Does My Level of Retirement Savings Justify a Self-Directed IRA?

A self-directed IRA can form the foundation of anyone’s long-term retirement savings plan. With a self-directed IRA at a custodian such as Quest Trust Company you can invest in a far wider range of asset types and classes than you could with a traditional IRA.

But because some individuals use their self-directed IRAs to purchase investments such as real estate, it leads some to wonder whether having that particular type of account only makes sense for retirement savers who have high levels of savings. In short, the answer is “no.” Just about anyone can benefit from a self-directed IRA – let’s examine the reasons why.

Self-Directed IRAs are Flexible.

As noted above, self-directed IRAs provide you with the greatest number of options in terms of the kinds of investments you can make for retirement. Savers with relatively small account balances can still benefit from this flexibility. It’s true that you can use a self-directed IRA to make large-scale investments in real estate, such as apartment buildings or commercial developments.

But you can also make investments in much smaller properties, including those in the lower price ranges. Furthermore, you can use your funds within a self-directed IRA to gain exposure to the real estate market in other ways as well, including by issuing mortgages or loans to home buyers.

In addition, the fact that there are a wider range of investment options available in a self-directed IRA doesn’t mean that you can only make those types of investments. If your account balance is still relatively small and hasn’t yet grown to the point where you can comfortably make investments in real estate or private equity, you can still invest in stocks, mutual funds, and more traditional asset classes.

Self-Directed IRAs Can Grow With You

Over time, with maximum annual contributions and good investment decisions, the balance in your self-directed IRA will grow. This will open up new investment opportunities to you over time.

A Self-Directed IRA Can Focus Your Saving Strategy

In fact, having a self-directed IRA can give you a focal point for your retirement investing. Rather than allowing your retirement nest egg to be spread out over multiple IRAs, 401(k)s and other accounts, you can make your self-directed IRA the primary account in your retirement savings strategy. You can roll other accounts into your self-directed IRA, and prioritize making maximum annual contributions to it. This helps your account balance grow much more quickly.

Remember that your self-directed IRA exists to help you pay for a retirement that still may be several decades down the road. By its very nature, your account is always looking forward. You should have that same attitude when it comes to your investment strategy and choice of IRA custodian. Small account balances are still appropriate for a self-directed IRA, and they keep you the greatest flexibility as your account balance grows.

Bonds or Dividend-Paying Stocks – Which are Better For Your Self-Directed IRA?

Regardless of your overall investment outlook, your preferred investment types, or even the size of your retirement portfolio, there’s a good chance that won’t at least part of your nest egg to be in assets that generate a regular income stream.

This is often a common scenario when someone enters retirement, and needs to begin living off of what they’ve accumulated in their various retirement accounts. Rather than having to sell off investments and reduce the size of their overall portfolio, many individuals choose investments that generate an income stream and can cover some or even all of that individuals or retirement expenses.

Differences in Risk

Bonds are generally considered to be a safer investment than stocks in terms of risk to capital. Bondholders receive their interest payments before the company can pay any stockholder dividends, and bondholders are generally near the front of the line in getting any type of payout if the company experiences any significant financial difficulty.

This generally results in greater market volatility and price fluctuations of stock investments over bond investments. Investors who are looking to make trades with a relatively short or medium term time frame will need to take these risk differences into account.

Differences in Potential Upside

In the most general of terms, stocks are considered to have a greater upside potential as compared to bonds. Bondholders are limited to receiving their stated interest payments, and those payment levels won’t grow over time, in contrast to the dividend payments at a common stockholder might receive. Furthermore, bondholders won’t share in the growth of the company in the same way that stock investors will.

But that certainly isn’t to suggest that it’s impossible to realize significant capital gains through bond investing. Remember that as current interest rates go up and down, the price of any given bond to instrument will tend to vary inversely to that interest rate change. This means that as current rates fall, the value of a bond will tend to increase.

Cash Distinguished

It’s important to note that when we’re analyzing and evaluating the relative pros and cons of bonds and dividend paying stocks, we’re still very much keyed into the investment elements of those asset classes. In other words, even where the primary investment goal is current income, we still evaluate and ultimately select our investments giving consideration to whether we can also realize gains on those investments too.

Bonds and dividend paying stocks should therefore be distinguished from cash or investments such as bank CDs. In general, the purpose of those investments is not to generate current income (particularly with the historically low interest rates we’ve seen over the past number of years), but liquidity and security of principal.