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Rocket Your Dollar Ep. 3: The Self-Directed IRA

Rocket Your Dollar Ep. 3: The Self-Directed IRA

A Self-Directed IRA offers unparalleled flexibility and choice for retirement investors. Discover how a Rocket Dollar Self-Directed IRA is structured and why it's legal to invest your IRA in alternatives. Also, learn the IRS laws for these accounts like contribution limits, do's and don'ts of investing.



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Thomas Young: Today's topic, we're going to talk about the Rocket Dollar Self-Directed IRA. We're going to touch a little bit on the history, and how it came to be that you can use checkbook control with an IRA. The mechanism by which you retain checkbook control, and how we set it up. Some of the investment options, and why it's so much more powerful than other IRAs. Let's dive in.

First off, let's talk about the history of the self-directed IRA, commonly referred to as the checkbook control IRA, is what we have at Rocket Dollar. This IRA allows the account holder, you, to have an LLC checkbook account from which you make investments into the assets that you want, which means you don't have to go through a custodian. You simply write a check.

A little bit about where it started, the checkbook control platform was given explicit approval by the US tax court in a landmark case that was called Swanson Vs Commissioner. That took place in 1996, and it was then rightified by the IRS in their field service advisory in 2001. And what Swanson was trying to do is exactly what we do now with LLC checkbook accounts. At first, it was deemed to be a prohibited transaction, but then that was reserved in this case. And since 2001 when this came into service, over 100,000 investors around the US enjoy the legality of the checkbook control platform.
Very simply stated, what this court ruling allowed was for an IRA to completely own an entity. In our case, a single member LLC, which is then controlled by the individual, and that's you. And so, your IRA owns the LLC, and you, as the manager of that LLC, have full investment discretion over what you do with it. That's a little bit on the history, so it's been around almost 20 years, 18 years so far, and we don't see it going away any time soon, which is exciting.

Let's talk about why the checkbook control structure is so much more powerful than a regular "self-directed IRA" that you might get from one of the big custodians, such as Vanguard or Schwab, or Fidelity. Really it comes down to the fact that self-directed IRA is a broad term where maybe you're allowed to choose which mutual funds to invest in, and that defines it as self-directed since you can choose the funds. You might be allowed to do a certain type of real estate, maybe an ETF, or a multi-family syndicate. Or sometimes they'll even let you make a startup investment.
But the point is that unless you have a checkbook control IRA, you have to go through the tedious and expensive process of reaching out to your custodian, filling out a ton of paperwork, and then waiting on the custodian to wire funds, if they even approve the investment, which they shouldn't have to do. You are the account holder, as long as the investment is legal, you should be allowed to make it.

While some of the same asset classes are available to you in a self-directed account from some of the big people, like maybe PENSCO, or Equity Trust, it's a tedious process, and it can get very expensive since they charge individual asset fees on a yearly basis. They charge wire fees, they charge investment under management fees, there's all these different fees. I mean, their fee sheets can really be a couple pages long in size 10 font. So, not something that anybody wants to deal with.

The beautiful part about the checkbook control IRA is that you don't have to deal with a stodgy custodian. You are free, like in their accounts, to choose any investment allowed by the IRS without having to ask for permission, or having to pay the custodian extra fees in order to make the investment. And of course, for questions around the legality of the investments, or if something's a prohibited transaction, or a disallowed party, for example, that you're investing with, you know, our team is always here to answer those questions. So just because you don't have to ask us for permission, doesn't mean you can't ask us for our advice around legality. You know, we won't tell you if it's a good or bad investment, we'll simply tell you if it's something that you can do legally or not.

Really, just to tie up the checkbook control IRA, it really is the IRA that gives the most power to the individual account holder, which is why we feel it's the best. Let's change topics a little bit, and then we'll dig into a little bit about the different types of IRAs all under the checkbook IRA structure.

Specifically, we're going to hit on a traditional versus a Roth IRA.
Really what it comes down to is where you get the tax break. A traditional IRA, the contributions made to the account are tax-deductible on both state and federal tax returns for the year you make the contribution. And then when you reach retirement age, and start making with withdrawals, the withdrawals are taxed at ordinary income tax rates. So, if you make $100,000 withdrawal when you're 62, you'll pay $100,000 worth of income tax.

On the flip side, the Roth IRA, they provide no tax break for contributions, but the earnings and withdrawals are tax free. For example, if you make that same $100,000 withdrawal when you're 62 or 62, and if that's the only income you make for that year, you'll essentially pay no income tax. So it's good to have really a mix of both, right? The traditional helps you lower your tax bill for the current year, and the Roth helps you pay less taxes at retirement.

Most people have a mix of the two accounts. I know that pretty much everybody at Rocket Dollar has both. The younger folks tend to really max out their Roth IRAs, simply because we're hopefully making less than we'll ever make right now since we're young, and we hope to grow in our careers. And some of the older folks that are making a little bit more money are concerned about their yearly tax bill, and so the contributions they make to a traditional account really help them on their tax bill on a yearly basis.

That's really the two main types of IRAs, and really, it's all around the tax treatment of both. Let's do a brief dive into some of the most frequently asked questions regarding Rocket Dollar IRAs. One of the most frequent ones that comes up is are there any extra fees or LLC fees apart from the $15 a month Rocket Dollar Compliance Fee? It's great to clear that up, because no. Your LLC compliance fee is included in the Rocket Dollar monthly fee, and sometimes questions come up about whether we charge more money for transferring, you know, two or three different IRAs or a 401(k). And again, the answer to that is no.

The only fee that we have at Rocket Dollar is the sign up fee, the one time $360 fee, and the $15 a month fee. So no individual asset fees, no separate fees, no transaction fees. None of that. We really aim to make it the easiest, most transparent IRA on the market.

Another question that comes up a lot is do I have to be an accredited investor to take advantage of this IRA? And the answer is no. To get a Rocket Dollar account, you do not have to be an accredited investor. The reason is because accreditation is not reliant on the vehicle through which you make an investment, it's reliant on the investment being made.

For example, if you're making a startup investment, a regular angel investment, most likely you will have to be accredited because the entity taking the investment requires accreditation.

However, if you want to do crowdfunding, or you want to buy real estate, assets that don't require accreditation, you could make those investments through a Rocket Dollar account. You will have to make sure that the investment you're making allow accredited or unaccredited investors depending on who you are and what your situation is. But to have a Rocket Dollar account and take advantage of self-direction, you do not have to be an accredited investor.

The third question that we get is Rocket Dollar's great, you can do alternatives, you can do real estate, you can do startups, but can I still own a brokerage account inside of my Rocket Dollar IRA, and invest in stocks, and bonds, and mutual funds, ETFs, and other publicly traded securities? The answer to that is yes. Just because a Rocket Dollar account allows you to invest outside of the market, and in real estate, or private equity, or startups, or cryptocurrencies, or basically whatever you're interested in, does not mean that we're advocating that you take all of your money and put it into these asset classes.

Absolutely inside of a Rocket Dollar IRA you can still, and should probably, invest in stocks, bonds, mutual funds... Vanguard, whoever you decide to use, these are all good things, and part of a healthy and diversified portfolio that should absolutely be taken advantage of. Whenever you get your IRA LLC, you then open a brokerage account in the name of the LLC, and you can make these trades. It's just important to make sure that you open that brokerage account in the name of your LLC, and not in your individual name. Otherwise, there could be some prohibited transaction problems there. But again, our team is here to help you through all of that, and we make it easy for you. Reach out to us if that's something that you want to do with your account.

Those are some of our most frequently asked questions that we get, but if you have specific questions, feel free to always email us at info@rocketdollar.com, or Tweet at us @RocketDollar, and our team is here basically 24/7 to answer your questions. And one of the big things that we want to make sure is that these sort of accounts line up with your goals, and with your situations. So reach out to us at any time, and we'll talk through your situation, we'll talk through what your goals are, and really determine if it's right for you.

You know if you're in the saving part of your life, and it doesn't make sense to pay $15 a month, we'll tell you that, and we'll talk again when it does make sense. Or if you're a newer investor trying to get into some more alternative stuff, we have great partners that make it really easy to sort of test the waters on some of these things. You don't have to go out and be a real estate investor on day one, or a cryptocurrency, or an angel investor, or whatever you're thinking. You can really test the waters, and that's what makes one of these account so great, and that's why our team is here to help.

There's a brief overview of a checkbook control IRA, and how it's different from regular IRAs or "self-directed" IRAs from big providers. A self-direction can mean varying levels of freedom, and we believe that you should be able to invest in what you want, when you want without having to pay extra, ask for permission, or have to deal with all the paperwork involved.
Our main mission is to make it easy, so we're here to help. Please reach out to us if you have any questions, even if it's just to sort of take the tires on Rocket Dollar or these accounts, our team is happy to talk.

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