An Introduction to Self Directed Individual Retirement Accounts

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Real Estate Agent with eXp Realty of California Silicon Valley Probate, Trust, and Investment Sales B.R.E. 01191194

A Guest Blog by Jesus "Jesse" D. Gonzalez Jr.

 

What is a Self Directed Individual Retirement Account?

 

Before we get started in answering what a SDIRA or Self Directed IRA is, first we must 

know what an IRA or Individual Retirement Account is. An IRA is an individual retirement 

account, that gives tax advantages for retirement savings. For right now, let’s keep it simple. 

For the purposes of our discussion today, all you really need to know is an IRA is a Individual 

Retirement Account that comes with tax advantages.

 

IRAs come in several types, some of which you may be familiar with because they are offered to 

you by your employer or you struck out on your own, contacted a bank and opened one up. The 

two most common are the Traditional IRA and the Roth IRA. Some other types of IRAs are the 

SEP or Simplified Employee Pension IRA and the Simple IRA. Of course, let’s not forget the 

least known amongst the IRA family and the purpose of our conversation today and that is the 

SDIRA or Self Directed IRA.

 

Where a SDIRA differs from the other members of the IRA family is the fact that a SDIRA 

allows owners to invest in a much broader array of investments. Other than investing in your 

banks typical, approved IRA investments like, stocks, bonds, mutual funds and CDs a SDIRA 

allows you to choose alternative investment options. For example, you can choose to invest your 

retirement money in real estate, tax liens, mortgages, franchises, private equity, partnerships or 

even precious metals. For this very reason, a SDIRA is an attractive option for investor looking 

to diversify their retirement funds and more specifically use their personal knowledge of a 

permitted investment to grow wealth.

 

So, by now, you are likely wondering to yourself, why haven’t you heard of this SDIRA 

option...right? Well, that’s actually a pretty simple question to answer. Your large financial 

institutions that govern or administer retirement savings are in the business or selling their own 

stocks, bonds, mutual funds and CDs. Essentially, they make more money by selling you their 

own “approved” products versus allowing you to go out and use your money to invest in real 

estate. In other words, they don’t make enough money off of you to make it worth their time 

to offer you the ability to invest in alternative investments. If you aren’t buying their products, 

they aren’t interested in having you as a client. The second reason is more of a practicability 

issue. You see, these banks have standardized their processes and procedures in order to reduce 

cost and by doing so, alternative investments like, real estate, aren’t able to be standardized 

and therefore, it’s really not feasible for them to allow their investor to invest in alternative 

investments. Essentially it would just cost them too much. Alternative investments don’t net 

large financial retirement institutions the money they want to make it attractive for them to offer 

alternative investing as an option for their clients. This is the only reason you haven’t heard of 

the SDIRA option.

 

A key difference between a SDIRA and the other members of the IRA family is that a Self 

Directed IRA is Self Directed. In other words, if you don’t log in and, make investment decisions 

on behalf of the fund, the fund will not grow, it will be stagnant. Understanding the role you play 

in a SDIRA is essential to your success because, unlike the other IRAs who are administered 

and controlled by your bank, a SDIRA is administered and controlled by you. You must take an 

active participatory role in a SDIRA to be successful.

 

A third difference a SDIRA has in comparison to the other IRAs is the fact your retirement 

money isn’t held in a bank. Unlike the other IRAs, normally the SDIRA funds are held with a 

custodian who isn’t a traditional bank. SDIRA funds are normally held in trust, with a trustee 

who acts as a custodian of the account. The custodian’s duties are extremely limited so, it’s very 

important when deciding what trustee or custodian to partner with, you do your research and 

learn about account minimums, fees and charges. They will all very greatly so, be informed. 

 

 

To sum it up, the three key differences with a SDIRA versus the other IRAs are....

 

1. SDIRAs allow for a broader range of investment opportunities

 

2. SDIRAs require their owners to make investment decisions otherwise, the fund doesn’t 

grow

 

3. SDIRAs funds are held in trust with a trustee who acts only as a custodian.

 

 

Now that you understand the three major differences between a SDIRA and other IRAs, let’s 

now talk more specifically about how to invest using a SDIRA.

 

SDIRA investing can be a bit tricky because, unlike traditional investments like stocks, bonds, 

mutual funds or CDs, the broader range of investment opportunities may simply lack the 

necessary information required to make a prudent financial investment decision. Think back 

to the last time you logged into your retirement plan with your bank. The bank should have 

provided you a booklet called a prospectus. This prospectus outlined all the investment facts 

about that fund, bond, mutual fund or CD you needed to know. Sure, most of you likely never 

read it but, all that important performance information was available to you to make a prudent 

investment decision. With SDIRA investments, you don’t get a prospectus. Stop and critically 

think about what I am saying. For example, if you decided to invest in livestock, do you really 

think the farmer is going to hand you over a prospectus of the livestock’s performance over the 

last 10 years? Nope, that’s not going to be happening. In fact, short of getting to go out to the 

farm, look the livestock over....that’s about as good as it is going to get. Let’s hypothetically say 

the farmer did have a prospectus of his livestock, would you be able to truly rely on its accuracy? 

 

Better yet, do you think he paid for an independent audit of his prospectus to verify it? I don’t 

think so. Keep in mind, your SDIRA trustee or custodian doesn’t research your investments 

either so, when determining on what to invest in, you are truly on your own....hence the word, 

Self Directed. You also need to know that because a serious lack of information exists with 

SDIRA investing, it does make SDIRA investors a big target for fraud schemes. With all that 

being said, you may now be wondering, why in the world would anyone invest their retirement 

savings using a SDIRA?

 

SDIRA investors typically have personal unique knowledge of the investments they participate 

in. For example, let’s take myself. As an experienced real estate broker, I would use my SDIRA 

to invest in things like, real estate, deeds of trust, mortgages and real estate tax liens. I use 

my personal, unique knowledge and experience of these topics to use my SDIRA to invest in. 

You wouldn’t see me investing my SDIRA in Livestock. I have absolutely no knowledge of 

Livestock and wouldn’t know the first thing about Livestock to consider. On the other hand, I 

have completed enough real estate transactions in my 10 years as a licensed agent, to determine 

if a house, or a piece of land, or a deed, or a tax lien is a wise investment. I can almost do that 

with my eyes closed. Now, most of you out there listening or reading this will think to yourself, I 

don’t have any experience in real estate so, I guess I am out of the SDIRA game however, that’s 

not true.

 

Some SDIRA investors who want to diversify their retirement and grow it quicker than they 

could with their bank will sometimes hire professionals to assist them with investing in a 

particular type of investment. For example, let’s take myself again. I have several SDIRA 

investors who have learned how to invest in real estate by using me as their agent. Because I 

myself use a SDIRA to invest with and I myself have been successful investing using a SDIRA 

for real estate investing, I can give potential SDIRA investors insight into my own experience. 

So, if you want to use your retirement to invest in SDIRA alternative investments like real 

estate, find yourself a qualified, experienced SDIRA real estate investor agent to help you out. 

 

For that matter, you don’t have to just stick with real estate, I am sure you could find a similar 

experienced SDIRA investor in any type of approved alternative investment you want to invest 

in, if you just ask around.

 

The Internal Revenue Service doesn’t give us a list of approved SDIRA investments, the list 

would be too long however, they do give us a list of prohibited investment, these you need 

to stay away from. For a list of prohibited SDIRA investments, you really need to visit the 

IRS website. That website changes often so, I didn’t give you a direct link to the prohibited 

investments but, it’s not that hard to search for on the IRS site. In the search engine, just type 

IRA and that whole section comes up. Not to mention, most custodians will give you a list of 

prohibited investments, so no worries, you will know what to stay away from, either way.

 

Finally, let’s talk about custodians. It has been my experience that they are not all created equal. 

Truth is, I learned the hard way that some are much better than others.....by leaps and bounds. 

I have finally settled on a custodian that I love. They have very low fees, very good customer 

service, incredible turnaround times and best of all, an education resource that has truly been 

beneficial to me. They aren’t paying me to be an advocate so, I won’t advertise for them for free 

in this blog but, who knows....I may become a paid spokesman in the future....lol.

 

That’s it. It really is that simple. You have now been introduced to SDIRA. I will be working 

on another blog a little later this week about some investment strategies using a SDIRA. To 

get automatically updated when that blog comes out, join my SDIRA Investment Network, 

 

www.MatherNetwork.com

Jesus "Jesse" D. Gonzalez Jr. Realtor, BBB Accredited Business

Principal Broker / Owner

Liberty House Realty LLC

1709 Ridgemere Ct.

Hermitage, Tn 37076

P# 615-424-0961

F# 615-391-4740

Facebook: www.facebook.com/LibertyHouseRealty

E: JGonzalez@LibertyHouseRealtyLLC.com

W: www.LibertyHouseRealtyLLC.com

Designation / Certification: REOPro, RDCPro, NFSTI, PSC Pre-Foreclosure Mastery, PSC HAMP Mastery, PSC HAFA Mastery, PSC FDCPA Compliant, CDAT, HRC, Short Sale Specialist

EMATR Ethics Standard Grievance Committee Member

Posted by

Marcy Moyer eXp Realty of California  Specializing in Probate and Trust Sales, and Rental Investment Properties

 

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