Investing with an Individual Retirement Account (IRA) is a wise choice if you aim to exploit tax benefits while saving for retirement. However, conventional IRAs typically restrict your investment choices to traditional assets such as stocks, ETFs, and bonds.
If investors desire to explore alternative assets and also reap the tax benefits of an IRA, they must possess a self-directed IRA (SDIRA). However, numerous self-directed IRA providers exist, each offering varying assets, charges, and regulations.
We are presenting the top self-directed IRA options that allow for investing in various asset classes while optimizing tax efficiency.
What Is A Self-Directed IRA?
A self-directed IRA provides the opportunity to invest in a wider variety of alternative assets compared to a regular IRA. This grants the freedom to invest in assets such as artwork, cryptocurrencies, fine wine, real estate, and numerous other alternatives at your own discretion. Furthermore, you still enjoy the same tax benefits and contribution limits as a traditional IRA.
SDIRAs are appealing because they offer complete control over trades and provide a wider range of options. However, it also implies that the custodian does not offer any investment advice. Additionally, self-directed IRAs allow investment in higher-risk assets such as private equity and speculative investments. Thus, they are more suitable for seasoned investors interested in exploring alternative investments rather than inexperienced investors focused on growing their savings.
The Best Self-Directed IRAs
These SDIRA providers offer great flexibility and affordability if you’re looking to explore alternative investments in your IRA.
1. Alto
Due to its affordability and user-friendly nature, Alto IRA has gained significant popularity as one of the top alternative IRA choices available. This platform allows individuals to easily open a Traditional, Roth, or SEP IRA and provides access to over 75 investment partners across various categories.
Although the investment partners possess varying investment criteria, most of them begin at a minimum of $100 and can go up to $1,000. Nevertheless, certain assets are exclusively accessible to accredited investors.
However, the primary advantage of Alto lies in its inexpensive fees. The Starter plan is available for just $10 per month or $100 per year if paid annually. Additionally, there is a $10 fee associated with every trade made with a partner. Nevertheless, if you opt for Alto CryptoIRA, the plan dedicated to cryptocurrencies, you will not be charged any account fees and will only need to pay a 1% trade fee.
In general, this uncomplicated fee structure contributes to streamlining your life. Moreover, Alto IRA offers a user-friendly process for opening an account, unlike certain self-directed IRA providers that require the establishment of an LLC for investment purposes. Consequently, this feature slightly restricts the capabilities of Alto IRA compared to other companies on our list. Nevertheless, it excels in terms of user-friendliness and affordability.
2. Rocket Dollar
If you desire greater authority in managing your investment assets or prefer to invest using a solo 401(k), Rocket Dollar is an excellent choice for a self-directed IRA. It facilitates the creation of an LLC specifically for your investments and provides checkbook control. This allows for quick and easy investments by writing a check or initiating a wire transfer. Furthermore, Rocket Dollar offers a “bring your own deal” option with the assistance of their team, enabling you to find and invest in your own opportunities.
Rocket Dollar, similar to Alto, collaborates with alternative investment platforms such as cryptocurrency exchanges, renewable energy companies, loan marketplaces, and crowdfunding sites.
Rocket Dollar offers two pricing plans: Silver and Gold. The Silver plan, priced at $15 per month with a setup fee of $350, is suitable for the majority of investors who are exploring alternative options. On the other hand, the Gold plan, priced at $30 per month with a setup fee of $600, provides additional benefits such as assistance with LLC setup, tax preparation, and priority support.
3. Equity Trust
Equity Trust, a prominent self-directed IRA provider, offers the opportunity to invest in various assets such as precious metals, cryptocurrencies, peer-to-peer lending, and real estate. Moreover, it allows for investment in traditional securities like mutual funds, stocks, and ETFs, ensuring a well-rounded and diverse portfolio.
Despite the user-friendly nature of several newer self-directed IRA companies, they lack the extensive experience and vast size of this SDIRA provider, which has been operating for more than 45 years, managing asset worth $34 billion. Consequently, the latter boasts a proven track record and a substantial client base.
In addition to that, Equity Trust allows the opening of solo 401(k)s, SEP IRAs, and other tax-advantaged accounts such as HSAs. Furthermore, the fee structure is determined by the overall balance of your account. For accounts that have a balance of up to $14,999, an annual fee of $225 is charged, and there is an additional $50 fee for online application. Unlike certain SDIRA providers, transaction fees are not applicable.
4. uDirect IRA
uDirect is similar to Rocket Dollar as another self-directed IRA provider that offers checkbook control. It is primarily recognized for its extensive range of real estate investment opportunities, such as individual deals, land investments, REITs, and real estate notes. Additionally, it grants you the ability to invest in various other assets due to the checkbook control feature, which provides full discretion over your account.
uDirect is a suitable option if you are seeking economical and uncomplicated charges. It imposes an annual fee of $275, along with a one-time setup fee of $50. Furthermore, maintaining a minimum account balance of $325 is required. Similar to Alto, uDirect charges a 1% commission for cryptocurrency trades up to $10,000, though larger trades result in reduced fees.
Depending on the total value, there are different storage fees for gold and silver that can be paid. However, uDirect is known for its comparatively low overall fees, particularly for bigger account balances.
5. Pacific Premier Trust
With $15 billion in assets under management, Pacific Premier Trust is another large player in the self-directed IRA space. It’s actually a division of Pacific Premier Bank, which has over 30 years of experience. And like Rocket Dollar and uDirect, you get checkbook control for as much control as possible.
The company places some emphasis on real estate and private equity, however, its website states that its team is knowledgeable in almost 42,000 alternative assets. Additionally, if you are not fully committed to alternative investments, you still have the option to invest in securities such as stocks, bonds, and ETFs.
A drawback of Pacific Premier Trust is its 0.30% annual fees for accounts up to $1 million; however, the company focuses on customer service and provides the assistance of Pacific Premier Trust IRA professionals for trade placement and to ensure IRA-compliant investments.
Criteria to use when evaluating a self-directed IRA
Before working with a custodian, it is important to consider certain factors such as fees, prohibited transactions, guidance, and potential fraudulent activity, despite the numerous benefits of self-directed IRAs.
Fees
Self-directed IRAs do not offer a free lunch in life, as they come with their own set of complexities and higher fees imposed by brokers compared to other accounts. It can be challenging to find a self-directed IRA company that charges a single fixed fee, resulting in investors having to pay multiple fees. For instance, transferring brokers alone can cost up to $250. Many brokers have fee structures that depend on the underlying asset, emphasizing the importance of conducting thorough research. Additionally, standard fees like service, establishment, wire transfer, and account renewal fees may apply.
Service fees, even those that are small, can accumulate over time. The broker imposes these fees when they compensate a worker on your behalf. For instance, if an investor employs a gardener to trim the grass on a real estate property owned by a self-directed IRA, the broker will cover the gardener’s fee, resulting in a service fee.
One way to potentially reduce these fees is by establishing an LLC that will have ownership of the self-directed IRA. This arrangement grants the IRA owner control over the account through a “checkbook” system, enabling them to handle transaction details. Although setting up an LLC incurs costs, the long-term result is a reduction in fees. These costs may vary depending on factors such as state, attorney, and business model, which can be checked here. To ensure proper setup and compliance with the IRS, it is recommended to seek the assistance of an attorney, accountant, or financial adviser knowledgeable in these plans. Working with professionals who understand these strategies guarantees compliance with IRS regulations while potentially saving money in the long run.
Prohibited transactions
Self-directed IRA accounts are a straightforward solution to avoid violating self-dealing rules. These regulations can be quite intricate, specifically in the context of rental real estate. For instance, the IRS strictly prohibits actions like an investor staying overnight in a rental property or personally repairing a bathtub, as these actions would constitute a violation. In such cases, if the IRS becomes aware, the entire account will be deemed a taxable distribution and incur a 10% penalty. However, by opting for a self-directed IRA, the account effectively assumes ownership and operation of all underlying assets, ensuring compliance with self-dealing rules.
Lack of guidance
Due to their complexity and numerous loopholes, a lot of investments made in self-directed IRAs are often challenging to navigate. As a result, brokers typically lack specialized personnel capable of providing guidance to investors in navigating these pitfalls. In some cases, custodians and administrators are unable to offer financial advice, hence their suggestion to seek the assistance of a competent third-party advisor, such as an accountant or a lawyer. In comparison, traditional brokerages usually have financial advisors available to assist retail investors with asset allocation, standard investments, and imparting general financial knowledge. However, these advisors may not possess the same level of expertise regarding these unique assets and must adhere to stringent regulations.
Having an exit plan is highly recommended by numerous advisers, particularly those with expertise in alternative assets. This is crucial because certain self-directed IRA assets, such as private placements, lack regulation by the SEC. Without a well-defined plan, investors might encounter difficulties when attempting to withdraw funds, as these assets are not as easily converted to cash as conventional stocks and bonds. Moreover, they typically incur heavy penalties for early withdrawal.
Possible fraud breeding ground
A lot of fraudulent individuals exploit self-directed IRAs as a means to create a false sense of legitimacy. Their assertion is that the custodian has given their endorsement to the investment. Nevertheless, the truth is that most custodians simply adhere to the IRS regulations regarding eligible assets and do not extensively investigate the validity of a particular asset.
As numerous investment options in self-directed IRAs lack SEC regulation, accounting rules are often less stringent. This creates an opportunity for fraudsters to attract victims with appealing financial statements and ratios, demonstrating inflated earnings and faulty revenue timing systems. Such statements can give the impression of higher profitability than the actual state of the company.
Enron, a well-known energy and commodities company, stands as a prominent case of financial statement fraud. Through deceptive financial accounting tactics, the company manipulated their stock to appear appealing. Tragically, these illicit practices eventually had consequences, leading to the company’s shutdown and the imprisonment of its top executives. A devastating consequence of this incident was the complete loss of life savings for thousands of Enron employees, primarily invested in the company’s stock.
Lack of diversification
The absence of diversification is another risk associated with this example of a self-directed IRA. Some investment firms may claim that self-directed IRAs provide diversification, but in reality, the asset might represent only one investment category. This poses a significantly higher level of risk compared to an ETF that allocates investments across numerous companies within a particular sector.
To steer clear of self-directed IRA scams, it is advisable to steer clear of unsolicited offers, validate all investment details, and steer clear of promises that seem too good to be true. Numerous unsolicited investment offers often make unrealistic guarantees that lure investors into using their retirement funds. Withdrawing retirement funds early can lead to missed opportunities by investing in assets that lack liquidity and fail to perform well.
Brokers often provide various valuations for alternative assets, such as the initial purchase price, the initial purchase price with projected returns, or a price suggested by the promoter. It is essential to independently verify this information by taking extra precautions. An effective initial step in confirming investments is to inquire about details from the promoter. To assist investors, the SEC has developed a “ask questions” cheat sheet as a guide.
Finally, numerous scam artists portray high-risk investments as unique chances of a lifetime and assure high returns of 20% or more annually. It is important to remember that the average long-term stock market return, adjusted for inflation, is approximately 7% per year. Consequently, any investment that claims to offer three times this amount carries significant risk. Several fraudsters organize “free lunch” seminars to discuss these investments, but these events often transform into persuasive sales presentations with upsells and intense pressure to make a purchase.
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