Deborshi Choudhury, an IRS Enrolled Agent with 16 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in the UAE and Canada.
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Can I take over my IRA using the self-directed IRA?
Yes, a self-directed IRA grants you complete control of investments from your retirement account.
Unlike traditional and Roth IRAs, a self-directed IRA offers nearly unlimited investment options that can change your investment strategy to fit your lifestyle and the rapidly changing economy.
Self-directed IRA (SDIRA)
A self-directed IRA is a different variation of a retirement account that allows you to choose from a wide range of alternative assets not typically offered in a traditional or Roth IRA.
Having extensive knowledge in choosing and managing alternative assets is crucial in opening a self-directed IRA as the responsibility is completely in your hands.
Why is asset management important in opening a self-directed IRA?
SDIRA places the responsibility of investment decisions on the account holder. Here’s why effective management of SDIRA assets is important:
- Maximizing returns: Specialized knowledge and proper management allow select investments to align with the individual’s financial goals and generate higher returns.
- Risk management: Allows for diversification of investments and allocating assets based on responding to market conditions, economic changes, or personal circumstances.
- Compliance with IRS regulations: To avoid prohibited transactions and ensure compliance with the IRS rules.
- Liquidity considerations: Ensuring sufficient liquidity flowing within the account to meet the required minimum distributions (RMDs) upon reaching 72 or 73.
- Aligning investments with retirement goals: To tailor an investment strategy that aligns with the individual’s retirement goals.
What kind of assets can I include in a self-directed IRA?
Here are various asset selections you can include in your SDIRA:
- Traditional assets: Stocks, bonds, mutual funds, or exchange-traded funds (ETFs).
- Digital assets: Cryptocurrency or non-fungible tokens (NFT).
- Real estate: Residential, commercial, or rental properties.
- Precious metals: Gold or silver.
- Foreign assets: Foreign real estate, international businesses, or currencies.
What is the process for opening a self-directed IRA?
- Search for a qualified SDIRA custodian: Not all financial institutions offer SDIRAs. Choose the one that does and supports alternative investments. This can be a bank, trust company, credit union, or other qualified financial institution.
- Open a self-directed IRA: Submit the requirements and fill out the application from the qualified custodian. This process is similar to opening a traditional IRA or Roth IRA.
- Fund the account: This can be done by contributing annually, transferring from an existing IRA, or initiating a rollover from other retirement accounts.
- Choose alternative assets for investment: Purchase or hold preferred investments in the self-directed IRA and ensure an understanding of IRS regulations on permissible investments.
- Manage and maintain the account: Actively manage the account, like buying and selling assets based on market conditions and keeping returns consistent for distributions.
How do I transfer funds from my existing IRA to a self-directed IRA?
Here are two options to transfer your funds to a self-directed IRA:
- Direct transfer: Your current custodian can initiate a transfer of funds from your existing IRA to your qualified SDIRA custodian. There is no tax consequence, and it avoids the risk of penalties.
- Rollover: You can request a distribution from your traditional IRA and deposit the funds into the SDIRA. This must be executed within 60 days to avoid taxes and penalties.
What are the contribution periods for a self-directed IRA?
The account holder should make contributions annually. In addition, owners who are 50 and above are allowed to make catch-up contributions of up to US$1,000.
Year | Maximum annual amount (USD) |
2024 | US$7,000 |
2023 | US$6,500 |
At what age can I start making withdrawals from my self-directed IRA?
It is the same as your existing IRA. The rules for distribution on a traditional and Roth IRA generally apply to self-directed IRA as well.
Traditional SDIRA
Setting up a traditional SDIRA will subject you to Required Minimum Distributions (RMDs). You can start claiming your RMDs once you reach the age of 72 (73 for those who turn 72 after December 31, 2022.)
Roth SDIRA
For Roth SDIRA, you can start claiming your contributions once you reach the age of 59½. The account must also be held on your ownership for at least five years. The benefit of Roth SDIRA is withdrawals are tax-free and penalty-free
If you wish to withdraw without meeting the requirements, you can be subject to regular income tax and a 10% penalty on your withdrawals.
What risks are associated with opening a self-directed IRA?
Here are the risks that arise from the complexity and less-regulated nature of many alternative investments:
- Lack of professional oversight: Some alternative assets have limited data on their financial statements and other records, and public accounting firms may not audit available information. If you don’t fully understand the assets you’re investing in, you might make poor investment choices and lose money.
- Illiquid investments: Many assets that can be held in an SDIRA are not easily converted to cash. Liquidating alternative assets may take time and could force you to sell investments at unfavorable prices.
- Investment Fraud Risk: SDIRAs are often targeted by fraudulent schemes because alternative investments are less regulated. Even though custodians administer the account, they do not validate the legitimacy of investments.
- Tax regulations: Some assets have different tax regulations to follow, which could disrupt your tax filing. Failing to file the proper taxes can result in penalties.
