Are you saving for retirement? Do you already have an investment portfolio? If you fall into any of these categories, you should consider getting a self-directed IRA. Before taking the plunge, there are a few things you should know:
There are distinct differences between self-directed traditional and self-directed Roth IRAs. Choosing the one that works for you should be based your short-term income goals and the long-term strategy you have for investing. If you have enough income to contribute to an account, a self-directed traditional IRA can be managed through a qualified consulting. The advantages here are that the interest and capital gains are tax-free until you withdraw. This will work well if you don’t have a retirement plan or 401(k) through your employer. Contributions are tax deductible. A Roth IRA offers a more flexible tax structure. The funds can be accessed after 59 ½, with those earnings tax-free.
There are limits on the amount that can be contributed per year. Traditional IRAs have a limit of $5500, and Roth IRA limits are $6000. There are also eligibility requirements attached to each based on the modified adjusted gross income (MAGI). Single filers can contribute to a Roth IRA if they earn under $116,000, with joint filers adjusted gross income limits set at$183,000. With traditional IRAs, single filers have limits of $118,000 with the joint filing limit at $186,000.
There are a number of investment options for an IRA. With a self-directed IRA, you can invest in stocks, bonds, mutual funds, ETFs, unit investment trusts, Bitcoin, real estate, mortgages, precious metals, businesses, collectibles, and certain derivatives.
You are responsible for the decisions you make, even if you have a consultant at work behind the scenes. With a self-directed IRA, you must have certain documentation in place before proceeding. It’s best to perform due diligence on any investment you are considering. Then you should complete a form with your consultant giving them permission to direct and allocate the funds. Once you start managing your investment, any funds related to that investment must come from the IRA and all gains must be put back into the IRA.
Since you are responsible for the decisions made in your IRA, it’s important to know and understand how to balance risk. Remember, this is a retirement account, so creating a sound long-term strategy is key.
Choosing a Consultant/Custodian
A consultant or custodian does not do research or perform due diligence. They are just an intermediary between you and the issuer of that investment. They do not have a fiduciary duty to you, and their only obligation is to track and report your contributions and distributions to the IRS.
Making sure you have all the information you need before making the decision to handle a self-directed IRA is crucial. While it is always a good thing to understand what the consultant does, having a hands-on attitude in ensuring your funds are well managed will assist in helping your portfolio grow.