IRA can either provide safe and reliable gains, the potential for life-changing wealth – or a happy medium based mostly on safety with a small percentage in the high risk / high reward category.
The choice is quite literally yours.
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Self Directed IRA and Tax
With tax being one of the two principal benefits in a self directed IRA, what are the rules, the limits and the potential fines if we get things wrong. After all the IRS is not known for it’s leniency.
As tax-advantaged vehicles, investors in an SDIRA need to pay specific heed to current tax legislation – a legislation which changes almost continuously as new benefits are added and loopholes closed.
Whereas tax compliance is largely taken care of in managed IRA accounts, with a self directed account you really are on your own. Certainly your SDIRA custodian can help keep you within the lines of the law as it stands, but you and you alone are responsible for looking ahead to future changes and how these will affect your investment plans.
Unless you have a good tax accountant, there will always be a lingering worry you’re doing something wrong.
Self Directed IRA Basics
All IRAs have contribution limits. For 2020 (as with 2019), your total annual contributions to all of your traditional and Roth IRAs cannot be more than:
- $6,000 ($7,000 if you’re age 50 or older), or
- your taxable compensation for the year, if your compensation was less than this dollar limit.
This limit is up $500 from 2018, where total contributions were $5,500 or $6,500 for those aged 50 or older.
Note: The IRA contribution limits do not apply to rollover contributions or qualified reservist repayments.
Required Minimum Distributions:
Unlike buying and holding precious metals outside of a retirement account, you are not allowed to keep retirement assets in your IRA indefinitely. Investors generally need to begin taking distributions from their IRA, SIMPLE IRA, SEP IRA, or other retirement plan account when they have reached age 72.
Your “required minimum distribution” is the minimum amount you must withdraw from your account each year.
- You can withdraw more than the minimum required amount
- Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts)
For IRAs this starts April 1 the year after the calendar year in which you reach age 72.
If you have any questions or need more detail on these distributions or contributions, look at the IRS website or speak to a Gold IRA specialist.
IMPORTANT: The retirement savings bill, known as the SECURE Act, saw sweeping changes made in January 2020. Running at 1,773 pages, the SECURE Act changes included increasing the age at which individuals must start taking their required minimum distributions from 70½ to 72 as well as eliminating areas of retirement planning such as the Stretch IRA.
Good IRA specialists such as gold IRA companies can help discuss the changes as they relate to precious metals – but all the repercussions related to all SDIRA assets are far too great to go into here and so we advise anyone speak with their tax accountant or tax attorney before making key decisions.
How Does a Self Directed IRA 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-deductible distributions (Roth SDIRA)
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 parties 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 moving parts with potential for costly mistakes.
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Self Directed IRA Vs 401k
The key difference between a self directed IRA and a 401k is control. With an SDIRA you are in full control of the account, what it invests in, how the assets are held, how your investment basket changes over time – as well as how and when you take distributions.
This is especially true for a self directed Roth IRA.
With a 401k on the other hand you have no control. Literally none.
A 401k is established by your employer – and contributions made by all employees and the company owners are held in a single plan trust, run by a manager who makes investment decisions on behalf of the whole fund.
Although your separate part of the fund is tracked individually your holding is just part of one big investment basket. How this basket is managed and how investments are made is fully outside of your say or control. You basically get what you’re given.
If you’re employed and inside of a 401k then this can provide an excellent and low-cost managed fund for your retirement – plus your employee is helping your plan grow with their contributions.
But if you want any degree of say in how your retirement dollar is invested then an IRA is a better alternative – and of course a self-directed IRA offers the most control of all retirement accounts.
Getting the Best From a Self Directed IRA
Getting the best from your SDIRA whether in terms of profit or tax-savings is under your complete and full control.
However unless you’re some kind of investing wizard with amazing inside knowledge on specialist investments then you’re going to need help at some point.
This is where IRA specialists come in. These specialists are not specifically custodians or qualified accredited professionals but will typically employ staff who do meet these capabilities.
In the precious metals market , IRA specialists are bullion dealers and professional gold investment companies who work the majority of their trade dealing with IRA accounts. As such you get all the benefits of their knowledge of precious metals, investment uses, market news and analysis, alongside an up to date knowledge of IRS legislation, specifically related to retirement.
These professionals will know the best ways to make tax savings, plus they’ll have insider knowledge on special deals along, access to wholesale prices and they can even offer savings on third-party IRA fees and storage costs due to the work volume they send both vaulting companies and gold IRA custodians.
By working with a gold IRA specialist like Goldco you’ll not only save on costs but can do so safe in the knowledge that everything you buy and the way you buy it is in full compliance with IRS rules.
The same applies in any specialist investment market. If you’re looking to add Bitcoin to your IRA you’d work with a Bitcoin IRA specialist such as CoinIRA. With real estate you’d find a real estate company who specializes in putting together investment packages perfect for capital growth and income.
In almost any of the major alternative asset niches – form Gold and Silver to Cryptocurrency or Tax Lien Certificates – there will be a specialist who’s daily bread and butter is working with SDIRAs.
Of course you can go it alone and do the research, put in the hours and learn the markets, their best processes and unique taxation situation – but the sometimes your time is more valuable than a $250 fee or a 0.5% saving.
If you have any concerns or worries, this is when IRA specialists come into their own.
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The Ease of Running a Self Directed IRA
As with anything in life, how easy something is comes down to your experience, your willingness to learn – or your access to help and advice.
The internet is filled with advice on opening and running a self directed IRA – the quality of which will vary enormously depending on the source and whether the information is written by an expert or an amateur.
If you already have some knowledge it will be easier to spot the good advice from the bad – but if you’re totally new to the subject how can you be sure what you’re reading is factual and legal, or misleading and liable to get you into trouble.
This is why it’s always beneficial to start with an expert: with an IRA specialist.
Most IRA specialists like Goldco will offer free information packs, guides and new investor kits with a sole purpose in bringing knowledge into the market – after all there’s nothing more dangerous than misinformation when it comes to dealing with the IRS and when you’re talking about an SDIRA, claiming ignorance of law is no defense when the Revenue Service comes calling.
With the right knowledge behind you, running a self directed IRA is no more difficult than buying and selling any other investment.
The process of buying bullion in an IRA is similar to buying any investment bullion – with three exceptions:
- The purchasing monies must come from your Self Directed IRA account.
- You are limited to only buying IRS approved metals.
- You need to use an approved IRA custodian / depository vault.
So rather than paying your bullion dealer in cash, check, credit card or bank wire you simply set up a transfer from your IRA account to the broker.
In every other respect it’s you who decides on which bullion bar or coin sizes to buy, and the brands or mints who produce them. The best thing is because precious metal IRAs are becoming such a common route to investing in gold, nearly all bullion dealer’s biggest sellers are suitable for precious metals retirement accounts.
And when your bullion dealer is a Gold IRA specialist this is 100% assured.
Choosing a Self Directed IRA Specialist
When precious metals first became available in an IRA and especially after gold’s huge rise in popularity between 2007-2011 a lot of bullion dealers jumped onto the Gold IRA bandwagon – some more successfully than others.
Gold’s short term drop from it’s $1800 high to today’s $1500 mark saw a lot of these newcomers either go out of business or be closed down by the FTC due to their ignorance of the markets, meaning the companies we have now are on the whole excellent at what they do.
The bullion market’s directory currently lists 73 Gold IRA specialists in America and of those it’s only the top 4 or 5 who do the majority of business. Goldco is acknowledged by the directory as being the best in the list – but the other main contenders are still excellent companies who will carry out your wishes with a minimum of stress.
As with any decision where money is concerned it pays to read reviews. Whilst reviews in the gold industry may be skewed by paid promotion, going with an industry leader is always going to be a more comfortable experience than little-known companies who pay affiliates a fat commission. This is why it pays to read reviews for precious metals with a pinch of salt.
Instead of random review sites, it’s better to go with trusted services like the BBB, Bullion Directory or Scam Report – accredited sites listing either the whole of market, or set up to clamp down on scams.
For further help in selecting a Gold SDIRA specialist we recommend the following investor kit:
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Choosing a Self Directed IRA Custodian
When you’re investing in an IRA, the IRS requires there to be a third party acting as a legal custodian for any investments you hold within the account.
A self directed IRA custodian should be an IRS authorized service provider and it is their duty to care for your account, to track values, individual transactions and of course taxation.
In short the custodian’s job is to safeguard your investments and ensure adherence to IRS and governmental legislation.
IRA custodians do not provide investment advice, or any active investment management services, but will assist you when you make decisions to buy and sell assets or transfer funds, by carrying out the required work on your behalf, by liaising with various third parties, intermediaries and facilitators such as bullion dealers, shipping services and vaulting companies.
Although there are many IRA custodians in the US, not all custodians work with self-directed IRAs and not all self-directed IRA custodians deal with precious metals – so choice is more limited than if you were to invest in stocks. Saying that, custodians who deal with precious metals are often exceptionally good at what they do due to the specialist nature of the investment.
Choice can be further impacted whether you want a traditional tax-deferred IRA or a Roth IRA.
After these initial decisions you can further narrow down your choice based on:
Unless you are only wanting silver in your IRA, it’s essential to work with a custodian who can handle as many of the assets you’re likely to want within your account as possible. The greater choice the better as this will future proof your account and reduce the need to use separate companies for separate investments.
Custodian fees can include maintenance fees, transaction fees and commission fees where the custodian enters trades on your behalf. Some custodians charge based on investment value, others a fixed annual sum. Depending on the size of your account this can have an impact on your charges.
The best custodians are knowledgeable – having precious metals experience, coupled with legal, fiscal and market knowledge. This will ensure all transactions and holdings are held to your best advantage and in line with all legislation. Similarly for those investors looking to combine various accounts, custodians should have expert knowledge of consolidation practices, being aware of compatible and non-compatible accounts.
The big one. Your custodian doesn’t only look after your assets, they are often the key interface between you and the various intermediaries and facilitators essential in the smooth operation of your account.
Having your investment processes run smoothly, knowing your requests are being handled efficiently and on time and knowing you will always have someone able to answer your questions to your full satisfaction is essential to both your well-being and peace of mind that your interests are being well cared for.
Good service can make or break your experience and missed communication, or misunderstandings can not only cost you time but money.
One custodian we come back to time and time again is Equity Trust. 45 years an industry leader, Equity deliver a truly expert service, fulfilling all custodial and administrative duties with a minimum of fuss and ticking all our boxes for price, service and choice.
Other leaders in the field include Broad Financial, New Direction and Provident Trust.
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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