A Self-Directed IRA is a type of IRA structure that allows the IRA holder (you) to have more control over your retirement funds. Unknown to some, not all Self-Directed IRAs are the same. It is well known that the IRS allows you to use your IRA to make traditional investments, such as stocks and mutual funds. It is not as well known that the IRS also allows you to use IRA funds to make investments such as real estate, precious metals, tax liens, private business and much more tax-free and penalty-free!
The Roth IRA in a Nutshell
In 1997, Congress, under the Taxpayer Relief Act, introduced the Roth IRA. This is like a traditional IRA but with a few attractive modifications. The big advantage of a Roth IRA is that if you qualify to make contributions, all distributions from the Roth IRA are tax free—even the investment returns and appreciation—as long as the distributions meet certain requirements.
The rules for the Roth IRA are found in the IRC under Section 408A. Here are some of its characteristics and features:
- Contributions are not tax deductible.
- Unlike traditional IRAs, you may contribute to a Roth IRA for as long as you continue to have earned income.
- All Roth IRA contributions are made with after-tax dollars. This means that the amount of the contribution is treated as basis in the IRA.
- Earnings and gains are tax deferred and may be tax exempt. This means that all income and gains generated by a Roth IRA investment are not subject to income tax. As long as certain conditions are met and the distribution is a qualified distribution, the Roth IRA owner will never pay tax on any Roth distributions received. Essentially, if the Roth IRA account has been open at least five years and the holder is over the age of fifty-nine and a half at the date of the distribution, there should be no tax on the entire Roth IRA distribution, including contributions, income, and appreciation.
- Unlike the traditional IRA, there is no seventy-and-a-half age limit on making contributions. Individuals of any age with compensation below a certain income threshold are eligible to contribute to a Roth IRA. The total amount you may contribute to a Roth IRA for 2015 cannot exceed the lesser of $5,500 ($6,500 if over the age of fifty) or 100 percent of compensation ($11,000 for married couples and $13,000 if over the age of fifty).
The IRS has established income rules that govern who is eligible to make after-tax (Roth) IRA contributions. You can only contribute to a Roth IRA, however, if your income is below a certain threshold. For single filers in 2016, that income threshold starts at $117,000 (up from $116,000) and ends at $132,000 (up from $133,000). In that range, your contribution is limit, eventually reaching zero. For married filers in 2016, that income threshold starts at $184,000 (up from $183,000) and ends at $194,000 (up from $193,000).
The primary advantage of using a Self-Directed Roth IRA to make investments is that all income and gains associated with the Roth IRA investment grow tax-free and will not be subject to tax upon withdrawal or distribution. This is because unlike traditional IRAs, you are generally not subject to any tax upon taking Roth IRA distributions once you reach the age of 59 1/2.
Types of Self-Directed Roth IRA Accounts
There are essentially three types of Self-Directed Roth IRAs:
1. Financial Institution Offered Self-Directed ROTH IRA
The most popular Self-Directed Roth IRA account offered is the financial institution Self-Directed Roth IRA. The reason that this type of Self-Directed Roth IRA is so popular is because it is generally offered by the major financial institutions, such as Bank of America, Wells Fargo, Fidelity, Vanguard, etc. With this type of Self-Directed Roth IRA, the Roth IRA holder is generally able to only make Roth IRA investments offered by the financial institution which typically only includes financial related investments, such as stock, mutual funds, and ETFs. Even though these types of IRA accounts are called “Self-Directed IRA” accounts, they are very limited in their investment scope and do not allow IRA investors to make any non-traditional investments, such as real estate.
Why do the financial institutions limit the investment options available?
A financial institution that offers IRA accounts is not required to offer its IRA investors with the opportunity to make all allowable types of IRA investments. For example, even though real estate is an IRS approved investment, an IRA custodian is not required or obligated to offer that investment option. Accordingly, most financial institutions offering Roth IRA accounts will restrict the Roth IRA investment option to financial products offered by the financial institution. The reason behind this is quite clear – a financial institution earns fees from the sale of financial products, not by allowing its clients to pull money out of the IRA account to buy real estate from a third-party.
2. Custodian Controlled Self-Directed Roth IRA
IRA Financial Trust Company offers Self-Directed IRA investors full IRA custodial services for traditional and alternative asset investments, such as real estate. All IRA funds will be held with Northern Trust, an FDIC insured global banking leader for over 125 years, before the client directs the funds for investment.
Until a 1996 court case, the custodian controlled Self-Directed Roth IRA was the only way one was able to use IRA funds to make a non-traditional investment, such as real estate. In essence, with a custodian controlled Self-Directed Roth IRA, every step a Roth IRA holder wanted to make had to be carried out through a custodian, such as IRA Financial Trust Company. In other words, the Roth IRA holder directs the IRA custodian, IRA Financial Trust, to make the investment directly. All transaction related activity, such as paying expenses or depositing checks, must be paid by the IRA custodian.
3. “Checkbook Control” Self-Directed Roth IRA LLC
IRA Financial Trust is proud to offer Checkbook IRA custodial services along with its full service IRA administration services, all for one low price without any transaction or asset valuation fees. IRA Financial Trust Company is one of the few full-service IRA custodians who specialize in establishing Checkbook Control IRA LLC accounts.
IRA Financial Trust Company is a regulated, non-banking financial institution that is made up of retirement tax specialists committed to helping you make Self-Directed retirement investments quickly while minimizing annual fees. IRA Financial Trust Company was founded by tax attorneys who worked at some of the largest law form in the world, including White & Case LLP and Dewey and LeBoeuf LLP and have helped over 15,500 clients self-direct their retirement funds through their ownership in the IRA Financial Group LLC. Our experience working with Checkbook Control IRA LLC structures is unmatched in the industry.
In the 1996 case of Swanson vs. Commissioner, 106 T.C. 76 (1996), the tax court gave its blessing to a new type of Self-Directed IRA structure — the Self-Directed Roth IRA LLC, also known as the Checkbook Roth IRA— that is much simpler than investing through a regular custodial controlled Self-Directed IRA account.
With a “Checkbook Control” Self-Directed Roth IRA, the Roth IRA holder (you) will have total control over your Roth IRA funds and you will no longer have to get each investment approved by the IRA custodian of your account, like in a custodian controlled Self-Directed Roth IRA. Instead, with IRA Financial Trust Company’s Checkbook Control Roth IRA account, all decisions are truly yours. When you find an investment that you want to make with your Roth IRA funds, simply write a check or wire the funds straight from your Self-Directed Roth IRA LLC bank account to make the investment.
Under the Checkbook Roth IRA format, the Checkbook Control Roth IRA is set up as a Self-Directed account with IRA Financial Trust that's capitalized by funds rolled over from your current retirement account. The funds are deposited with Northern Trust. Then, a Limited Liability Company (“LLC”) is created in which your new Roth IRA purchases all the membership units/interests. Now, your money is held in an LLC and you are ready to invest at your discretion. A “Checkbook Control” Self-Directed Roth IRA allows you to eliminate the delays, IRA custodian transaction fees, and IRA account annual valuation fees, enabling you to act quickly when the right investment opportunity presents itself.
With a Self-Directed Roth IRA, when you find an investment that you want to make with your Roth IRA funds, simply write a check or wire the funds straight from your Self-Directed Roth IRA LLC bank account to make the investment. The Self-Directed Roth IRA allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.
IRA Financial Trust offers one low, flat IRA Custodian fee without any transaction fees and annual account valuation fees. We believe that Self-Directed Roth IRA investing should be affordable and simple. IRA Financial Trust is committed to helping all our clients build their retirement wealth through Self-Directed IRA investments without the high costs and complexities.
To learn more about what type of Self-Directed Roth IRA account will best suit your retirement and investment needs, please contact an IRA retirement expert at 1-800-472-1043.