Did You Know There Are 3 Different Kinds Of Self-Directed IRAs?

Investors who are successful and want more options for retirement investments are wise to take advantage of the Self-Directed IRA. This type of account allows you to have more control over your retirement funds. You may already be somewhat familiar with this option. But what you may not know is that not all Self-Directed IRAs are created equally.

Most people are aware of the fact that Traditional IRA accounts can hold traditional investments, such as bonds or managed funds. What’s not as well-known is that the IRS also allows you to use IRA funds to invest in real estate, gold, private business and more tax free.

Many traditional IRA custodians claim to offer a Self-Directed IRA. They probably do. But what that means is you will need to pay transaction fees and get their approval to make other types of investments.  
The Self-Directed IRA LLC offers greater freedom than its traditional counterpart. How it works is fairly simple. An LLC is established which is owned by your IRA account and managed by you. You can easily keep your Self-Directed IRA LLC funds with a passive custodian, such as a bank. Which means you don’t have to pay fees or ask anyone for permission. Let's take a look at the three most common types of Self-Directed IRA Accounts.

1. Self-Directed IRA from a Financial Institution

These types of accounts are easily the most popular type of Self-Directed IRA. Accessibility is a major reason for this type being the most common. It’s offered by most major financial institutions.
With this type of Self-Directed IRA, you can only make IRA investments offered by the financial institution. Which usually include stocks, bonds, and some less common options. However, you're still fairly restricted. Even though they are technically Self-Directed, you are limited in terms of investment options. When you use a Self-Directed IRA from a financial institution, that institution typically does not allow you to make any non-traditional investments, such as real estate.

Which makes you wonder why the bank or other institution places such restrictions in the first place. The plain and simple truth is that they just aren't required to. Simply because they offer the Self-Directed version of an IRA doesn't mean they're forced to give you total freedom of investment. Many financial institutions limit the types of investments account-holders can make beyond even what the IRS permits.

You won't, for instance, be able to hold real estate with this option. In fact, most banks and other financial groups are inclined to limit the IRA account's investments to only the products it offers itself.

So now, the reason might be obvious to you.
A financial institution can’t make any extra money or collect fees for items it doesn't offer. If an investor were to want to pull funds from their IRA for nontraditional investments, the group loses out on the opportunity to profit off of that investor. It's pretty cynical, but it's true.

2. Self-Directed IRA from a Custodian

This option gives you greater freedom of investment than the first. "Custodian-controlled" simply means that an IRS-approved IRA administrator will facilitate any transactions involving the IRA. All legitimate IRA custodians are FDIC insured. Unlike a financial group, custodians earn their profits through fees from creating or managing IRA accounts. They don't offer investment products, and therefore don't have the incentive to limit your investment options as harshly as financial institutions. When you use this type of account, the custodian holds the IRA funds until, at your direction, will then invest the IRA money on your behalf.

Not as “self-directed” as it claims to be.

Any time you want to make an investment or contribution you have to use a custodian, which involves annual fees, time delays, and transaction fees. In other words, you’re not in control. You can’t even pay an IRA transaction expense without having to pay a custodian to do it for you.

So to summarize the above, if you’re really trying to get control over your investing without having to pay lots of fees, you don’t want a custodian-controlled self-directed IRA.

3. The Self-Directed IRA LLC

No one knows how long the Self-Directed IRA LLC has been in use, but it wasn't until 1996 during the case of Swanson vs. Commissioner that they became widely known. Wider general use is an even more recent phenomenon.

In 1996 the tax court set a precedent which would forever permit a new type of self-directed IRA structure known now as the Self-Directed IRA LLC, which is much simpler (and cheaper!) than investing through a regular custodial controlled self-directed IRA account.

The Self-Directed IRA LLC vs. A Custodian Controlled Self-Directed IRA: 6 Aspects Compared.


The Self-Directed IRA LLC allows you to sit in the pilot's seat of your investment portfolio. You don't need anyone's permission to make the types of investments you want to make. The funds will be overseen by a passive custodian, such as a local bank, instead of at a custodian you have never worked with before.


When you find an investment that strikes your fancy, you can make the payment immediately and directly. Since custodians make you obtain permission or approvals, these processes take up time. This won't be a concern with a Self-Directed IRA LLC.
With no custodian to wait around for, you' are able to act decisively when the right investment opportunity presents itself.

Lower Fees, Higher Profits.

When you use a Self-Directed IRA LLC, you'll be free of the costly fees you'd ordinarily pay a custodian. You won’t be paying transaction fees, annual fees, or any other fees other IRA holders pay.

Asset Protection and Limited Liability Protection.

By using a Self-Directed IRA LLC, you receive an additional layer of liability protection, just as if the investments were held in a Traditional LLC.  IRA real estate investments are also more protected from lawsuits. State laws can leave IRA-funded property vulnerable, but the LLC structure will secure your properties against directly-related lawsuits.

Creditor Protection.

Self-Directed IRAs also protect you from creditors, to the tune of $1 million. Also, most states will protect a Self-Directed IRA from creditors’ claims against you outside of bankruptcy.

Privacy Protection.

With a Self-Directed IRA LLC, your investments will be made in the name of the LLC. But with a custodian controlled Self-Directed IRA, your name is available to anyone seeking to locate you.

To learn more about a Self-Directed IRA LLC, call Royal Legal Solutions today at (512) 757–3994, or use our web tool to set up your Self-Directed IRA LLC consultation.

Last Updated: 
October 20, 2017

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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