Self-directed IRAs allow you to invest in alternative assets like real estate, precious metals or startup equity as long as you follow all rules. But there may be risks involved.
If you violate IRS rules, penalties and taxes could accrue accordingly. Signs to look out for may include brand new investments with no track record and claims of very high returns.
1. They offer more investment options
Self-directed IRAs enable you to diversify your retirement portfolio beyond stocks, bonds and funds by investing in real estate, private equity and cryptocurrencies – giving you greater chance for significant returns over time.
Investment in tangible alternative assets such as real estate offers an additional level of protection in case the stock market takes a dive, as well as being an effective means of hedge against inflation.
Selecting an investment custodian that supports your desired investment options is the first step toward creating a self-directed IRA. Once found, opening an account may involve rolling over an existing IRA or old 401(k), or making regular contributions – some online brokerages offer them. It should be noted however, that certain assets like collectibles and life insurance may still be forbidden under IRS regulations, so before investing in such assets seek advice from an experienced legal or financial advisor first.
2. They give you more control over your retirement savings
Self-directed IRAs allow investors to invest in alternative assets with potentially higher returns or security than more traditional investments, including real estate (such as rentals and fix-and-flips), precious metals, and even private companies.
Finding an asset type-supportive custodian who allows you to manage it yourself can be difficult, according to NerdWallet’s John Bishop. He suggests performing due diligence by researching companies’ track records and reputation as well as their investments’ individual characteristics; seeking guidance from an advisor experienced managing such assets could also prove useful in this endeavor.
Keep in mind, however, that the IRS has specific rules governing your retirement account assets and management. Violating one could result in serious repercussions; such as borrowing money from or selling property back into your own IRA without first consulting an advisor and in some cases using your retirement funds for personal use or living purposes – any violations could cost you dearly!
3. They come with higher fees
Self-directed IRA custodians may charge additional account setup and annual fees that go beyond traditional brokerage accounts. Knowing exactly what your fees cover allows you to compare options and select the one best suited to your situation.
Since alternative investments are less regulated than publicly traded stocks and bonds, it’s especially essential that investors do their homework before investing. That includes taking time to examine account statements to confirm asset values and returns according to certified public accountant and investment adviser John Bishop.
If you’re considering opening an SDIRA, make sure that the firm you select offers checkbook control options. For instance, Entrust Group’s Prepaid Card gives checkbook control without needing to create an LLC, saving time and money; but note that there may be fees associated with maintaining and tracking investments under an SDIRA account.
4. They have a lot of rules to follow
An Self Directed IRA (SDIRA) allows you to invest in both traditional and nontraditional assets, including real estate. To open one you’ll need a custodian who specializes in this form of account and follow IRS regulations.
Your purchase could also incur fees such as account management, trading and transaction costs. It is wise to do your research so as not to overpay.
SDIRAs contain rules regarding “self-dealing” and prohibited transactions, which the IRS considers inappropriate and can result in penalties. Such transactions include using your IRA to buy property where you live or investing with a disqualified individual.
Fraud is also something you must keep an eye out for, since criminals can prey upon those with SDIRAs. Therefore, it’s essential that you conduct research on any new investment companies offering high returns or those without third-party oversight; additionally consult a tax professional so as to make sure your retirement savings meet all regulatory standards and maximize returns.