Headline: Direct your own plays?

Date: 11/28/2020

Body:  I was reading Yahoo Finance and I found an article about a “self-directed IRA.”   I had never heard of this before, and I thought it was an interesting concept.  The article link is below:

What Are the Differences Between a Self-Directed IRA and a Traditional IRA? (investopedia.com)

What Is a Self-Directed IRA (SDIRA)?

A self-directed individual retirement account (SDIRA) is a type of individual retirement account (IRA), and differs from the normal IRA in that it is directed by the investor, and administered by a custodian.  Because it is self-directed, by IRS regulations, it can be invested in a far wider selection of investments than a more conventional IRA.   (By the same token, custodians are prohibited from making suggestions on what to invest in.)  It can be structured either as a Traditional IRA or a Roth IRA.

Traditional v. Roth IRA

The most important distinction between the Traditional IRA and the Roth IRA, is when the taxes are paid.  In a traditional IRA, taxes are deferred until withdrawn.   In a Roth IRA, taxes are deducted immediately, and contributions and earnings can be withdrawn tax-free.

Traditional vs. Roth Self-Directed IRA (SDIRA)

Self-directed IRAs can be set up as traditional IRAs or as a Roth. But keep in mind, the two account types have different tax treatment, eligibility requirements, contribution guidelines, and distribution rules.

 Traditional IRARoth IRA
TaxedTaxed when withdrawn from IRATaxed when originally earned.
Income limitsNo income limit$139,000 (single) $206,000 (MFJ)
Required minimum distributionRMDs start at 72.No RMDs
Early WithdrawalTax and penalty free for withdrawal after 59.5.No Early Wihdrawal penalty for contributions
Limits$6,000 per year $7,000 with a catch-up contribution (over age 50)$6,000 per year $7,000 with a catch-up contribution (over age 50)

Are there Risks Related to a Self-Directed IRA?

  1.  Please be sure that you do not invest in the prohibited asset classes.   Some examples of these prohibited classes include: artwork, stamps and S corporation stock.  If you do invest in these vehicles, the total of the account could be deemed “distributed” to you.
  2. Please remember that the custodian cannot provide advice on investments.
  3. Be aware that the SDIRA has a complex set of fees that could make it an unfeasible choice.
  4. Make sure that you have an exit plan, as some of the assets invested in are highly illiquid, and might be difficult to find a market for.
  5. Fraud can be a big problem with the SDIRA.

Fraud, isn’t that the “F” word?

Fraud is a larger issue for the SDIRA than for other flavors of IRA because of the wide variety of assets that are available for investment.   One legitimate choice is Bitcoin and other types of cryptocurrency.    The possibilities for fraud within this arena are broad, and limited only by the imagination of the fraudsters and the black-hat coders with whom they work.

The Verdict

An SDIRA can be alluring in the abstract, especially with the volatility of the stock market these days.   But, there is really only one Pro argument (flexibility) and there are many Con arguments.   Further, I only found reference to one “case study” where an SDIRA worked out really well for somebody, and that somebody was Peter Thiel.   Far from being an average investor (like you or me), Mr. Thiel is the co-founder of a laundry list of technology companies and runs his own foundation in addition to Thiel Capital.  Seeing that his was the only case study in advancement of SDIRA, I think you can agree that he is not your average investor, and caution should therefore be exercised.  In relation to your retirement, you are the Executive Producer already.   Consider hiring somebody else as the Director; Your future is nothing to play with.


Self-Directed IRA (SDIRA) Definition (investopedia.com)

A Guide to Self-Directed IRAs (usnews.com)

SEC.gov | Investor Alert: Self-Directed IRAs and the Risk of Fraud

Why Self-Directed IRAs Are a Bad Idea (fool.com)

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