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Are you tired of being limited by the traditional investment choices that typically come with an IRA (individual retirement account)? The standard-issue IRA that people put money in each year usually consist of stocks, bonds, mutual funds, ETFs, and other vanilla-type investment instruments.
The good news is that you can set up a self-directed IRA (SDIRA) that opens up a new, fresh world of opportunities. What are some options and why would anyone want to opt for one? Let's dive in.
SDIRA Basics
There are lots of reasons, chief among them the fact that you can include things in an SDIRA that are prohibited by law from going into a traditional retirement account.
Related: How to Buy Physical Gold and Silver with Your Self-Directed IRA (Tax-Free)
SDIRA Basics
There are lots of reasons, chief among them the fact that you can include things in an SDIRA that are prohibited by law from going into a traditional retirement account.Simply put, if you're employed in the United States, you likely hold retirement savings in one (or more) of the following retirement plans.
Traditional IRA
The basic theme upon which all the others are built, you put pre-tax money into the account and your investments grow tax-free until you withdraw the money in retirement.
Roth IRA
A twist on the traditional version, a Roth lets you invest after-tax money and grow your nest egg tax-free. Then, you can withdraw your retirement funds without paying tax.
SEP IRA
A SEP is a Simplified Employee Pension plan. These are common with self-employed individuals and small business owners.
An employee enrolled in a SEP IRA doesn't actually make contributions themselves. Your employer sets up your account and makes the IRA contributions on your behalf. Your employer can contribute up to 25%(or $57,000) into your SEP in a year.
SIMPLE IRA
The Savings Incentive Match Plan (SIMPLE) is very similar to a SEP except you contribute a percentage of your salary to the IRA, and your employer typically matches what you put in (up to a certain percentage).
TSP
If you work for the military or federal government, you're likely investing with the Thrift Savings Plan (TSP). The TSP offers members the option to invest pre-tax dollars into multiple funds. Investors have the ability to invest with their Lifestyle funds or create their own mix from the following individual funds:
- S Fund: Small Cap stock index investment fund
- C Fund: Common stock index investment fund
- I Fund: International stock index investment fund
- F Fund: Fixed income index investment fund
- G Fund: Government securities investment fund
These all offer Americans tax advantages to save for retirement. Employees should absolutely take advantage of tax-free growth and any contribution match from your employer.
The downside? All of the above retirement plans limit you to 'paper' investments like stocks, bonds, ETFs, index funds, and mutual funds.
If you want to get in any 'alternative assets,' you'll have to turn to a self-directed IRA (SDIRA).
Related: Diversify Your 401(k) with Physical Precious Metals
The Power of SDIRAs
Exactly what is a self-directed IRA? The short answer is this: it's a useful variation of the basic traditional or Roth IRA. The "variation" is in the account's ability to hold assets that are not legally able to reside in traditional IRAs.
Related: 9 Best Gold Coins to Buy and Hold as Investments
Self-Directed IRA FAQS
Here are some of the key questions people have when they first hear about the concept of a self-directed IRA:
Many investors don't know there are companies that specialize solely in facilitating self-directed IRA rollovers. You have probably seen commercials for "investing in gold" as these firms often advertise on cable news channels.
When you're ready to roll over a portion of your IRA into bitcoin or gold, one of these "gold IRA" companies can walk you through the whole process.
Related: How to Buy Bitcoin and Ethereum with Your IRA (Tax-Free)
No. Even though you can put hundreds of asset types into a self-directed account, there are a handful of prohibitions. What are they? Here's the list:
- S-Corp stocks
- Collectibles (the classic car, rare, numismatic or collector coins, rare stamps, and similar items)
- Life insurance
- Anything that flows from a legally prohibited transaction
Related: Gold IRA Tax Rules - The IRS and Your Precious Metals
- Fees: Each custodian has its own fee structure, so inquire about specifics before opening an account. Annual and establishment (account-opening) fees are the two most common ones.
- Liquidity: Keep in mind that when you take distributions, some assets are easier to liquidate than others. Gold bullion is simple to turn into cash, but real estate not so much. Keep a detailed tally of the liquidity of each of your fund assets so you will know what can be readily converted into cash.
- Uncertain returns: The risk of self-directed investments, whether in a retirement account or somewhere else, is risk. It's up to you to vet every item you place in your SDIRA, so be ready to do some homework when you purchase assets for the account.
- Strict enforcement of rules by the IRS: The IRS can declare your entire SDIRA as an "immediate asset distribution" to you if you flagrantly break one or more of the main rules, like putting a prohibited item into a SDIRA. If that happens, you could stand to face a significant tax bill and the end of your self-directed retirement account.
