The Do It Yourself (DIY) Movement and the IRA

PimpMyRideDo it Yourself (DIY) exists for IRAs, although the Financial Infotainment Industrial Complex would prefer you not know this.

Normally banks, brokerages, and mutual fund companies happily open your account and act as custodian of your retirement funds, secure in the knowledge that at the moment you invest you are likely to choose a bank, brokerage, or mutual fund product that they can then sell you.

These types of mainstream IRAs have much to offer, including low cost, low maintenance, high liquidity, regulatory coverage, a vast universe of public securities to invest in, and the safety of buying something off the shelf from a big fat financial entity carrying massive consumer liability in the event something goes wrong.

But we live in a Pimp my Ride world, so off the shelf doesn’t work for everyone and some people like to put their own personal stamp on everything.  The DIY IRA – typically referred to as a ‘self-directed IRA’ – has some advantages as well.

Many people do not realize that a whole range of investment products can be purchased inside an IRA, beyond the traditional bank, brokerage and mutual fund products.

You can buy real estate for investment,[1] lend money to others[2], earn rental income, earn royalties, own physical commodities, or speculate in currencies.  You can buy distressed debt, private companies, franchises, rare coins, artwork, private equity investments, and tax liens.  Heck you could probably create weird derivative products with your neighborhood banker and own them through your IRA as long as it didn’t break the main IRS rules on forbidden investments.[3]

The downside, of course, is that to invest in these products appropriately requires additional work, could involve higher fees, low liquidity, less regulatory protection, and access to professional advice to make sure you stay within the rules.

I’m not advocating a Pimp my Ride IRA for most people, but I did open accounts for myself and my wife a few years ago.  All of our IRA contributions since 2010 have gone into self-directed IRAs.

As a result of my old investing business, I occasionally find small but worthwhile opportunities that could grow in our IRAs.  Many of us have specialized knowledge that could help make niche investments in a self-directed IRA.

If you’re curious to find out more, Wikipedia is a good place to start learning.  In addition, an online search for ‘self-directed IRA’ in your state will bring up custodian companies you may want to contact for more information.

Please see related posts on the IRA:

The Humble IRA

IRAs don’t matter to high income people

A rebuttal: The curious case of Mitt Romney

The magical Roth IRA and inter-generational wealth transfer

The 2012 IRA Contribution Infographic

Angel Investing and the IRA

[1] But not for personal use

[2] But not to yourself

[3] Don’t take my word for it on that last one.  Please consult with somebody a bit more reliable than a guy online who calls himself an Anonymous Banker.  I will say, however, that the biggest rule in IRA investing is a prohibition on ‘self-dealing.’  That means there needs to be a fiduciary wall between you as the IRA beneficiary, and you as a Trustee of your IRA.  So you can’t sell things of yours into an IRA, nor can you borrow money from it, nor can you be employed by a company owned by your IRA.

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8 Replies to “The Do It Yourself (DIY) Movement and the IRA”

    1. Well, there is a place you can find out more information. Those fees really do not seem to jive with my experience. There are fees to set up, but as a self directed IRA you can invest in real estate without a broker and eliminate those fees. That’s why your current IRA custodian only sells you investments that they can make a commission on…

    2. This looks like a comment designed entirely to get people to click your link, because the video has nothing to do with self-directed IRA’s. Financial adviser fees are less of an issue in self-directed IRA’s than in practically any other type of financial account.

  1. Much of the justification for DIY self-directed investments can be uncovered by gaining a simple understanding of the agent-principal problem. There’s a strong tendency for an agent and his principal to not have a proper alignment of interests. This can get to a point of predatory behavior; when the agent baby-steps his way from a fiduciary duty to the less strict “duty of care.” Holding those concepts in one’s mind long enough will likely take an investor down the path to DIY.

  2. Great article. Gold, silver and other precious metals also become possible investment options in a self-directed IRA. That’s something that many Americans ignore…

  3. Times are definitely changing. Today you can’t just sit back and let the bankers decide your fate. Its imperative to educate yourself on the best way to diversify your portfolio, including your IRA.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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