Self directed IRAs prove to be special kinds of individual retirement accounts. They are different from traditional IRAs because they provide the account holder with a significantly greater variety of investment choices and control over decisions on the account. With these types of IRAs, the owner or an investment advisor makes a variety of investment decisions. They then deliver these instructions to an IRA custodian who executes them.
Federal law allows these types of IRAs to invest in a tremendous range of investment vehicles. It is IRS section 408 that restricts the few categories that are not allowed. The IRS forbids investments of IRA funds in life insurance and collectibles such as rugs, art, gems, etc. It does allow a wide range of investment choices that cover most anything else.
Self directed IRAs may purchase real estate, mortgages and trust deeds, energy investments, gold and other precious metals in bullion form, privately held stock, privately owned LLCs and Limited Partnerships, and corporate debt or promissory notes. When accounts such as these are opened primarily to purchase precious metals bullion, they are typically known by the name of their primary metal in which they invest.
These Precious Metals IRAs can be called Gold IRAs, Silver IRAs, Platinum IRAs, and Palladium IRAs. Such self directed IRAs can even purchase franchises such as Subway or Timothy Horton. All of these different investment choices allow for superior and broad based asset diversification of investors’ retirement funds.
These types of IRAs also provide all of the usual benefits which are commonly associated with Traditional IRAs. Money saved in these plans is contributed on a tax free or tax deferred basis. No taxes will be paid on either the money deposited, or the gains made on these investments within the account, until they are withdrawn at retirement or under early withdrawal rules and limitations. Self directed IRAs are still subject to the same yearly maximum contribution limits of $5,500 in 2016. They allow for larger contributions of $6,500 to be made as catch up once the account holders reach age 50.
Early withdrawals from these IRAs as with traditional ones are penalized. It is often more advantageous to take a loan against the value of the IRA rather than suffer the financial consequences of early withdrawal. When loans are taken, there is no penalty. A repayment plan is established to put the borrowed funds back in the account in installments. Loans can be approved for a variety of expenses, such as home purchase, educational needs, or health care related expenses.
When an actual early withdrawal is taken, two penalties are assessed. First the money in the account is taxed as ordinarily earned income. Next a 10% penalty is levied by the IRS on all monies which the owner early withdraws.
These types of IRAs do have some limitations. The custodian must physically hold all assets in the account. This means that the account owners are not allowed to keep their real estate or mortgage deeds, stock certificates, or precious metals bullion at home in a safe. There have been offers made by some companies to help investors become their own IRA custodian by forming a special LLC company. This is a gray area which the IRS has not yet come down on with a hard ruling. In the future, they are likely to rule that investors absolutely can not be a custodian for their own gold, silver, platinum, or palladium bullion using either a safe deposit box or a home based safe.
The IRS requires that owners of these accounts begin taking distributions no later than at age 70. They can start withdrawing them as retirement funds at 59 ½ if they wish to begin using the money earlier.