What can I invest in with a self-directed Ira? Does it allow me to invest in traditional assets only, or can I add non-traditional assets to my portfolio as well? Join me in today’s comprehensive post in which I will help you find the answers to some of the questions pertaining to what you can use your self-directed IRA for. Read on to find out more.
Self-directed IRAs make it possible for investors to invest in unique and varied investment options. This is unlike what is offered in the case of traditional IRAs and Roth IRAs, where investors are only allowed to hold paper assets such as stocks and bonds. A self-directed IRA comes with its unique advantages in that the account owner is also charged with managing their account, hence is responsible for ensuring that they have selected their preferred assets and allocated funds to them, as they please.
The general outlook when it comes to self-directed IRA ownership is that one should be prepared to do their due diligence as an investor and to research widely before making the investment decisions.
What is a self-directed IRA?
In a number of ways, a self-directed IRA is like a traditional IRA or a Roth IRA. This account is designed to provide investors with tax advantages, and like other types of IRAs, the owners must meet the same eligibility requirements and stick to similar contribution rules.
As of now, the maximum contribution limit is $6000 for those aged below 50 years and $7000 for those above 50 years. One can start withdrawing their funds without getting penalized by the IRS upon hitting 59 ½ years.
All the above requirements apply to almost all types of IRAs, with the main difference with a self-directed IRA being the type of assets that you are allowed to hold.
***Read more on”What is a self-directed IRA?”
Which assets can I hold in a self-directed IRA?
Rather than insist on a particular set of assets, and limit the investor from tapping into the potential of non-traditional assets, a self-directed IRA does the opposite-presents you with the opportunity to invest in almost any imaginable assets. Here is a list of assets that you can begin investing in if you were to open a self-directed IRA today:
- Precious metals e.g. gold, silver, platinum, and palladium
- Cryptocurrency e.g. Bitcoin, Ethereum, etc.
- Venture Capital
- Oil and gas
- Unsecured notes
- Limited partnerships
- Undeveloped land
- Structured settlements
- Car dealerships
- Secured notes
- Retirement homes
- Joint ventures
- Hedge funds
- Construction loans
- Recreational facilities
- Offshore real estate
- Royalty interests
- Sports stadiums
- Apartment complexes
- Show horses etc.
As you can see, self-directed IRAs could be the fun aspect of your retirement investment portfolio that you could have been missing. With the contribution limits set on IRAs, it is not possible to invest in all of the assets listed above and make significant gains, which is why many investors who are looking into opening self-directed IRAs do so mainly to invest in a few main assets such as precious metals, cryptocurrencies, and real estate, in a bid to diversify their retirement investment portfolios.
How can I open a self-directed IRA?
Whereas a self-directed IRA allows you to make investment decisions, it is not a retirement plan that you get to manage without any oversight. You are required to work hand in hand with a custodian or trustee, who ensures that all rules and regulations as set by the IRS are met.
To open a self-directed IRA, you can follow these steps below:
- Find a reliable custodian or trustee for your account, and open your account.
- Fund your account by making your contributions, or rolling over ( or transferring) the funds in your other retirement plans.
- Choose the products you want to purchase with your funds. Depending on your financial goals, this is a good time to consider whether your investment portfolio will be well-diversified.
- Complete the transaction – upon finding your preferred assets you can instruct your custodian to purchase them on your behalf. Note that you must specify the dealer from which your custodian should purchase, say, your precious metals.
- Follow up on the performance of your assets, and when the time is right, plan your withdrawals. As earlier on highlighted, you can take your withdrawals with no penalties starting from 59 ½ years. If you take an early withdrawal, you will have to pay a 10% tax penalty on the withdrawn amount, in addition to the other taxes that are due by then.
**Get started on the right foot – reliable gold & silver IRA solution
What are the advantages of self-directed IRAs?
Investing in a traditional IRA presents you with unique benefits, including the following:
- Greater flexibility to hold the type of investments that you prefer – as opposed to being forced to stick to a specific range of assets.
- tax -breaks to maximize your earning potential
- The opportunity to pick from and invest in a wide variety of assets.
- A chance to diversify your retirement investment portfolio – you can open a self-directed IRA alongside a traditional or Roth IRA, to minimize the risk exposure on your entire portfolio( by investing in non-correlated assets).
- The opportunity to tap into high-income potential assets such as cryptocurrencies.
**Also read: What is a 401(k) to gold IRA rollover
The disadvantages of self-directed IRAs
Some of the main downsides of these unique IRAs include:
- You are not allowed to invest in collectibles, life insurance, or the real estate you live in.
- Most of the non-traditional assets tend to have higher risks.
- The account maintenance fees are relatively higher than those of the regular IRAs
- There are some transactions that are prohibited by the IRS.
Is a self-directed IRA right for you?
Owing to the fact that you will be making the investment decisions of your self-directed IRA e.g. managing all paperwork, making all necessary communication, and following up on transactions, a great level of dedication is required. This is one top factor to consider when opening a self-directed IRA. If you do not foresee yourself being the shot-caller of your investments, then you can switch to other types of IRAs.
That said, however, investing in assets such as precious metals may not be very demanding, since you are only required to buy and hold the assets.
Also, if you have specialized knowledge or are willing to hire someone who has specialized knowledge in a certain field, then this type of IRA will be perfect for you. The same applies if you are looking for ways to diversify your retirement investment portfolio.
Frequently asked questions on “What you can invest in with a self-directed IRA?”
1. What are you not allowed to invest in a self-directed IRA?
It comes as a surprise to many investors that the list of assets allowed for use in a self-directed IRA is quite long. Investors are since turning to them for the great potential that they bear, as far as tapping into non-traditional high-income assets is concerned. The IRS however prohibits investors from investing in the following assets:
- Collectibles such as alcoholic beverages, collectible coins, stamps, rugs, antiques, and pieces of art.
- Real estate that you already live in.
- Life insurance
2. Who offers self-directed IRAs?
Self-directed IRAs are offered by specialized IRA firms which have the necessary resources to oversee investors’ progress as they tap into the potential borne by the non-traditional assets. If you are looking forward to opening a self-directed IRA, then you should perform your due diligence to check if the Self-directed IRA firm is reliable based on:
- Fees and other charges
- Customer service
- Consumer satisfaction ratings
3. Can I use my self-directed IRA to invest in paper assets?
Yes, you can. The IRS allows investors to invest in both traditional and non-traditional assets through their self-directed IRAs. This means that you can hold stocks, bonds, funds, and other paper assets in your SDIRA, and even add non-traditional assets as you please, provided that you do not break any rules while doing so.
4. How much money can I contribute to a self-directed IRA for the purposes of investment?
Self-directed IRAs like other IRAs have to abide by the contribution rules set by the IRS. The contribution rules change from year to year, so you should always visit the IRS website to check all the relevant updates. As of now, the maximum amount you are allowed to contribute to your self-directed IRA is $6000, or $7000 if you are 50 years old or older.
Thank you for making it to the end of this post in which we have answered the question “What can I invest in with a self-directed IRA?” I hope you found it helpful, and that it will provide you with the necessary tips to get started as a self-directed IRA owner. Let me know if you have any questions related to today’s topic, or whether you also have any experiences to share about investing through a self-directed IRA- drop them in the comments section.
I wish you well,
Eric, Investor and Team Member at Gold Retired!