The IRA, or individual retirement account and its various forms are a common way that people invest money for retirement while seeking to shelter that money from taxes. While the standard IRA accomplishes these goals well enough, there is a problem. That problem is that with your standard IRA you are typically limited to investments in securities like stocks and bonds in addition to mutual funds. These can give you growth overtime, but it does not provide much flexibility and does not let you utilize your own knowledge and abilities. So while traditional IRA’s have a place, the question many might ask is if there is an alternative. The fact is that there is an alternative, and it is known as the self-directed IRA.
The self-directed IRA or SDIRA operates exactly the same way as your traditional or Roth IRA, with the same tax advantages, eligibility requirements and contribution limits, but with a major difference. You are able to place the funds in this kind of IRA into a huge number of different alternative investments. These include real estate, precious metals, cryptocurrencies, part or complete ownership in businesses, and a number of other alternative investments. The main things you cannot invest in are collectibles, S-corp stocks, and real estate that you or your family members live in.
The investment flexibility that SDIRA’s provide can enable you to grow a portfolio of investment properties which can provide sustainable rental income in retirement. And that is just one potential avenue of growth that SDIRA’s can give you. If you have some special understanding of a particular area, say the land market in a certain region, SDIRA’s let you utilize that knowledge in a way which traditional IRAs just cannot.
There are some drawbacks and considerations which should be considered, however. One important thing to note is that you will need to have an IRS approved custodian set up the account. You run your own account, but a 3rd party must be the custodian. In addition, you have to keep an arm’s length away from the assets in the SDIRA. For example you cannot use personal funds to improve investment properties held by the SDIRA. You can use funds in the SDIRA to hire a contractor to conduct those improvements, but you cannot be personally involved whether via money or labor. Its important to do you due diligence and carefully research all of the factors before you enter into these kind of financial framework.
If you are interested in an SDIRA, be sure to consult your attorney/accountants to ensure that you are in compliance with all tax and legal minutiae. While it can take time and effort to set up an SDIRA, it can be well worth your effort if you are able to use it effectively.
Financial Analyst Intern