What Is a Truly Self-Directed Retirement Account?

David Moore: Hello, David Moore with IRA Advantage, iradvantage.com. And today we’re going to talk a little bit about what is a truly self-directed retirement account. And the reason I’m going to cover this, and we’ve covered it before, but I was driving into work this morning and listening to the radio and I heard that somebody was talking about their new self-directed accounts. And it was from a firm that I know is not offering truly self-directed accounts. And so I wanted to address this.

Lots of investment firms, custodians will offer what they call a self-directed investment account, self-directed IRA, self-directed 401K plan. It’s really critical you understand what they mean by self-directed. When we talk about a truly self-directed retirement account, our definition is an account that’s going to allow you to buy anything the law allows. It’s not going to limit you to some investment menu from a given sponsor or custodian.

David Moore: So a truly self-directed IRA or 401K plan, self-direct is not a legally defined term, and that’s probably why I’m having to spend the time talking about it today, because everybody uses it differently. So in the context of the self-directed retirement world, a self-directed retirement account, as I stated, is going to allow you to buy anything the law allows.

Now, if we’re looking about looking at IRAs, for example, that means anything other than collectibles, life insurance contracts, or stock in a sub S-Corporation. So rarely is that investment going to be something that’s excluded from your investment menu with a truly self-directed IRA. Now, a 401K plan, the menu of opportunities is even more broad. The only limitation with a 401K plan is collectibles.

David Moore: So if you’ve got a 401K plan that does not allow you to, for example, buy real estate or make loans, buy notes, buy crypto, precious metal, all these things, I mean, that restriction is not by law. The restriction is by plan document. If you’re looking and working with a company on a self-directed IRA, for example, if that IRA does not allow you to buy all those previously mentioned items, then it’s not a truly self-directed retirement account.

Usually, these firms are offering, their self-direction is going to say, “Hey, you pick and choose from our menu of investments.” A truly self-directed account, you’re not going to have to deal with that. You’re literally going to be able to go out and buy anything the law allows. And I like simple, so when I’m looking at, let’s say, for example, a 1031 exchange, our sister firm Equity Advantage, 1031exchange.com, handles those, when I’m looking at what’s important for an exchange, I look at four basic issues.

David Moore: One, it’s got to be an exchange. Two, what’s given and received have to be of like kind. Three, we have to go across or up in value and equity for total deferral. It’s not all or nothing. And then, finally, we have to have continuity investing. When I look at a retirement account, it’s very easy to get stuck in the weeds on details that are really not that important.

What is critical when you look at a retirement account, a self-directed retirement account, is two factors. One, what are you going to buy? And unless it’s specifically prohibited by law it is therefore allowed. And two, who are you transacting between or for the benefit of? So the issue typically is not going to be the investment that you want to make. It’s who you’re transacting between or for the benefit of. Any transaction between or for the benefit of a disqualified party would constitute a prohibited transaction.

David Moore: Your next question is, who’s a disqualified party? And that would be lineal ascendants, descendants, their spouses, or any legal entity owned in a controlling interest by one of those parties. So you can’t sell to one, buy from one, loan to, borrow from, or, let’s say, acquire a property that allows one of those disqualified parties to benefit. Stay in, in any way, you cannot benefit by a disqualified party.

So what are you going to buy? Who are you going to transact between or for the benefit of? That’s what’s going to dictate what a truly self-directed account’s going to do. If your 401K plan restricts you beyond collectibles, it’s a plan document issue. And first thing we do when we look at those, we want to see the plan documents, see if it allows, because a lot of times we’ll have the conversation with people, and even their trustee or administrator doesn’t understand truly what that plan document allows them to do.

David Moore: So, one, we’re going to look at the plan. If the plan doesn’t allow you to make the investment you want, we’re going to see if we can amend the plan to allow it. If we can’t amend it, we can replace it. But all those things are going to be subject up to your administrator trustee too. If we’re looking at IRAs, it’s, really, the restriction is based upon the custodian.

What’s that custodian going to allow you to buy? So if we’re working with a purely wall street custodian, their “self-directed IRA” is going to be something that allows you to buy different things at your discretion on Wall Street. A truly self-directed IRA custodian is going to allow those investors to invest in anything the law allows, which, once again, is anything other than collectibles, life insurance contracts, or stock in a sub S-Corporation.

David Moore: So truly self-directed is one thing. Self-directed is quite another, and as I said earlier, it’s not a legally defined term which allows people to use that term at their discretion. So if you’d like something that’s a truly self-directed account, give IRA Advantage a call. You can reach us at iraadvantage.com, iraadvantage.net, and we’d be happy to talk you through your questions. The only dumb question is the one you don’t ask. Look forward to hearing from you soon, and have a better new year. Thank you. Once again, David Moore, IRA Advantage, iraadvantage.com. Bye-bye.