If you are looking into diversifying your investment options with your IRA then you may want to consider a self-directed IRA. This type of IRA allows you greater flexibility in choosing how your IRA funds are invested. This type of IRA is becoming more and more popular with investors who want to protect themselves against a volatile stock market and to diversify their assets.
Self-directed IRAs are on the rise, as much as $100 billion is now invested in self-directed IRAs. These IRAs are good and bad because instead of being managed by a custodian that knows the market and will recommend solid investments, the pressure is entirely on the owner of the IRA. Self-directed IRA accounts are administered by a specialized custodian involved with a trust bank, rather than a major bank or brokerage. All this custodian does is make sure that your paperwork is in order and then offer annual valuations of your account, but that is it.
You do have the option to hire someone that can help you make smart investments with your self-directed IRA if you do not feel comfortable managing the account entirely on your own. However, for the majority of investors, going alone is exactly the reason for having a self-directed IRA. You will have some things to consider that might make you wary of a self-directed IRA but first lets go over the positives about self-directed IRAs.
Choice Of Assets
When it comes to a self-directed IRA you are given more options when it comes to the types of assets you can invest in. You can keep stocks, bonds, real estate and precious metals in your IRA. It is important to keep in mind that you are limited to approved assets so that means that certain assets cannot be included in your IRA. So investments like life insurance, personal properly, and collectibles like stamps and artwork cannot be included in your IRA.
When you have a traditional IRA or a traditional 401 (k) you are limited in the investment choices that you can take advantage of. You can choose an aggressive investment plan or one geared toward long term growth. You as an individual have very little control in what stocks are invested and often you cannot change your investment plan if it comes with high fees or is poorly managed. With a self-directed IRA you will be in complete control of how your money is invested and you can invest it in the stocks and assets that you want.
Another benefit to having a self-directed IRA is that you can have your investments be much more liquid. With some IRAs, the custodian of your funds can take up to 30 days to release your money once you request it. This means that in cases of an emergency or where you need funds quickly, you can spend a great deal of time waiting on your custodian to get the money to you. When you have a self-direct IRA you can have the money in as little as 1 – 2 days.
Invest In What You Love
If you want to invest in new technology, horses, houses, or even an underwater basket weaving program, you can do it. You can invest in nearly anything you want and you can manage those investments to make sure that they offer you the biggest returns. You will be able to use your IRA to invest in things that you want to support or that you believe in, which can be the biggest draw to a self-directed IRA. Of course, you can make bad investments as well and this can be riskier than investing in stocks or leaving your money to a custodian who will invest for you. However, if you are smart and know what you are investing in, then you can see some really high returns.
Now comes the downsides to a self-directed IRA. You will have to pay much higher fees to your custodian who will be doing relatively less work. One self-directed IRA trust charges $50 to open your account, a $300 annual fee, a $125 holding fee per asset and $250 transaction fee for real-estate investments.
You Can’t Invest It All
When it comes to investing in certain assets such a real estate or businesses with your self-directed IRA you will have to make sure that the money within your IRA account can cover any and all fees to maintain those investments. So if one of your real estate properties needs a new roof, the only way you can pay for it is with money in your IRA account. If you invested all of your money then you will not be able to fix the roof because you cannot use your personal funds to maintain a property that is part of your self-directed IRA investment. Additionally, all of the profits that may come from your investments will also have to be placed into your IRA account and not touched.