Setting up a Self-Directed IRA

Everyone knows about a traditional IRA. You know, that account that you set and forget. IRAs are designed to grow wealth over time, and they do so with some great tax benefits that make them worthwhile. Now, while this may be the case, a self-directed IRA is another option entirely.

That’s why, today, I’ll be taking you through the steps that it will take you to open one up. Not only will I show you how, but I’ll also break down exactly what a self-directed IRA is as well.

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I’ll be breaking each step down into its own section, so please pay close attention to each one. If you miss one, you may end up a bit lost or confused along the way. Here is a look at the steps I’ll be going over:

  • What is a self-directed IRA
  • Using a custodian
  • Using an LLC
  • Recap

What is a self-directed IRA

A self-directed IRA is a unique IRA account that functions a bit differently than traditional IRA accounts. This is due to the fact that these accounts tend to require some hands-on management, and there are some additional steps that you may need to take with them. I’ll get into the trusts, custodians, and LLC accounts later, but for this section I want to stick to the regulations.

The basics

A self-directed IRA works the same way as any other account, which means that they have the same tax and withdrawal rules. For example, self-directed IRAs grow tax-deferred, and distributions can’t be surrendered without penalty until you’re 59 and a half. Also, forced distributions will still occur at 70 and a half. So, to summarize, the tax rules and distribution requirements are all the same.

Where things start to become different

Things start to become different once you get into account management. Self-directed IRA accounts are not able to be solely owned by you, which means that there are some extra steps involved when it comes to setting them up. For example, you’ll need a custodian, LLC, or trust to technically own the rights to the account. I’ll have more on this for you later.

What can be invested in self-directed IRA accounts?

Self-directed IRA accounts provide you with a whole lot more than traditional IRA accounts. Instead of being limited to just EFT investments, self-directed IRA accounts allow you to invest in almost anything you choose. This can include precious metals, ETFs, and more. Think about a self-directed IRA as a retirement account that provides you with a lot more options.

Self-directed IRA accounts may seem complicated, but when push comes to shove, they typically work in a similar way. So, just think of a self-directed IRA account as an account that offers some different options and routes to take.

Using a custodian 

A custodian is a person that essentially acts as the middleman. You need a custodian because you can’t manage the account on your own. This is why custodians tend to be the first choice for people using self-directed IRA accounts. So, in this section, I’ll provide you with some details about how a custodian actually works.

Who are they?

A custodian will be someone that has the right to make trades and manage a self-directed IRA. They’re chosen by you, and by law, have to act in your best interest. A custodian can also handle the trading, helping you store funds, and managing distributions. Custodians also tend to be firms that handle storage aspects.

Think of a custodian as the middle man for your self-directed IRA account. They’ll essentially be the ones taking care of the busy work for you.

Using an LLC 

You can also use an LLC company to hold the funds and name of the self-directed IRA account. This is a great route to go because it provides the most hands-on experience. Think about it, if you use an LLC, you can get rid of any middlemen that may be involved in the process.

How do I create an LLC?

Creating an LLC is actually a lot simpler than it sounds. For example, all you need to do is consider a company that you would like to have -if you don’t have one already- and establish it. If you already have a business, feel free to use that one. If you will be using an LLC or creating one, you’ll need to make sure that you file with the state you live in.

Going the LLC route is definitely a lot more complicated than using a firm or custodian, but it can be more rewarding if done right.

Final Thoughts

A self-directed IRA is an account that a lot of people tend to avoid. This is due to the fact that they can appear to be very complicated at first. This is due to the fact that they’re not as simple as simply calling a firm and opening an account. This is what turns a lot of people off to the idea, but it doesn’t have to.

I know that I went over a lot, and some aspects of a self-directed IRA can be complicated, so I always recommend using a custodian if you can. A custodian can definitely help make the process easy.

Now that you know the facts, what will you use a self-directed IRA for?

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