Famous investment guru Benjamin Graham once said: “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” If someone were to ask you what the most popular way to fund retirement was, you would probably hear some version of the same response: find a wealth manager, use retirement accounts, and keep saving. And that is great. For some people, it is very effective. But what if there are tweaks along the way that could potentially boost your ROI in significant amounts, further bolstering your chances at a fully-funded retirement? The Self-Directed IRA is one such path.
Unfortunately, a recent article in WorldFinance.com—while offering plenty of insight about retirement—did not spend any of its time talking about the Self-Directed IRA. And while they talked about the five most popular ways to finance retirement, it is important to remember one basic fact: effectiveness and popularity are two different things entirely.
Why a Self-Directed IRA Makes Sense
The first item on the list at WorldFinance.com makes a lot of sense: taking advantage of retirement accounts to maximize investment growth. Putting aside money in this fashion allows investors all over the country to build wealth easily and passively. The article went into detail about the types of accounts—including SEP-IRAs—but never addressed what happens when an investor self-directs their own retirement.
A Self-Directed IRA is just that: an account that you control. And while the second item on the list at WorldFinance.com addresses real estate, there is little time spent pointing out that it is possible to hold real estate within a Self-Directed IRA account. Given that real estate is one of the most powerful ways to generate returns on investment, it is clear that what is “popular” is not always the total picture.
Understanding the Self-Directed IRA Landscape
Why is Self-Direction so powerful? It not only helps investors avoid the often-expensive management fees associated with money managers, but it allows investors to tap into those investments they would otherwise make through general accounts. For example, if an investor is strong in real estate, they would typically make the investment using the simple, routine processes of real estate investing. But with a Self-Directed IRA, they can hold real estate within a retirement account.
This does mean that there are some important regulations to keep track of. One cannot simply purchase a home and live in it through a Self-Directed IRA—the IRS prohibits these kinds of investments from being used within a retirement account. A Self-Directed IRA is considered a separate entity from the investor, which means that the property itself will also have to remain separate.
There are other options, such as investing in precious metals. This opens up the possibilities of a more diversified investment portfolio. See our section on Investing to find out what these are.
Popularity vs. Effectiveness in Retirement Planning
There is nothing wrong with a strategy being popular. The concept of buying and holding mutual funds in an IRA is popular because it is effective, it works. Over the long-term, this can generate amazing returns for investors who have the patience to withstand challenging market conditions.
But that does not mean that what is popular is also the end of the available options, especially in the world of retirement investing. There is more to consider. There are other advantages investors can use. There are different asset classes that can potentially bring wealth to investors who understand them well. It is vital for investors to broaden their horizons so they know each and every potential advantage they can use on the path to financial independence in retirement age.
Want more information about Self-Directed IRAs? Visit our section on Self-Directed IRA accounts or call American IRA at 866-7500-IRA.