Should You Create a Self Directed IRA?: Part 1

Most people know that an IRA, or individual retirement account, is a type of account that people use to plan their post-employment futures. Like employer-sponsored 401ks, IRAs allow for contributions and growth that come with unique tax advantages. While many people have heard of Roth IRAs or rollover accounts, self-directed IRAs aren’t quite so common, so a lot of investors aren’t as familiar with them. In this two-part post, we’ll go over all the basics of self-directed IRAs, including whether or not this type of retirement account is right for you.

What is a Self-Directed IRA?

First, we need to define what a self-directed IRA even is. Simply put, this type of IRA gives you more control over your investment choices. Other IRAs restrict investors to things like stocks, bonds, and mutual funds, but this isn’t the case with a self-directed IRA. Without these restrictions, investors can diversify their retirement portfolio and take advantage of a myriad of investment opportunities that traditional, Roth, and rollover IRAs don’t allow.

What is Allowed and What’s Not

While people certainly have more control over the types of investments they can add to a self-directed IRA, that doesn’t mean that these accounts don’t come with a few rules of their own. There are certain investments that are allowed with this type of retirement account, and others that are not.

Allowed

• Real estate
• Stocks
• Franchises
• Mortgages
• Private equity
• Tax liens
• Precious metals
• Partnerships

Not Allowed

• Life insurance
• Artwork
• Antiques
• Rugs
• Gems
• Stamps
• Coins (with some exceptions)

Who Should Opt for a Self-Directed IRA?

Self-directed IRAs aren’t for everyone, and most people can do well with the more standard accounts, such as 401k and traditional IRAs. However, self-directed IRAs do serve a valuable purpose in planning for retirement - obviously, since they exist in the first place! That said, these types of retirement accounts are best suited for individuals who are “experts” in their asset’s industry. For example, let’s say you’re thinking of opening a self-directed IRA to hold some of your real estate investments. If you’re a casual investor, you’re probably not ready for this kind of account. Most financial advisors recommended that self-directed IRAs be left to the professionals, or those who have developed some level of expertise in handling real estate investments over the years.

You may be wondering why only the “pros” should get all the fun with self-directed IRAs. The answer is simple: these accounts are not usually very diverse. Most people who invest in real estate don’t also invest in things like precious metals. The vast majority of folks stick with one asset class in a self-directed IRA, which can be a lot riskier than accounts that are truly diverse and contain multiple assets and asset classes.
So there you have it - the lowdown on self-directed IRAs. In our next post, we’ll talk about some of the advantages and disadvantages that come with this type of retirement account, along with whether or not YOU should open one.