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How Self Directed IRAs Work: Everything You Need to Know

When it comes to saving for your retirement, there are several options available. It’s important to remember, however, that the best option for you will always depend on your unique preferences and goals. IRAs — or individual retirement accounts — are a popular type of retirement accounts offered in a variety of forms. Keep reading to learn more about the difference between self-directed IRAs and regular IRAs.

What Is a Self-Directed IRA?

A self-directed IRA is a type of traditional or Roth IRA that someone can choose to invest in non-traditional investments with. A regular IRA is typically for those interested in common investment vehicles, such as stocks and bonds. A self-directed IRA, on the other hand, differs in this way. This type of account may be beneficial for those looking to own different kinds of assets in their account — such as real estate, a privately held company or any other endeavor a custodian will agree to.

Self-Directed IRAs: Rules and Limitations

As of 2019, your self-directed IRA total contributions cannot exceed $6,000. However, if you’re 50 or older, you can contribute up to $7,000.1 According to the IRS, this limit does not apply to rollover contributions or qualified reservist repayments.1 A rollover happens when funds are distributed from one retirement account (such as an IRA) and deposited into the same — or a different — account.

Under the SECURE Act’s new rules, there is no age cap for contributing to an IRA or self-directed IRA. In addition, the required minimum distribution age has been adjusted from 70½ to 72 in an effort to match longer expected life expectancies.2

Advantages of Self-Directed IRAs

If you’re someone who prefers having more options, a self-directed IRA could be a good fit for you. That’s because with a self-directed IRA, you can invest in a variety of companies, properties and operations.

If you’re passionate about a certain field or industry, a self-directed IRA offers the opportunity to put your knowledge to the test. Instead of investing in things you know nothing about, you’re able to go after investments you actually have an interest in, which can make the experience much more enjoyable. For example, you could invest in real estate, precious metals, or a privately held company. It’s important to note that regardless of the type of IRA you have, you’re going to need to have a person or company hold the account for you.

Regarding a self-directed IRA’s tax advantages, your contributions could either be fully or partially tax-deductible, depending on a variety of factors. Oftentimes, both the earnings and gains in your IRA are not taxed until they are distributed. Sometimes, this money may not be taxed at all.3 However, if your spouse has a retirement plan at work and your income level exceeds a certain amount, your total tax deduction may be reduced.1

Disadvantages of Self-Directed IRAs

When exploring the possibility of contributing to a Self-Directed IRA it’s also important to consider the amount of responsibility required. Because your custodian will be passive — as in they will simply hold the account without providing investment advice — you will need to educate yourself on investment best practices if you want to generate consistent, positive returns. Additionally, you’ll be in charge of managing paperwork and transactions, which requires ongoing dedication.

In some ways, a self-directed IRA can be seen by some as a part-time job, so you want to think carefully about your own capabilities and time before you make the commitment. For some people, a self-directed IRA may be appealing because of the dedication and commitment it requires to stay focused on changes in the economic environment. Neglecting to do so means running the risk of losing a considerable amount of money. A self-directed IRA is a good fit for people who enjoy the challenge of investing and are eager to learn and grow as the market fluctuates. If this doesn’t sound like you, a traditional or Roth IRA may be a more suitable option.

  1. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-contributions
  2. https://www.congress.gov/116/bills/hr1994/BILLS-116hr1994rds.pdf
  3. https://www.irs.gov/publications/p590a

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.