One great benefit of a self-directed IRA is that it gives you the freedom to diversify your investments. Furthermore, it gives you the chance to maximize your earning potential since there are more options of what can be invested than Traditional IRAs. With this in mind, how does a self-directed IRA work and what are its other advantages?
Are Self-Directed IRA Benefits a Smart Investment?
How Does a Self-Directed IRA Work?
If you think the investments inside your Traditional IRA are not enough to set you up for retirement, then you may want to consider investing in self-directed IRAs. Unlike a Traditional IRA, which mainly limits one to stocks and bond, a self-directed IRA allows you to choose from alternative types of investments. These can be things such as real estate, mortgages, precious metals, mutual funds and private stocks.
Self Directed IRA Benefits
1. Investment Expertise
Stocks and bonds are generally risky and do not always give positive results. Their volatility can harm your investments. In contrast, opening a self-directed IRA gives you the flexibility to choose investments in your area of expertise. For example, real estate agents can choose to invest in real estate in a self-directed IRA, giving that extra edge since it’s their field of expertise.
2. Security of Assets
With a self-directed IRA, you can protect your investment from economic fluctuations. Additionally, federal bankruptcy laws protect these investments with the assurance of safety to all assets under these programs. This is because self-directed IRAs are under the protection of the Employee Retirement Income Security Act of 1974.
3. Tax Benefits
Traditional IRA’s and self-directed IRA’s enjoy the same tax benefits for similar contributions to the account (ie. stocks, bonds, mutual funds). However, you will want to keep in mind that since self-directed IRA’s allow you to contribute more than your traditional investment options, those may have separate stipulations and additional taxes incurred depending on the investment. It’s wise to have the expertise of a custodian or facilitator to help manage your account and better understand the different taxes associated with your investments.
4. Generates Higher Profits
A self-directed IRA increases the potential for income growth by putting your money in investments with booming markets and higher returns. Additionally, if you have selected to invest in an area of your own expertise, you can save on management fees to a custodian as you can manage your own investment after the account is all set.
Although these self-directed IRA benefits sound like a great option for your retirement account, you still need to do your research before opening an account so you can set up an effective plan. In addition, finding the right facilitator can be tricky as well, so be sure to choose the right financial institution to help you achieve your retirement goals.
What are your insights about self-directed IRA benefits? Share your thoughts with us in the comments section below.