Self Directed IRA

If you're an investor that likes to take control of their money, then there is good news in the form of a self-directed IRA.  Just what is a self-directed IRA?  Simply put, it is an individual retirement account that is established with a stockbroker rather than a bank or an investment house.

Advantages of a Self-Directed IRA

With a self-directed IRA, you can buy and sell individual stocks, and have greater control over the investments in the account.  You also don't have to pay management fees to have others invest your retirement money; so that makes these IRAs a bit more efficient.  If you want more control over the investment strategy of your retirement funds, and are comfortable with taking on that responsibility, a self-directed IRA is the right choice.

Requirements of a Self-Directed IRA

Unfortunately, the process of starting one of these funds is a little more complicated than just pulling the money out from an existing account one day and trading stocks with it the next.  The IRS wants to make sure that money you've put aside for retirement is actually used in retirement.  So they've established some rules around the transfer of funds between accounts.

Individual Retirement Accounts

To start the process of creating a self-directed IRA, you need to make sure the account passes all of the rules or tests the IRS has set up for any IRA.  To summarize those requirements:

• The trustee or custodian of an IRA must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee custodian.  This list includes a stockbroker's account.
• The trustee or custodian agrees not to accept more than the allowable annual contribution limits for an IRA.
• All contributions, except for IRA rollovers, must be in cash.
• The account must offer you a non-forfeitable right to your money at all times.
• The money in the account cannot be used to purchase life insurance.
• The assets in this IRA account cannot be combined with your other investment assets.
• Finally, you need to abide by all of the minimum required distribution rules that apply to IRAs.

Setting-up a self-directed IRA is not a new process, so an established stockbroker should be able to ensure that the new account you set up passes all of these rules.

Setting-Up a Self-Directed IRA

The next step you need to take is to contact a broker, and explain to them that you want to set up a self-directed IRA.  That broker, in turn, will send you two forms.  One form is a basic IRA application, which is similar to ones you've completed when setting up an IRA account in the past.

The second form is one that needs to be sent to your existing IRA custodian.  You see how that works?  The IRS has set up a system of "custodians" that are charged with taking care of our retirement money for us.  Money must pass from one custodian to the next.

IRA Transfers

The second form will direct the existing custodian of the account to transfer the funds of your IRA account into your new self-directed IRA at the brokerage house you've selected.  You can expect your broker to send you these forms immediately, if not overnight.  In fact, they are probably available for download right from the broker's website.  This information is readily available because your broker is eager to add your IRA to the portfolio they currently manage.

Delays in Setting-up an IRA

You need to complete these two forms, and send them back to the broker helping you to manage your IRA.  Next comes the waiting part of this process.  You see, your existing IRA custodian is probably not too eager to have your funds transferred to another company.  They can't delay this forever, but typically it will take between 30 to 45 days for the transfer to occur.

By doing a trustee-to-trustee or custodian-to-custodian direct transfer, you don't have to worry about income taxes, withholding, or any other IRS penalty - permanent or temporary in nature.  We've discussed this problem in our article on IRA Rollovers.  But once all this is behind you, and the money is in your self-directed IRA, then you can start trading stocks, bonds, or mutual funds right away, and get that money working for you once again.

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