3 Things You Should Know about Self-Directed IRAs

You can choose to follow the regular IRA route with the bank or brokerage firm of your choice, but in doing so, you forfeit some of the freedoms you could have enjoyed if you’d chosen to go the self-directed route. In choosing a self-directed IRA, you take on more responsibility, but you also open your portfolio up for more investment options.

Many banks and firms allow for IRA investments in only the traditional sense – so, via stocks and bonds or mutual funds. Once you choose a bank or firm with which to work (such as Fidelity or Vanguard), you can only invest in the vehicles they have to offer. Self-directed IRAs can offer access to real estate and precious metal investments in addition to those traditional options. This is only skimming the surface of things you should know when choosing whether to build a self-directed IRA or a Roth/traditional IRA.

Who Would Benefit Most from this Type of IRA:

You’re going to want to choose the self-directed IRA option if you are familiar with making investments of your own volition but are more knowledgeable about not-so-traditional markets. For example, you could be well-versed in the ways of agriculture and real estate investments, but not as experienced with the stock market.

Another acceptable reason for choosing a self-directed IRA is wanting a more diverse portfolio altogether. Maybe you have a hand in plenty of stocks, bonds, and mutual funds, but you’d like to branch out (timber pun intended) into other investment vehicles, such as those of private companies and precious metals. In this scenario, a self-directed IRA would serve you well.

If your goal is to create a steady income stream that flows right into your IRA, the self-directed IRA with a real estate portfolio could be extremely appealing to you. Using this method, you can purchase a property and rent it out, and that revenue stream would flow right back into your retirement fund. You wouldn’t be able to do this with an IRA of another sort. Think on these points when determining whether the self-directed IRA is right for your needs.

Self-Directed IRAs Require Greater Risk and Responsibility

It’s often true that the greater the risk, and the more difficult the task, the better the reward. That’s plenty true in most aspects of life. It’s just as true in the world of investment. If you’re familiar with the stock market, you’re familiar with this concept; you know that the greater the risk in the stock, the more the indices swing up and down, the more likely you are to have a decent return in the end. When it comes to investing in a self-directed IRA, you must be comfortable with a little bit of risk.

That risk comes from relying on yourself and your own knowledge in choosing your investment vehicle. The first step to setting up a self-directed IRA is to choose the most appealing investment options to you. You’d then fill out a Direction of Investment (DOI) form and provide it to the custodian of your choice, such as NuView Trust Company, a proven leader in the world of self-directed IRAs. Your investment can then be set up accordingly.

The reason why it’s important to have some familiarity with the markets when entering such a venture as a self-directed IRA is because many financial advisors you come across may not be familiar with this type of IRA at all. It’s been around just as long as the traditional IRA, established in 1974, but because it isn’t as popular or well-known, you can’t rely too heavily on a financial advisor to show you the way around one. This is also why it’s important to choose your custodian carefully. Unlike a brokerage firm, a custodian doesn’t offer advice – it simply manages your funds for you according to your specifications. For advice, it’s recommended to consult an attorney.

There are Tax Benefits to Choosing a Self-Directed IRA

The primary advantage to choosing this type of IRA over others is there is deferred taxation on growth.

Also, in a tax-advantaged IRA plan, you are taxed when making withdrawals from your fund. The same goes for a 401k savings plan. However, this is not the way it works with a self-directed IRA. You can even choose to run funds through your investment vehicle (e.g., real estate rentals or an LLC) without having to pay taxes on those funds.

In the end, it’s always worth researching and looking into.