Self-directed IRAs are becoming a popular option for retirement savers who want to be able to invest in things beyond just stocks, bonds and mutual funds. But self-directed IRAs are still something of a mystery to many future retirees. Neither your bank nor your investment broker is likely to publicize this type of IRA, because they probably don’t offer custodial services for them. So what do you need in order to open a self-directed IRA?
You Need to Understand the Self-Directed IRA Vehicle. The first thing you need is an understanding what self-directed IRAs are and how they work. Self-directed IRAs are legally identical to the traditional and Roth IRAs that you’re probably already familiar with. The difference is that a self-directed IRA custodian, such as Quest Trust Company, permits you to make any legally permitted investment within your account. The more traditional custodians will likely limit you to stocks, bonds, mutual funds and other similar investments.
You Need to Select an Eligible Account Type. Since a self-directed IRA is not a separate type of IRA, you’ll still need to decide whether to open a new account as a Traditional IRA or a Roth IRA. This decision may be driven by your eligibility for current tax year deductibility of your contributions (as can sometimes be the case with traditional IRAs) and whether your level of income permits you to make the contribution at all (as is sometimes the case with Roth IRAs).
You Need to be Able to Fund Your Account. Being able to invest in things like real estate and private equity is great, but you need to have the funds in your account to do so. With the annual IRA contribution limit of $5,000 (or $6,000 for savers above the age of 50), your ability to make certain types of investments will depend on your being able to roll over a significant balance from an existing IRA. Also keep in mind that many individuals accumulate significantly more in their employer-sponsored 401(k) plans than they do in their personal IRAs, so if you have any 401(k)s from a prior employer, consider rolling these funds over into a self-directed IRA.
You Need to be Comfortable Assuming More Control. Because self-directed IRAs are more flexible in the types of permitted investments, you need to be comfortable in making your investment choices. There can be an opportunity for greater investment return, provided that you understand and accept whatever risks may be associated with the investments you make.
You Need to Find the Right Custodian. As mentioned above, your investment broker or local bank likely do not offer self-directed IRA custodial services. On the other side of the coin, you may see advertisements from custodians who offer accounts that purport to give you “checkbook control” of your retirement funds through an LLC structure. Unfortunately, this structure has not been explicitly approved or authorized by the IRS, and itself carries some legal risk. Instead, seek out the services of an experienced custodian like Quest Trust Company.