Self-directed IRAs are just what they sound like—IRAs that you call all of the shots for. These accounts allow for investments with larger rewards, but you will only reap them if you know what you are doing. Self-directed IRAs are inherently riskier than accounts controlled by a plan manager. Since you are the one choosing the investments, not just picking from a list, you will need to contribute research and prior knowledge into the process in order to play smart. Read on to learn more about what you should know about Self-Directed IRAs before starting one of your own.
Knowledge is Power
Most people who utilize Self-Directed IRAs stick with what they know. If they have a background in technology, or know a lot about real estate, they can make wise choices with those investments. Gathering as much information as possible, keeping up on the latest news in the industry, and checking projections are all ways to make the most of your investments. Remember, there are some restrictions for Self-Directed IRAs that can cost you in penalties. Avoid these at all costs.
Going into an investment blind could end up costing you big time, and you don’t want to be too risky with your retirement! However, the bigger the risk, the bigger the reward most of the time. Just keep in mind, there’s risk and then there’s calculated risk. Stay on the calculated side to avoid big blunders.
One Misstep Can Cost You Thousands
Not only do you have to be aware of the risk and rewards of each investment, but you also need to understand the total price as well. Some investments carry with them an added tax burden that investors should calculate into the total cost of the investment before purchasing. Just because these investments do have tax consequences doesn’t mean you should automatically write them off, however. The rewards for some outweigh the costs, but it’s important to at least be aware of them before you get yourself into a situation you weren’t prepared for. Typically, Self-Directed IRAs have lower management costs, so don’t forget to calculate in that piece as well.
Investment Opportunities are Abundant
Most retirement accounts have a list of investments that plan owners can choose from. Sometimes these options are just what you are looking for, and other times not so much. Self-Directed IRAs offer more room for experimentation and opportunities. If you have kept up-to-date on trends in your industry and see an opportunity that could pay off big time, a Self-Directed IRA is one way to make that happen. You can also invest in real estate, gold, private businesses, and tax liens with a Self-Directed IRA, which you can’t do with typical IRAs. However, like with conventional IRA accounts, you can choose between Traditional, Roth, SEP, SIMPLE, Individual 401(k), etc. for your plan type.
If you would like to diversify your portfolio or invest in something specific, you can use a Self-Directed IRA to accomplish your goals. As long as you understand the investment and calculate your risk, these types of investments can pay off handsomely.