Gain Control of Your Investments with Self-Directed Accounts
Post by Ryan Gibson, COO, Spartan Investment Group, LLC
Self-directing your retirement account affords more control and decision making over your investments. Your standard proclaimed “self-directed” account administered by a traditional brokerage (such as Fidelity, Schwab, TRow Price, etc.) does not allow you to fully self-direct. While those brokerages tout selection of your investments, or offer a brokerage link, the type of investment is limited.
A truly self-directed account not only allows you to invest in non-traditional assets such as real estate, precious metals (gold and silver), but also traditional investments you may be more accustomed to such as stocks, bonds, and mutual funds. Some investors think their retirement is not available to purchase real estate other than through a Real Estate Investment Trust (REIT). This is simply not true.
When you self-direct your retirement, money may be allocated to investments that real estate developers like Spartan Investment Group, LLC put together. You may also purchase your own real estate such as a residential or commercial rental property. Several of our investors have found that self-directing has many benefits to include:
Providing all the tax benefits of an IRA or 401(k)
Flexibility to choose a wider variety of assets
Ability to directly control and select a hard asset investment
Low maintenance fees
A self-directed account can be established by rolling over your existing IRA or 401(k) with a custodian that administers self-directed retirement accounts. Many of Spartan Investment Group, LLC’s clients use a company based in Bellevue, Washington called Wealth Flex. The administrator rolls over your 401(k), IRA or eligible retirement account into your control by establishing a checking account in your Retirement Trust’s name. Think of it like you are switching from Morgan Stanley to Charles Schwab, but instead of being limited to the funds those brokerages offer, you now have less restrictions over your investment decisions.
There are several options offered by self-directed administrators for structuring your Self-Directed retirement account. You can setup a “checkbook IRA”, an “LLC” or a “Trust” to name a few. An LLC structure can be costly and difficult to maintain; however, speak with your financial advisor and CPA for the structure that best meetings your specific needs. Interviewing several self-directed administrators may also assist in determining what’s best for you.
While a self-directed account provides large degrees of flexibility, it does come with responsibility and some restrictions. For example: You are walking the beach in Hawaii and see a rental property that would be amazing to put in your portfolio. You can buy it with your self-directed account, rent it out, and your retirement account will benefit from the earnings. However, if you personally benefit from it (you go there for your yearly vacation and stay in the property) it is a prohibited transaction. Also, you cannot rent the property to your “vertical” relatives (think up and down) children, parents, grandparents. Keep in mind prohibited transactions can result in severe tax penalties so check with your advisor/administrator before making a transaction.
Your 401(k), with your current employer most likely cannot be rolled into an IRA. This is due to most plan administrators’ rules. However, if you have left an employer, your 401(k) becomes eligible for “rolling out” into a self-directed plan by the US Department of Labor regulations. You can also convert an existing IRA into a self-directed account.
Several of our investors have used self-directed accounts to invest in a self-storage project. One client had a 401(k) from a former employer that was eligible to roll-over to a self-directed account. The client started the roll-over process and eventually used a portion of the account to invest directly in the self-storage project. The opportunity allows the investor to see the project evolve first hand, bolster a strong return, continue to build retirement funds, and control which operator they invested with.