A Self-Directed IRA is a type of individual retirement account that allows the account owner to make investment decisions and direct the investment of the funds in the account. Unlike traditional IRAs, which typically limit investments to stocks, bonds, mutual funds, and other conventional assets, Self-Directed IRAs can invest in a broader range of assets, including real estate, private placements, and limited liability companies (LLCs).
The key difference between a Self-Directed IRA and a Traditional IRA lies in the range of permissible investments and the level of control the account holder has over those investments. While traditional IRAs are generally managed by custodians who limit investment options to standard financial products, Self-Directed IRAs provide the account holder with the ability to invest in a wider array of assets, subject to certain restrictions and prohibitions under the Internal Revenue Code (IRC).
However, it is important to note that with the increased control and flexibility of a Self-Directed IRA comes increased responsibility and risk. The account holder must ensure compliance with IRS rules, particularly those concerning prohibited transactions under IRC Section 4975. Prohibited transactions can include self-dealing, where the account holder uses the IRA assets for personal benefit, which can result in the disqualification of the IRA and significant tax consequences.
In summary, a Self-Directed IRA offers greater investment flexibility compared to a Traditional IRA. If you are interested in setting up a Self-Directed IRA, please reach out by clicking the “Contact” button on the top of the page.