What Is a Self-Directed IRA?
Many new investors or seasoned veterans wonder if they should begin investing in alternative assets including precious metals, cryptocurrencies, and other investments. They learned quickly that the best way to invest in these assets for retirement is via a self-directed IRA.
Some of these investors are pretty new to the strategy so they wonder if a self-directed IRA is the best choice to meet their wants and needs.
As mentioned, this is a retirement investment that allows you to hold physical precious metals and other alternative assets. It comes with its own set of risks and rules that need to be adhered to at all times. Keep reading to learn more.
An Explanation of a Self-Directed IRA
The most important thing to know about the self-directed IRA is that there are two ways to open this account. First, you have the opportunity to open a traditional self-directed IRA, which provides certain tax advantages. Or, if you prefer to make tax-free withdrawals after you reach retirement age, you’ll benefit the most from a Roth self-directed IRA.
Why is there a difference between the two? The difference between these self-directed accounts is that there are certain tax benefits to make the most of, depending on the type of account that you own.
A Full Understanding of the Self-Directed IRA and How It Differs from a Regular IRA
The main thing to know about a regular IRA is that it’s usually the type of account to own if you only want to purchase traditional or common types of investments. More often than not, you’ll find mutual funds, bonds, and stocks housed within a regular IRA retirement account.
On the other hand,
The investment possibilities in a self-directed IRA are more expanded and provide the retiree access to non-traditional investments that you wouldn’t typically find in a regular IRA.
As an example, within a self-directed IRA, you have the opportunity to invest in a privately held company or real estate as part of this account. Or, as mentioned above but bears reiterating, you also have the opportunity to begin investing in alternative assets including cryptocurrencies and precious metals like gold, silver, platinum, and palladium.
The most important thing about opening a self-directed IRA is finding the right custodian and gold company to work with. The custodian is the person who will manage and operate the account on your behalf, which is one of the most important rules set forth by the IRS. The account holder is not allowed to initiate the transactions on their own, because they need a custodian or trustee to manage on their behalf.
3 Main Differences between a Regular IRA and a Self-Directed IRA
- Self-directed IRA accounts make it possible to invest in nontraditional assets including precious metals, cryptocurrencies, non traded businesses, and real estate. You can even purchase a horse farm through this type of retirement account.
- It’s impossible to have a self-directed IRA account without having a trustee or custodian in place. This specialist is an absolute must because they must manage the account on your behalf, which is one of the rules stated clearly by the IRS when they first allowed US citizens to open this type of account.
- Cryptocurrencies and precious metals make it possible for account holders to make big returns. These diverse assets could potentially earn large percentage gains at any time. They are also somewhat risky investments as well, so please keep this in mind.
Opening a Self-Directed IRA Account
Believe it or not, there are a number of different brokerage firms that act as if they were a custodian for a wide range of IRAs. More often than not though, the big-name brokers typically do not offer their customers access to self-directed IRA accounts. So, you can possibly work with a brokerage firm as a custodian, but the likelihood is slim, and this is especially true with the larger firms.
A custodian for a self-directed IRA is a company or individual that specializes in this type of account. Certain trust companies and banks also provide this specialized service. It’s important to know that you’ll likely need to shop around for a custodian, because each organization will handle certain things and provide specific services, so it’s necessary to find the best one to meet your needs.
In all likelihood, if you’re looking to invest in cryptocurrencies or precious metals, you should connect with a precious metals broker and they will help you open your self-directed gold IRA from start to finish and even handle the bulk of the paperwork on your behalf, which is really beneficial to many brand-new self-directed IRA investors.
Some things to look for in a custodian include:
- Consider picking a custodian with plenty of real-world experience when it comes to managing self-directed IRAs. The best kinds are usually financial advisors who understand the investment type, have done their due diligence, and can advise you and guide you to the correct investments.
- Remember that the IRS is very strict with the type of investments allowed within self-directed IRAs. Precious metals collectibles aren’t allowed. Only precious metals that meet specific purity levels and fineness requirements are acceptable in this account.
- After finding the right gold company to work with, ask them to recommend their top custodian. They will help you open your account and they will even assist with the bulk of the paperwork, making it really easy for new investors to get started.
The Biggest Benefits of a Self-Directed IRA
Lastly, before taking the plunge and opening your new account, it’s important to learn the major advantages. They include:
- Higher yields – investing in cryptocurrencies and precious metals are very high yield investments. They are also volatile and can lose money quickly, so it’s important to invest for the long term.
- Tax benefits – investors love opening precious metals IRA accounts because of the tremendous tax benefits. With a traditional self-directed IRA, they achieve tax-deferred status on a portion of their income and only pay taxes after they begin taking distributions at 59 ½ years old. Roth self-directed IRA accounts fund using money that was already taxed, so everything earned within this account is for the investor to keep.
Opening a self-directed IRA is an amazing opportunity for investors looking to add greater diversity to their portfolio. It’s an excellent hedge against inflation and it will protect your bottom line during stock market downturns. You can’t go wrong investing in a self-directed IRA.