The Four Stages of an IRA
Copyright 2006 Damon Clifford
With all these different names and terms being thrown
around in the financial community, it can get very
confusing on what something is, and what it is not. How
many times has it happened to you? Let me go through and
explain the four stages of an IRA.
Stage 1 – Regular IRA
Everyone knows what the traditional IRA is. It is what
most of us have our money in. We call up Fidelity, Charles
Schwab, or Merrill Lynch and give them our money. With
this IRA, they make the investment choices for you. They
charge you for this, as they are managing your money. It
could be either fee based or commission based depending on
the custodian you chose.
Stage 2 – “self directed” IRA
Stage 2 takes it a little step further. You still have
your money with Fidelity, Charles Schwab, or Merrill Lynch
but they allow you to make the decisions. They have given
you a “self directed” IRA. However, you can only invest in
their products which can include stocks, bonds, and mutual
funds. What happens is that they will offer you Microsoft,
GM, or Starbucks stock and instead of them choosing which
is right for you, they allow you to choose the stock. With
this control (over which stock you choose), they call it a
“self directed” IRA.
A simple test to see if you really have a self directed IRA
is to ask your custodian if you can invest in real estate
and other non-traditional assets. If they say “no, you
cannot buy a house with your IRA”, then it is not a "true"
self directed IRA.
Okay, here’s where we take the big jump from traditional
investments to non-traditional investments. Remember, the
traditional investments are typically stocks, bonds, and
mutual funds, which all of the larger custodians will offer
to you. The non-traditional investments include real
estate, energy, tax liens, and many more.
Stage 3 – Self Directed IRA
With the self directed IRA you are now allowed to invest
your IRA funds in non-traditional assets. The custodian
for the non-traditional IRA will hold your funds for you.
They make their money by charging different types of fees.
These fees can include asset fees, transaction fees, and
maintenance fees. Each custodian is a little different, so
you may want to check a couple of them out and see if any
of them are a good fit for your particular types of
When you find an investment you want to make, you have to
get approval from the custodian first. This can take time,
and depending on the types of investments you are making,
you may lose out on “quick turn” investments. I have seen
many investors lose out on an investment because they could
not fund it in time. On the flip side, I have seen many
investors who were already at the fourth stage of an IRA
and were able to fund the investment and reap the generous
Stage 4 – Self Directed IRA LLC
The self directed IRA LLC is by far the most flexible IRA
tool, and because of this, one must always be aware to stay
within IRS regulations. You have complete control over
your funds. You are the only one that will be held
responsible for the success of managing your IRA account.
This is why the Self Directed IRA LLC is not for the
With the self directed IRA LLC, there are four main
benefits that none of the other levels of an IRA can offer.
First, the self directed IRA LLC provides the lowest
custodian cost on their clients. Second, there is no need
for you, the investor, to ask permission for an investment.
Who is going to know more about that “hot” property just
around the corner from your house, you or a custodian in
Chicago? Third, there is the extra layer of LLC
protection. It would make it just that much harder for
someone to try to seize your assets in litigation.
Finally, and most importantly, you have checkbook control
of your account. You are able to make on the spot
decisions about your investments. You can use this as
leverage against the investments you are considering.
Now you should have a better understanding of the different
levels of an IRA. Do you have the type that best suites
your needs? As more and more investors learn about
non-traditional assets and how it can improve their
portfolio returns, I hope to see many more of them at the
fourth level of an IRA!
About the Author:
Damon Clifford is a Self Directed IRA LLC Advisor. If you
would like to learn more about the Self Directed IRA LLC,
you can visit www.captuity.com/selfdirectedira or
you can call (888) 352-1799. You can also view his
retirement blog at www.DamonClifford.com