Whether you are new to the world of IRAs or have been saving with one for decades, you may have never heard of a self-directed IRA and are wondering what exactly it means. In short, self-directed IRAs function just like regular IRAs in terms of the standard rules and regulations, but they offer quite a bit more investment options. Most brokerage firms stick to ordinary investments, so the key to saving with a self-directed IRA is first finding a reputable company that specializes in them. Even with a self-directed IRA, you will still have an administrator over the account that will ensure you’re following all proper laws and procedures regarding paperwork and valuations. Explained below are a few benefits to self-directed IRAs.
- More flexibility with investments. Self-directed IRAs exists to give investors more options for asset growth besides a typical stock, bond, mutual fund, or CD. Some companies offer very select options that limit what the investors can do with their money. A stock that an investor likes may only be available through a mutual fund or the investor may know about a start-up business that they would like to invest in but isn’t included on their list of available options. With self-directed IRAs, investors have more control over what they invest their money in, even if they want to invest it in gold, real estate, promissory notes, or other commodities such as horses. Collectibles such as artwork, coins, and stamps, however, are a no go.
- Can use your expertise. If you work in a particular field or participate in a unique hobby, you can use your expert knowledge to make smarter investments. For instance, a realtor has greater knowledge about real estate than the average person and can easily spot a good deal when they see one. Typical IRA options won’t include real estate as an investment option, but the realtor can use a self-directed IRA to jump on the particular opportunity. Using a self-directed IRA provides more investment choices to a person whose niche isn’t included within average IRA options. Investing in what you know can lead to more informed retirement decisions.
- Greater earning potential. Because investors who utilize self-directed IRAs are usually more knowledgeable investors, they have the potential to earn big time with particular investments. They can spot trends in their market and know when to jump in the game. A savvier investor can take advantage of the more open choices available to them and invest in a business, niche, or commodity otherwise not accessible to them or anyone else through a standard IRA.
While self-directed IRAs can prove a useful tool for certain people, novice investors may want to educate themselves in a particular field and gain more experience within the market before utilizing this option. Just as these accounts can have greater earning potential, they tend to be a higher risk option for investors who don’t know what they’re doing. Self-directed IRAs may include higher fees depending on the investment, so it’s important to read the fine print before signing up.
A few rules to keep in mind before investing with a self-directed IRA are that you can’t invest in anything that directly benefits you as a person, such as buying a vacation home with your IRA money, and you can’t mix personal funds with IRA funds to finance an investment. There are several nuances to self-directed IRAs that are important to understand before investing, and not following proper procedure can have devastating effects on your retirement goals. As long as you follow the rules and do your homework on the investment, with a self-directed IRA you don’t have to miss out on the perfect opportunity.