What Is a Direct IRA?
Using the term "direct" when referring to Individual Retirement Accounts refers to one of two possibilities. The first is a type of IRA where you make all investment decisions, known as a self-directed IRA. The second is how retirement assets can move tax-free from one plan to another, known as a direct rollover.
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Self-Directed IRA
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A self-directed IRA is a term that describes any IRA account where you personally are making the decisions on your retirement asset investments. IRA owners have many investment options, including bank IRAs, securities, real estate, and certain bullion and U.S. minted coins. As the IRA owner, you have the option to put your money into a managed account where the financial adviser has fiduciary authority to buy and sell investments on your behalf. Other IRA accounts might be completely autonomous while still others provide some advice. As long as you have the final say, you have a self-directed IRA.
Marketing Ploy
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It has become a marketing ploy to attract IRA investors with "self-directed IRA" accounts. IRA accounts giving the less common IRA investment options usually use this to give investors a sense of control over assets. The control also comes with responsibility of understanding the increased IRS regulations that less common IRA options provide. For example, real estate IRAs are often touted as "self-directed IRAs"; these account must use real estate only for investment purposes and have a partner LLC that maintains income, expenses and mortgage holdings. The complexity increases the demands on the IRA owner. Keep in mind that just because one IRA isn't marketed as self-directed doesn't mean you are not in control of your assets.
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Self-Administrated IRAs
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Investors who want to maintain as much control as possible might look for a self-administrated IRA. The reality is that there is no such thing as a self-administrated IRA. You can have a self-directed IRA but it must have a administrator or custodian who is conducting all IRS reporting. This includes contributions, distributions and regulation maintenance. Retirement plan custodians or administrators include banks, brokerage firms, insurance companies and certain specialized accounting or financial services firms.
Direct Rollover
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A direct rollover is a transaction that moves money from one qualified retirement plan to another. Rollovers are commonly used when you leave a job and want to move your 401k plan into a self-directed IRA offering more investment options. In reality, you can roll over retirement assets from and to a variety of plans such as 401k, 403b and IRA plans. The Internal Revenue Service allows one rollover per 12-month period. The direct rollover moves money from plan to plan whereas an indirect rollover sends you the check. Indirect rollovers have more regulations since the money goes to you.
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