The term ‘self-directed IRA’ was initially coined about 20 years ago by the custodial firms involved in administering retirement accounts. These companies had the idea to distinguish themselves from the more well-known and larger financial services companies that also offer retirement accounts but only allow you to hold marketable securities such as stocks, bonds, mutual funds, and other securities traded on exchanges. The term started to become more popular about 10 years ago and is now routinely used in the IRA industry. Let’s take a look at how the term has been adapted and adopted since.
The companies that came up with the term ‘self-directed IRA’ were trying to emphasize the point that an individual can direct how to invest IRA money into things that larger financial institutions typically don’t offer. This includes investments like real estate, private businesses, machinery, private notes, and other investments that you’re not able to participate in with your IRA at a broker, bank, or insurance company.
Private investments are more cumbersome for well-known custodians in the space because they are non-standardized and would require a lot of paperwork. But more importantly, they haven’t proved to be a scalable or profitable business to be involved in for these larger firms that custody 98% of all IRA account assets. This left a tiny niche for administrators, mostly non-bank trust companies, to custody IRAs that hold private investments. According to the Retirement Industry Trust Association, of the $29 trillion in retirement plan assets, only about 2% or so is invested in private investments.
According to eMarketer, in 2019, large-scale IRA providers spent $15 billion on digital advertising, while self-directed IRA administrators spent as little as 1/100 of 1% of this amount. Many large financial services firms have started using the term ‘self-directed’ to describe IRAs that allow you to direct your IRA with them into any number of mutual funds that they make available, constructively hijacking the term.
‘Self-directed IRA’ is not a technical term described in any tax code or IRS guideline. It’s just a description of a Traditional, Roth, SEP, or Simple IRA that happens to be able to participate in private investments. We believe this term will likely start to be used less over time, as more companies like Yieldstreet offer IRAs that allow private investments, making the need for an outside administrator to custody an IRA that holds their private investments unnecessary.
A Yieldstreet IRA falls under the category of a self-directed IRA. However, investors do not need to go out and hire a custodian, as Yieldstreet directly manages the custodian.
If you have both a Roth IRA and a Traditional IRA and you would like to invest with Yieldstreet with both of them, you will need a separate account for each type of IRA. This is because the IRS requires Yieldstreet to report each individual taxpayer’s account separately.
An important thing to remember is that Roth IRA funds and Traditional IRA funds cannot be commingled. One idea would be to convert your Traditional IRA to a Roth IRA and invest with just that. It’s important to take the advice of your tax professional before doing this because it has tax ramifications. Read more about the differences between Roth IRAs and Traditional IRAs to learn more.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.