Self-Directed Individual Requirement Account (SDIRA) Responsibilities and Asset Types

Self-Directed IRAs (source: ramseysolutions.com) 

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

What Is an Individual Retirement Account (IRA)?

An Individual Retirement Account (IRA) is a tax-advantaged retirement savings account. It is an account that must be established at a financial institution, like a bank, a brokerage, or a mutual fund company.

A custodian must hold an IRA on behalf of an individual where these retirement investments grow on a tax-free or on a tax-deferred basis. All custodians must be approved by the Internal Revenue Service (IRS).

There are two types of conventional IRAs. There is the traditional IRA where contributions to the account are made with pre-tax dollars. And there is the Roth IRA where contributions to the account are made with after-tax dollars. Both the traditional IRA and the Roth IRA have their own rules and restrictions regarding fund accessibility, tax consequences, and eligibility.

What is a Traditional IRA?

Contributions to a traditional IRA are tax-deductible but there are strict eligibility requirements. These requirements are mandated by the IRS and are based on an investor's income, filing status, and availability of other retirement plans.

Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while the funds remain in the account. However, when funds are withdrawn from the account, withdrawals are subject to federal income tax.

Investors might find traditional IRAs beneficial if their tax rate in retirement might be lower than when contributions are made.

What is a Self-Directed Individual Requirement Account (SDIRA)?

A Self Directed Individual Requirement Account (SDIRA) is an IRA type that must be set up as a conventional IRA, that is, either a traditional IRA or a Roth IRA. Whether you select either a traditional or Roth IRA for your SDIRA, the same limitations and eligibility guidelines apply to SDIRAs as conventional IRAs.

An SDIRA allows the account holder to invest in alternative assets for retirement savings. For example, these alternative assets may be real estate, precious metals (gold and silver), private equity, commodities, or digital assets (such as cryptocurrencies).

Importantly, SDIRAs have the same contribution and income limits as conventional IRAs. All individual retirement accounts including SDIRAs are covered under Internal Revenue Code 408.

What are SDIRA Account Holder Responsibilities?

Unlike with conventional IRAs, SDIRA account owners are “self-directed.” These owners must be mindful that this means that the owner - and not the directed custodian - must directly manage the alternative assets held within the account.

What Asset Types Can and Cannot be Held in an SDIRA?

SDIRAs are designed to hold alternative assets which are those assets that are forbidden to be held in conventional IRAs. Alternative assets include things like precious metals, tech startups, private equity, investment property, wind farms, promissory notes, and cryptocurrencies.

There are, however, limits or restrictions to the types of assets that can be held in an SDIRA, and these assets are outlined by the IRS. For example, you cannot hold life insurance, collectibles, or S-corporations in an SDIRA

 Collectibles include works of art, rugs or antiques, certain metals, gems, stamps, and certain coins, alcoholic beverages, and any other tangible personal property that is a "collectible" under IRC Section 408.

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