Like many retirement savers, you might believe that if you have a 401(K) through an employer, you cannot open an IRA. But that is not true. As long as you meet the eligibility requirements and follow contribution guidelines, you can open a Self-Directed IRA even though you have a 401(K).
Another misconception about Self-Directed IRAs is that you can only invest in stocks, bonds, and mutual funds. And with a Traditional IRA, this might be true. With a Self-Directed IRA, however, your choices expand to real estate, tax liens, private stock, precious metals and more.
Add flexibility to your retirement portfolio with a Self-Directed IRA
Talk to anyone who has a 401(K) through their employer, and they will probably complain about the limited amount of investment choices they have. (Some offer only a few bland mutual funds and a money market account!).
Sometimes the mutual funds that are offered through a 401(K) have fees, typically called “loads,” that are taken out at the time of purchase (front-load) or when you sell them (deferred load). There may also be higher-than-average expense ratios, fees which come right out of your returns, reducing the growth of your funds and costing you tens of thousands of dollars over a typical career.
Adding a Self-Directed IRA to your retirement portfolio can give you immediate diversity since you will be choosing from a wider variety of investments. Those choices can include any of the following:
- Thousands of mutual funds
- Exchange traded funds (ETFs)
- Common stocks
- Private stocks
- Real estate
- Individual bonds, bond funds, and bond ETFs
- Precious metals including gold, platinum, and silver
- Tax liens
- Private lending notes
With the Self-Directed IRA, you have so many choices that you can also choose lower-cost investments for your overall strategy.
You can manage your taxes and your estate with a Self-Directed IRA
After you retire, you can minimize your tax bill by customizing your withdrawals between Traditional IRAs (taxable) and Roth IRAs (usually non-taxable) to get the income you need. Keep in mind that once you reach 70-1/2 years of age, you must begin required minimum distributions (RMD) on your Traditional IRA only.
After you are gone, your heirs must start taking distributions from their Self-Directed Inherited IRA within a certain amount of time, but they may have the option of extending those distributions throughout their lifetimes, which means that the tax benefits of your Self-Directed IRA could stretch out through another generation.
You are also gaining control
You do not need your employer’s cooperation to save in a Self-Directed IRA. You are in control of the investments, and you can invest in almost anything you want. You can opt for a regular IRA for immediate tax deductibility or a Roth IRA for tax-free, long-term growth. Using a Self-Directed IRA in your retirement planning can leave you with more money in your pocket at the end of your career.
A word of caution about control
You can choose practically any investment strategy you wish in your Self-Directed IRA, and that can result in true diversification, lower expenses, and more money toward your retirement. And while having control is a good thing, with it comes certain responsibilities, the most important of which is something called ‘due diligence.’
Simply put, it means that you have taken every reasonable step to ensure that you understand an investment product before you add it to your portfolio. Why? It is because everything in your portfolio comes with some inherent risk. On one end of the spectrum, CD’s carry the almost certain risk of not keeping up with inflation, and on the opposite end, some cryptocurrencies are so volatile they could keep you awake at night.
While there are no risk-free investments, there are those that have the potential to protect you in a down market and those that will contribute toward your portfolio’s long-term growth. Doing the necessary research (due diligence) will help you match your Self-Directed IRA investments to your goals and your temperament.