What is a Self-directed IRA?
Everybody needs to prepare for retirement at some point in their lives. It is important to start financially preparing for your golden years as soon as possible. There are numerous options and available retirement vehicles which you can choose from to start building capital for retirement. One of the most commonly used retirement vehicles is an Individual Retirement Account (IRA).
Most people will choose an IRA that is managed by a professional investment fund manager. This is reasonable since the professional fund manager will have the knowledge and experience necessary to make smart investment decisions. Of course, this makes sense for those who do not have much knowledge of the financial markets. On the other hand, there are some who do have some working knowledge of the markets and may want to consider a Self-Directed IRA (SDIRA).
What is a Self-Directed IRA?
Choosing a SDIRA as a retirement strategy allows you to directly manage how your funds deposited into the IRA are invested. Many SDIRAs will allow you to invest in alternative assets which may be prohibited with regular IRAs. An SDIRA is administered by a trustee or custodian, usually a financial institution, but it is managed directly by you, the account holder. However, you should be aware that with a SDIRA the trustee will not be able to provide you with investment advice.
An SDIRA can be either a traditional IRA or a Roth IRA. Each has different tax advantages. With a traditional IRA you are depositing pre-tax dollars which means that you are able to deduct the funds on your tax returns for that year but will pay taxes upon withdrawal of the funds. A Roth IRA does not allow you to deduct what you deposit but you will be able to withdraw without paying taxes. With both types of IRAs, you will be charged penalties for early withdrawal before retirement age.
You may want to consult with your financial advisor to decide which type of SDIRA you should choose.
What assets can you hold in an SDIRA?
Many times, with an SDIRA the administrator will allow you to invest in more than just the standard assets available with regular IRAs. Usually, regular IRAs are only allowed to hold stocks, bonds, certificates of deposit (CDs), exchange-traded funds (ETFs) and mutual funds. SDIRAs will usually be able to invest in various alternative assets such as commodities, precious metals, limited partnerships, real estate, private placements, tax lien certificates and more. However, you should check with your SDIRA custodian to find out exactly which types of assets are offered.
Consulting with a professional financial advisor
Since you are not able to receive investment advice from the custodian of your SDIRA you will want to be as knowledgeable as possible about the financial markets in order to make good investment decisions. However, you also have the option of consulting with your financial advisor who will have the experience and understanding of markets to guide you through constructing your investment portfolio.