What is a Self-Directed Individual Retirement Account (SDIRA)?


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Precious metals continue to serve as a popular investment for retirement savings. But in order to include physical precious metals in your retirement account, you must use a specific type of account. The self-directed retirement account (SDIRA) allows for physical precious metals, bars and coins, to be purchased and held in a tax-sheltered account. Let’s take a look at exactly what this means.

What is an SDIRA?

A self-directed individual retirement account — better known as an SDIRA — is a type of retirement account that the account holder fully manages. Instead of being limited to a menu of savings options provided by a bank or brokerage, SDIRA investors have access to a much wider array of assets, including precious metals, that are simply unavailable in other types of retirement accounts.

How self-directed compares to a conventional IRA

An SDIRA mimics a conventional IRA for legal and tax purposes, as it brings the same benefits as a traditional retirement account. However, account holders of an SDIRA have much more control over the assets held in their accounts.

A conventional IRA is managed and administered by a third party and hasstock trading graph closeup limitations on the types of assets held within it. The specific offerings vary based on the company managing the account. Some administrators offer very limited choices; some charge rapacious fees. A conventional IRA does allow you some degree of freedom to choose how to invest your savings.

On the other hand, an SDIRA is entirely managed by the account holder and has a much wider array of assets available. Instead of a broker or bank telling you what you’re allowed to buy, you choose for yourself. You can invest in types of assets that conventional IRAs can’t. A custodian handles your paperwork for you. The bottom line is, your money is yours to invest as you see fit.

The increased investment options in an SDIRA allow investors to diversify their retirement savings more thoroughly than traditional retirement accounts. Portfolio diversification is one of the ways to mitigate risk and increase return potential. Diversification can also be advantageous for investors with expertise in certain investment areas, like precious metals for example. Precious metals investors can further take advantage of those assets in an SDIRA.

SDIRA investment options

Account-holders of an SDIRA can choose from a wide range of investable assets, much wider than those available within a conventional IRA. But this doesn’t mean that any asset is available for an SDIRA account.

 

SDIRA-approved investments Prohibited SDIRA investments
  • Precious metals (gold, silver, platinum, palladium)
  • Commodities
  • Real estate
  • Digital assets (cryptocurrencies)
  • Collectibles (including antiques, gems, rare wines, stamps, etc.)
  • S-corporations
  • Life insurance
  • Property for personal use

 

Opening an SDIRA

While you can open an SDIRA at some traditional investment brokers, most don’t offer this type of account. Instead, you need to find a qualified IRA custodian that specializes in SDIRA accounts.

Before choosing a custodian, do the necessary research to understand what is offered for self-directed IRA accounts. Custodians can be limited in allowed investment options, so you want to ensure your custodian offers the specific types of investments you are interested in for your SDIRA account.

What is an IRA custodian’s role in an SDIRA?

According to IRS guidelines, an individual retirement account custodian is necessary for all retirement accounts:

“All IRAs must be held by a custodial entity such as a bank, credit union, trust company, or an entity that is licensed and regulated by the IRS as a ‘non-bank custodian.'”

An IRA custodian doesn’t make investment recommendations themselves and instead sticks to the administration and handling of your account and your assets. Therefore, a custodian is the entity that holds and secures your SDIRA assets while maintaining the account’s standing with the IRS.

Custodians perform the following functions:

  • Maintain IRA forms and follow regulations as laid out by the IRS
  • Record income from assets held within the SDIRA
  • Record account contributions, transfers, and rollovers
  • Place buy/sell orders and follow-through on asset liquidations
  • Tax reporting to the IRS
  • Provide up-to-date account statements which outline the financial positions of all assets within the SDIRA account

Roth SDIRA vs. Traditional SDIRA

Like a conventional IRA, your SDIRA can be opened as a Traditional IRA or a Roth IRA. The main difference between these two types of retirement accounts is in their tax implications. Contributions to a Roth SDIRA occur after taxes, and any earnings within the account grow tax-free. Therefore, distributions out of a Roth SDIRA are also tax-free. The Roth is basically the opposite of a Traditional IRA, which allows you to make tax-free contributions to the account but requires taxes to be paid on any contributions and earnings at the time of withdrawal.

Here’s a look at some other differences between the two options:

Roth SDIRA Traditional SDIRA
Funding source After-tax dollars Pre-tax dollars
Distributions Tax-free Taxed as income
Taxes on growth? No Yes, taxed as income
Contribution limit Income-based limits Standard limit regardless of income
Early withdrawal Can withdraw contributions at any time with no penalty OR at age 59 ½ Penalty-free withdrawals begin at age 59 ½
Required minimum distributions (RMDs) No RMDs required RMDs required at age 72

Fees

SDIRA fees can be higher than conventional IRAs due to their more complicated structure and availability of assets. This makes it all the more important to find an IRA custodian with a transparent and fair fee structure. SDIRA custodians often charge a fee to open an account, manage the account (quarterly or annually), make investments, and subsequently close the account.

When it comes to fee structures, IRA custodians generally work from one of two fee models:

Flat Fee A single fee is charged regardless of the value of your account.
Asset-based Fee A fee based on the total asset value in your account. As your account value grows, the fee charged increases as well.

Risks

Because the possibilities for investments in an SDIRA are nearly endless, it comes with higher risk than a conventional IRA. Instead of choosing from a pre-vetted list of investment options, SDIRAs allow you to invest in almost any legal asset imaginable as long as a qualified custodian agrees.

While there are risks with SDIRAs, a knowledgeable and experienced custodian will help protect you and mitigate risks on your valuable assets.

Liquidity risk

Traditional investments trade on very liquid markets, making it easy to trade in and out of them as needed. On the other hand, alternative investments can be highly illiquid, making it difficult to extract money from your SDIRA in a timely fashion. Lack of liquidity could create a situation where an asset sells for much less than its actual value, due to lack of demand.

Investment risk

As with any investment, an SDIRA has the risk of investment loss. Simply put, this means the value of your assets declining. On the other hand, because you can invest in a vastly more diverse array of assets with an SDIRA, this risk is heightened. Doing your due diligence will help identify riskier assets and avoid those which are not a good fit for your retirement savings plan.

Fraud

Black keyboard with red Fraud Key

Unfortunately, SDIRAs are more prone to fraud than other retirement accounts. Anyone can pose as an SDIRA custodian and fraudulently take money from unsuspecting investors. Fraud can be combated by researching the proposed custodian and ensuring they are verified by the IRS. There is also the risk of investment fraud, where investors are tricked into buying an asset that has been misrepresented.

Maintaining tax status

To maintain the IRA status of your account, you must follow the IRS rules for an SDIRA. Some of these rules include:

  • No use of SDIRA assets as collateral for loans
  • No self-dealing
  • No prohibited transactions (such as “selling” property to your own IRA)
  • No transactions with relatives

Physical precious metals in an SDIRA

Stacks of 1 kg gold bars

One of the most sought-after invested asset classes within an SDIRA is physical precious metals. These assets allow investors to diversify their retirement holdings into tangible commodities that serve as solid stores of value and a traditional “safe haven” for investors.

Birch Gold has worked with Equity Trust Company and STRATA Trust

Company for over 15 years, they are two of the most qualified SDIRA custodians and have A+ ratings with the Better Business Bureau. Birch Gold is a leading dealer of physical gold, silver and other precious metals in the United States. We can help you to acquire gold and other precious metals with your retirement funds through our qualified custodian partners.

If you’re interested in the options an SDIRA can offer to diversify and fine-tune your retirement savings, we can help. Get in touch with a Birch Gold Specialist today to learn more about how you can open up a precious metals SDIRA.