In choosing a Self-Directed IRA to guide your retirement future, you may notice that not everyone is on board. Given that only about 1% of IRAs are Self-Directed—if that—you may find that there’s a peer pressure aspect to creating a retirement strategy like this that you never imagined. “Why are you doing that?” someone might ask. “Isn’t that a lot of work? You should just invest in the stock market like me.”
If you are confident in what you are doing, then you know that you do not have to answer to anyone when you use a Self-Directed IRA. But it still helps to know enough about the process to not only answer these questions, but to remain confident that the strategy you have chosen is the right one. Here are some of the basics you will want to know.
Self-Directed IRAs are Still IRAs
There seems to be a school of thought that Self-Directing an IRA somehow makes it a different type of account. Not so. One thing that may put many of your family and friends’ fears to rest is that you will still be using a retirement account—you are just choosing how it’s used. You can still use a Traditional IRA, or a Roth IRA, or a Solo 401(k). These account types don’t have special rules for people who Self-Direct that don’t already apply to any investor.
As a Self-Directed IRA holder, you won’t have lower contribution limits than someone who doesn’t Self-Direct. The same rules will apply to you as to anyone else. If someone points out that you can’t use a Self-Directed Real Estate IRA to buy your house and live in it, for example, then you might point out that the same rules apply to them. They’re just choosing not to invest in real estate as a retirement option.
Self-Directing Opens Up More Possibilities
One thing you might ask someone who doesn’t understand why you use a Self-Directed IRA is this: do they enjoy the investment options they have through their IRA or 401(k)? If so, great. If not, what’s their alternative? You might paint yourself as someone very similar to them, who happens to enjoy having more investment options than the traditional route made available.
For example, if you have expertise in real estate investing, then it would only make sense to leverage that experience to create more wealth for yourself. That’s exactly what you can do within a Self-Directed IRA. Just as someone without a Self-Directed IRA might invest in real estate with the goal of building wealth and passive income through the collection of rent, you would be doing the same. You would just be doing that within a retirement account.
True, using a Self-Directed IRA for real estate investments means that you or a close relative would not be able to leverage your own rent payments by staying in an investment property yourself. But that’s one small trade-off for the tax protections that come from keeping a piece of real estate within an IRA.
A Self-Directed IRA is Just a Strategy; You Might Share the Same Goals
Finally, keep in mind that retirement investors often share the same goals. Everyone wants to have enough to retire on. Everyone wants to feel the peace that comes with having a financial plan in place. Everyone wants to make sure that their current investment levels will be enough to sustain them after they can no longer work.
With a Self-Directed IRA, you just utilize a different strategy to end up in the same place.