Self-Directed IRA and Solo 401(k): How to Invest Beyond Wall Street
Investors do not have to limit their retirement savings to stocks, bonds and mutual funds.
A Self-Directed IRA can allow you to invest retirement funds in alternative assets such as real estate, private placements, private lending and certain other investments. Likewise, a Self-Directed Solo 401(k) can give qualifying self-employed investors greater control over how they invest for retirement.
As a result, investors can build retirement strategies around assets and opportunities they understand rather than relying exclusively on traditional Wall Street investments.
What Is a Self-Directed IRA?
A Self-Directed IRA, often called an SDIRA, is an individual retirement account that allows the account owner to invest in a broader range of assets than most traditional brokerage IRAs offer.
Depending on the investment and account structure, a Self-Directed IRA may hold assets such as:
- Real estate
- Private placements
- Private equity
- Promissory notes
- Private lending investments
- Certain precious metals
- Certain cryptocurrency investments
- LLC interests
- Real estate syndications
The tax advantages generally come from the IRA itself. The key difference is the range of investments the account can hold.
What Is a Self-Directed IRA Custodian or Administrator?
A Self-Directed IRA requires a qualified custodian or trustee.
A Self-Directed IRA administrator helps process transactions, maintain account records and facilitate the reporting required for the retirement account.
However, the account owner chooses the investment.
At uDirect IRA Services, investors direct us to process investments they have selected. We provide administration and education, but we do not recommend, endorse or perform due diligence on investments.
As a result, investors retain control over their investment decisions while the retirement account remains properly administered.
Can a Self-Directed IRA Invest in Real Estate?
Yes. Real estate represents one of the most popular uses for a Self-Directed IRA.
A Self-Directed IRA may potentially invest in assets such as:
- Residential rental property
- Commercial real estate
- Raw land
- Real estate investment funds
- Real estate syndications
- Mortgage notes
- Certain LLC interests that hold real estate
The IRA, rather than the individual account owner, must generally purchase and own the investment.
Likewise, income and expenses associated with the IRA-owned investment generally flow through the retirement account.
For example, if a Self-Directed IRA owns a rental property, rent should return to the IRA and eligible property expenses should generally be paid from the IRA.
As a result, maintaining separation between personal funds and IRA funds becomes an important part of Self-Directed IRA investing.
Can I Buy Rental Property With My IRA?
Yes, a Self-Directed IRA can potentially purchase rental property.
However, IRA owners need to follow IRS rules carefully.
For example, an IRA owner generally cannot personally use an IRA-owned vacation home or rental property. Certain family members and other disqualified persons also face restrictions.
The account owner should also avoid personally paying expenses related to IRA-owned property.
Understanding these rules before purchasing real estate can help investors avoid prohibited transactions.
What Is a Real Estate IRA?
A Real Estate IRA usually refers to a Self-Directed IRA that holds real estate or real-estate-related investments.
It is not a separate type of IRA under the tax code.
Instead, an investor might use a Traditional IRA, Roth IRA, SEP IRA or another qualifying retirement account and direct that account toward real estate investments.
As a result, someone searching for a “Real Estate IRA” is typically looking for a Self-Directed IRA provider capable of administering real estate assets.
Can I Use an IRA to Invest in a Real Estate Syndication?
A Self-Directed IRA can potentially invest in a real estate syndication if the investment qualifies under the retirement account rules.
Instead of directly purchasing a property, the IRA may purchase an interest in an entity that owns or operates real estate.
This approach can appeal to investors who want exposure to real estate without personally managing property.
Investors should still perform their own due diligence on the sponsor, offering documents, fees, projected returns and investment risks.
Can a Self-Directed IRA Invest in Private Placements?
Yes. Private placements represent another common alternative investment held through Self-Directed IRAs.
These investments may include:
- Private companies
- Private equity funds
- Limited partnerships
- LLC membership interests
- Real estate funds
- Syndications
- Certain startup investments
A Self-Directed IRA custodian or administrator processes the investment according to the account owner’s instructions.
However, investors remain responsible for evaluating the investment opportunity.
Can a Self-Directed IRA Make Private Loans?
A Self-Directed IRA can potentially make loans and purchase promissory notes.
For example, an IRA might make a real-estate-secured loan to an unrelated borrower.
The borrower then makes principal and interest payments back to the IRA.
As a result, private lending can provide another way for investors to use retirement funds outside traditional securities markets.
Investors must still comply with prohibited transaction rules and should understand the credit, collateral and default risks associated with lending.
What Is a Self-Directed Solo 401(k)?
A Self-Directed Solo 401(k) is a retirement plan designed primarily for business owners or self-employed individuals who do not have eligible full-time employees other than a spouse.
You may also hear it called:
- Solo 401(k)
- Individual 401(k)
- One-Participant 401(k)
- Self-Employed 401(k)
- Owner-Only 401(k)
A Self-Directed Solo 401(k) can potentially invest in many of the same alternative assets available through a Self-Directed IRA.
Who Can Open a Solo 401(k)?
A Solo 401(k) generally works for a business owner or self-employed person with earned business income and no qualifying full-time employees other than a spouse.
For example, qualifying individuals may include:
- Consultants
- Real estate professionals
- Independent contractors
- Freelancers
- Small-business owners
- Self-employed professionals
Because eligibility depends on your specific business circumstances, investors should review their situation carefully before establishing a plan.
Can a Solo 401(k) Invest in Real Estate?
Yes. A properly structured Self-Directed Solo 401(k) can potentially invest in real estate.
Depending on the plan and investment, this may include:
- Rental property
- Commercial property
- Land
- Real estate syndications
- Private lending
- Mortgage notes
- Private companies
- Certain alternative investment funds
As a result, a Solo 401(k) can become a powerful option for eligible self-employed investors who want greater control over their retirement assets.
What Is the Difference Between a Self-Directed IRA and a Solo 401(k)?
Both accounts can potentially hold alternative investments, but they have different eligibility rules, contribution limits and administrative requirements.
A Self-Directed IRA is available to a much broader group of investors.
A Solo 401(k), by comparison, requires qualifying self-employment or business income and generally cannot cover eligible full-time employees other than a spouse.
Solo 401(k)s may also provide higher potential contribution limits for qualifying business owners.
The best choice depends on your employment situation, retirement goals, investment strategy and tax considerations.
Can I Roll a 401(k) Into a Self-Directed IRA?
In many cases, investors can roll eligible retirement funds from a former employer’s 401(k) into a Self-Directed IRA.
Common funding sources may include:
- Former employer 401(k) plans
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs when applicable
- Other eligible retirement accounts
A direct rollover generally moves retirement funds from one qualified account to another without the investor personally taking possession of the funds.
As a result, investors can reposition existing retirement savings for alternative investments without necessarily making a new cash contribution.
What Does a Self-Directed IRA Cost?
Self-Directed IRA fees vary considerably between providers.
Some custodians charge fees based on:
- Account value
- Number of assets
- Transactions
- Asset type
- Percentage of assets under custody
uDirect IRA Services uses a flat-fee structure rather than charging based on the dollar value of the account.
This can become increasingly important for investors with larger account balances.
For example, a percentage-based fee can increase as the retirement account grows. A flat annual fee does not automatically rise simply because the investment increases in value.
As a result, investors should compare not only the initial setup cost but also the long-term cost of maintaining the account.
Why Are Self-Directed IRA Fees Important?
Fees can reduce long-term retirement returns.
Every dollar paid in administrative or asset-based fees represents money that is no longer invested for retirement.
For that reason, investors should compare:
- Setup fees
- Annual account fees
- Transaction fees
- Wire fees
- Asset fees
- Percentage-based fees
- Termination or transfer fees
A low-cost or flat-fee Self-Directed IRA can therefore become especially attractive for investors holding higher-value alternative assets.
What Is a Flat-Fee Self-Directed IRA?
A flat-fee Self-Directed IRA charges a predetermined administrative fee rather than calculating the primary annual fee as a percentage of the retirement account’s value.
At uDirect IRA Services, the annual account fee is $275, with a $50 account setup fee.
A flat-fee structure can make costs easier to understand and predict.
As a result, an investor with a higher account balance does not necessarily pay a higher annual administration fee simply because the account becomes more valuable.
What Should I Look for in a Self-Directed IRA Provider?
When comparing Self-Directed IRA companies, consider more than price.
Look at:
- Experience with alternative assets
- Real estate processing capabilities
- Private placement experience
- Customer service
- Funding and transaction processes
- Education
- Fee transparency
- Account setup procedures
- Technology
- Processing times
- Custodial relationships
You should also determine whether the provider regularly handles the particular type of investment you plan to make.
For example, a real estate investor may have different needs than someone purchasing private equity or making private loans.
What Is the Best Self-Directed IRA?
There is no single Self-Directed IRA provider that is best for every investor.
The right provider depends on the assets you intend to hold, the service level you need and the fees you are willing to pay.
An investor planning to buy rental property should look for a provider experienced in Self-Directed IRA real estate.
Likewise, someone investing in private funds or syndications should consider a provider experienced with private placements.
Cost matters as well.
As a result, investors with larger retirement accounts may want to compare flat-fee providers with custodians that charge according to account value.
What Is Checkbook Control?
Some investors use an IRA-owned LLC, sometimes called a Checkbook IRA structure.
In this arrangement, the Self-Directed IRA invests in an LLC, and the LLC may then make investments.
This can provide investors with greater transactional flexibility in some circumstances.
However, greater control also creates greater responsibility.
The account owner must understand prohibited transaction rules and avoid using IRA assets for personal benefit.
Investors should work with appropriate legal and tax professionals when considering an IRA-owned LLC.
What Are Prohibited Transactions in a Self-Directed IRA?
A prohibited transaction generally involves improper dealings between the retirement account and certain people or entities known as disqualified persons.
Examples can include using IRA assets for personal benefit or engaging in certain transactions involving the IRA owner or specified family members.
Self-Directed IRA investors should therefore understand the rules before investing.
The flexibility of an SDIRA does not eliminate the tax rules governing retirement accounts.
Does uDirect Choose Investments for Clients?
No.
uDirect IRA Services does not sell investments and does not recommend or endorse investment opportunities.
The investor identifies the investment and directs uDirect to process the transaction.
That distinction lies at the heart of self-directed investing.
You choose the investment.
We help administer the retirement account.
Why Consider a Self-Directed IRA?
A Self-Directed IRA may make sense for an investor who wants to:
- Diversify beyond traditional securities
- Invest in real estate
- Participate in private investments
- Make private loans
- Invest in assets they understand
- Exercise more control over retirement investment choices
As a result, a Self-Directed IRA can give experienced investors another way to build a retirement portfolio around their own investment strategy.
Why Consider a Self-Directed Solo 401(k)?
For qualifying self-employed investors, a Solo 401(k) can combine retirement savings opportunities with access to alternative investments.
It can be particularly useful for entrepreneurs and business owners who want to invest retirement funds in real estate, private placements or private lending.
However, eligibility and plan rules matter.
Investors should understand those requirements before establishing the account.
Ready to Invest Outside Wall Street?
You may have more retirement investment choices than you realize.
A Self-Directed IRA or Self-Directed Solo 401(k) can provide access to real estate, private placements, private lending and other alternative assets while allowing you to retain the tax advantages associated with the retirement account.
At uDirect IRA Services, we have helped investors understand and use self-directed retirement accounts since 2009.
If you are ready to explore your options, learn more about opening a Self-Directed IRA or Solo 401(k) with uDirect IRA Services.
Call 866-447-6598 or visit uDirectIRA.com to get started.
Frequently Asked Questions About Self-Directed IRAs
Can I buy real estate with a Self-Directed IRA?
Yes. A Self-Directed IRA can potentially purchase rental property, commercial real estate, land and certain real estate investment interests, provided the investment follows applicable retirement-account rules.
Can my IRA invest in a private company?
Potentially, yes. Self-Directed IRAs may invest in qualifying private companies, LLCs, partnerships and private placements.
Can my IRA lend money?
Yes. A Self-Directed IRA may potentially make private loans or purchase promissory notes, subject to applicable rules.
Is a Real Estate IRA different from a Self-Directed IRA?
Usually not. “Real Estate IRA” is commonly used to describe a Self-Directed IRA that invests in real estate.
Can I move an old 401(k) into a Self-Directed IRA?
In many cases, an eligible former-employer 401(k) can be rolled into a Self-Directed IRA.
Is a Solo 401(k) only for self-employed people?
Generally, a Solo 401(k) is intended for qualifying business owners or self-employed people without eligible full-time employees other than a spouse.
What is the advantage of a flat-fee Self-Directed IRA?
A flat annual fee does not automatically increase as the value of the retirement account rises. As a result, it may be particularly attractive for investors with larger account balances.
Does uDirect recommend investments?
No. uDirect provides Self-Directed IRA administration and education. Investors select and perform their own due diligence on investments.
Contact uDirect IRA Services
Want to learn more about self-directed IRAs and retirement investing beyond Wall Street?
Call uDirect IRA Services at (866) 447-6598
Email info@uDirectIRA.com
Click HERE to schedule a consultation with the uDirect team.