A Guest Blog by Jesus "Jesse" D. Gonzalez Jr.
What is a Self Directed Individual Retirement Account?
Before we get started in answering what a SDIRA or Self Directed IRA is, first we must
know what an IRA or Individual Retirement Account is. An IRA is an individual retirement
account, that gives tax advantages for retirement savings. For right now, let’s keep it simple.
For the purposes of our discussion today, all you really need to know is an IRA is a Individual
Retirement Account that comes with tax advantages.
IRAs come in several types, some of which you may be familiar with because they are offered to
you by your employer or you struck out on your own, contacted a bank and opened one up. The
two most common are the Traditional IRA and the Roth IRA. Some other types of IRAs are the
SEP or Simplified Employee Pension IRA and the Simple IRA. Of course, let’s not forget the
least known amongst the IRA family and the purpose of our conversation today and that is the
SDIRA or Self Directed IRA.
Where a SDIRA differs from the other members of the IRA family is the fact that a SDIRA
allows owners to invest in a much broader array of investments. Other than investing in your
banks typical, approved IRA investments like, stocks, bonds, mutual funds and CDs a SDIRA
allows you to choose alternative investment options. For example, you can choose to invest your
retirement money in real estate, tax liens, mortgages, franchises, private equity, partnerships or
even precious metals. For this very reason, a SDIRA is an attractive option for investor looking
to diversify their retirement funds and more specifically use their personal knowledge of a
permitted investment to grow wealth.
So, by now, you are likely wondering to yourself, why haven’t you heard of this SDIRA
option...right? Well, that’s actually a pretty simple question to answer. Your large financial
institutions that govern or administer retirement savings are in the business or selling their own
stocks, bonds, mutual funds and CDs. Essentially, they make more money by selling you their
own “approved” products versus allowing you to go out and use your money to invest in real
estate. In other words, they don’t make enough money off of you to make it worth their time
to offer you the ability to invest in alternative investments. If you aren’t buying their products,
they aren’t interested in having you as a client. The second reason is more of a practicability
issue. You see, these banks have standardized their processes and procedures in order to reduce
cost and by doing so, alternative investments like, real estate, aren’t able to be standardized
and therefore, it’s really not feasible for them to allow their investor to invest in alternative
investments. Essentially it would just cost them too much. Alternative investments don’t net
large financial retirement institutions the money they want to make it attractive for them to offer
alternative investing as an option for their clients. This is the only reason you haven’t heard of
the SDIRA option.
A key difference between a SDIRA and the other members of the IRA family is that a Self
Directed IRA is Self Directed. In other words, if you don’t log in and, make investment decisions
on behalf of the fund, the fund will not grow, it will be stagnant. Understanding the role you play
in a SDIRA is essential to your success because, unlike the other IRAs who are administered
and controlled by your bank, a SDIRA is administered and controlled by you. You must take an
active participatory role in a SDIRA to be successful.
A third difference a SDIRA has in comparison to the other IRAs is the fact your retirement
money isn’t held in a bank. Unlike the other IRAs, normally the SDIRA funds are held with a
custodian who isn’t a traditional bank. SDIRA funds are normally held in trust, with a trustee
who acts as a custodian of the account. The custodian’s duties are extremely limited so, it’s very
important when deciding what trustee or custodian to partner with, you do your research and
learn about account minimums, fees and charges. They will all very greatly so, be informed.
To sum it up, the three key differences with a SDIRA versus the other IRAs are....
1. SDIRAs allow for a broader range of investment opportunities
2. SDIRAs require their owners to make investment decisions otherwise, the fund doesn’t
3. SDIRAs funds are held in trust with a trustee who acts only as a custodian.
Now that you understand the three major differences between a SDIRA and other IRAs, let’s
now talk more specifically about how to invest using a SDIRA.
SDIRA investing can be a bit tricky because, unlike traditional investments like stocks, bonds,
mutual funds or CDs, the broader range of investment opportunities may simply lack the
necessary information required to make a prudent financial investment decision. Think back
to the last time you logged into your retirement plan with your bank. The bank should have
provided you a booklet called a prospectus. This prospectus outlined all the investment facts
about that fund, bond, mutual fund or CD you needed to know. Sure, most of you likely never
read it but, all that important performance information was available to you to make a prudent
investment decision. With SDIRA investments, you don’t get a prospectus. Stop and critically
think about what I am saying. For example, if you decided to invest in livestock, do you really
think the farmer is going to hand you over a prospectus of the livestock’s performance over the
last 10 years? Nope, that’s not going to be happening. In fact, short of getting to go out to the
farm, look the livestock over....that’s about as good as it is going to get. Let’s hypothetically say
the farmer did have a prospectus of his livestock, would you be able to truly rely on its accuracy?
Better yet, do you think he paid for an independent audit of his prospectus to verify it? I don’t
think so. Keep in mind, your SDIRA trustee or custodian doesn’t research your investments
either so, when determining on what to invest in, you are truly on your own....hence the word,
Self Directed. You also need to know that because a serious lack of information exists with
SDIRA investing, it does make SDIRA investors a big target for fraud schemes. With all that
being said, you may now be wondering, why in the world would anyone invest their retirement
savings using a SDIRA?
SDIRA investors typically have personal unique knowledge of the investments they participate
in. For example, let’s take myself. As an experienced real estate broker, I would use my SDIRA
to invest in things like, real estate, deeds of trust, mortgages and real estate tax liens. I use
my personal, unique knowledge and experience of these topics to use my SDIRA to invest in.
You wouldn’t see me investing my SDIRA in Livestock. I have absolutely no knowledge of
Livestock and wouldn’t know the first thing about Livestock to consider. On the other hand, I
have completed enough real estate transactions in my 10 years as a licensed agent, to determine
if a house, or a piece of land, or a deed, or a tax lien is a wise investment. I can almost do that
with my eyes closed. Now, most of you out there listening or reading this will think to yourself, I
don’t have any experience in real estate so, I guess I am out of the SDIRA game however, that’s
Some SDIRA investors who want to diversify their retirement and grow it quicker than they
could with their bank will sometimes hire professionals to assist them with investing in a
particular type of investment. For example, let’s take myself again. I have several SDIRA
investors who have learned how to invest in real estate by using me as their agent. Because I
myself use a SDIRA to invest with and I myself have been successful investing using a SDIRA
for real estate investing, I can give potential SDIRA investors insight into my own experience.
So, if you want to use your retirement to invest in SDIRA alternative investments like real
estate, find yourself a qualified, experienced SDIRA real estate investor agent to help you out.
For that matter, you don’t have to just stick with real estate, I am sure you could find a similar
experienced SDIRA investor in any type of approved alternative investment you want to invest
in, if you just ask around.
The Internal Revenue Service doesn’t give us a list of approved SDIRA investments, the list
would be too long however, they do give us a list of prohibited investment, these you need
to stay away from. For a list of prohibited SDIRA investments, you really need to visit the
IRS website. That website changes often so, I didn’t give you a direct link to the prohibited
investments but, it’s not that hard to search for on the IRS site. In the search engine, just type
IRA and that whole section comes up. Not to mention, most custodians will give you a list of
prohibited investments, so no worries, you will know what to stay away from, either way.
Finally, let’s talk about custodians. It has been my experience that they are not all created equal.
Truth is, I learned the hard way that some are much better than others.....by leaps and bounds.
I have finally settled on a custodian that I love. They have very low fees, very good customer
service, incredible turnaround times and best of all, an education resource that has truly been
beneficial to me. They aren’t paying me to be an advocate so, I won’t advertise for them for free
in this blog but, who knows....I may become a paid spokesman in the future....lol.
That’s it. It really is that simple. You have now been introduced to SDIRA. I will be working
on another blog a little later this week about some investment strategies using a SDIRA. To
get automatically updated when that blog comes out, join my SDIRA Investment Network,
Jesus "Jesse" D. Gonzalez Jr. Realtor, BBB Accredited Business
Principal Broker / Owner
Liberty House Realty LLC
1709 Ridgemere Ct.
Hermitage, Tn 37076
Designation / Certification: REOPro, RDCPro, NFSTI, PSC Pre-Foreclosure Mastery, PSC HAMP Mastery, PSC HAFA Mastery, PSC FDCPA Compliant, CDAT, HRC, Short Sale Specialist
EMATR Ethics Standard Grievance Committee Member