Money Tips: The Ins And Outs Of Self-Directed IRAs

The American dream of a prosperous and early retirement seems harder for many of today’s investors. Economic uncertainty often means wild swings in the value of your retirement portfolio. With so much of today’s retirement dollars tied up in stocks, bonds, and mutual funds, it can be hard to strike out an independent path for wealth accumulation. However, in recent years, the emergence of self-directed individual retirement accounts (SDIRAs) has provided a beacon of light in an often murky investment landscape.

The History of SD IRAs

Created by law in 1974, SDIRAs operate much like traditional IRAs. The key difference is the type of investments allowed in your account. While more traditional IRAs focus on stocks, bonds, and mutual funds, an SDIRA allows a wide range of alternative investments, including real estate, precious metals, oil and gas leases, tax liens, and deeds.

In fact, it is easier to understand what is allowed by focusing on what is prohibited: you cannot use your SDIRA for art, collectibles, life insurance, and any tangible personal property. Another key to understanding SDIRAs is to avoid self-dealing; you cannot use your SDIRA assets for personal use. For example, if you buy a South Texas vacation property inside your account, you cannot rent it out to family.

The Focus

Despite the rules and limitations, an SDIRA offers all the advantages of an IRA including tax-deferred growth, tax deductions, asset protection, and estate planning. Additionally, you are able to nurture investments you understand and create lasting wealth for you and your family. Again, the focus is on you; that’s the key to self-directed IRAs. While an administrator manages the account paperwork and provides annual valuations, it is solely up to the account owner to identify and vet any investments.

The Advantage of Professional Help

Establishing an SDIRA is just a bit more complicated that opening a regular IRA. You will need to work with your broker to understand the guidelines and then find a custodian to hold your assets. There are fees to manage and maintain the account.

Another financial consideration of the SDIRA is that all asset income (i.e., rent on properties owned in the account) must remain in the account and all the expenses needed to maintain the assets (i.e., property taxes and maintenance) must also come from the account. Failure to abide by the rules of the SDIRA can result in stiff financial penalties.

Willing to Put in the Work

Investing with an SDIRA requires more effort that traditional retirement funds. The rewards of such effort include diversifying your assets, being in more control of your investments, and reaping higher returns than the stock market. Supporters of the SDIRA approach hail the opportunity to diversify through alternative investments. Detractors point out the opportunity for fraud and loss of money.

Of course, like any investment, assets held within your self-directed IRA are not guaranteed. In the end, like any financial vehicle, the SDIRA is not one size fits all. However, with proper due diligence and resources, these accounts offer a way for interested investors to build a healthy retirement portfolio that reflects their interests and provides for their family’s needs through retirement.

This article was written by Jeffrey Tipsher. A big-time finance guru, Jeffrey enjoys sharing all that he knows about financial services.