WHAT YOU SHOULD KNOW ABOUT A SELF-DIRECTED IRA
For investors who are comfortable controlling their own retirement accounts — and those savvy investors who are already dealing in real estate or investing in certain instruments outside of their existing IRAs — there is an option that allows for more diversified, tax-advantaged portfolios than in traditional IRAs or 401(k) plans: the self-directed IRA.
What is a Self-Directed IRA?
A self-directed IRA is a nontraditional retirement account that allows individuals to invest in what they already know and understand… with alternative investment options not allowed within typical retirement plans. A self-directed IRA includes:
- Real estate – residential and commercial properties, land, renovation or new construction, passive rental income
- Mortgages and other loans
- Private hedge funds
- Precious metals
- Limited partnerships
- Commercial paper and notes
- And many more
A broader selection of allowable investments in a self-directed IRA means informed consumers can develop a more eclectic portfolio that they control; the self-directed IRA allows them to respond to economic downturns or take advantage of opportunistic (and tax-advantaged) investments in a more nimble way than going through a conventional IRA custodian.
If you have had experience before with these kinds of investments outside of your retirement plan, a self-directed IRA could be a smart way to grow your savings more aggressively.
Who Should Open a Self-Directed IRA?
If you are someone who understands certain markets and investments and perhaps is already investing in those as part of your retirement plan, consider applying what you know to this new investment strategy with a self-directed IRA.
People who open a self-directed IRA may:
- Be an angel investor in a company
- Purchase real estate or own rental property as an investment
- Invest in certain commodities
- Make unsecured personal loans to friends or certain relatives and earn tax-free interest on the loan
You can do all this within a self-directed IRA and enjoy the tax advantages of these plans.
Are you self-employed? You may open a self-directed SEP (simplified employee pension plan) IRA . Individuals can roll over the funds from a traditional IRA or an old 401(k) plan. You can even choose to keep your existing IRA account for stock and bond transactions and open a self-directed account for your other investments. And you can start with an initial investment of just a few thousand dollars.
The bottom line is you must want to make the investment decisions for your account or have a trusted advisor who’s knowledgeable about the options available for these accounts who will work with you.
How Do I Open a Self-Directed IRA?
Although you control your investment strategy, self-directed IRAs are administered by neutral third-party professionals, such as Next Generation Trust Services, who serve as custodians of the assets in these accounts. The custodians offer knowledge and insights to help you make informed decisions when you purchase, maintain, or sell your investments, and will ensure those transactions are properly expedited.
Custodians of self-directed IRAs understand the special processes, documentation, and regulations these accounts are subject to, and handle all the necessary paperwork so that you invest safely and securely. When you open your account, ask about phone support for when questions arise and educational seminars for you and/or your advisor so that you receive the knowledge you need to control your self-directed IRA wisely.