A self-directed IRA is a little different than the traditional account that most people are used to. An IRA is an Individual Retirement Arrangement/Account that is used to save money for retirement. The difference is in the term “self-directed” which means that you, as the account owner, have full control over each of your investments. It also allows you to invest in different types of assets such as real estate, commercial paper, notes and many more.
History In 1975 self-directed IRAs were approved as part of the Employee Retirement Income Security Act (ERISA). Initially, the most common investment choices were real estate and notes but has expanded significantly since that time. The concept has been around for many years but has just recently gained popularity with investors looking to have more independence and growth beyond stocks and bonds. This trend has been driven by dissatisfaction in Wall Street’s traditional offerings. Now it is seen and recognized as a strategy to broaden and diversify an investor’s portfolio.
Benefits As a result of the broader variety of asset options, these accounts have the potential to earn a much larger profit than other retirement accounts. As an account holder, you have the independence to invest in what you know best so you can use the knowledge you have in a certain area such as real estate and leverage it for capital gain. You also have the option to partner with friends and family to build on investment opportunities. Another benefit to self-directed IRAs is the ability to watch your investments grow on a tax-deferred or tax-free foundation until retirement. These types of assets can help you build a foundation for your future and protect your wealth against economic instability.
Risks Though the freedom sounds appealing, this type of retirement account is not for everyone. There is more responsibility falling on the investor than there is with the traditional IRA. It is crucial that you do your due diligence and have full understanding of all the investment types as well as the rules and tax implications surrounding them. Since you will not receive any guidance, and there is no regulation, it is important that you make careful decisions about each investment and be prepared for any tax consequences because you will be fully responsible.
Overall, self-directed IRAs could be a great tool for seasoned investors who fully understand the market. You have access to all the tax advantages and can be your own administrator, protecting your investments and controlling your future.
