Feb 28 2007

Self-Directed IRA’s

Posted by Dax Desai in Financial Planning, Investing
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If you are changing jobs or perhaps exiting the workforce permanently you have a very important decision to make. What do you do with your 401k? There are some very obvious and easy choices such as roll it over into your private IRA account, the lesser, weaker version of the 401K. Or you can opt to be crazy and withdraw it, pay all the taxes and buy a big RV. The 3rd obvious choice if you are retirement age is to start your withdrawals and pay taxes as normal income. Remember the money was tax-free contributions so you have to pay when you withdraw.

Then there’s another more sophisticated method. Open a self-directed IRA and rollover your 401K into it. You can do this and invest in many investments that a normal IRA could not invest in. You can buy real estate, gold, foreign exchange, etc. There are some restrictions though. To facilitate a self-directed IRA, you’ll have to have a custodian. Therein lies some costs. The custodian will essentially oversea your investments and paperwork has to be filed for each transaction. This can be tedious, not to mention expensive. Most custodians charge for each transaction in addition to annual fees. For active traders the last thing you would want to do is file a form every time you wished to buy or sell a stock. What to do? Well with some creativity and perfectly IRS-compliant methods you can get checkbook-control privileges over your investments.

What does checkbook-control mean? This means you don’t need to ask anyone for any investments you make. This is the end-goal to enable more sophisticated and fully controlled investing.

So how do we do it?

Create an LLC for your IRA.
Rollover your IRA’s/401K to your custodian.
Write a check from your custodian account to the LLC. You are effectively investing in the LLC.
The LLC takes the funds and invests as it sees fit within the IRS boundaries. You have “checkbook-control” now.
The investment returns made by the LLC accure tax-free until withdrawn.

There are some other benefits of opening a self-directed IRA and administering it yourself, namely liability protection. If you gets sued the most that can happen to your assets in the IRA LLC is that the court will grant a judgement of payout. For example if the court grants a $10,000 payout against your IRA, the winner of the suit will end up paying all the taxes/penalties associated with withdrawal. In addition awards of payout are based on protecting enough to ensure retirement of the individual thus reducing the funds further. In the end, going after these assets becomes a tedious and unproductive effort. It is very difficult to get to these assets.

Are there any Prohibited Investments?

The IRS outlines the following types of investments as disallowed: