A Better Understanding of the Self-Directed IRA Rules

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Everyone’s goal in life is usually to find a nice high paying job with good benefits, but that only gets you so far. Earning plenty of money is fine if you know how to handle your money, which is why it’s much better to focus on investing for the future than it is to focus on just making more money. You want your money to make money for you and to set you up nicely, and a self-directed IRA (SDIRA) is a good way to do so.

An SDIRA is a type of investment account that allows people to stash away their money, much like a 401(k) or regular IRA, except the difference is that the self-directed aspect means you have more control, which also means more risks. This is attractive for some people as they want more control, but you should know the rules and purpose of an SDIRA to fully take advantage of it.

What a Self-Directed IRA Is

As mentioned, an SDIRA is a type of investment account that is a type of traditional/Roth IRA investing account in which a person can put money into purchasing shares, real estate, bonds, mutual funds, ETFs, and even cryptocurrencies. The difference is how it allows you to hold your money in more assets than traditional types of IRAs, assuming that a custodian agrees to allow you to do so when investing in your SDIRA.

How You Can Open a Self-Directed IRA

There are generally two ways you can open an SDIRA, with a brokerage firm or with a custodian. Brokerage firms can vary in offering SDIRAs because many don’t want to take the risk involved or have their own mutual funds set up, so they would rather a client invest through those. Custodians can be a brokerage firm or a company that specifically offers SDIRAs. It’s important to find one that allows you the freedom to invest in assets you want to, as not all will agree to certain investment options.

Important Rules to Remember About a Self-Directed IRA

As with any kind of investment account, you’re going to need to follow the rules. The rules to IRAs will differ for traditional vs. SDIRAs, so it’s important to keep in mind when picking which investing account you’d like. An SDIRA will prohibit furnishing towards an asset, like fixing a rental property you purchased through your SDIRA, which incurs penalties. This is called “self-dealing” and another problem is the liquidity of your assets. Getting money out of your SDIRA is harder because you need to sell off the asset to get the money out. 

Possible Advantages of This Type of IRA

Although there are some unfortunate rules and some risks, there are advantages to an SDIRA. If you’re someone who has a keen eye for picking investment opportunities, or is unafraid of risks in picking assets and will do your own homework, it’s a good way to do the work yourself. Instead of investing in safe picks which may not have higher yields, you can take bigger risks if you feel like you can justify it. It’s certainly not for the faint of heart, but an SDIRA has the potential to net a savvy investor some great returns.

Possible Risks to Consider for this Type of IRA

On the flip side, those higher yields come at a higher risk. You never know how a stock or a property will do in the investment world, so every penny you put in has the chance of decreasing in value. With an SDIRA, you’re mostly on your own here. Your custodian may disagree to allow the purchase of certain assets because they are aware of how volatile they can be, so if a custodian allows it, it may be a sign that you are taking on a big risk. Not to mention the liquidity issue, as well as transparency when dealing with the SEC regarding assets. Keep in mind what risks you may be taking on here.

Other Types of IRAs to Consider

Traditional or Roth IRAs might be enough if you feel like the fees, the liquidity issue or the fear of doing the investing yourself is too much, and those types of investment accounts are just as good, if not better, depending on your needs. All in all, an SDIRA has its perks, but it depends on the individual as always.

Choosing assets to invest in is as difficult as picking the investment account type itself, but an SDIRA may be something to consider if you contemplate the rules and consider the risk to reward ratio.


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