5 Things You Need to Know About Self-Directed IRAs

Are you looking for more control over your retirement investments? A self-directed IRA (SDIRA) could be a beneficial option, allowing you to invest in unique assets like real estate, precious metals, and cryptocurrency. However, this option also comes with increased responsibility and regulations. Consider the following factors to determine if a self-directed IRA is the right choice for you.

A self-directed IRA is a type of individual retirement account (IRA) that allows you to hold a broader range of investments compared to a typical IRA. Despite this flexibility, participants must adhere to the same eligibility and contribution limits as those governing traditional or Roth IRAs. While account holders manage their own accounts, self-directed IRAs are still administered by custodians or trustees and must be opened through specialized firms that provide self-directed IRA services. A more detailed explanation of self-directed IRAs can be found in the previous Escient Financial Insights article What is a Self-Directed IRA and Does It Work?

A self-directed IRA offers the opportunity to invest in a wide range of alternative assets beyond standard investments available in traditional or Roth IRAs. For example, you can allocate funds to real estate, precious metals, cryptocurrency, livestock, water rights, tax liens, and more. If you’re interested in diversifying your investment portfolio with these unique assets, a self-directed IRA provides the freedom to do so.

With a self-directed IRA, the responsibility for researching and managing investments rests entirely on the account owner. This includes understanding the risks associated with various investments and complying with specific regulations and rules.

Self-directed IRAs come with various fees, such as annual custodian fees and transaction minimums. Additionally, strict rules govern these accounts, including prohibitions on transactions involving certain disqualified persons, like family members. Engaging in prohibited transactions can result in penalties. The diverse investment options available in a self-directed IRA can also mean increased exposure to risk and additional regulations, which account holders must fully understand and follow.

Not all brokerage firms offer self-directed IRAs. To open a self-directed IRA, you must select a company, bank, or trust company that specializes in these accounts. While custodians or trustees administer self-directed IRAs, they are not permitted to provide investment advice, making it crucial for account holders to be well-informed and proactive in managing their investments.

Similar to regular IRAs, both traditional and Roth IRAs can be self-directed. The key differences between these two types remain the same: with a self-directed traditional IRA, taxes are paid upon withdrawal during retirement, while contributions to a Roth IRA are made with after-tax dollars, allowing for tax-free growth and distributions.

A self-directed IRA can be an excellent option for seasoned investors or those with expertise in specific areas like real estate or equities. The independence and flexibility it offers require a commitment of time and effort to manage the account effectively. However, if you’re interested in a self-directed IRA but lack the necessary time or expertise, consulting with a financial advisor can provide valuable guidance and assistance in managing your investments.