Why You Need a Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: April 13, 2021)

There are many reasons why you should be contributing to a retirement account as soon as you start working. However, a typical IRA can feel restrictive as it generally only invests in stocks and bonds. While this may be helpful for many people, it may not result in optimal returns. What are some other good reasons to have a self-directed IRA?

Invest In Whatever You Want

Perhaps the best reason to have a self-directed IRA is that you can invest in whatever you want. This means that you can invest in oil futures, startup businesses or even your own company. You could also choose to use the proceeds from a self-directed IRA to buy real estate or land for development.

You Are the Trustee of the Account

With a self-directed IRA, you are generally the trustee of the account. Therefore, you have complete control over where the funds in your account go. All you have to do to make an investment is write a check from that account when you are ready. With a traditional IRA, a bank or financial institution acts as the trustee, which means that it has final say over how your money is used.

Only You Know Your Goals and Risk Tolerance

Having control over your retirement account is ideal because only you know your risk appetite as an investor. Furthermore, you should be allowed to invest in products or companies that you understand best. If you happen to understand real estate better than the bond market, being forced to keep money in bonds may lower returns. Over the course of 10, 20 or 30 years, even small reductions in annual return could reduce your nest egg by thousands of dollars.

Contributions Can Reduce Your Tax Burden

Contributions to a self-directed IRA may be used to reduce your taxable income for the year. This may be a powerful way for the self-employed to save money today while helping to secure their financial future. Like a traditional IRA account, you can contribute up to $6,000 of self-employment income if you are under the age of 50. If you are over the age of 50, you may be entitled to contribute an extra $1,000 per year. Talk to your tax adviser before making a contribution if you have any questions about how it impacts a future return.

Costs to Run the IRA Are Lower

Whenever someone else manages an account for you, that person or entity will charge a fee. When you run your own retirement account, you won’t charge yourself a management fee. Furthermore, there is less paperwork and fewer reporting requirements, which means that you will spend more time finding investments and less time with administrative tasks.

If you have self-employment income, you need to have a self-directed IRA. It offers tax benefits, flexibility when it comes to what you can invest in and is allows total control of your money. By investing in what you love and understand, the odds are better than you can achieve your retirement goals.

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