Investors all over the country flock to Self-Directed IRAs because it opens up all sorts of possibilities with retirement investing. But how does it actually work in real life, and what are the benefits of investing this way? We decided to take a comprehensive look at what Self-Directed IRAs are, why they work the way they do, and why so many investors turn to Self-Directed IRAs for more financial freedom in retirement planning.
What is a Self-Directed IRA?
The first question is the most basic—and perhaps most important. A Self-Directed IRA is a type of retirement account in which an investor can use tax-advantaged benefits to put money aside for retirement, often within a wide range of potential investment asset classes.
To understand the Self-Directed IRA, you first have to understand what a Self-Directed IRA custodian does. A Self-Directed IRA custodian is one that may specialize in the investment asset classes that aren’t as typical as your standard retirement assets, such as real estate and precious metals. While these might be popular investment asset classes in general, they tend to be less common in retirement investing. However, that isn’t to say that investors can’t invest in them in retirement.
By working with a custodian, a Self-Directed IRA investor can then make investments in the types of asset classes handled by the custodian, such as real estate or precious metals. Typically, brokerage firms act as custodians for IRAs, but in less-common investment arrangements like real estate, the larger brokerage firms don’t typically offer this service.
Why Use a Self-Directed IRA?
After learning what a Self-Directed IRA is, the most obvious next question is simple: why use one at all? After all, isn’t it easier to work with a brokerage firm and have many of the potential investments chosen for you in advance? This essentially answers its own question: not everyone wants to have such limited options in investing.
For example, consider someone with an extensive background in investing in real estate. Without a Self-Directed IRA with a custodian who offers real estate investing administration, that investor would still be left with the basic brokerage options available. This typically means funds and stocks. In other words, the investor wouldn’t even be able to make real estate investments with a custodian who doesn’t offer that service.
By using a Self-Directed IRA with a Self-Directed IRA custodian who does offer that service, the investor expands their potential avenues for retirement investing. With real estate, for example, within a Self-Directed IRA, the investor can then enjoy the tax benefits that come with collecting rental income through the IRA, not through personal assets. The tax benefits are obvious and exist with every valid retirement account. But using different asset classes like real estate and precious metals can be a truly expansive experience for some investors.
What You Need to Know About Self-Directed IRAs
We’ve taken the time to answer two core questions about Self-Directed IRAs: what and why. These questions get to the heart of what a Self-Directed IRA can do for you—assuming that you make prudent investments. After all, a Self-Directed IRA is a powerful way to put money aside for retirement, but it’s also a way for you to take the financial reins over your own retirement account. This puts more responsibility and freedom in your hands. Once you’re the one calling the shots in your investment portfolio, you have the opportunity to do great things with it—but only with the decisions you make.