A custodian holds the IRA funds for you, just as they would if you were investing into a traditional IRA. And they keep records as far as your investments and all transactions, they notify the IRA of the account activity, send you statements about your account, and offer advice as far as the rules of the self directed IRA are concerned.

When you invest in a traditional IRA, you’re not taxed on the money you invest. And if you don’t take the money out of the account until you’re 59 ½ years old, you won’t be taxed on it then. This gives people using IRAs to save for retirement a distinct tax advantage. The money is typically invested in things like stocks, mutual funds, bonds and other low-risk investments. If you choose a self-directed IRA, however, there are many different ways in which you can decide to invest your money.

The IRS allows self-directed IRA holders to invest in things like real estate, including foreign property, tax liens, mortgages and even franchises and partnerships. Some types of investments like life insurance, or investing in real estate that you already own by purchasing it from yourself, are forbidden. There are a number of rules in place that can cause other people with whom you engage in transactions with to be “unqualified” so that investing in anything involving them is a violation of the IRS code.

With a self-directed IRA, it’s your responsibility to know the codes and understand the rules. The custodian will watch your transactions and can guide you when you ask for assistance, but they can’t give you legal advice or advice on how to minimum your taxes. You should get this information from a different source than your custodian.

Some custodians, even though the IRA may allow certain types of investments, will not allow certain types. And some will monitor activity more closely than others. It’s also important to note that every institution that offers IRAs does not offer self-directed IRAs. And the contribution limit per year on a self-directed IRA is the same as a traditional IRA. In 2008, that limit was $5,000.

The biggest advantage some people find with self-directed IRAs are in those structured like a Limited Liability Company, or LLC. This makes the IRA its own business entity, so the custodian is technically investing in the LLC. The person who owns the self-directed IRA then becomes the owner of the LLC, and has what’s known as “checkbook control.”

Checkbook control lets the owner invest money directly without having to go through a broker or get permission to make certain investments. This is why it’s so important for someone starting a self-directed IRA to have investment knowledge and a good understanding of the rules.

Tax Liens and Deeds Investing