About Self-Directed IRA Rules

by Bill Herrfeldt ; Updated July 27, 2017

Many people think that IRAs can only be set up by banks and credit unions. But, while they are safe by every standard, the interest these IRAs earn is small. Banks earn a huge profit from IRAs, and they will do everything possible to keep them there, including making transfer of those funds to a self-directed account very difficult to understand. Actually, the rules governing self-directed IRA are very easy to understand, and these IRAs can earn far more for your retirement than if you leave them at the bank.

Significance

The rules governing self-directed IRA accounts are not hard to grasp, particularly if you find someone knowledgeable. First, find a company that manages self-directed IRAs. For instance, most mutual fund companies do this every day, and they employ people who will tell you all you need to know. That's your first step, because all IRAs must have a custodian or a trustee to manage your account (see Resources below).

Function

People set up IRAs to save for their retirement. Many allow a bank to manage those accounts, for which they will earn a small amount of interest. Others look to other ways to increase the amount of money that will be in their accounts when they retire. A popular way to do this is to convert an IRA to a self-directed IRA and make the money work harder for you.

Considerations

If you open a self-directed IRA, you can invest your fund almost anyway you wish. You can choose individual stocks, or you can have a mutual fund invest the money for you. You can also invest in annuities or in real estate, both of which require a professional to help you as those investments are more complicated (see Resources below).

Warning

If you made the decision to move your IRA to a place where you will earn a greater return, do not make the mistake of having those funds made payable to you, even though you intend to immediately turn them over to the new trustee. If you do it this way, you are liable for a 20 percent penalty as well as income tax that you avoided. Avoid this by asking your bank to make the check payable to your new trustee.

Potential

More companies today in the United States are contributing less to their employees retirement, making it incumbent on employees to do more. The federal government is recognizing this fact, and are gradually increasing the amount you can contribute annually to your IRA. Currently, you can contribute as much as $5,000 to your IRA, and $6,000 if you are over 50 years of age. At a return of 8 percent on your money, you will retire with over $600,000. Of course, that assumes you invest the money wisely in your self-directed IRA..

About the Author

Bill Herrfeldt specializes in finance, sports and the needs of retiring people, and has been published in the national edition of "Erickson Tribune," the "Washington Post" and the "Arizona Republic." He graduated from the University of Louisville.