Delta Trading Group

What is a Self-Directed retirement account. A Self-Directed Retirement Account, or SDRA, is a term used to describe a defined contribution plan, or rather a retirement account which is able to be invested in any investment, both traditional and alternative investments, at the discretion of the account owner. All of these retirement accounts have preferential tax treatment for the individual. While not all retirement plans or accounts are self-directed, these are examples of some that are:

Self-directed IRA
Self-directed Roth IRA
Self-directed SEP IRA
Self-directed SIMPLE IRA
Self-directed Beneficiary IRA
Self-directed Solo 401(k) (or Solo K)
Self-directed 401k

Although each of these account types is defined in the Internal Revenue Code (IRC) as a type of retirement account, the IRC rules applicable to each are different. It is important to note that there is no term in the Internal Revenue Code (IRC) which is defined as “self-directed”. All retirement accounts listed above are self-directed by their nature according to the IRC.

The self-directed individual retirement account (IRA) is for investors who are determined to go beyond the usual investments that are available for retirement accounts—way beyond, in some cases.

IRAs are currently available from most financial institutions, and each offers a wide range of stocks, bonds, and mutual funds, including exchange-traded funds and index funds. Investors can choose a conservative bond fund or an aggressive stock fund, and there are plenty of choices in between.

The self-directed IRA is for those who demand access to alternative investments in their retirement savings. And, they want total control over the buy and sell decisions.

The self-directed IRA gives the investor control over buy and sell decisions.

It permits alternative investments in assets like precious metals and cryptocurrencies that are not normally found in IRAs.

The self-directed IRA requires a high level of confidence and a considerable investment of time and attention.

Self-directed IRAs are in most ways the same as any other IRA. That is, they have tax advantages designed to encourage Americans to save for retirement. That means the IRS gets some say in what an IRA can and cannot be invested in. That includes some alternatives to the usual stock and bond funds.

Investments that are highly tax advantageous or require require active trading such as Futures, Commodities, and Real Estate are often eligible.

As of 2019, the IRS permits self-directed IRAs to invest in real estate, development land, promissory notes, tax lien certificates, precious metals, cryptocurrency, water rights, mineral rights, oil and gas, LLC membership interest, and livestock.

Who Wants a Self-Directed IRA?

The self-directed IRA might appeal to an investor for any of several reasons such as Portfolio Diversitfication:

It could be a way to diversify a portfolio by splitting retirement savings between a conventional IRA account and a self-directed IRA. It could be an option for someone who got burned in the 2008 financial crisis and has no faith in the stock or bond markets.

It may appeal to an investor with a strong interest and expertise in a particular type of investment, such as cryptocurrencies or precious metals.

In any case, a self-directed IRA has the same tax advantages as any other IRA. The investor who has a strong interest in precious metals can invest pre-tax money long-term in a traditional IRA, and pay the taxes due only after retiring.

The self-directed aspect may appeal to the independent investor, but it's not completely self-directed. That is, the investor personally handles the decisions on buying and selling but a qualified custodian or trustee must be named as administrator. Otherwise, it's not an IRA as the IRS defines it.

The administrator is usually a brokerage or an investment firm.

Self-directed IRAs are held by a custodian chosen by the investor, typically a brokerage or investment firm. This custodian holds the IRA assets and executes the purchase or sale of investments on the investor's behalf.

We have many investors who have paid for their education and costs using retirement funds without penalty. You will work this out with your broker for proper documentation and permittable accounting.

Self-directed IRAs are held by a custodian chosen by the investor, typically a brokerage or investment firm. This custodian holds the IRA assets and executes the purchase or sale of investments on the investor's behalf.

If you are offered the option of a self-directed 401(k) by an employer, the custodian would be the plan administrator.

The same contribution limits apply as for regular IRA and 401(k) plans. In 2019 and 2020, the maximum IRA contribution is $6,000, plus a $1,000 catch-up for those aged 50 or above. The maximum for 401(k) plans is $19,000 ($19,500 in 2020), plus a $1,000 catch-up.

The withdrawal rules are also the same. A withdrawal made from any traditional IRA or 401(k) prior to age 59½ will trigger a 10% early-withdrawal penalty unless an exception applies.

Required minimum distributions begin at age 70½ through the 2019 tax year. A new tax law effective Jan. 1, 2020, extends the age for taking required minimum distributions to 72.

For those who choose the Roth option for a self-directed IRA or 401(k), the rules are mostly the same, except that there are no required minimum distributions at any age. The investor pays the taxes on the income in the year the money is invested and the entire balance is tax-free when money is withdrawn in retirement.

Your account automatically loses its tax-advantaged status if the IRS rules that you made a prohibited transaction.