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Self-Directed IRA: What Is It?

When you work hard, you expect to see big results. That’s why some investors aren’t satisfied with building their retirement income by following the usual IRA method. They want to create long-lasting wealth for their family. For higher expected returns, qualified investors turn to the self-directed IRA.

A self-directed IRA is a retirement savings method that allows you to choose the investing direction and opens up unique investing options that aren’t available through the more common, “non-self-directed” IRA. Compared to a non-self-directed IRA, a self-directed IRA gives you more control.

For example, you might be more familiar with how a non-self-directed IRA allows you to invest in stocks, mutual funds, bonds, and CDs that are directed by portfolio managers. A self-directed IRA adds to that list by allowing you to invest in a broader range of assets including: real estate, private company stock, intellectual property—and even horses!

Is a Self-Directed IRA the Same as a Traditional IRA or Roth IRA?

The self-directed retirement savings method is known as a “self-directed IRA” because—just like a non-self-directed IRA—it grows money with the tax-advantage of a “Traditional” or “Roth” IRA. The language that’s often used to tell the difference between IRAs only refers to how you pay into your retirement account:

  • Traditional refers to an IRA that allows you to postpone paying taxes on your investment money until withdrawal
     
  • Roth refers to an IRA that allows you to invest after-tax money that won’t be taxed upon withdrawal
     

Distinguishing between a “self-directed” and “non-self-directed” IRA only refers to the level of control you have over your retirement funds.

How Does a Self-Directed IRA Work?

A self-directed IRA gives you more control over your investment than a non-self-directed IRA. And since you’re in control, you’re responsible for making it happen. That’s why it’s important to know what to expect when you open a self-directed IRR .

What Are the Benefits of a Self-Directed IRA?

Technically, all IRAs follow the same rules instituted by the IRS. That’s why a self-directed IRA holds to the same contribution limit and receives the same tax-advantages as any other chosen IRA. But don’t overlook the unique investment opportunities made available through the tax-free growth of a self-directed Roth IRA.

As mentioned earlier, all IRAs allow you to invest in traditional brokerage accounts such as stocks, mutual funds, and bonds. But a self-directed IRA allows you to take on more advanced risk and return profiles by investing directly in real estate, mortgages, private businesses, and more—which provide higher expected returns through more direct control.

Make sure to ask an investing professional how you can use a self-directed IRA to learn if it’s your best option to build wealth for the retirement of your dreams.

How Much Money Can I Put in a Self-Directed IRA?

The self-directed IRA follows the same rules governed by the IRS as any IRA. The total contribution limit for a self-directed IRA in 2018 can’t exceed $5,500 (or $6,500 if you’re age 50 and up).(1Your contributions to a self-directed Roth IRA may be limited based on your filing status and income.

How Does a Self-Directed IRA Apply to Real Estate Investments?

One popular way to invest with a self-directed IRA is in real estate. The first thing to note is your IRA can’t purchase property you currently own—the IRS prohibits “self-dealing” transactions.

So if you invest in real estate, the title of the property must be under the name of a qualified trustee or custodian. In other words, your IRA will purchase mortgage or promissory notes and—if you arrange to secure your investment with collateral—you will receive a deed of trust.

As a self-directed investor, you’ll want to find a real estate investment management firm you can trust. Then tell your custodian you’d like to make an investment with your self-directed IRA money.

The ability to invest in real estate allows you to create a healthy amount of diversification and capitalize on exciting investment opportunities. For example, imagine you provide a real estate investment management firm $100,000 of capital through your self-directed ROTH IRA to build a home. After the home sells, you receive a return of 12% which equals $112,000 into your IRA—with profits that are completely tax-deferred!

Learn More About the Self-Directed IRA

Do you care if you’re getting the highest possible returns for your dream retirement? If you do, we’d be happy to provide you with more information about self-directed IRAs—or a free consultation to find out if it’s your best option for growing wealth. Contact our investing professionals today!

Posted by Josephine Saffert at 7:26 AM