DIY Investment Management of Retirement Assets: Is There an LLC in Your Self-Directed IRA’s Future?

An idea worth considering.

As baby boomers begin to retire, the burden of making management decisions regarding their retirement assets may seem daunting. This is especially true for those who choose to forego using professional investment advisors and instead manage their assets by themselves. If DIY appeals to you, just know there are many pros and probably as many cons.

 First, the pros of choosing to manage your own retirement funds, particularly if you are a business owner with expertise in the area in which you invest. By doing it yourself, you can:

  • Exercise greater control over investment choices,
  • Enjoy greater flexibility in allocating and diversifying these investments, and
  • Avoid high fees associated with having a financial advisor.

If you choose to pursue the DIY method, a reasonable option for you to explore is the self-directed Individual Retirement Account (IRA). A self-directed IRA is like other retirement accounts that allow individuals to save for retirement. A self-directed IRA can take the form of any of the more common ROTH, SEP, and traditional IRAs, allowing your investments to enjoy benefits like tax-free growth or specified tax-deferment. The self-directed IRA’s unique attribute relates to the types of investments that are permitted. Unlike standard IRAs, a self-directed IRA extends beyond mutual funds and stocks. With a self-directed IRA, a custodian can also invest in real estate, private company stock, precious metals, and all other investments available by law.

(Some investors have taken the self-directed IRA a step further and set up what is referred to an “IRA/LLC” or “checkbook control IRA,” an arrangement by which investors may directly manage their IRA investments through an LLC owned 100% by a self-directed IRA. This arrangement is beyond the scope of this short blog post, but since it’s an option worth considering, it’s one worth mentioning.)

Pros inevitably are accompanied by cons. Self-directed IRAs are no exception. In fact, there are considerable risks and other considerations, you should take into account:

  • Clarity of Goals. One significant limitation for individuals attempting to manage their own retirement accounts is that they haven’t given serious thought to their financial goals, let alone their retirement plans. To successfully manage retirement assets, you must understand exactly what you are trying to achieve and strategically align your investments with those goals. Failure to do so may result in inadequate savings or over-spending. Both mistakes can lead to complications once you retire.
  • Understanding of Financial Concepts. In addition to having a clear vision for your financial future, you must understand basic financial concepts associated with investing. For example, anyone interested in managing their retirement funds should be able to develop an asset allocation strategy that incorporates factors like tax rates, age of retirement, required income, and current assets. Without a solid understanding of how these various factors influence each other, you could under-save and outlive your retirement funds.
  • Compliance with complex investment rules. Understanding your goals and navigating complex financial concepts will not matter if you violate one of the many rules associated with investments. The federal government has a variety of regulations that govern the types of permitted transactions, who can be a party to such transactions, and the extent to which various taxes apply. For example, in a self-directed IRA, clearly defined rules prohibit certain transactions characterized as self-dealing. To that end, your self-directed IRA is not allowed to engage in transactions with certain people, including the account owner, family members, and business partners. What constitutes self-dealing is defined by the Internal Revenue Service and case law. Figuring out which transactions are allowed is tricky, and failure to comply with IRS rules can result in hefty fines.

In short, going DIY? Be careful out there. Better, don’t DIY in every aspect of managing your retirement funds. Be honest with yourself: Seek advice where you lack knowledge.

The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer’s credentials and ability, and not rely upon advertisements or self-proclaimed expertise. This website is an advertisement.