Self-Directed IRAs: The Best Underrated Tool Around

Self-Directed IRAs: The Best Underrated Tool Around

Imagine being able to assume control of your retirement account, invest where you want and lower your fees. That may sound too good to be true, but it is true. Less than 6% of Americans know about these accounts. This is known as a self-directed IRAs.

Think of it as it sounds: You have the ability to self-direct where your money goes. You can explore alternative investments or stick with what you know, but you’re in control. You have the freedom to make your own investment choices within your IRA.

Trisha LaVeck, founder of Safe Money Consulting, regularly helps clients better understand the benefits and advantages of a self-directed program. “People utilizing a self-directed IRA now have the ability to diversify assets outside of traditional mutual funds, bonds or stocks. We like real estate and lending options. Real estate feels more tangible than stocks. A self-directed IRA empowers investors to make their own decisions and investments.”

How does a self-directed IRA work?

 Once you’ve made the decision to take control of your retirement future, now you must find a custodian or qualified trustee to hold your IRA assets. Next, you and your custodian will work together to request funds be transferred from your current retirement account to your new self-directed IRA. Most custodians have professional transfer desks to help you or your financial advisor can help, too.

Once your funds are in your self-directed IRA account, your custodian will take care of the transaction of sending your money wherever you’ve decided to allocate it. Research shows that 95% of self-directed IRA accounts have just one asset class in them. Once this asset begins to generate cash flow, those funds go directly back into the self-directed IRA account your custodian is managing for you. Your money continues to grow over time and all qualified funds remain in your IRA until you are ready to retire. This ensures you are compliant with the IRS.

Remember: your custodian follows IRS regulations and will process transactions for you, maintain records, file IRS required information and provide statement access to you; however, they won’t give you advice, since they are a neutral 3rd party. You are responsible for understanding tax implications for any investment you choose and you must perform any due diligence to know where you should direct your money.

La Veck continues, “Many people are so frustrated with their investment options, high fees and portfolio performance within a company sponsored 401(k). When an employee leaves their employer they can decide to roll their 401k over into a self-directed IRA. Rollovers from 401(k) plans are the most common way to fund a self-directed IRA. A traditional IRA to a self-directed IRA is the second most common way.”

Where can I self-direct funds to?

With a self-directed IRA you can direct funds beyond the market into alternative investments, such as, real estate, tax liens, private company stock, partnerships, private mortgage lending, precious metals, intellectual property, foreign currency and private equity.

Benefits of a self-directed IRA:

 There are several benefits to using a self-directed IRA. The greatest benefit is the ability to diversify your retirement money to protect against market volatility, as well as inflation. People want the freedom and flexibility to be ready for changing economic conditions. Some people take it a step further and want to stimulate entrepreneurial activity with their investment choices. Additional benefits of a self-directed IRA are:
  • LOW Fees. Flat annual fees from $150 to $500
  • Tax-deferred or tax-free growth
  • Passing wealth down to the next generation (certain self-directed IRAs allow the passing of assets to beneficiaries after death with little or no tax implications)
  • Complete control and ownership of your retirement future and investment choices, without the headache of trying to follow IRS rules/regulations
  • Protection from creditors and bankruptcy, since under Federal bankruptcy laws, up to $1million of IRA assets are exempt from bankruptcy
  • Confidence in your investments, which results in stronger long-term results

Everyone has the opportunity to participate in a self-directed IRA. Investors need to become wary because there are prohibited asset types listed in Section 408 of the Internal Revenue Code. Also included in Section 4975 of the Internal Revenue Code showing prohibited IRA transactions.

That said, there are custodian and third-party providers who have made it their goal to make self-directed IRA investing more accessible to the average investor and easier to understand. You can even self-direct a Roth IRA or a SEP IRA now. If you have qualified funds and want to have more control and predictability with your investments, then a self-directed IRA is the best place to start.

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