Demystifying the Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: January 14, 2020)

The self-directed IRA is still not as common as traditional or Roth IRAs held with custodians such as banks or investment brokerages (only about 2% of all IRA assets are in self-directed accounts), but they are gaining in popularity. Unfortunately, there still seems to be a bit of mystery surrounding the self-directed IRA account. Some retirement savers haven’t heard of self-directed IRAs at all, and many of those who have view it as a highly specialized or exotic account type that may only be suitable for highly sophisticated individuals who have retirement account balances in the millions of dollars.

This lack of knowledge surrounding the self-directed IRA often has the effect of scaring people away, or making them think that there’s no way such an account could work for them. That’s why it’s so important to Quest Trust Company that they educate people on what their options are. They meet with individuals to eliminate confusion and misconceptions surrounding self-directed IRAs so they can make an informed decision about planning for their retirement. Let’s demystify the self-directed IRA so that you can make a reasonable assessment of whether it might be right for you.

First of all, a self-directed IRA is nearly identical to the traditional IRA and Roth IRA accounts that you’re probably already quite familiar with. The primary difference between the two accounts is in the custodian – that is, the entity that holds the investments you select, provides various recordkeeping and transaction clearing services, and which distributes funds to you upon your request.

For traditional and Roth IRAs, the most common custodians are banks, credit unions and investment brokerages. These custodians generally make it easy for you to invest your retirement funds in common investment assets such as stocks, mutual funds, CDs, bonds and ETFs. But those custodians rarely provide a way for you to invest in real estate or private companies or other types of investment classes.

This is not because IRAs are legally restricted from doing so. Traditional IRA custodians are simply not willing to serve as custodian for accounts that hold these assets because management of such assets can require more expertise and effort than holding more liquid asset classes. IRA custodians who specialize in self-directed IRAs can help you take advantage of the full range of legally permitted investments, and provide you with a degree of investment flexibility that simply can’t be matched by traditional IRA custodians.

Keep in mind that the custodial fees for self-directed IRAs are generally higher than traditional IRAs because of the expertise and effort that’s required. This is likely a contributing factor to banks and investment brokerage custodians choosing not to offer the full range of investment options within an IRA. They want to be able to offer free or very low-cost custodial services, so they limit your investment options to those which require little custodial effort or expertise.

Self-directed IRAs can be appropriate for retirement savers who have moderate account balances, and who are interested in investment options beyond mere stocks and mutual funds. If you want to know what choices are available for your specific situation, contact Quest Trust Company today at 800-320-5950 for a free appointment. Their staff is trained to educate you and help you decide the best path for your retirement plan.