6 Vital Things to Know About Self-Directed IRA

Being able to set yourself up financially means picking the best possible tools to help you reach a point where you feel financially secure. The best way to build your wealth is not to let it sit idly in your savings but to invest in assets that will appreciate in value and grow your portfolio.

Choosing a self-directed IRA account is one that will allow you to build upon the money you earn and expand your financial horizons, but it is not a guaranteed trip to a fruitful retirement. You need to know what a self-directed IRA entails, and here are six vital facts.

1. More Flexibility With Your Investments

Being able to choose investment options that you would love to pursue is something that makes a self-directed IRA very attractive to those that are financially knowledgeable. Some asset investments for self-directed IRAs are real estate (and trusts), stocks, IPOs, start-ups, and precious metal ETFs. A lot of these are available in certain stocks, but the self-directed IRA gives you the freedom to build a portfolio that you like.

2. Ownership of Your Portfolio

The self-directed IRA means you are in control, which means you take on some serious risks (more on that in the next section), but it also means you can control where you move your money and assets. If you are expecting a downswing in one area of your portfolio, like a hit to the housing market, you can move assets to ensure that you are not going to deal with the financial burden as badly. The ownership is on you, and there is no hand-holding, but that can be advantageous if you truly feel you want control of your money.

3. Higher Risk for Investing

Self-directed is, as the name suggests. It means you are in control of your portfolio, which can be good or bad depending on how much you are comfortable with. When you take a risk with stocks, the onus is on you if it performs poorly and loses value. It is easier to allow a broker to invest your money for you, but self-directed IRAs allow you to be independent, which can be good for those with a keen eye for investment potential.

4. Different Rules and Regulations

Your IRA rules and regulations are different for your self-directed account. It depends on the custodian of your IRA (firm or broker), but you can often expect an annual fee plus a potential minimum on the number of transactions you can make. Not all interactions of a financial manner can be done, like for family, and you need to adhere to the rules to make sure you do not get hit with penalty fees. Prohibited transactions are also something to keep in mind with a self-directed IRA, and trying to purchase them also results in fees. While these rules seem to be hypocritical of the idea of self-directed investments, the purpose is for the custodians to protect you as much as they can through as minimal means as possible

5. Specialized Account Firms

It will come as a surprise that some brokerage firms will not offer self-directed IRAs, but this is normal. The reason is that they would rather make sure their clients are able to invest properly without taking on significant risks with their money. So who offers a self-directed IRA? Companies, banks, and trust companies that specialize in them can offer these services to you. The same rules will apply, such as having a custodian or trustee that will administer and monitor the account for you, but the investment is in your hands, with the exception of prohibited transactions, of course.

6. Similarities to Other IRA Accounts

As previously mentioned, the self-directed IRA accounts are available as either traditional or Roth IRAs. The differences have been listed, but the purpose of taxation on your investments is where they differ. It was mentioned that a traditional IRA account with be taxed on assets during retirement when you withdraw from it, but a Roth IRA does not, with the exception of contribution and earnings growth being tax-free. All this means is that a self-directed IRA is different from non-self-directed accounts, but it is still either-or of the IRA account types.

When you are deciding on how to invest, you need to figure out what kind of account you want to use. An interesting choice is the self-directed IRA. This is a type of account that lets you take on the risk to potentially reward yourself with a diverse portfolio. Before you open an account or purchase any assets, use this information to help make a good decision.