Are Self-Directed IRAs Worth the Fees?

The Big Picture on Self-Directed IRAs:

• • A self-directed IRA lets you invest in non-traditional assets like real estate, private businesses, and cryptocurrency—offering broader diversification than a standard IRA.

  • While SDIRAs offer flexibility, they come with strict IRS guidelines. You can’t personally benefit from your IRA investments, and you must work through a qualified custodian.

  • Setup, annual, and transaction fees vary by custodian, but if used strategically, the growth potential from alternative investments can justify the costs.

When it comes to retirement accounts, most people are familiar with traditional IRAs and 401(k)s. But did you know there’s another powerful option that less than 5% of IRA holders utilize? Enter the self-directed IRA (SDIRA)—a retirement account that allows you to invest in alternative assets like real estate, private companies, and even cryptocurrency.

But despite its potential, most investors shy away from self-directed IRAs because they don’t understand them or have never heard of them at all. So, in this post, we’re breaking down everything you need to know about self-directed IRAs, the pros and cons, and how they can help you diversify your retirement portfolio.

What is a Self-Directed IRA?

A self-directed IRA is like a traditional IRA, except it allows you to invest in a broader range of assets. Instead of being limited to stocks, bonds, and mutual funds, you can use an SDIRA to invest in things like real estate, startups, and even cryptocurrency. However, it’s important to note that to invest in these alternatives, you’ll need to work with an IRA custodian—an intermediary that holds and manages your account.

Aaron Fratto, founder of People’s Capital Group, explains that less than 5% of IRA holders utilize self-directed IRAs, and many don’t even know this option exists. But if you want more control over your investments and access to unique opportunities, a self-directed IRA might be exactly what you need.

What Can You Invest in with a Self-Directed IRA?

Self-directed IRAs open up a world of possibilities. You can invest in:

• • Real estate: Rental properties, fix-and-flips, multifamily units, and more. 
  • Private businesses: If you’re interested in supporting startups or owning part of a business, a self-directed IRA can help. 
  • Cryptocurrency: Digital assets like Bitcoin or Ethereum are eligible investments. 

But there are some things you can’t invest in. The IRS prohibits certain assets, including:

• • Collectibles (art, antiques, wine, etc.) 
  • Life insurance policies 
  • S corporations 

While the list of prohibited assets is relatively short, it’s important to keep them in mind to avoid any penalties or violations.

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IRS Rules and Restrictions

One of the key things to understand about self-directed IRAs is that while you have the freedom to choose your investments, there are strict rules about what you can and can’t do. 

For example, you cannot personally benefit from any of the real estate you invest in through your IRA. That means no vacation homes, no house hacking, and you can’t live on the property yourself.

Additionally, you can’t lend money to your family members through your IRA. So no loaning money to your son for college or helping your parents buy a home. Your IRA custodian will be there to guide you and make sure you follow the rules, but it’s your responsibility to ensure you stay compliant.

Self-Directed IRA Fees

Like any financial product, a self-directed IRA comes with fees. These can vary depending on your IRA custodian, but here’s a breakdown of what to expect:

• Setup fees: Generally range from $50 to $300
• Annual fees: Typically between $250 and $500 per year to maintain your account
• Additional transaction fees: There may be fees for things like wire transfers, check disbursements, or asset purchase.

Some custodians charge based on the number of assets you hold, especially if you invest in real estate. Other custodians offer a flat fee structure, which can be simpler to manage. The key is to shop around and choose a custodian that fits your needs and investment style.

Why Not Just Stick with a Traditional IRA?

If you already have assets in stocks, bonds, or mutual funds in a traditional IRA, you might be wondering: Why would I pay for a self-directed IRA when I can just stick with my brokerage account?

Aaron recommends that you don’t have to move all your funds to a self-directed IRA. Instead, you can self-direct a portion of your IRA—say, 30% to 50%—into alternative assets, keeping the rest of your funds in traditional stocks and bonds. This allows you to maintain diversification, which is a key strategy in risk management.

Additionally, it’s worth noting that you can also open a Roth self-directed IRA, which allows for tax-free growth on your investments.

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At SparkRental, our Co-Investing Club prioritizes diversification across various property types and geographic locations throughout the U.S. Our carefully selected investments span multifamily units, mobile home parks, self-storage facilities, short-term rentals, and more, aiming for average annualized returns of 15% or higher on equity investments and 10-12% interest on debt investments. 

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How Can Self-Directed IRAs Help You Grow Your Wealth?

Self-directed IRAs are particularly beneficial for those looking to invest in tangible assets like real estate. Aaron’s firm, People’s Capital Group, focuses on New Jersey multifamily real estate and helps investors grow their wealth by finding and repositioning vintage properties. This model provides quarterly cash flow and opportunities for large liquidity events.

However, it’s not just about investing in real estate. By diversifying into alternative investments like private businesses, you’re able to access deals that traditional IRAs wouldn’t give you. This makes a self-directed IRA a powerful tool for building long-term wealth.

Conclusion

If you’re ready to take control of your retirement and explore alternative investments, a self-directed IRA might be the solution you’ve been searching for. While it’s not for everyone, it’s an option worth considering if you’re looking for more flexibility, more investment opportunities, and greater control over your financial future.

To learn more about how you can start self-directing your IRA, check out Aaron Fratto’s company, People’s Capital Group, where they help investors grow wealth through multifamily real estate.