Is a Self-Directed IRA Right for You?

Tax-advantaged retirement accounts such as IRAs or 401(k)s are a great way to save for retirement. You are able to put away money and defer the taxes, which allows these funds to mature over time through strategic investment portfolios.

 Limitations of Traditional IRAs

However, when you establish a traditional IRA with a bank, brokerage or trust company, you are generally limited to a narrow range of investment options. These may include CDs, publicly traded stocks, bonds, mutual funds and ETFs (exchange-traded funds). There are often set plans to choose from that offer safe and diversified, yet usually very conservative, investment returns.

More Investment Options with Self-Directed IRAs

Custodians for traditional IRAs will typically not permit you to invest your retirement money in alternative investments such as real estate, precious metals or cryptocurrency. If these types of investment assets are of interest to you, you will want to consider a self-directed IRA. These individual retirement accounts will allow you to invest in just about anything other than collectibles like coins or rare art, life insurance or S corporation stock. You have more control over your investment funds.

Investment options for self-directed IRAs include, but are not limited to:

• Real estate
• Cryptocurrency
• Private businesses
• Trust deeds and mortgages
• Tax liens
• Precious metals (gold, silver, platinum, etc.)
• Private offerings
• LLCs and limited partnerships
• Real estate investment trusts (REITs)
• Livestock
• Oil and gas interests
• Franchises
• Hedge funds
• Promissory notes

Pros & Cons of a Self-Directed IRA

Aside from the flexibility to invest in these alternative assets, a self-directed IRA is the same as a traditional IRA. They follow the same structures and tax rules. The income earned from your IRA is not taxed until you take distributions. Distributions before the age of 59 ½ are subject to a 10% penalty unless an exception applies. You can also establish a self-directed Roth IRA, which allows for tax-free distributions after five years.

Of course, some of these investments like cryptocurrency are much riskier than traditional stocks, bonds and mutual funds. With greater risks, however, can come greater rewards. At the same time, the stock market can also be volatile. Sudden crashes can be devastating to your investment portfolio. Traditional IRAs make it harder to move your money around quickly. They are designed for steady long-term growth. A self-directed IRA can allow you to invest in something you believe will stand up to economic ups and downs, like a certain business industry or precious metals.

If investing in a self-directed IRA, you must make sure to avoid self-dealing and other prohibited types of transactions. These could cause your account to lose its tax-advantaged status. As with any investment plan, an alternative investment plan like a self-directed IRA is not something you should pursue without proper research and financial planning. You need to know what you are doing or work with an experienced investment advisor who will help you navigate the process for better returns.

For more information about self-directed IRAs and other retirement savings options, contact Illumination Wealth today.