Saving for your retirement is so important that you want to make sure you make the right decision on the type of investments you make.
Many people will use the standard IRA, which is an excellent way to save for your retirement because it provides you with a way to save with tax advantages.
However, one option you may be unaware of is the self-directed IRA. You may never have heard of this option before, let alone have used it. So what does it involve? This guide will delve into this type of retirement fund to help you decide whether it is a suitable option for you so that you can make an informed decision.
What Is a Self-Directed IRA?
A self-directed IRA is a retirement account that is similar in many ways to a standard IRA. The big difference with this type of account is that you get to choose how you want to invest your money, and this makes them highly flexible.
With the standard IRA, the investments are more traditional. They are controlled by banks and insurance companies, and the options are generally limited to bonds, publicly traded stocks, mutual funds, and other more traditional investments.
With the self-directed IRA, you can use this to place money into any asset that the IRS permits, whether that involves traditional investments or alternative options. This means you can invest in alternative investments like real estate and private placements.
These alternative investments are maintained through the self-directed IRA, and at the same time they earn tax benefits, so you can acquire alternative assets with the same tax-free benefits.
Why Choose a Self-Directed IRA?
Self-directed IRAs are not suitable for all investors. However, they do have a number of benefits that make them appealing to some investors.
The main advantage is that they provide far greater flexibility. You may have greater knowledge and deeper understanding of certain investments, and it may therefore make more sense for you to invest in these rather than more standard investments.
Without the same limitations like those on standard IRAs, you can essentially decide how your money is invested. This can give you greater control over your financial future by providing you with greater diversity in your portfolio.
And of course, you will also get the benefits that the IRA brings, which include asset protection, tax-free profits, etc.
Various Types of Self-Directed IRAs
There are different types of self-directed IRAs that you can choose from. These include the traditional IRA retirement savings account, which grows faster than a taxable account because interest, capital gains, and dividends compound every year.
Then there is the SEP IRA, which is for self-employed and small business owners with tax-deductible contribution, and the Simple IRA is for employees. The Rollover IRA is a traditional IRA for people who have had various employers, and the Roth IRA can be funded with after-tax dollars to grow your funds tax-free and withdraw them without any penalties.
How to Get Started
Getting started with a self-directed IRA does not have to be difficult, but it can sometimes be confusing. Many advisors have not heard of self-directed IRAs, and this can make it more difficult for you. If you already have a trusted advisor, ask them to find out more about self-directed IRAs so that they can provide you with specialist advice. You may also want to use a specialist like IRA Services Trust to find out about getting started.
Rules Surrounding Self-Directed IRAs
There are a number of rules that you will have to know about if you invest in a self-directed IRA. The main issue is that some transactions cannot be performed. For example, self-dealing is prohibited, which is where you, or a family member, have prior ownership.
Do not get involved in prohibited transactions because the consequences can be serious. If you do engage in any such transactions, the IRA stops being an IRA, and you could suddenly have a large amount of taxable income.
Decide Which Option Is Right for You
A self-directed IRA can be a good option for many people who want to enjoy greater flexibility in their choice of retirement investments. That being said, it is certainly not the right option for everyone. If you are still trying to decide which is the best option for you, make sure you get professional financial advice from an advisor with detailed knowledge of all the options for retirement investments. That way you can make a more informed decision and choose the best option for your circumstances.
Edwin earned his Ph.D. in Physics from UCLA. After employment with Lockheed Martin, General Electric, and Atomics International, he started an IT service company for banks and credit unions. In 1979, when IRA accounts became more available, Edwin recognized a unique need that his banking customers had when it came to servicing IRAs. He founded the IRA service company known today as IRA Services, Inc., and its trust-chartered entity, IRA Services Trust Company.