Self-Directed IRA

A Self-Directed IRA (SDIRA) can be a powerful tool for those looking to diversify their retirement portfolio beyond traditional stocks and bonds. With the freedom to invest in real estate or other qualifiable assets. A Self-Directed IRA offers greater control, but also greater responsibility. Without proper guidance, it’s easy to make costly mistakes that can lead to penalties or even disqualification of your IRA. Here are five common mistakes consumers make with Self-Directed IRAs—and how you can avoid them. 1. Engaging in Prohibited Transactions One of the most common (and serious) mistakes is violating the IRS rules around prohibited transactions. These include buying or selling assets between your IRA and “disqualified persons”—such as yourself, your spouse, parents, children, or any entities they control. For example, you can’t use your Self-Directed IRA to buy a property that you or a family member lives in. Doing so could disqualify your entire IRA and trigger heavy taxes and penalties. Please abide by IRS guidelines to avoid prohibited transactions. 2. Failing to Understand IRS Rules and Compliance Unlike traditional IRAs, Self-Directed IRAs require you to stay informed about compliance regulations. The IRS has specific rules about valuation, recordkeeping, and annual reporting. If you fail to provide accurate valuations or don’t maintain proper documentation, your account could fall out of compliance. Checkbook style IRAs allow account holders flexibility, but it is your responsibility to ensure your investments remain compliant and properly reported. 3. Overlooking Due Diligence on Investments Because Self-Directed IRAs allow investment in nontraditional assets, the burden of research falls squarely on the account holder. Unfortunately, this can lead to investing in high-risk or fraudulent opportunities. Before committing your retirement funds, thoroughly vet each investment opportunity. Review financial statements, verify ownership, and assess long-term viability. If something seems too good to be true, it often is. 4. Neglecting Liquidity Needs Self-Directed IRAs often hold illiquid (cannot be sold or exchanged quickly) assets like real estate or private equity. While these investments can yield strong returns, they can also create challenges when it’s time to take required minimum distributions (RMDs) or cover unexpected expenses. It’s important to maintain some liquid assets within your IRA to ensure you can meet obligations without forcing the flash sale of long-term investments. 5. Doing It Alone Without Professional Guidance Managing a Self-Directed IRA can be complex. From IRS compliance to asset management, there are many moving parts that can trip up even seasoned investors. Working with your SouthStar Bank experts can help provide some oversight and structure needed to keep your account on track. At SouthStar Bank, we believe that every customer deserves the freedom to shape their financial future, without unnecessary risk. Whether you’re exploring real estate investments or diversifying your retirement portfolio, our experienced team can help guide you through the process with personalized support and trusted service. Have any questions? Ready to start your SDIRA journey? Contact your SouthStar Bank IRA experts today at 512.384.3948 or IRA@southstarbank.com. SouthStar Bank does not provide tax, legal or investment advice. […]

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 […]