Should you Open a Self-Directed IRA? Here’s what we think.

In this article, you will learn:

  • Why experienced investors and those who want to better control their money choose Self-Directed IRAs (SDIRAs) and other retirement plans?
  • Why Wall Street brokers and other financial dealers prefer to act as custodians for their clients' capital?
  • Why broker-dealer firms benefit from holding their clients' money?
  • How Wall Street financial advisors/salespeople make commissions on your retirement account savings, and why these commissions and fees can erode your capital over time?
  • Why experienced and sophisticated investors prefer self-directed IRAs and retirement accounts over traditional plans that limit their access to private investment opportunities?
  • When experienced and sophisticated investors want access to hard money and hard asset investments, e.g. when the public financial markets sell off or trade sideways?
  • What kinds of assets and opportunities investors can hold in a self-directed IRA or retirement plan, e.g. real estate, private companies, precious metals and gold, cryptocurrencies, and more?
  • Why a direct custodian is such an important part of how to succeed in growing your assets for retirement?

You may wonder why Wall Street doesn’t want you to know that you can self-direct your IRA account. The reality is that many investors choose to self-direct their retirement plans, including IRAs and 401(k) accounts, to invest in real estate, precious metals, private (not publicly-traded) companies, and other non-Wall Street types of investments.

Wall Street broker-dealer firms have a vested interest in holding your retirement plan assets for as long as possible. While the money in your retirement plans is certainly yours, Wall Street firms benefit from a type of capital control.

In this article, you will learn more about what your self-directed IRA or 401(k) can invest into.

Why Wall Street Doesn’t Want You to Know That You Can Self-Direct Your IRA Accounts?

Wall Street brokers earn commissions and fees from financial products like mutual funds, ETFs, unit trusts, and limited partnerships. These products are marketed to you for inclusion in your IRA, 401(k), or other retirement plan account.

When you purchase these financial products, the financial advisor/salesperson earns a commission. Most of the time, the salesperson earns a commission when you buy or sell a product held in your retirement plan or other financial accounts.

Did you know that you can gain competitive advantages by investing in what you know?

How and Why Some Investors Profit By Investing in What They Know?

Self-directed retirement plans (this include IRAs, 401k, 403b and many other plans) make sense for investors who like to invest in things they understand. These investors may avoid the public stock market or mutual funds because their experience in certain investments is a competitive advantage.

These investors may possess special expertise in real estate or precious metals investing. Because of this experience, they may expect to obtain better returns on their invested capital.

For this reason, these investors often use Roth IRA or 401(k) plans for their investments. For example, an LLC entity owns Roth IRAs to negotiate a royalty agreement with an unrelated client company. The LLC can receive royalty payments and the income returns tax-free to the Roth IRA accounts.

Investing in real estate with you self-directed retirement plan

Let’s say you’re a professional real estate developer. You understand how to develop real estate projects as your career focus. As a real estate developer, you can also use a Roth IRA to fund specific real estate investments.

In a qualified self-directed Roth IRA or another retirement plan, it’s possible to acquire real estate to sell in the future. As a real estate developer, you know how to identify potentially valuable real estate assets that might benefit from future zoning law changes or planned developments from neighboring properties.

Investing startups with a self-directed retirement plan

Similarly, let’s imagine that you’re a startup entrepreneur in the biotechnology sector. You’re already an experienced biotech investor. You’ve invested in early-stage companies from the patent stage to successive funding stages.

If you use Roth IRA funds to invest in future biotech opportunities, you can reap significant rewards when the startup goes public or has any other positive kind of liquidity event.

Note that the rules relating to these types of investments are complex. You must carefully plan ahead to avoid certain types of prohibited transactions or incurring unrelated business income tax (UBIT).

There are many other investment opportunities with SDRPs (self-directed retirement plans)

To sum it up, if you’re a sophisticated investor with expertise in investing in non-Wall Street opportunities, you can potentially sock away large returns in your tax-free or tax-advantaged retirement accounts. There’s no better opportunity in the IRS tax code for your retirement assets.

Do the following IRA brokers offer true self-directed retirement account options?

Let’s review which broker-dealers offer self-directed IRAs in the next section.

Does Charles Schwab Offer a Self-Directed IRA?

No, Charles Schwab does not offer a self-directed IRA for investors. It’s possible to open Schwab IRAs and other retirement plans but the firm does not recommend or refer investors to non-Schwab direct custodians.

Schwab offers a self-directed brokerage account called the Schwab Personal Choice Retirement Account (PCRA). The firm says that the PCRA “expands your retirement offering beyond a preselected investment lineup…it gives…more flexibility to select the individual investments in their plan. The PCRA…it’s designed to fit seamlessly into any plan you offer.”

Investors can direct their own retirement plan assets without a Schwab financial advisor. However, because Schwab holds your retirement funds, you’re limited to Schwab’s financial product offerings. For instance, you won’t be allowed to invest in private real estate or non-public companies.

Does Fidelity Investments Offer Self-Directed IRA?

Similarly, it’s possible to use what Fidelity Investments calls Fidelity Solo FidFolios. As the investor, you can direct your assets to any financial products offered by Fidelity Investments.

You won’t have the opportunity to direct your retirement plan funds into truly private opportunities. You won’t be able to use your expertise in real estate, precious metals, or entrepreneurship in the private sector. You are limited to the products offered by Fidelity and you will pay some costs to buy or sell these assets.

Does Vanguard Offer Self-Directed IRA?

You can open a Vanguard IRA or other retirement account with or without the services of a Vanguard financial advisor. If you open your retirement account with Vanguard, you are limited to their family or mutual funds as well as basic financial products like stocks, ETFs, bonds, money market funds, and the like.

You pay commissions to buy and sell these products. You can “self-direct” your retirement assets at Vanguard but you cannot invest in opportunities outside of the Vanguard offerings. If you prefer, it’s possible to work with a financial advisor at Vanguard.

Keep in mind that you will pay for the advisor’s investment suggestions when you buy and sell assets in your retirement plan account.

Does Betterment Offer Self-Directed IRA?

No, Betterment offers “traditional investment services & custody.” Betterment’s model can allow you to choose the investment products for your Betterment retirement account. You will be limited to the products and services offered by Betterment.

You won’t have the ability to invest your retirement assets in private investment opportunities, including but not limited to real estate, cryptocurrency, precious metals/gold, or private company financing.

Does Wealthfront Offer Self-Directed IRA?

You can invest your Wealthfront IRA plan assets into any of the many financial products offered by Wealthfront. However, your assets cannot be directed into truly private investment opportunities. Your plan is held by Wealthfront.

If you’re interested in socially responsible investing products or cannabis investments, it’s possible to access these on the Wealthfront platform. You won’t be permitted to direct your money to private opportunities.

Does Interactive Brokers Offer Self-Directed IRA?

Your retirement plan assets may be invested in products offered by Interactive Brokers. You cannot direct your plan assets to private investment opportunities.

Does E-Trade Offer Self-Directed IRA?

As one of the earliest online trading platforms, E-Trade has always allowed its customers to direct their own buy and sell orders. However, your retirement plan assets must be invested in the products available on the E-trade platform.

You cannot direct your retirement plan capital to private investment opportunities.

Does Schwab Intelligent Portfolios Offer Self-Directed IRA?

Again, you can make buy and sell decisions for your Schwab Intelligent Portfolios account. You cannot direct your money away from the Schwab Intelligent Portfolios platform.

Does Merrill Edge Offer Self-Directed IRA?

As one of the most recognized broker-dealers in the world, Merrill Edge offers investors with a range of retirement plan accounts. You can make buy-and-sell decisions without the input of a financial advisor/salesperson. However, you can’t direct the money from your Merrill Edge account to private real estate and other specialized financial or investment opportunities.

You are limited to the products and services offered by Merrill Edge.

Does Fundrise Offer Self-Directed IRA?

Fundrise offers investors opportunities to invest in real estate. Their professionals select the properties and package them for inclusion in your retirement plan or IRA.

Although this company offers you access to real estate investments, these aren’t opportunities you identify and select. Because you’re working with a dealer firm, you will pay fees to invest your retirement plan funds in their offers.

Unlike opportunities you might source as a real estate investor, you must choose from Fundrise’s offerings for your retirement plan. You don’t have the option to direct your money to more potentially profitable private deals.

What Are Some of the Most Famous Self-Directed IRA Custodian?

Two of the most widely noted self-directed IRA custodians are Equity Trust and Directed IRA.

Decades ago, some Wall Street broker-dealer firms maintained relationships with direct custodians. The direct custodians charged investors annual fees. These custodians were often difficult for investors to work with.

If an investor wanted to roll over an employer retirement plan into an old-school custodian firm, it could take weeks and weeks to transfer the assets. During that time, the investor couldn’t buy or sell the assets in their retirement plan. If the financial markets moved during the transfer period, the investor could lose opportunities.

About Equity Trust

Equity Trust is considered the top custodian by Investopedia. Equity Trust’s more than USD 34 billion in customer assets and positive customer reviews speak loudly to prospective investors:

  • Equity Trust is recognized for its outstanding customer service. Sometimes, you need to speak with a human to solve a problem. You will find a well-recognized team of customer service professionals at Equity Trust.
  • Equity Trust is an IRS-approved direct custodian.
  • Equity Trust is directed by you. You direct your capital to investments of your choosing. You’re empowered to take more control of your money.

About Directed IRA

Directed IRA is recognized as a direct custodian as well. You direct your assets into traditional or non-traditional assets, such as real estate, small businesses and start-ups, bitcoin and crypto investments, promissory notes and lending, or publicly traded investments like stocks and bonds.

Why Investors Choose Self-Directed IRA Accounts Over Traditional Broker-Dealer Plans?

In a word, self-directed IRA investors want better returns. They’re tired of poor stock or fund performance. These investors also dislike the high fees charged by Wall Street that diminish their retirement plan assets over time.

They’re often frustrated by the ups and downs of public stock markets and want more stability in their investment portfolio.

They also want to understand more about what they’re invested in.

For that reason, experienced real estate investors want to direct their money into deals offering more stable returns. They know how to analyze the offers they source.

Few investors in this class have the time or attention span to review a lengthy mutual fund prospectus. They prefer to use their due diligence hours to review private offers in their field of expertise.

Invest in real estate and loan money to other investors with your retirement plan

For example, a real estate investor may have employer 401(k) plans or traditional self-directed IRA accounts. If they combine the assets from these plans into a self-directed IRA account with a custodian like Equity Trust, they can direct retirement funds to income-producing rental properties:

  • If the investor buys a property outright (no debt), the cash flow from the property returns to the IRA.
  • In retirement, the investor takes distributions from the self-directed IRA account to supplement other retirement income.
  • Because the investor draws only income from the plan, it’s possible to retain the potentially appreciating asset.

It’s also possible to use a self-directed 401(k) plan to loan money to other real estate investors who buy investment properties. These loans are often referred to as trust deeds or “hard money” loans.

The 401(k) is able to lend money to investors in situations in which banks might not agree to lend. This scenario can benefit a real estate broker who knows certain markets very well and receives either a first or second-place mortgage (deed of trust) to secure the loan.

Because these are private loans, it’s possible for the lender to secure a higher annual interest rate with additional points.

A self-directed investor with deep experience in real estate an therefore achieve higher annual returns that are higher than public financial markets returns.

Hard Assets Vs. Financial “Paper” Assets

Many self-directed investors prefer hard assets vs. paper financial assets. They may be disillusioned by public markets, e.g. stock or bond markets. They believe that price-earnings (PE) ratios of public stocks don’t reflect the company’s performance.

They may believe that publicly traded assets like stocks aren’t correlated with real dollars and cents, and that Wall Street’s money machine props up these values.

If these investors have traded paper financial assets over the years, they’re familiar with market cycles that have little to do with the local economy.

They’ve lost faith in the financial markets. These investors prefer a self-directed IRA, 401(k), or Roth IRA. If the public markets collapse or underperform, they want to invest in real estate, precious metals, or private companies that they know something about.

Invest in what you know by self-directing your retirement plans

It’s possible to use a self-directed retirement plan held by a direct custodian to buy actual precious metals for the future. These precious metals assets must be stored at an approved depository.

Because these precious metals, e.g. gold, palladium, silver, or platinum, are actual physical assets, the investor must meet special retirement plan rules to own them for retirement.

Why Your Choice of a Direct Custodian is Important?

Your choice of a direct custodian is crucial to your long-term investment success. As noted above, you're in charge of managing your money as you see fit in a self-directed IRA retirement plan.

However, a qualified custodian works for your benefit by filing the required documents each year. Your custodian also takes direction from you. Custodians like Equity Trust and Directed IRA facilitate your investment decisions.

For instance, if you want to own precious metals like silver in your SDIRA, the custodian works with you, the precious metals dealer, and the qualified depository. It also ensures that you can access account information 24/7.

Due diligence is an essential part of your long-term success as the money manager of your SDIRA. Take the time to learn more about experienced, recognized direct custodians as the first critical step.

While your custodian cannot give you investment or tax advice, they can help you transfer assets from another retirement plan or custodian. They can also provide excellent support and customer service that allows you to focus on growing your assets for retirement.