Using Self-Directed IRAs to Invest Outside the Stock Market
How to Invest in Alternative Investments
In this episode, we explore the basics of self-directed IRAs and how they work. Discover the wide range of alternative investments you can make, from hotels and self-storage units to real estate and even businesses.
Self-directed IRAs are less complicated than they seem and align perfectly with my philosophy of investing beyond the stock market into real estate and alternatives. Join me as I break down the essentials and show you how to diversify your investment portfolio.
We cover:
Impact of tax status on control over IRA funds
Overview of alternative investments not available through traditional custodians
Comparison of costs between traditional and self-directed IRAs
Time Stamps
00:22 Understanding Self-Directed IRAs
01:01 Alternative Investments Explained
01:35 Custodians and Their Roles
04:24 Self-Directed IRA Companies
07:32 Fees and Fraud Considerations
11:18 Conclusion and Final Thoughts
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Introduction to the Podcast
Welcome to me financial the podcast designed to inspire your financial life.
Hello everyone. And welcome to the podcast. I am Michelle Moses, your host. I am a certified financial planner, realtor, and former e commerce store owner. And today it is a solo show.
Understanding Self-Directed IRAsWe're going to be talking about self directed IRAs and self directed accounts, I think is what I should say. Uh, and I, this is actually a request from a listener.
And so I really appreciate this because I never would have thought. to, uh, talk about this because this is part of my everyday life. I mean, I deal with these, uh, every day of my working life because I deal a lot with alternative investments. And if you have listened to some of my other episodes, it is episode number four and number 35, and I will reference those again later, uh, those are kind of my deep dive on alternative investments [00:01:00] and how they work.
Alternative Investments ExplainedAnd what I mean by alternative investments is when you want to invest in things. Uh, like, uh, real estate, self storage. Uh, you want to buy your own house, you know, like a house that you would rent out. Uh, and these things are called private placements, limited partnerships. You can buy tax lien certificates.
Uh, and then there's other alternative investments that you could do. You could do like precious metals and commodities. So really when it's something. That you want to hold that is outside of what you can get at a normal custodian.
Custodians and Their RolesSo like Schwab or Fidelity, and you need to think of a custodian. Like, so when you have an IRA, you haven't paid taxes on the money.
So the money is FBO for the benefit of, and then it says your name and because you haven't paid the taxes on it, it is for your benefit, but it's really not your money, that's the way I think of it. Until you pay taxes on your money. it's not your money yet. [00:02:00] And so you have it in a Roth IRA or a regular IRA or a simple IRA or you know, your 401k, which at whatever platform you have it in, whatever kind of account, that's like the, just the title of the account, but they all kind of work the same.
Whereas, although the Roth, we should put that kind of off to the side, you haven't paid taxes on the money in an IRA and a Roth you have, however, that also has government rules. So you're following all these government rules. And when you're doing that. You need to hold your account at a custodian and what that means is that they are doing record keeping on your account and they're tracking whether you're moving 5 from one IRA to another 5, you're transferring that over to, you know, your Schwab IRA or wherever else you might have another IRA.
They need to keep track of that and have a paperwork trail and they send in the paperwork to the government for your taxes, how much you put in, maybe you have a distribution, [00:03:00] uh, all of that. So they're really record keeping for you. And when you have your retirement accounts at one of these large brokerage brokerages, um, you, You know, you can do stocks and bonds and CDs, mutual funds, exchange traded funds.
That's really the limit of what you've got, but you've got to think of it too that, um, you know, you're getting these from like people that have been vetted. You're, you're not going to be frauded. Yes, the market could go down. Yes, there could be something that happens in the market, you know, as a whole, but you're not going to be frauded, uh, out of your money because you, these people have to go through a vetting process and be reviewed and by the SEC and, and by, uh, Schwab or Fidelity or whoever they're on.
in order to be on their platform. Okay. So it's kind of a safety net is how you need to think of it. And then when you [00:04:00] move over into these other custodians that do self directed IRAs, and sometimes you'll see it as an S D I R A. It's just short, shortened for a self directed IRA. It's just so that you can invest in other things outside of the stocks and bonds and mutual funds and CDs.
And so you're, you're wanting to kind of expand your horizons and expand your investment horizons. Okay.
Self-Directed IRA CompaniesAnd you want to go to a, there are these, Certain self directed IRA companies around the country. I mean, there's, there's quite a few of them and there's quite a few that are pretty good too, uh, where you could roll your IRA, but you're not going to be at most of them.
I would say 99%. I actually I've never seen another one where you could do stocks. And bonds and CDs. It's not a bank. So a lot of times like Schwab and, you know, they have special like banking clearances to where you can buy all of these stocks and bonds and CDs. Whereas when you move over to the self directed IRA [00:05:00] space, they're really kind of a, just kind of a record keeper is the way you need to think of it.
Like when you invest in something. They're asking for you to report every single six months, a year, just depends on, on the company. Um, they want reporting on everybody's accounts. You know, what is the asset valued at? Uh, whenever there's a distribution, you need to send it into the account. It can't go directly to the client's house so that we can track it.
And so then we can then. Send the paper, proper paperwork to the government for your taxes and all of those things. Uh, so you're, you need to think of it like when you are at these custodians that you've heard of, and that you know the stocks and bonds, like we all know all of this. It's almost like we're, it's drilled into us with all of these, articles and, and things that we've read over the, over our lifetime.
But the self directed IRAs is when you want to get into something that's a little bit different. So if you're wanting to get into some precious metals like gold or silver, um, [00:06:00] then, you know, there's these companies where you can buy actual gold, you can buy actual silver and they'll hold it like in a vault for you.
And then they'll report to the self directed IRA company. Um, that it's worth 50, 000. And so then you can see that there's a value in there. So there's obviously a lot of advantages of that. And I use these all the time to invest in alternative investments. I'm a huge believer in not only investing in stocks and bonds and exchange traded funds and things like that.
I really like to diversify with alternatives. And so, uh, self storage hotels. You know, uh, apartments, which is called multifamily, uh, a lot of that kind of stuff, you've got to hold it in a self directed IRA. Uh, and I, I think it sounds super exciting. People are like, Oh, okay, well, this sounds awesome. And I do think the only downside is that the custodian, the self directed IRA custodians, [00:07:00] they are not vetting these companies.
That it's, it's truly, they, You know, reach out to these companies and say, Hey, I've got somebody that wants to invest with you or they get approved on the platform and they fill out some paperwork and then they're basically saying, yes, here's our address, here's all of our information and yes, we can fulfill the reporting requirement that is every six months or every year.
Yes, we can send in this Excel spreadsheet or whatever this paperwork is to update a client's account. So that's essentially. Okay.
Fees and Fraud ConsiderationsAnd you're also going to be paying more fees at the self directed IRAs, right? Cause you've got two different accounts. So you're paying an account opening. You're going to pay per transaction per year because it takes a lot more paperwork, a lot more man hours in order to report on these, you know, real estate holdings and all of these different alternative investments.
And so you want to, you know, you, you don't want to, [00:08:00] I don't know. You want to make sure you're going to make enough so that you can pay the fees. And I'm not saying it's an exorbitant amount. I mean, I'm with one and it's 50 a year per position. So if you've got 25, 000 in a hotel investment, 50, 000, a hundred thousand, it's still 50 a year for that one particular position in your account.
So it's not like it would add up that much, but if you're not making anything for five years, then, you know, you do want to be aware of that. And back on the fraud thing. You know, I have seen some of these limited partnerships and what limited partnerships mean is, you know, you Someone says, Hey, I want to build an RV park.
I want to go raise money for it. Here's the documents. I want everybody to put in at least, you know, 50, 000. I need to raise 10 million. And here's all the parameters of what you're going to make. I mean, these people could. Walk away and disappear with all of your money. So they don't do, you know, the, the, the self directed IRA [00:09:00] places, they don't do the due diligence.
They don't do any research. You know, you need to make sure that you are investing with someone. Cause what you're essentially doing is you're sending your money to this custodian, the self directed IRA custodian, and then they're going to send your money, that check to whoever you say it. To send it to and then that person has your money and you are trusting them with your IRA money to then go invest it and you are trusting them to then send you distributions back to your IRA and the self directed custodian is not doing any due diligence or fraud detection or anything like that about whether they are upstanding or whether this is a good investment.
Whereas if you're with a Schwab or, uh, Fidelity or someone like that, they have done the due diligence to make sure this is an upstanding company and that, you know, they're legit is really, I need to think of it. Um, and so I, that's really all there is [00:10:00] about, uh, self directed IRAs in an IRA. I mean, you're never going to be able to hold Life insurance and S corporation stock, which is somebody that is like my size, you know, I'm an S corporation.
It's just a tax election You can't hold any of that and you can't hold any collectibles or anything that's a prohibited transaction which That's kind of a long conversation, but collectibles, you know, like art, you can't hold that in an IRA. So you're never going to be able to hold life insurance or collectibles inside your IRA, but you could do gold and silver, which some people are really interested in doing.
Uh, and so I think just being aware of the fees, making sure that you're with, um, a custodian that has some good reviews, that's good to, With me and any financial company that I'm dealing with, it's always about customer service because you know how frustrating it is when you call and nobody knows what they're doing or [00:11:00] they give you a wrong answer.
And every single time you call, It's a different answer. And so I'm just really big on customer service, because if you can't get to your money and they're basically holding it hostage, it is like the most frustrating thing ever. And I deal with it all the time. And maybe I was just telling you that because I deal with it all the time.
And it's one of my big annoyances.
Conclusion and Final ThoughtsAnyway, I hope that helps you with self directed IRAs. Uh, and if you are investing in some of these things with just cash, you obviously. You don't need a custodian. You don't have to have it there. You could just, you don't just send your cash directly with these alternative investments.
But when you actually want to use your IRA for something else besides the stock market, you're going to have to employ a self directed IRA place. Um, and I've seen every major city has them. Um, and, You know, and they're at a lot of these alternative investment conferences that I go to, uh, there's not, you know, millions of them or anything like that.
And they're not huge companies. Uh, but you know, I think if you're asking an [00:12:00] advisor and they deal with alternative investments, they usually have an opinion about it or the investment that you're going with. We'll have an opinion about it. Uh, so let me know if you guys have any questions. Again, the other episodes that I have done that are about alternative investments are episode four and number 35.
If you want to learn more about alternative investments, uh, 35 is much more of a deep dive about the limited partnerships that I was speaking about. Those are for accredited, accredited investors. And that means you have over a million dollars or 200, 000 a year in income. Uh, so thank you guys for listening.
I really appreciate your feedback, your questions and just, yeah, I am loving doing this podcast and I really hope that this helps in your financial life. So thanks so much for listening and, uh, have a great [00:13:00] day.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.