Self-Directed IRAs: Are They Right For You?

Self-Directed IRAs: Are They Right For You?


Self-directed IRAs offer individual investors the opportunity to expand the range of assets they invest in for their retirement. With this increased control comes increased responsibility. For every success story of an investor using a self-directed IRA to build wealth, there are other stories of investors who failed to do the due diligence or follow the rules of the account and were penalized.

Self-directed IRAs are powerful vehicles for financial independence, but investors must understand what they are before making the move.

A Retirement Account

A self-directed IRA (SDIRA) is a retirement account in which the individual investor makes all the investment decisions. These accounts allow investors to diversify their assets and move away from the traditional approaches of stocks, bonds and mutual funds.

Alternate investments available to individuals using a self-directed IRA include real estate, private tax liens, businesses, and even precious metals. All investments are held in an account administered by a custodian or trustee.

Popular Investing

Investors have had the opportunity to use self-directed IRAs since 1974, but only in recent years have they emerged in popularity. As more people become interested in applying their own expertise to building a retirement fund, they have sought out ways to have more control. The self-directed IRA is a means towards that control.

In Control of Your Savings

Having control over your account means you can act as you wish to make investments that may offer a higher rate of return than more traditional assets. Real estate investments within a self-directed IRA are a common approach. Investors can buy property, collect rent, and sell the property, with all net profit landing in their retirement account. Additionally, the account offers the tax advantages of standard IRAs.

Know What You Want

Establishing a self-directed IRA is not difficult. However, it is a good idea to have a clear idea of what you want to do with your account prior to setting one up. Review your financial goals with your advisor or attorney, then determine how a self-directed IRA works and how it will help you meet your goals. Next you need to find a custodian for your account; the custodian holds the assets and administers all paperwork.

Finally, you will complete the required paperwork provided by the custodian and fund your account with either new money or roll over funds from an old IRA or 401(k) account.

The Advantages and The HomeWork

The advantages of a self-directed IRA are readily apparent from the above discussion. The account offers all the tax advantages of traditional IRAs, but allows investors greater control and flexibility to hold their money investments other than stocks, bonds, and mutual funds. This ability results in greater portfolio diversification and, with the breadth of investments, the potential for greater returns.

However, like all investment vehicles, the self-directed IRA has some downsides. These accounts come with more rules, thereby making them complex to understand and more costly to administer. The investments require more research, interest, and due diligence by the individual investor. This work is required to both understand the investments as well as avoid fraud and other cons.

While the jury is still out on self-directed IRAs, it is clear that they are a tool that offers increased control and flexibility for the individual investor. As with any investment, if it sounds too good to be true, it likely is! Self-directed IRAs require due diligence and hard work. For investors willing to do the research, they have the potential to yield great financial successes.

This article was written by Randy Nixon. Mr. Nixon is a financial guru with a wealth of knowledge. He enjoys writing all things financial. Informing and assisting audiences is his passion.