Self-directed IRAs have been around a long time, and their increasing popularity has grown over time, especially with those who like a lot more control in their financial future. A self-directed IRA provides diversification of assets for everyone from the average Joe to investors looking to expand beyond stocks, bonds and treasuries.
A self-directed IRA involves a custodian holding your money in the account and makes investments in things like real estate, private placements, and metals for you based on your directive. Self-directed accounts put more responsibility on you, meaning you have to understand all the rules governing any particular investment and the tax implications. Not to mention you’ll have to do your own due diligence when choosing investments.
For complex investment opportunities, particularly those which involve the opening or creation of a new account outside a traditional financial institution or well-recognized broker, investors should consider getting a second opinion from a licensed unbiased investment professional or an attorney.
Self-Directed IRA Investments are not Guaranteed
Like any and every investment, there’s no such thing as a “sure thing”. While that’s unfortunate that there’s no guarantee, that doesn’t mean that investments should be avoided, it just means that you, as the investor, should just tread lightly.
Consulting with seasoned and qualified custodian, doing due diligence in research into an investment beforehand, and keeping a pulse on technology, like apps, startups, and gadgets are your best bets for secure investments.
Roth or Traditional?
Let’s say you’re eligible for both a Roth and a traditional IRA. Generally, you’re better off in a traditional if you expect to be in a lower tax bracket when you retire. By deducting your contributions now, you lower your current tax bill. When you retire and start withdrawing money, you’ll be in a lower tax bracket, thereby giving less money overall to the tax man. If you expect to be in the same or higher tax bracket when you retire, you may instead want to consider contributing to a Roth IRA, which allows you to get your tax bill settled now rather than later.
Play by the Rules
Every IRA has a list of persons and entities that are considered disqualified to that IRA. IRS rules prohibit the IRA from dealing with these people and entities. Any transactions that do take place between an IRA and Disqualified persons result in what’s called a Prohibited Transaction.
Those disqualified persons to an IRA cannot buy or sell any asset from the plan. Nor can they make personal use of an asset. Disqualified persons cannot live in or rent IRA-owned real estate, nor can they provide “sweat equity” to that property.
Your IRA cannot acquire life insurance or collectibles as assets. Some examples include:
- Any work of art
- Rugs or antiques
- Stamps or collectibles
- Any alcoholic beverages
Investing in your retirement doesn’t have to be complicated or unnerving, it can be easily navigated and even fun at times, so long as you have the right people working with you and for you, and always have your best interests at heart.