9 Questions to Ask Before Opening a Self-Directed IRA

Written By: Daniel Gleich

Key Points 

• You’re likely to have a better experience opening a Self-Directed IRA (SDIRA) if you have an awareness of your interested investments and your exact amount of available funds.
• Researching Self-Directed IRA custodians can prove to be favorable in finding a company that provides exceptional service and lines up with your specific financial goals.
• Planned and prepared is the best manner to arrive at the embarkment of your investing, as it will generally embellish you with peace of mind from start to finish.

Self-Directed IRAs (SDIRAs) are retirement accounts that allow you to participate in alternative investing across a wide range of asset classes. Opening a Self-Directed IRA grants retirement portfolio diversification as these alternative assets are typically uncorrelated to Wall Street products. In addition, SDIRAs can potentially safeguard against inflation, all while developing gains in a tax-advantaged vehicle. Predictably, these accounts have garnered curiosity among many new investors. If you’re considering opening a Self-Directed IRA, you might want to begin by acquiring deeper insight with these nine common questions.

1. Do Self-Directed IRAs Allow My Investment of Interest?

Self-Directed IRAs offer their anticipating investors virtually ceaseless opportunities. Aside from standard investments like stocks, bonds, and mutual funds, you can dabble in alternative assets that align with your possible passion and expertise. 

Popular alternative assets include real estate, precious metals like gold and silver, promissory notes, small businesses, startups and crowdfunding initiatives, and even creative pursuits like intellectual properties and music royalties. What you’ll need to be cautious of when selecting your investment is that it’s IRA allowable. 

You are prohibited from investing in life insurance, S-corporation stocks, or anything that can be deemed as a collectible item. Moreover, any potential investment should not have affiliation with a disqualified person. Disqualified people are typically individuals or entities who are closely affiliated with you, such as lineal descendants, certain family members, and any LLCs or corporations that are owned by you or a disqualified person. 

It's strongly encouraged that you check with a financial advisor prior to placing your investment to ensure that you are adhering to the Self-Directed IRA appointed regulations. 

2. Do I Have Sufficient Funds to be Opening a Self-Directed IRA?

The amount of money you’ll need to open your Self-Directed IRA is contingent on the Self-Directed IRA custodian you’ll open your SDIRA through. Account set-up fees and the initial, mandated deposit can vary. You may also want to consider the cost of your chosen institute’s transaction fees, annual account fees, and the LLC state fee if you opt to upgrade your account with checkbook control.

At Madison Trust, we pride ourselves on being amongst the lowest in the industry. Our flat-rate fees help ensure the profitability of your investments. Regardless of your IRA’s worth, you will continue to pay at a fixed price. For more information, visit our fee schedule.

3. Will These Funds Cover the Costs Associated with My Investment?

Any investment purchase you make - accompanied by any of its future related expenses - must flow from the funds in your Self-Directed IRA. Because of this, it’s considered best practice that you take an honest look at the funds you’re supplying during the initial stages of opening a Self-Directed IRA and determine if there’s enough remaining to pay for your investment. 

Have I Considered the Options, Processes, and Implications That May Arise from My Alternatives?

If you’ve concluded that you can’t fund all your associated investment costs on your own, there are a few options: 

• Co-Investing with Personal Funds: You cannot utilize your personal funds to cover any IRA-related expenses. If you decide to create a Multi-Member IRA LLC and plan ahead, you can co-invest with both IRA and personal funds in certain cases. In the Multi-Member IRA LLC structure, the ownership percentage of your personal vs. IRA funds and returns on investment need to be allocated precisely and properly. It’s considered best practice to consult with your financial advisor to see if this structure aligns with your investment goals. 

• Pooling From Multiple Investors: You and a few other SDIRA holders can pool your funds collectively to make this investment, or you can create a Multi-Member LLC to seize the desired asset. It’s considered best practice to keep concise records of everyone’s ownership and contribution as in this structure once the ownership percentages are set, they can’t change. You may find consulting with a financial advisor to be essential as they can guide you through and steer you clear of prohibited transactions. 

If you aren’t interested in partaking in either of these options, you might achieve your required funds by obtaining a loan. You must obtain a non-recourse loan as these loans have the SDIRA guaranteeing repayment. If you personally guarantee the loan, it will likely result in a prohibited transaction as this signals an attempt to provide benefits to your retirement account.  Non-recourse loans do not allow the lender to go after you personally in the event of default. 

4. When Do I Need to Have the Funds Available for Investing?

Once your account is set up, your next step will be to fund the account with cash or assets. If you’re transferring funds from another IRA or retirement account, there may be a stagnant period as the transfer processes. Similarly, the purchase of your investment may be put on hold as the timing of your investment could be dependent on market fluctuations and availability. As a prospective investor, an optimal strategy may be familiarizing yourself with your industry’s field so that you can have a better understanding of your market’s patterns. 

5. What Kind of Account Should I Look into When Opening a Self-Directed IRA?

Every Self-Directed IRA lets your investment appreciate in a tax-advantaged environment. The difference between these accounts is how the tax advantages are received. Self-Directed Traditional IRAs let your gains grow in a tax-deferred account. Self-Directed Roth IRAs allow your gains to develop tax-free. This is because upon creation of a Self-Directed Roth IRA, taxes will be due when you contribute to your IRA. 

In the event that you plan on participating in an investment that’s transaction heavy, you could opt for a Self-Directed IRA LLC or Self-Directed IRA Trust. These accounts are upgraded with the supercharged power of checkbook control. This means you can perform your everyday investing transactions on your own accord, without the involvement of your Self-Directed IRA custodian. Furthermore, IRA LLCs offer superior liability protection, and IRA Trusts provide an extra layer of privacy since these accounts are not required to participate in certain reporting. 

A knowledgeable Self-Directed IRA Specialist can help educate you on various IRAs, so that you can make a well-informed decision on which account may be right for you.  

6. What Should I Expect from My Self-Directed IRA Custodian?

Your Self-Directed IRA custodian is primarily responsible for holding your assets and completing administrative tasks per your direction as the IRA owner. A custodian is mandatory following the IRS rules and regulations. Custodians are not permitted to give any financial advice or recommendations, and they cannot complete any forms or facilitate any transactions without your instruction. When looking for your Self-Directed IRA Custodian, you should take a few quintessential factors into consideration: 

• Industry Knowledge – Your custodian should be well-versed in IRS codes, prohibited transactions, disqualified persons, and other significant regulations.  

• Reliable Support – Returning calls and being available should be your Self-Directed IRA custodian’s priority. You may have a concern and the matter could be time sensitive. Being able to speak to a live representative is fundamental. 

• Cost-Effectiveness – Your account can accrue administrative and transaction fees. Some companies will charge extra for their custodial fees, based off the total amount of funds existing in your retirement savings account. This indicates that the more successful your investments are, the more you’ll pay. 

Madison Trust has instituted a low-cost, flat-rate fee schedule because we believe you shouldn’t pay more for investing wisely. Our method allows you to potentially accumulate money and save successfully, without additional costs. For more information, please visit our transparent fee schedule. 

7. Does the Self-Directed IRA Custodian I’m Considering Have a Respectable Online Presence?

Upon your research, you most likely will be perusing through the internet in the hopes of gaining clarity on your prospective custodian. A solid and renowned Self-Directed IRA custodian should have an active and respected online presence. Their official webpage should behave as an educational resource, providing substantial evidence of their industry knowledge. Checking their reviews is paramount, as an extraordinary company should perform their tasks so well that they inspire their clients to share their positive experience.

8. Have I Familiarized Myself with IRS Rules and Regulations Prior to Opening a Self-Directed IRA?

There are particular rules you must abide by when orchestrating an investment with a Self-Directed IRA, and some of the prohibited transactions can be a bit more granular depending on your asset class. Per se prohibited transactions, self-dealing prohibited transactions, and extension of credit prohibited transactions are the most common ones mistakeably performed by investors.  

Learning about the regulations of your account type is equally crucial. For example, you can’t take qualified distributions from your Self-Directed Roth IRA until five years after your first contribution date. Self-Directed Traditional IRAs mandate required minimum distributions after you’ve turned the age of 73 in 2024.  

The ins and outs of contribution limits are essential to know. As of 2024, the annual IRA contribution limit is a maximum of $7,000, unless you’re aged 50 and older, and are eligible for a catch-up contribution totaling to $8,000.  

The rules can be intricate and somewhat complex at times. Not familiarizing yourself with them could possibly compromise the validity of your account. Once you’ve drafted your investing blueprint, it’s recommended that you run it by a financial or tax advisor who can comprehensively explain your plan’s possible implications from an integrity and tax perspective. 

9. Does My Investment Exit Strategy Align with My Retirement Planning Goals?

Self-Directed IRAs were designed with the intention to aid in a better retirement. This is a key element to keep in mind when planning your financial goals. Decipher if you’re aiming for a long-term or short-term investment. Since SDIRAs tend to home in on stable, long-term growth, short-term investments may not flourish as you anticipated with this mechanism. 

Evaluating your liquidity needs, risk tolerance, overall portfolio diversification, and the income you plan on requiring from your retirement savings once you’re no longer employed is incredibly important. There are several exit strategies to potentially analyze, including distributions in-kind, traditional withdrawals, estate planning, the selling of your investments, and beyond. Constructing a plan of action and staying on course can possibly guide you towards your dream outcome. 

Opening a Self-Directed IRA Can Be Seamless

Through education, an exceptional custodian, discipline, and a gameplan, you can potentially accrue excess funds for your retirement. Madison Trust’s Self-Directed IRA Specialists want to help you bring your financial ambitions to fruition. With our simple, three-step process for opening accounts, and our responsive and extensively trained custodians, we are readily available and eager to get you to the finish line. Call us today and start your self-directing sojourn!