Why are self-directed IRAs so popular? It’s because they give you plenty of investment choices – mutual funds, bonds, energy, real estate, stocks, etc. You can invest where you’re comfortable or you have profound expertise.
The freedom and tax-deductible contributions make self-directed IRAs an attractive choice for investors who wish to build lasting wealth. However, this doesn’t imply that self-directed IRA is suitable for all. Each investor has a different investment goal and personality. If one is not aware of the nitty-gritty of self-directed IRA, then it would be very easy to make mistakes. And, this would affect the retirement life of investors.
Here are the 4 essential facts anyone should know before opting for Self-Directed IRAs.
1. You need to be an expert at managing accounts
Are you comfortable at managing accounts properly? Are you a sucker of do-it-yourself approach? If so, then Self-Directed IRA is the right option for you. You need to do a lot more paperwork when investing in alternative assets. Plus, you should know all the rules when using a self-directed IRA. For instance, you can’t invest in rare coins or antiques. Educate yourself as much as possible on self-directed IRA before investing. You need take on a lot of responsibility when it comes to self-directed IRA. Are you ready for that?
2. You can enjoy deferred taxation
Self-directed IRAs have some tax benefits and drawbacks. You need to know about them so as to reap maximum profits. The biggest benefit is, of course, the deferred taxation on growth. You can keep investments that would be considered as taxable assets. As you don’t have to pay tax now, so you can invest that money to earn growth.
Wait. The story is not yet over. There is yet another thing which you need to keep in mind. You should know how investing in a traditional self-directed IRA can change the scenario. Once you withdraw money, you would have to pay tax. Do you realize what this means? You may have to pay a higher tax when your income is at a higher tax bracket at retirement. Your income from a self-directed IRA may give you a higher tax bill.
3. Select your custodian with extreme care
This is because the custodian holds the assets. You have to look at your options and analyze them properly. Evaluate the size of the custodian since it would give you an idea about the firm’s stability. Acquire information about the services that custodian provides.
Look a custodian won’t give you direct advice but they must be able to solve your queries about your plan. They must be able to take care of the paperwork. They should review your account on a regular basis so that you don’t indulge in illegal transactions that violate the IRS guidelines.
There is yet another factor you need to consider. And, it’s an important one.
Find out if this custodian accepts the kind of assets you would be working with. Next, check out the fees too. You need to choose a custodian that perfectly suits your investment strategy.
4. Analyze your investment goal
What is your investment goal? How much risk are you willing to take? Do you wish to build your nest-egg in a tax-advantaged way? Or, do you want to increase your cash-flow right now?
If your long-term goal is to build your nest-egg, then go for self-directed IRA. For instance, let’s say you love to generate income through rental property. So, you buy a property and rent it out. Once done, you start earning money from the rental property every month. You can use this money anytime. But, if you invest in a rental property using the self-directed IRA, then you can’t enjoy this money now. The rental income will go back to the IRA.
The bottom line
It isn’t too tough to set up a self-directed IRA. After reading this article, if you feel Self-Directed IRA is the best option for you, then go for it. If you want help in setting up a Self-Directed IRA, then work with a professional financial consultant. You’ll see that the process is very simple and easy.