5 Easy Steps to a Self-Directed IRA

April 26, 2018 No Comment

A Self-Directed IRA (SDIRA) provides investors with the opportunity to diversify their retirement portfolio and earn tax-deferred or tax-free returns in alternative investments such as real estate, precious metals, digital currency, and private equity to name a few. Unfortunately, many investors let themselves be intimidated by the process or fall prey to some common misconceptions, preventing them from taking their investment strategy to the next level.

We put together this simple guide to show how easy it is to integrate this unique investment vehicle in just 5 steps.

1. Find your investment(s): This step is completely in your hands. However, unlike with traditional brokerage firms, SDIRA account owners must go out and find the investments on their own; whether that’s by finding a company or unique opportunity that offers the type of investment you’re looking for. It is your responsibility to vet the investment sponsor and determine if the investment fits your comfort level for risk.

2. Choose a Self-Directed IRA custodian:  Do your research, understand what an IRA custodian can do for you and how they can insure you have a successful outcome. Research what a SDIRA custodian does. To put it simply, do your due diligence as you would with any investment and make sure your chosen custodian is regulated and has a process and plan for their investors.

3. Set up a SDIRA account: Like most accounts that deal with money, each company will provide you with paperwork to fill out and sign. If you have any questions before opening the account, make sure to address them with the custodian. Also be aware, it does take time for the account to be set up based on if you are transferring funds.

4. Fund the SDIRA account: You can fund your new self-directed IRA account a few ways. You can fund it with new money (a.k.a. annual contribution), transfer or rollover an existing IRA account you may have, or use a 401k from a current or previous employer. There are no IRS imposed limitations regarding the amount or number of transfers IRA account holders can make between like-kind IRA accounts throughout the year.

Unlike traditional brokerage firms, most SDIRA custodians like Preferred Trust Company do not earn a commission off your investment to pay for their services. This means that you will not only need to take into consideration how much you will need fund your investments, but also cover any investment or administrative fees and custodian imposed minimum cash balances.

It is important to note that the custodian currently holding your funds can take up to 2 weeks to process the request and send the funds for your SDIRA account. For example, at Preferred Trust Company, the average time for an account to be set up is 14 business days.

5. Processing transactions: Once your account is funded, the next step is to direct your SDIRA custodian to fund your investment. First, you must submit the appropriate investment direction forms and provide any supporting documentation related to the investment. The SDIRA custodian will review this information and verify that the investment stays compliant with the IRS regulations.

It is important to confirm with your SDIRA custodian that they have the correct documents before signing. You personally should never sign any legal documents pertaining to an investment asset within your SDIRA, your custodian does this on behalf of your IRA. This can cause a transaction to become prohibited and disqualify your IRA, in turn requiring you to pay taxes or even penalties on the investment returns. If you are concerned about what to do, you can work with a tax professional to help assist you with the process.

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