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What is a Captive IRA?

by | Feb 27, 2017

Any IRA that is not a self-directed IRA is a captive IRA.  I coined the term “captive IRA” to reflect how nearly all IRA custodians use the IRA to create a captive audience for that custodian’s investment products.


For example, consider the “conventional” type of IRA offered by a local bank, a big insurance company or even a stock brokerage.  In each case, those companies offer IRA’s to their clients, but there’s a catch:  The client must invest the funds contributed to that IRA exclusively in assets sold by the custodian.

…If you have a bank IRA, your IRA has to buy investments from the bank.

…if you have an insurance company IRA, your IRA must buy investments from the insurance company

…if you have a stock brokerage IRA, your IRA must buy investments from the stock brokerage

As a point of comparison, imagine a checking account that obligates you to spend all of the money you deposit into that account at your bank.  You’re forced to buy all of your groceries, clothing, and supplies at your bank.  Furthermore, anything that you need but that is not made available at your bank is simply not available to  you…

…That is the essence of a Captive IRA.

How Can You Determine if Your IRA is Self-Directed or Captive?

Nearly all IRA’s are captive IRA’s.  If you have any doubt, ask your custodian these questions:

  • May I purchase real estate in my IRA?
  • May I purchase privately-traded companies in my IRA?
  • May I purchase a single-member LLC in my IRA?
  • May I borrow money in the name of my IRA to finance further IRA investments?

If the answer to any of those questions is “no”, then you have a captive IRA.  Some IRA’s are more captive than others, to be certain.  But an answer of “no” to any of those questions means that the custodian you’re questioning will not provide you with the full extent of authority available to your IRA under the law.

A final question to ask for ultimate clarification is this:

  • Will you ever restrict my IRA’s investment choices beyond insurance and collectibles?

If the answer to this is “yes”, then it’s a practical certainty that the custodian you’re dealing with offers (more or less) captive IRA’s.

How Can I Convert To A Self-Directected IRA and Abandon my Captive IRA?

Whether your IRA is a self-directed IRA or a captive IRA is entirely a function of the restrictions imposed by your IRA custodian.  This means that if your IRA company refuses to allow you the flexibility you desire within the law, then you can make a change by converting to a fully self-directed IRA custodian, a list of which you can find here.


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