What is A Self Directed IRA and How to Use it
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- By Hank Coleman
- July 23, 2010
A self-directed Individual Retirement Account (IRA) is exactly what the name describes. It allows an account owner to make investment decisions on his or her own behalf for retirement while continuing to provide the account holder with tax benefits.
You can have either a traditional self directed IRA or a self directed Roth IRA. You have control over your retirement money in your nest egg instead of relying on the recommendations of a mutual fund manager or account manager. Unlike the self directed IRAs more famous cousins, the Roth and Traditional IRA, you call all the shots in the self directed version.
What You Can Invest In
Under IRS rules and regulations, you are pretty much only limited by your imagination on what you can invest in inside your self directed IRA. You can invest in stocks, bonds, mutual funds, real estate, mortgages, franchises, partnerships, private equity, and tax liens. These are just a few examples. There are only three types of investments that are specifically forbidden to be invested in any type of IRA: Life Insurance Contracts, S Corporations and collectibles such as art and jewelry.
Self-directed IRAs have all the advantages of regular IRAs (Traditional & Roth depending on the type of self directed you choose), as well, the tax advantages in order to help your retirement income grow. The sheer choices of investments allow you to diversify your nest egg holdings beyond your wildest dreams.
You will also not be tied down to any one particular mutual fund company or products that an investment company sells. Many people choose to hold rental real estate in their self directed IRA which gives them an added investment that is not normally available to investors out side of mutual funds that specialize in Real Estate Investment Trusts (REITs). A self directed IRA provides you with a lot of freedom to make the best investment choices for your situation.
Many IRA custodians and money managers do not want you to know that you can manage your own retirement accounts.
In many ways, Wall Street earns its bread and butter on selling products and services, and they spend a lot of time and money trying to convince the average citizen that picking your own investments is too complicated for the masses to understand. Also, by managing your money on your own, you are foregoing the advice of a qualified professional.
If you are doing all the stock picking, you will have to follow the companies you choose rather than let a mutual fund manager do it for you. You may not have the time or the ability to understand what makes certain stock prices move in the market. Also, you could possibly under-diversify your retirement nest egg if you make large gambles on investments such as rental real estate or small local corporations in your self directed IRA.
You Still Need Help
IRS regulations require that a qualified trustee or a custodian hold your investments and assets on behalf of the self directed IRA owner. Many large institutional investment companies such as Fidelity, TDAmeritrade, and Vanguard just to name a few allow their customers to have these types of accounts and assists them with the administrative, paperwork portion of these types of accounts. Generally the trustee will maintain the assets, execute the transactions, process the recordkeeping, produce client statements, and assist in the IRS reporting requirements associated with the IRAs.
Everyone’s investment abilities and retirement needs are different. You significantly increase your risk by handling your investment portfolio yourself. You should think long and hard before you invest a large portion of your retirement nest egg in a self-directed IRA, and you should not hesitate to seek out the advice of a competent and qualified finance professional should you need the help. With that said, self directed IRAs provide you with the freedom to invest and retire how you want to. You are in the driver seat with a self directed IRA.