Self-Directed IRA

A Self-Directed IRA (SDIRA) can provide you with unique benefits to maximize your retirement. At SouthStar Bank, you can utilize your SDIRA to invest in options beyond stocks and bonds, including real estate, private equity, tax liens, and private loans. While there are numerous benefits to using an SDIRA, the IRS enforces strict regulations to protect your retirement savings and maintain your account’s tax advantages. In this guide, we’ll cover the most important Self-Directed IRA rules you need to know to avoid penalties and maximize your retirement benefits. What Is a Self-Directed IRA? A Self-Directed IRA is an individual retirement account that allows investors to diversify their portfolios with alternative assets. Unlike traditional IRAs, which limit investments to stocks, bonds, and mutual funds, SDIRAs offer a broader range of investment options, including real estate, precious metals, private loans, and other alternatives. Top Self-Directed IRA Rules You Must Follow 1. Account Holders Must use an IRS-approved Custodian or Trustee Every Self-Directed IRA must be held by a qualified IRA custodian or trustee. SouthStar Bank offers custodial services to customers for their SDIRAs that have Checkbook Control-style accounts1. This structure allows you to invest in alternative assets beyond conventional options and provides easier access to your funds compared to traditional IRAs. 2. Account Holders Must Avoid Prohibited Transactions and Disqualified Persons The IRS prohibits certain transactions, known as prohibited transactions, involving disqualified individuals. Disqualified individuals include the IRA owner, spouse, ancestors, descendants, and controlled entities. Examples of prohibited transactions are: Buying property from yourself or a family member Using IRA-owned property for personal use Lending money to yourself or related parties Violating these rules can trigger taxes and penalties, disqualifying your IRA’s tax benefits. 3. No Self-Dealing Self-dealing occurs when you personally benefit from your SDIRA investments outside the account. For example, living in or using real estate owned by your IRA is strictly forbidden. All income and expenses must flow through the IRA to preserve its tax-advantaged status. 4. Know What You Can and Cannot Invest In While SDIRAs allow many alternative investments, certain assets are banned by the IRS, including: Collectibles like art, antiques, and most coins (except specific precious metals) Life insurance policies Always verify investment eligibility with your custodian before proceeding. 5. Required Minimum Distributions (RMDs) Apply If you have a traditional SDIRA, you must start taking required minimum distributions (RMDs) by age 73 (as of 2023). It’s important to note that Roth SDIRAs do not require RMDs during the owner’s lifetime. 6. Be Aware of UBTI and UDFI Tax Rules Investments generating Unrelated Business Taxable Income (UBTI) or Unrelated Debt-Financed Income (UDFI) can incur additional taxes. For example, using leverage (non-recourse loans) to buy real estate or investing in an active business may trigger these taxes, which reduce your overall returns. In Conclusion Understanding the rules of a Self-Directed IRA is crucial to legally maximizing your retirement account’s growth and avoiding costly penalties. From working with an experienced custodian to steering clear of prohibited transactions, knowledge is […]

When planning for retirement, most consumers assume that traditional options, such as 401(k)s, IRAs, or employer-sponsored plans, which typically include mutual funds and stocks, are the only available options. However, many people long to have more control over their retirement and are unaware of the other options available. Enter the Self-Directed IRA (SDIRA) — a powerful yet often overlooked retirement account that puts the customer in control of their investments. Understanding the benefits of using a self-directed IRA will help an investor optimize their retirement planning. Benefits of Self-Directed IRAs: Expanded Investment Options Unlike traditional IRAs, SDIRAs allow account holders to invest in a variety of investment options, including: Real estate (residential, commercial, raw land) Precious metals (gold, silver, etc.) Tax Liens Private Equity/Companies Having investment control opens up opportunities for higher returns, better diversification, and investment in areas where investors have personal knowledge and expertise. Diversification Outside of the Stock Market Relying solely on the stock market can expose your retirement to volatility amidst economic downturns. With a SDIRA,  investors can hedge against inflation and market risk by investing in hard assets or alternative markets. For instance, real estate or private lending can provide stable, passive income streams even when the stock market is down. Tax Advantages Just like traditional and Roth IRAs, SDIRAs offer tax-deferred growth depending on the account type: Traditional SDIRA: Contributions are tax-deductible, and growth is tax-deferred until withdrawal. Roth SDIRA: Account holders make contributions after tax, but qualified withdrawals are tax-free. Greater Control and Flexibility With an SDIRA, the account holder has complete control over their investment. They decide which assets to invest in and when to make a move, which is especially attractive to experienced investors or entrepreneurs who want more input in the use of their retirement funds. Potential for Higher Returns By investing in assets, the account holder will typically invest in options that they have a strong understanding of and feel confident will be a beneficial investment. One commonly chosen investment is real estate used as rental properties. Building a portfolio centered around unique investments may generate higher returns than a traditional stock-based portfolio. While these investments may carry higher risk, they also offer the potential for substantial rewards. Before Opening a SDIRA While SDIRAs offer numerous advantages, they also include additional responsibilities for the investor. For example, account holders must avoid prohibited transactions (such as self-dealing or using SDIRA assets for personal benefit) and follow IRS rules carefully. It’s critical to work with a qualified custodian, such as SouthStar Bank, and consult with financial or legal professionals who have experience working with SDIRAs. In Conclusion A Self-Directed IRA isn’t for everyone, but for investors looking to diversify and take control of their retirement planning, it could be a top account option. Whether you’re a real estate investor or simply looking to escape market dependency, an SDIRA gives you the flexibility to build a retirement portfolio on your terms. Interested in starting your SDIRA journey? SouthStar Bank is ready to […]