The 5 Basics of a Self-Directed IRA
Taking the reins of your future can be an exciting moment, especially when building up a nest egg for your golden years. Self-directed IRAs are a great way to help you plan for your retirement and secure funds for you and your loved ones.
If you are thinking of opening an SDIRA to save for your retirement, it may be tricky getting started. Before getting into financial investments, here are five basic tips about self-directed IRAs and self-guided savings.
#1 – Control over your Investments
If you want to be hands-on with your retirement savings, opening a self-directed IRA is the best route to take. A SDIRA is a tax-advantaged savings account that you construct however you choose. You decide how you want to save, which assets you want to invest in, and how you want to set up your personal goals.
SDIRA account holders can make their retirement savings more diverse and take control of their investment choices. Depending on your investment plan, you can select a traditional IRA, which grows tax-deferred over time, or a Roth IRA which allows tax-free withdrawals. A self-directed IRA allows you to have a hand in planning for your future rather than relying solely on financial institutions.
#2 – Alternative Assets
Self-directed IRA owners have the advantage of alternative investments. Traditional financial institutions allow account holders to invest in stocks, bonds, and mutual funds. SDIRAs, however, grant a new level of freedom with many more investment options.
Investors can explore many different alternative assets: real estate, precious metals, rental properties, tax liens, private lending, cryptocurrency, and many more. Your investment options are nearly unlimited, provided they follow IRS guidelines. While the IRS doesn’t clearly state what you can invest in, they are very clear on what you cannot. Life insurance, tangible objects, and most collectibles are considered off-limit investments.
The key to alternative investing is sticking with what you know. Explore the different options open to you, but start with investments you may be familiar with. With so many options, you can create a diverse portfolio for your retirement fund.
#3 – IRA Custodians
While owning a self-directed IRA allows you to manage your own retirement, the IRS does require you to have a licensed IRA custodian handle your funds. A certified IRA custodian is often educated about different alternative assets, keeps track of all transactions, and reports to the IRS.
Though having a custodian is a requirement, account holders can select the one that best fits their investment strategy. It’s imperative to select a custodian who understands and is up-to-date on the types of investments in your plan. There are many certified individuals to fit the bill, so perform your due diligence when building your SDIRA.
#4 – Building a Portfolio
When it comes to a solid self-directed IRA portfolio, balance is the key. As you build your fund, variety will ensure steady growth and a more comfortable retirement. As you select your assets, be sure you pick multiple investments to cover all growth types. You don’t want to put all your hard-earned money into just one investment, but be careful not to spread your funds too thin. Balance is essential for building up a secure retirement fund.
When selecting assets for your portfolio, a mix of long-term and short-term assets is great for well-rounded growth. For instance, it may be a good idea to invest in rental properties and have and a business investment. Having more than one option can also protect you should one of your investments fail. Additionally, having a diverse portfolio can allow you to branch out of your comfort zone as long as you have a secure investment to fall back on.
#5 – IRS Rules
Self-directed IRAs can be an excellent way to secure funds for you retirement; however, before jumping in, account holders should be aware of the rules. The last thing investors want is to lose their hard-earned money to penalties and disqualifications. You can avoid these pitfalls by performing your due diligence to follow the rules set by the IRS.
Don’t invest in prohibited assets like life insurance, tangible assets, or collectibles. Avoid prohibited transactions like self-dealing, or using your personal funds on your IRA investments. Additionally, do not deal with anyone considered a disqualified individual: children, spouses, grandchildren, etc. Remember, you and anyone who stands to benefit from your IRA cannot reap the rewards until after you hit retirement age.
As your account grows, be sure to report any changes and all important investment information to your IRA custodian.
Take charge of your future by investing in yourself with a self-directed IRA. As always, when making any financial investments, consult your financial advisor when considering your options. It’s time to start building your retirement savings. Find out what an SDIRA and alternative assets can do for your future by contacting a trusted custodian today.