Learning Center

Why a Self Directed IRA

This section is a general overview of IRA history. It is not a detailed review of every IRA rule and sub rule.

The IRA Club offers or sells no investment products. The IRA Club does not take the place of your attorney or CPA. The IRA Club is an educator and facilitator whose goal is to guide individuals as they fully understand, open and maintain a SD IRA in accordance with the rules and regulations.  

What Congress Said:

In 1974, Congress passed the Employee Retirement Income Security Act (ERISA). That legislation created the rules that allow individuals to establish a trust fund for their retirement. The plan would be called an Individual Retirment Agreement (IRA).

The concept was simple. Individuals could establish their own retirement trusts; they could fund their trust by contributing money based on limits set by the Act. (Originally $1,500 per year, the limits have become more liberal since inception of the act.)

Contributions made to the fund are deductible in the year they are made. (Example; a person earning $50,000 a year makes a $1,000 contribution to their IRA. They would deduct $1,000 by completing line 32 of their Federal Income Tax return (Form 1040) thus reducing their taxable income by $1,000 for the year.

Earnings made by the investments or savings held inside the IRA (the trust) could accumulate tax free as long as they remained inside the IRA (the trust). Withdrawals from an IRA are considered a “taxable event”. The owner of the IRA pays Income Tax on the amount they withdraw.

As Congress intended these accounts to be for retirement, they set the minimum age for withdrawal of 59 1/2. Withdrawals made prior to age 59 ½ are considered premature withdrawals. A person who makes a premature withdrawal from their IRA must pay a tax penalty of 10% of the amount withdrawn.

What Kind of Investments could be made in the IRA?

It may be a bit of oversimplification however, it appears that it was the intent of Congress to allow IRA holders to put their money into anything that would be a reasonable investment for their retirement. There are a few restricted investments however, the restrictions are minimal and clearly spelled out. (See below).

IRA Investment Restrictions:
A. IRA Funds may not be used to buy Life or Health Insurance
B. IRA Funds may not be used to buy “collectables” (such as art, wine, baseball cards, antique cars, etc.)
C. An IRA may not transact business with a “disqualified person”.

There is a complete definition of who are “disqualified persons” one this web site. For now, let’s simply say that disqualified persons include the IRA owner, their spouse, their family and any financial professionals who represent the owner or the IRA. The goal is that the funds invested are for the owner’s future and any current benefit those funds bring to the IRA owner or their family may disqualify the trust.

For example:
A. Your IRA can not buy a house that you will live in. Even though buying a house may be a good investment, the fact that you live in the house means you are receiving a current benefit.
B. Your IRA can not buy assets from you.
C. You may not use your IRA as security for a loan made to you.

Keep in mind that, you and your IRA are separate. The IRA is for your retirement and should remain separate until at least your age 59 ½ or the plan could be charged a tax penalty or dissolved.

Remember the rules apply to all disqualified persons.

Who are disqualified persons?

• The IRA Owner
• Your Spouse
• Your Children and Grandchildren
• Your Parents and Grandparents
• Your Spouse’s Children and Grandchildren
• Your Spouse’s Parents and Grandparents
• Any fiduciaries working on this account such as the account custodian and sponsor
  
  

What happened when Congress passed ERISA?

Not very much. Back in 1974, the idea of such a trust made available to almost every individual was a radical concept and one which most people were not prepared to take advantage of.

However, within a few months banks began to offer pre-printed IRA trust forms. People could simply go to their bank and complete an IRA Trust form. That person could now “fund” (contribute money) to their IRA. HOWEVER, the way the bank IRA forms were written, the only investment a person was able to make was to deposit money in that bank or buy a product sold by that bank, such as a C.D. (Millions of people opened such accounts).

Soon, Mutual Funds began to offer pre printed IRA Trust forms. As with the bank, the investor simply completed the form and then could contribute to their IRA, HOWEVER, the way the mutual IRA forms were written, the only investment a person was able to make was to buy a mutual fund offered by that fund family. (Millions of people opened such accounts).

More recently, brokerage firms such a Merrill Lynch, Charles Schwab and others began to offer pre printed IRA Trust forms. The investor simply completes the form and then can contribute to their IRA, HOWEVER, the way most brokerage house forms are written, the only investment a person is able to make is to buy products (stocks, mutual funds etc.) offered by that brokerage house. (Millions of people opened such accounts).

IT IS IMPORTANT TO NOTICE THAT CONGRESS PLACED VERY FEW RESTRICTIONS ON HOW WE INVEST OUR FUNDS INSIDE OUR IRA.

YET, ALMOST EVERY IRA OWNER IS STRICTLY LIMITED AS TO WHAT THEY MAY INVEST IN BECAUSE OF RESTRICTIONS PLACED ON THEIR INVESTMENTS NOT BY CONGRESS BUT BY THEIR BANK, MUTUAL FUND OR STOCK BROKER.

A Self Directed IRA (SD IRA) is just as the name implies. A SELF DIRECTED IRA PLACES NO RESTRICTIONS (other than the few restrictions placed on IRA’s by Congress or the IRS) on what a person may invest in inside their IRA.

It is interesting when we realize that fact that ALL IRA’S ARE SELF DIRECTED IRA’S UNTIL A BANK, MUTUAL FUND, OR BROKERAGE FIRM PLACES ITS OWN RESTRICTIONS ON THE INVESTOR. By opening an IRA with The IRA Club, you are free to make any reasonable investment for your retirement that you like inside of your IRA. There are no investment restrictions beyond the reasonable restrictions placed on all IRA’s by Congress and the IRS and the Department of Labor.