Self-directed IRAs allow investors to have greater freedom when managing their retirement assets, but also carry greater risk when making alternative purchases like gold and real estate investments.
Investors must remain mindful of red flags, such as new investment companies making extravagant claims about returns or making false statements about investment opportunities. Furthermore, they should understand the rules associated with self-directed IRAs such as prohibited transactions.
Eligibility
Self-directed IRAs may provide more investment options and flexibility than standard IRAs; however, these accounts also may carry higher fees and risks, so investors should carefully consider all factors before deciding to roll over their 401(k).
As well as these rules, self-directed IRAs must abide by several more restrictions that must be observed. For instance, self-directed IRAs cannot purchase property from or rent to an ineligible individual and they cannot pay maintenance bills or use it as vacation homes.
If you’re keen on investing in alternative assets, a self-directed IRA could be the perfect option for you. Many alternative investments feature low correlations with traditional stocks and bonds, offering greater diversification without increasing risk or volatility. But make sure your custodian is licensed to store alternative investments safely; otherwise you risk running afoul of IRS regulations and forgoing the tax advantages offered by an IRA account.
Fees
Self-directed IRAs (SDIRAs) provide investors looking to diversify their retirement savings portfolio with nontraditional assets like real estate and precious metals an ideal way to do so. While regular IRAs typically provide only stocks, bonds or mutual funds as investments options, SDIRAs allow more options such as real estate.
Self-directed IRAs require more responsibility from its beneficiaries, since custodians of self-directed accounts cannot offer investment advice or recommendations.
IRS has stringent rules regarding investments you can make with your self-directed account, which could prove costly should you fail to abide by them. For instance, buying or selling certain assets such as collectibles or businesses without liability insurance without prior permission could incur severe repercussions; prohibited transactions between yourself and family members also need to be avoided in order for rollover to proceed smoothly. Due to such limitations it’s critical that careful research be conducted prior to undertaking a rollover transaction.
Taxes
If you choose to convert your 401(k) into a self-directed IRA, it’s important to think through how its tax implications will be managed. There are two options for doing this – an indirect rollover wherein your current custodian sends you a check withheld 20% and gives you 60 days to deposit into a new IRA without incurring income tax and early withdrawal penalties, or direct transfer or trustee-to-trustee transfer which involves moving funds directly between accounts without tax implications at all.
With a direct transfer, your IRA will move directly from one custodian to the next without paying account management or trading fees, although other expenses related to investing may still arise based on what asset(s) you invest in (for instance if investing in precious metals you may incur storage and insurance costs). It is important that you understand your custodian’s fee structure before beginning investing and may incur a flat annual maintenance fee from them as well.
Investments
Self-directed IRAs allow investors to diversify their portfolio with alternative assets, including real estate, startups and crowdfunding platforms, private equity and tax liens. When selecting your custodian for these investments, make sure their fees, services and experience match your desired investments; additionally find trustworthy dealers to sell these assets.
Self-directed IRAs offer numerous advantages, with higher returns potentially being one of them. But be wary that these investments involve greater risk.
One of the biggest challenges associated with self-directed IRAs is keeping tabs on fees, which can add up quickly. NerdWallet recommends selecting a custodian with low fees and minimal hassle; avoid commissions or transaction fees altogether and consider switching custodians every few years; some IRA custodians charge additional asset-specific fees that you may wish to bypass using trustee-to-trustee transfers as another solution.
