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

A self-directed individual retirement account (SDIRA) is a type of retirement account that allows individuals to purchase alternative assets, such as precious metals, that aren’t offered in conventional individual retirement accounts. For those looking to safeguard their wealth and preserve their savings, SDIRAs can be a great option, as they offer more control and flexibility over your investment choices.

Similar to conventional IRAs, self-directed IRAs are subject to the same rules and regulations set forth by the IRS, including contribution limits, distribution rules, and tax treatment. However, due to the broader range of asset types that are allowed to be purchased in an SDIRA, they typically require more active management and due diligence to ensure compliance.

In this guide, we explore self-directed IRAs in detail, allowing you to learn about the different types of assets allowed, the benefits and potential drawbacks, the rules governing SDIRAs, and more. This way, you can gain a better understanding of how these types of retirement accounts work and whether they align with your retirement and savings goals.

What Is a Self-Directed IRA?

A self-directed individual retirement account (SDIRA) is a type of retirement account that allows account holders to invest in alternative assets that are generally not permitted in conventional IRAs. Self-directed IRAs gain their name from the ability of account holders to manage their own accounts, such as having the ability to choose whether to buy gold or buy silver, for example.

However, while account holders can manage their accounts, they must work with an IRS-approved custodian, which is a financial institution or entity that’s responsible for administering the account. The role of an SDIRA custodian is to administer the assets within the SDIRA on behalf of the account holder, facilitating the investments made and ensuring compliance with IRS regulations. Some of the primary responsibilities of a custodian include:

  • Account administration: Custodians are tasked with administrative tasks related to the SDIRA, such as processing paperwork for contributions, distributions, or rollovers.
  • Recordkeeping: Your custodian maintains accurate records of transactions, investments, and account balances related to your SDIRA.
  • Compliance oversight: IRS-approved custodians are experts who understand prohibited transactions, regulatory guidelines, and other IRS regulations to ensure you remain compliant.
  • Reporting: One of the benefits of a custodian is reporting. Your custodian can provide regular account statements that detail account activity, performance, and other important information.

If you’re considering a precious metals IRA, your custodian can ensure the metals you choose are compliant and meet IRS purity requirements, as well as help facilitate transactions and rollovers, such as buying gold with a 401(k). It’s important to choose your custodian carefully, as they play a crucial role in the management and administration of your retirement assets. At Birch Gold Group, your Precious Metals Specialist can connect you with trusted custodians who specialize in precious metals.

What Types of Assets Are Allowed in SDIRAs?

One of the top reasons why individuals consider opening a self-directed IRA is that they offer the ability to purchase alternative assets outside of conventional IRAs. This broader range of options gives more control over your investment choices and can be a great way to protect your savings and meet your retirement goals. Below are some of the various types of assets permitted in an SDIRA:

  • Precious metals:Investing in precious metals like gold, silver, platinum, and palladium offers account holders a wide range of potential benefits. Precious metals are often seen as safe-haven assets, making them an excellent option for diversifying current savings and hedging against inflation. Eligible precious metals can take various forms, such as bars, rounds, and coins.
  • Real estate: Another asset class account holders can purchase through an SDIRA is real estate. Residential, commercial, and rental properties, along with land and real estate investment trusts (REITs), are all eligible types of real estate that are allowed in SDIRAs.
  • Businesses: Through an SDIRA, account holders can invest in privately held companies, venture capital funds, private debt instruments like promissory notes and trust deeds, startups, and private equity funds.
  • Cryptocurrencies: SDIRAs now allow individuals to purchase cryptocurrencies like Bitcoin and Ethereum.

What Are the Different Types of SDIRAs?

Self-directed IRAs are similar to conventional IRAs in that they can take different forms and tax structures. Similar to how a conventional IRA can be a Traditional IRA, Roth IRA, SEP IRA, or SIMPLE IRA, so can an SDIRA. Understanding the different types of SDIRAs can help you choose one that aligns with your goals and current financial situation. Below is a breakdown of how each type of SDIRA works:

Types of SDIRAs

Traditional SDIRA

A Traditional SDIRA is a form of SDIRA that allows you to make tax-deductible contributions, meaning these contributions lower your taxable income for the year in which that contribution was made. When you make a withdrawal during retirement, your withdrawals will be taxed as ordinary income. A specific rule for Traditional SDIRAs is that account holders must take required minimum distributions (RMDs) once they reach the age of 73. An RMD is simply the minimum amount you must withdraw from your retirement account each year.

Roth SDIRA

A Roth SDIRA, such as a Gold Roth IRA, allows you to make contributions with after-tax dollars, meaning you pay taxes when you make a contribution. Because taxes are already paid, they’re not deductible for that given year. However, once you make a withdrawal during retirement, that withdrawal is tax-free. Unlike Traditional, SIMPLE, and SEP SDIRAs, Roth SDIRAs are not subject to required minimum distributions during your lifetime. However, Roth SDIRAs do have income limits, whereas Traditional SDIRAs do not, which means if you earn more than a certain threshold, you will not be able to contribute to a Roth SDIRA.

SEP SDIRA

A Simplified Employee Pension (SEP) SDIRA is an IRA that allows employers to make contributions on behalf of eligible employees. These contributions are tax-deductible for employers during the year in which the contributions were made, and withdrawals employees make in retirement are considered taxable income. It’s important to note that the employer makes contributions on behalf of participating employees, meaning employees are not permitted to make contributions.

SIMPLE SDIRA

A Savings Incentive Match Plan for Employees (SIMPLE) SDIRA is a retirement plan that allows employees to make contributions through salary deferrals. Employers must make either matching contributions or non-elective contributions. A key difference between SEP and SIMPLE SDIRAs is that both employees and employers can make contributions to a SIMPLE SDIRA. However, this retirement savings plan is only available to employers with 100 or fewer employees. SIMPLE SDIRAs also follow the age restrictions for RMDs, and withdrawals made in retirement are taxed as ordinary income.

What Are the Benefits of SDIRAs?

A self-directed IRA offers account holders a wide range of potential benefits that conventional IRAs don’t always offer. For example, for account holders opening a Gold IRA, some of the benefits you can enjoy include:

  • Flexibility: Because SDIRAs give account holders the flexibility to manage and direct their accounts, they can choose the types of assets they want to hold. When it comes to precious metals, options include eligible gold, silver, platinum, and palladium.
  • Diversification: A self-directed IRA opens the door for purchasing a wide range of assets, allowing individuals to diversify their current savings to spread risk and protect their savings.
  • Potential for higher returns: Precious metals like gold have historically maintained their purchasing power, serving as a safe haven asset that acts as a shield during times of economic uncertainty. Overall, gold has proved to perform when the dollar doesn’t.
  • Tax advantages: Like conventional IRAs, SDIRAs offer various tax advantages depending on the type of SDIRA you choose. For example, Traditional SDIRA account holders can benefit from tax-deferred growth, whereas Roth SDIRA account holders can enjoy tax-free growth.
  • Hedge against inflation: Historically, precious metals like gold and silver have remained stable even during times of inflation, offering peace of mind that you can maintain your purchasing power during periods of instability.
  • Safeguarding wealth: If you’re looking for ways to protect your current retirement savings, an SDIRA can be an option. By purchasing alternative tangible assets like precious metals, their inherent value adds another layer of diversification to protect your savings.

What Are the Potential Drawbacks of SDIRAs?

As with any financial decision, it’s important to understand the potential drawbacks to ensure the choice you make aligns with your financial goals and risk tolerance. Below are possible limitations to consider before opening an SDIRA:

  • Due diligence: As an account holder, it’s up to you to perform your due diligence on the assets you’re considering. While a custodian helps administer your account, they can’t provide financial advice. Working with a certified financial advisor can help guide your decisions.
  • Regulatory compliance: SDIRAs have additional rules and regulations to abide by, such as understanding eligible assets, withdrawal rules, prohibited transactions, and the potential non-compliance penalties that can result from failing to follow IRS rules.
  • Fraud and scam potential: Depending on the types of assets you’re considering, such as cryptocurrency or private equity, there’s a potential for falling risk to fraud or scams, as custodians typically offer limited protections. Working with an IRS-approved custodian can help ensure you’re working with a reputable entity.
  • Market and economic risks: Like any financial instrument, SDIRAs are subject to market and economic risks, such as swings in supply and demand, global events, and market fluctuations.
  • Custodial and administrative fees: There are several fees account holders may be responsible for when setting up and managing their SDIRA, such as account setup fees, management fees, storage fees, and insurance fees.

Potential benefits and drawbacks of SDIRAs

What Are the Rules of SDIRAs?

Maintaining compliance with IRS guidelines is crucial when opening a self-directed IRA. There are certain eligibility requirements, contribution limits, and withdrawal rules that need to be followed to avoid potential penalties and fees.

Contribution limits

Similar to conventional IRAs, SDIRAs have annual contribution limits, which refer to the amount of money you can place in your account for that year. Below are the SDIRA contribution limits for 2023 and 2024:

  • 2023 Contribution Limits
    • Traditional SDIRA: $6,500 with a $1,000 catch-up contribution limit
    • Roth SDIRA: $6,500 with a $1,000 catch-up contribution limit
    • SIMPLE SDIRA: $15,500 with a $3,500 catch-up contribution limit
    • SEP SDIRA: $66,000 or 25% of net earnings
  • 2024 Contribution Limits
    • Traditional SDIRA: $7,000 with a $1,000 catch-up contribution limit
    • Roth SDIRA: $7,000 with a $1,000 catch-up contribution limit
    • SIMPLE SDIRA: $16,000 with a $3,500 catch-up contribution limit
    • SEP SDIRA: $69,000 or 25% of net earnings

Withdrawal rules

Self-directed IRAs are subject to certain withdrawal rules depending on the type of account. For all SDIRAs, account holders must wait until they reach the retirement age of 59 ½ to make penalty-free withdrawals. However, for Roth SDIRAs, you are allowed to make withdrawals on your contributions tax- and penalty-free— only early withdrawals on earnings will be penalized. Non-qualified early withdrawals from any SDIRA can result in a 10% penalty.

Additionally, with Traditional, SIMPLE, and SEP SDIRAs, account holders are subject to make required minimum distributions (RMDs) when they reach the age of 73. The minimum amount is calculated based on factors like age, SDIRA value, and life expectancy. Failing to take an RMD can result in a hefty penalty of up to 25%.

Prohibited transactions

There are numerous prohibited transactions to which SDIRA account holders are subject. Examples can include:

  • Certain precious metals: Not all precious metals are IRA-eligible. Eligible gold must be 99.5% pure, except for the American Gold Eagle, silver must be 99.9% pure, and platinum and palladium must be 99.95% pure.
  • Self-dealing: Account owners, along with certain family members or entities related to the account owner, are prohibited from making transactions with assets that directly benefit the account owner, such as using funds to purchase a primary residence or vacation home. An example of self-dealing is when an account holder owns a rental property inside of their SDIRA. If their rental property needs repairs and the account holder uses their funds to repair it, it’s considered self-dealing due to furnishing services. To avoid this, the account holder would have to use funds from the SDIRA to make the repair.
  • Lending money to oneself: Account owners are prohibited from borrowing money from their SDIRA and lending it to themselves, their beneficiaries, or disqualified persons.
  • Purchasing prohibited assets: The IRS prohibits certain types of collectibles from being placed in an SDIRA, such as artwork, antiques, gems, rugs, and stamps.

If a prohibited transaction is made, the SDIRA will lose its IRA status, and you may be subject to certain penalties and taxes.

How Do You Open a Self-Directed IRA?

Opening an SDIRA has several benefits, such as the ability to purchase precious metals and make a gold investment, for example. If you’re ready to open a self-directed IRA, a Birch Gold Group Precious Metals Specialist can help you get started. Below are the general steps taken to begin safeguarding your wealth with an SDIRA:

1. Open an account with a custodian

Your Precious Metals Specialist will work with you to open your account and find a reputable custodian you can trust. We partner with various custodians, such as Equity Trust Company and Goldstar Trust Company. To open your precious metals IRA, we require an initial deposit of $10,000.

2. Fund your account

Once the paperwork is complete, the next step is funding your account. There are various accounts that can be rolled over into your new SDIRA, such as:

  • Traditional IRA
  • Roth IRA
  • SEP IRA
  • SIMPLE IRA
  • Eligible 401(k), 403(b), 457, TSP, and more

Your Specialist will work with you to ensure a smooth rollover or transfer process and ensure the path you choose to fund your new SDIRA abides by compliance standards.

3. Select and purchase assets

With your SDIRA account funded, your next step is to choose the alternative assets you wish to purchase. For those interested in precious metals, the IRS has criteria for certain types of gold, silver, platinum, and palladium. Precious metals have a reputation for maintaining value, making them a great option for diversifying your savings and protecting your wealth.

At Birch Gold Group, your Precious Metals Specialist will walk you through the IRS’ criteria, along with your precious metals options, to ensure they meet your retirement goals. Once your precious metals are purchased, they will be stored at a secure and approved depository. A depository is a secure storage facility that not only offers robust security features like vaults, 24/7 monitoring, and on-site security professionals but also strong insurance policies for an added layer of protection.

Wrapping Up: Understanding Self-Directed IRAs

A self-directed IRA grants account holders the ability to purchase alternative assets not permitted in conventional IRAs. An SDIRA can be a great option for those looking for ways to safeguard their savings and preserve their wealth through assets like precious metals that can serve as a safe haven asset or hedge against inflation. At Birch Gold Group, our Precious Metals Specialists can help you get started. You can review our guide to investing in gold to learn more about the benefits of gold and how to purchase gold through a precious metals IRA, as well as request our free information kit or call us at (800) 355-2116 to speak to a Specialist.

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