Quick Guide to Open a Self-Directed IRA
Saving up for retirement can be a difficult task, especially if you must rely on a financial institution to do it. Taking the reins of your own retirement savings can be beneficial if you perform your due diligence and use the proper strategy to build your nest egg.
Setting up your SDIRA doesn’t have to be difficult. By following these easy steps, it’s possible for you to save for your future the way you want to.
What Is An SDIRA?
A self-directed IRA is an IRA controlled by the account holder. As the IRA owner, you are responsible for making all the decisions regarding your strategy, the assets, passive custodians, and how they will work together. You decide where your funds are placed and manipulate how they grow.
With a self-directed IRA, there is a lot of wiggle room – yet a lot of room for error. There are several ways you can set up your own account, but the most crucial step you need to take is deciding whether self-directed saving is right for you.
SDIRAs require due diligence and in-depth research. If you aren’t willing to put in the work and set up your personal retirement fun, this may not be the right choice for you. If the idea of running your own account sounds appealing, then here are the steps you will need to take to get started.
What Do I Need To Get Started?
Before running to the nearest financial institution, it’s important to research your possible options. Selecting the right trust company, the best custodian, and assets that will work for you takes some time. Check your personal finances and set up a plan with financial goals. Set a budget and see how much you can afford to set aside. Once you’ve settled your personal funds, focus on the plan that will get you to a comfortable retirement.
Look at the different types of IRA, the alternative assets, and start building you mock-portfolio. What investments suit your retirement goals and financial situation? Do you want your funds to grow tax-deferred with a traditional IRA, or would you like tax-free withdrawals with a Roth IRA?
Are you interested in dipping into alternative assets? While traditional institutions limit your investments to stocks, bonds, and mutual funds, self-directed accounts open the door to different types of investment like real estate, precious metals, and private lending. In addition, research possible custodians who are experienced with those assets.
Once you’ve got a plan together, you can set up your self-directed IRA
How Do I Set Up My SDIRA?
Now that you’ve performed your due diligence, you can take the steps to set up your self-directed IRA. You’ve done the leg work already, so the next part is simple.
1. Select the financial institution and start your application.
- You’ll want to select a Roth or a traditional IRA.
- Choose the best IRA for your financial situation or retirement saving goals.
2. Select your SDIRA custodian.
- This choice should be made based on the assets you’ve selected.
- Make sure the custodian you choose is certified and suits your needs, both financially and intellectually.
3. If you want to roll over existing IRAs, now is the time.
- Consider rolling over previous IRAs into the same account.
- Note, they must be similar accounts for an easy transfer.
4. Build your portfolio by selecting your assets.
- Using your research and plan-of-action, select your assets.
- Be certain to follow all the guidelines and avoid prohibited transactions.
With your account ready to go, don’t just sit back and wait for your funds to accumulate. Stay vigilant by monitoring your investments and making tweaks to your portfolio. Additionally, as you set up your fund and watch your account grow, there are some risks to be aware of.
What Are Some Pitfalls I Should Avoid?
Self-directed accounts have endless potential and freedom; however, that also means there’s plenty of room for error. After putting in all of this work, the last thing you want to do is lose it all because of a technicality. As you put the finishing touches on your account, here are a few things to keep in mind.
- Avoid prohibited transactions – The IRS has rules about what SDIRA owners can invest in or who they can invest with. All IRA investments should remain independent of your personal funds to avoid “self-dealing.” This means you can’t fix your IRA owned property using your own money – nor can you use that property. You cannot benefit from the IRA account before you reach retirement.
- Disqualified individuals – Much like self-dealing, there are certain individuals who cannot benefit from your SDIRA, nor can they contribute personal funds to those assets. This list of individuals includes parents, grandparents, children and their spouses, and grandchildren in addition to others.
- Fees – The fees from SDIRA funds can be crippling if you switch custodians, choose the wrong custodians, or use your SDIRA to take a non-recourse loan to purchase assets.
- Low Transparency and Liquidity – While you have a variety of alternative assets to choose from, it may take a bit longer to unload them if they aren’t exactly paying off. This could especially be a problem once you reach retirement age. Also, with so much freedom, the asset market can get a little muddy. The value of your investment may not be as high as you estimate it.
Before you decide to open an SDIRA, take these issues into consideration. Be mindful of the potential risk and whether this investment is right for you.
Setting Up Your Future
Taking control of your future takes time, effort, and research. If you put in the effort, the payout will be a comfortable nest egg for your future. With these easy steps, you can control your investments, and plan for your retirement. As always, perform your due diligence and discuss your options with your financial advisor before making any investment decisions. Start planning for your retirement, one asset at a time, by contacting a trusted Horizon Trust custodian.