What are the benefits of a self-directed IRA? Does it work like the other types of IRAs or does it have unique benefits that you should take advantage of? Can you use it to build long-lasting wealth or is it simply good for short-term horizons? Welcome to today’s post in which we shall be looking at the potential benefits of a self-directed IRA, with the hope that you will gain enough info to help you decide whether you will open one today.
Like any other Individual Retirement Account, a self-directed IRA is a tax-advantaged retirement account that any investor can rely on to build sustainable wealth for retirement.
Self-directed IRAs are, however, unique, in the way they offer the freedom and flexibility to invest in a wide variety of assets, beyond what you would normally get by turning to traditional investment options such as stocks, bonds and mutual funds.
Benefits of self-directed IRAs
You can take control of your finances
A self-directed IRA gives you more power to decide how you want to reach your financial goals. You are usually in control of all the decisions pertaining your account, and have the flexibility to invest in the assets that you have already proven to be best for you, and the ones you are comfortable with.
This type of IRA is not tied to your employer, and is one that you open to further your own financial goals. The good news, however, is that if you are currently employed and would need to change your job, you can roll over the funds in your previous 401(k) or any other retirement plan to your self-directed IRA so that you can continue investing for retirement no matter where you are in life, or the status of your career.
This does not mean that you have to change your job for you to open a self-directed IRA. It is possible to have a self-directed IRA in addition to your 401(k) or any other retirement plans that are sponsored by your employers.
Also, simply because it is referred to as a self-directed account does not mean that you have to do all the work alone. You can find a trusted advisor or any other retirement investment professional to help you with the making of retirement investment decisions. This type of account gives you total control over the choice of methods that work best for you.
Self-directed IRAs have tax advantages
Provided that you follow the rules set by the IRS, you are bound to gain a couple of tax advantages that qualified retirement accounts present. The two main types of IRAs are Roth IRAs and Traditional IRAs, both of which present investors with unique advantages. Regardless of whether you open a Traditional IRA or a Roth IRA, your investments are required to remain in the account until after you hit 59.5 years.
All the income, profit, and appreciation that results from the investment in the self-directed account is ploughed back into the IRA without being taxed or without being perceived as your overall taxable income for the year.
You may think that the tax-advantages of retirement plans such a self-directed IRAs are not significant, until you realize that they can be very powerful due to the effect of compounding over the years. The fact that the funds return to the account directly without being taxed implied that tax-savings can be reinvested into any upcoming opportunity.
Say you have invested in a variety of precious metals and they perform beyond your expectations, you can decide to invest part of your proceeds in cryptocurrencies to diversify your retirement investment portfolio.
Self-directed IRAs allow you to invest in more than just the paper assets
The main difference between a self-directed IRA (SDIRA) and other types of IRAs and retirement plans is the increased freedom and flexibility that the SDIRA presents to their owners. By opening an SDIRA, you gain the freedom to tap into the benefits of traditional and alternative assets, which is something that other retirement investment plans may not offer.
Most investors go for many years without realizing that they their investment options are quite limited. Some do not see beyond what stocks, bonds, mutual funds, ETFs, and other paper assets.
The truth, however, is that there is a way through which they can also invest in assets such as private stocks, real estate, promissory notes, precious metals, and cryptocurrencies. This can be achieved through the opening of an SDIRA.
Note that not all alternative investments can be held in an SDIRA, according to the rules set by the IRS. The IRS publication 590 prohibits states that the following items cannot be invested through a self-directed IRA:
- Life insurance policies
- Alcoholic beverages
- Some precious metals
- Collectibles e.g. some types of coins, stamps, art works, antiques, and gems
Note that for the precious metals, not all of them are prohibited. You can hold IRS-approved gold, silver, platinum, and palladium bullion that meets the set fineness requirements.
Most of the other investments are permitted, provided that they meet the rules specified in the Internal Revenue Code 4975 and IRS Publication 590.
As you can see, if one is to open an IRA, then a self-directed IRA is the best option for them, owing to the extra benefits that they offer. The thing about SDIRAs is that they also allow for their holder to elect one or several beneficiaries for their IRA.
One can select whomever they want to enjoy the benefits of their investments after they pass away, including their spouse, grandchildren, or even charities. The good thing is that this retirement plan is tax-advantaged, so you will not have to worry about your investment capital being eaten into by taxes long after you are gone.
Check out some of our top-recommended gold & silver IRA service providers (self-directed IRAs that also allow you to invest in gold, silver and other IRS-approved precious metals).
That will be all for today’s post on what the benefits of a self-directed IRA are. I hope that you found it helpful, and that you now know whether you will need to open one as you invest for your future. Let me know if you have any questions regarding today’s post, and whether you’d need any help finding a reliable company as you open your self-directed IRA.
I wish you well,
Eric, Investor and Team Member at Gold Retired!