If Self-Directed IRAs are a great option, why don’t more people do them?
If you have heard anything like that before, you know that some people try to make their arguments based on what most people do—not by what is most effective for your retirement plan. But if you ever find yourself defending your decision to select a Self-Directed IRA for your retirement plans, there is actually plenty you can do to defend yourself. And one of the most convincing arguments is that Self-Directed IRAs are growing in popularity. Here is what you need to know.
How Many People Use Self-Directed IRAs?
We’ve previously examined this question here at the American IRA website. And at the time, we noted that “According to the Investment Company Institute, the total amount of assets in IRAs totaled $7.3 trillion, with an additional $4.7 trillion in 401(k)s.”
And there are nearly a half-million Self-Directed IRAs, according to the data available at the time. That means that there was as much as $49,768,207,085 invested in these accounts, according to the GAO.
In other words, there are a lot of investors—and a lot of money—put aside through Self-Directed IRAs.
But we feel like this is missing the point. The point is not how many people use a Self-Directed IRA, even though there are more and more investors turning to Self-Directed IRAs for their retirement. The point is whether a Self-Directed IRA is right for your investment strategy. And it is important to get to the bottom of that quandary.
Should You Use a Self-Directed IRA, Too?
Of course, the fact that there are so many people now using Self-Directed IRAs is no more an argument for using them than saying that a lot of people invest in the stock market and do not direct their own IRAs. What matters is whether a strategy is right for you. And there are a few reasons that people might turn to a Self-Directed IRA and take their retirement portfolio into their own hands:
- Diversification is all about minimizing your risk. You do not want to put “all of your eggs into one basket” when it comes to putting money aside for retirement. If there’s a stock market crash and you need to fund your retirement, you’re suddenly left with far less than you’d hoped—even though you worked hard all your life to put that money away. Diversification also means going beyond just one asset class (stocks) and into alternative asset classes like real estate and precious metals.
- Using a traditional arrangement with your 401(k) means that you will have limitations when it comes to picking your own investments. How are you supposed to maximize returns when you have to use a menu of options, many of which might not even make sense for your current goals?
These two reasons are powerful, compelling arguments for using a Self-Directed IRA. But perhaps one of the most important arguments is that a Self-Directed IRA works like any other when it comes to tax implications. You will still be using an IRA to protect assets from paying taxes on tax-free growth, for example, which is a benefit no matter what your investment style may consist of.
A Self-Directed IRA might be slightly more involved than a traditional arrangement, but that does not mean it cannot be a great way for you to store money for retirement and allow it to grow. What is important is that you know all of the options available to you—and that there are indeed a lot of people who self-direct their retirement accounts.