Self-Directed IRA Benefits: What Exactly is a Self-Directed IRA?
 To understand what a self-directed IRA is, let’s review how it came into existence.
The History of ERISA
ERISA is an acronym for Employee Retirement Income Security Act. It was signed into law by President Gerald Ford on September 2, 1974 (Labor Day). It has been amended countless times, but the basic underpinning – to protect worker pension plans – remains at its heart.
Although ERISA wasn’t signed into law in the 70s, the origins of the law began a decade earlier, in 1961 when then president John F. Kennedy created the President’s Committee on Corporate Pension Plans. The call for pension reform became really strong just two years later in 1963. The automaker Studebaker Corporation closed its plant. Because worker pension plans were funded so poorly, Studebaker couldn’t afford to give many workers the pensions they had worked so hard for and relied on.
Hence, the cry for pension reform.
A Turning Point for Pension Plan Reform
In 1970, NBC broadcast an hour-long special entitled Pensions: The Broken Promise. It in essence, perhaps for the first time, laid out to Americans what could haappen if their pension plans were poorly funded. It also went into great detail about vesting requirements for pension eligibility.
After this program aired, the interest in pension reform grew even stronger. Legislators spent the next few years holding public forums and getting feedback from workers about what they wanted in pension reform. Finally, in 1974 ERISA was enacted.
ERISA and Self-Directed IRAs
In order to give more control to workers over their retirement plan funds, in 1975, self-directed IRAs came into existence. During the early years, real estate and notes were common investment choices.
Today, self-directed IRAs are used by investors who want to diversify their retirement portfolio. The first portion of the phrase (self directed) means the individual decides how to invest the funds. The second portion, the IRA, must conform to IRA/401(k) investment regulations as outlined in ERISA. This part is overseen by an account administrator, whose sole job is to make sure that the account follows applicable governmental regulations.
The administrator does not advise you on how to invest. That is completely up to you. They simply “keep you on the straight and narrow” as far as governmental regulations are concerned by completing the necessary paperwork to establish your IRA and make your investment purchases.
The self-directed IRA is really the best of both worlds. Somebody else worries about the intangibles of the law, while you make the investing decisions.
Self-Directed IRA Benefits
There are three distinct advantages to having a self-directed IRA.
Tax Advantages: You reap the same tax advantages afforded all 401(k) and IRA plans.
Wider Range of Investment Possibilities: You are not as limited in what you can invest in. Self-directed IRAs allow you to diversify your portfolio over a range of investment choices – from real estate to mutual funds.
Invest in What You Know: You can put your personal knowledge to use with a self-directed IRA. For example, if you know real estate and come across a great deal, you can invest in it. If you are knowledgeable in the mortgage industry, you can put your IRA funds to work as a lender. Know a fast-growing company that needs expansion capital? Invest in a note with it.
Your life. Your choices. Your rewards. These are the benefits of a Self-Directed IRA. |
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