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10 Self-Directed IRA Misconceptions

Estimated reading time: 3 minutes, 39 seconds

Kingdom Trust has previously posted articles from our IRA Myth Debunked series seeking to debunk some commonly-held misconceptions about investing. Unfortunately, despite our industry’s efforts to educate on the truth about Self-Directed IRAs, we still find a bevy of IRA misconceptions that are, for lack of a better term, fake news.

In today’s post, we highlight 10 of the prevailing Self-Directed IRA misconceptions.

  1. A Self-Directed IRA is a separate type of IRA.

    “Self-Directed IRA” is essentially just a marketing term, not a separate IRA type. A Self-Directed IRA may be a Traditional, Roth, SEP or SIMPLE IRA and must follow the same rules and regulations. The only real distinction is with who may custody a self-directed account. Alternative asset custodians like Kingdom Trust allow self-directed accounts, enabling the investment freedom and flexibility investors require. Traditional custodians usually do not permit self-direction.

  2. Self-Directed IRAs are difficult to set up.

    While you may not be able to open a self-directed account at your local bank or trust company, it’s not difficult to set up a Self-Directed IRA with Kingdom Trust. Opening an account is a simple online process taking no more than 5-10 minutes. And our team is standing by to assist you at every stage, from account opening to investment.

  3. You can’t work with an advisor when holding a Self-Directed IRA.

    10 Self-Directed IRA MisconceptionsThis couldn’t be further from the truth, as we work with advisors on our clients’ behalf through the entire investment process. An advisor is a key component of your long-term goals, so we strongly encourage you to seek out such counsel.

  4. You may not contribute to a 401(k) and an IRA at the same time.

    Actually, you may make IRA contributions even if you also contribute to an employer plan. So, you have the potential to maximize your savings by combining different tax-advantaged accounts. However, depending on your income, you may not be able to deduct all the contributions you’ve socked into multiple tax-deferred retirement accounts.

  5. Investing in alternative assets is illegal.

    Investing in alternatives via Self-Directed IRAs is perfectly legal. The Internal Revenue Code doesn’t list what you can invest in. It does, however, tell you what you cannot: life insurance policies, collectibles and stock in an S corporation. Alternative assets like real estate, private companies, digital currency and more are fair game.

  6. Owning real estate in an IRA is illegal.

    This myth has persisted for decades. Real estate investments can be owned by a retirement account. Period. As long as IRS rules are followed (i.e. you avoid real estate-related prohibited transactions like living in a property owned by your IRA), you can absolutely own real estate in an IRA.

  1. You cannot have a Self-Directed IRA without opening an LLC. 

    A relatively new misconception, some have been told by investment promoters they must set up a single-member LLC before holding a Self-Directed IRA. This simply isn’t true. You certainly may invest in an LLC with a Self-Directed IRA, and many have chosen this investing method. However, you aren’t required to use this method to experience the tax-advantaged investing potential of a Self-Directed IRA.

  1. Self-Directed IRA earnings have an annual limit. 

    Perhaps confused by terminology, some investors believe you can only have so much profit before you lose the tax advantages associated with a retirement account. While your account has annual contribution limits, it does not have a cap on earnings. Earnings from IRA-owned assets can grow year-to-year without penalties.

  1. Disqualified persons cannot be beneficiaries of an IRA. 

    While prohibited transaction rules prohibit certain individuals from transacting with a plan, you may still name a disqualified person as beneficiary of the plan. Therefore, you can name your spouse, children and grandchildren (each considered disqualified persons) as beneficiaries.

  1. Alternative investing is riskier than traditional investing. 

    Just like investing in traditional assets, investing in alternative assets is only as safe or as risky as the assets in which you choose to invest. You must determine your risk exposure. Self-directed accounts provide the opportunity to invest in assets with little market risk (such as a money market fund) or those with much more volatility (like precious metals). You have more freedom to dial your investment risk up or down depending on your comfortability. The risk, and potentially the reward, is entirely up to you!

Our firm regularly helps clear up these and other IRA misconceptions with individual investors and their advisors. Feel free to have your advisor contact Kingdom Trust at 888.753.6972 so we can educate him or her on alternative assets and self-directed retirement accounts.