While a self-directed individual retirement account is very similar to a traditional IRA, the latter allows individuals to invest in a wide range of assets that are typically outside the scope of a traditional IRA. In other words, you can think of it as an IRA that puts a lot of responsibility on an investor. However, before you open a self-directed account, you should not only have a good grasp of the rules and regulations that govern these IRAs but also their tax implications. With that in mind, here is some more information about this topic:
State of SD-IRAs
According to the Securities and Exchange Commission (SEC), SD-IRAs account for about two percent of all IRAs in the US. These accounts have investments worth more than $100 billion. While SD-IRAs have been around since 1974 when the Employee Retirement Income Securities Act was established, they have become increasingly popular over the past few years due to the growing interest in alternative investments. More specifically, figures published by MarketWatch show that global alternative assets grew from $2.9 trillion in 2005 to $6.5 trillion in 2011. In addition, investors have become disappointed with the lack of transparency in the financial industry.
The Types of Investments You Can Hold in a Self directed IRA
This investment vehicle would enable yo to invest in assets such as real estate, tax lien certificates, limited partnerships, commercial notes, and private placements. Moreover, you can still invest in traditional IRA assets like bonds, stocks, and CDs.
How a Self-directed IRA works
Despite offering more investment flexibility, a SD-IRA account still requires a custodian. It is the work if the custodian to make investments based on directives given by clients. After identifying an asset, an investor must present this information to a custodian. This is in addition to documents related to the asset titled in the name of one’s IRA, not the name of the client. The custodian will process documents received and release funds to purchase the assets identified by clients. Once your custodian completes this process, profits and expenses related to these assets trickle back to your IRA. You can direct your custodian to dispose an asset at any point in time. Your custodian will deposit funds realized from such a sale in your IRA.
The Benefits of a SD-IRA
To start with, you can access a wide range of alternative assets such as precious metals and real estate. Secondly, you can use such an IRA to diversify your portfolio and protect against market volatility, high inflation rates, or economic and political uncertainties. Thirdly, you can use this type of IRA to grow your nest egg on a tax-deferred basis. Fourthly, you can make your own investment decisions instead of relying on others. All these are benefits traditional IRAs, brokerages, or banks do not offer.
In conclusion, a SD-IRA account would give you greater control over your investments. You can use such an account to buy/sell properties, precious metals, commercial notes, and outstanding tax certificates. All you have to do is instruct your custodian to release funds to pay for the assets you have identified. Benefits include tax-free profits and portfolio diversification.