Considering a self-directed IRA may be a good option if you are seeking to diversify your investments with IRA. Self-directed IRA is type of IRA that enables more flexibility in deciding how you would particularly want to invest your funds using IRA.
As much as one hundred billion dollars right now are being invested in self-directed IRAs, and more and more investors are choosing this type of IRA specifically those who want to diversify their assets and protect their accounts from the volatility of the stock market.
Of course there are pros and cons in investing in self-directed IRA. For instance, instead of having a custodian to manage your account, the pressure is wholly on you as the owner and manager of your IRA. A traditional IRA custodian will typically recommend solid investments to account holders as the custodians are the ones who know the status of the market best; hence, not having a custodian for self-directed IRA is somewhat a considerable disadvantage.
Instead, a specialized custodian associated with a trust bank (instead of a brokerage firm or major bank) is the one administrating a self-directed IRA account. All a specialized custodian does is: 1) making sure that all your paperwork is in proper order and 2) offering thorough assessment of your account on a yearly basis. Other than that, the self-directed IRA custodian does nothing else especially on the part of managing your investments.
Still, a self-directed IRA allows you to hire another person who can guide you in making wiser investments with your account most especially if you don’t feel confident enough or knowledgeable enough in managing your account by yourself.
For most investors though, opening a self-directed IRA account and being able to go alone in managing their own investments is the exact reason why they have chosen this type of IRA.
The following are some of the things you may consider in deciding for or against self-directed IRA. First are the benefits or advantages of choosing a self-directed IRA.
In a self-directed IRA you have more choices in terms of assets. A lot more options in the types of assets you can invest in are available. It is up to you which ones to choose. For instance, you can keep bonds, stocks, as well as real estate or even valuable metals in your IRA account. The only important thing to remember is that you are entitled only to “approved assets”. Thus, there are also a certain few assets which you cannot include in your IRA account namely: insurance investments, private property, and precious collectibles like artwork and collector’s stamps, etc. among others.
Having a traditional 401 (k) IRA on the other hand gives limits in the investment choices you can use for returns. As an individual account holder, you can choose between an aggressive investment plan and one that targets long-term growth but nonetheless, you only have minimal control in the stocks and assets you have invested. Also very often, you cannot request for any modifications to your investment plan, plus traditional IRA also requires high fees but with the tendency to be poorly managed. With a self-directed IRA on the other hand you can invest only in the stocks and assets you want and gain total control of how your own money is invested.
Invest in Anything You Want
Self-directed IRAs allow you to invest in houses, horses, new technology, potential programs and innovations, or nearly anything you want. You are able to use your account to both support and invest in the things you admire or believe in the most, and, you can direct those investments according to what makes you think will offer you the biggest proceeds. This, most probably, is the biggest gain you can have from self-directed IRAs but of course, bad investments are still possible. In some instances too, this can be a riskier option compared to investing in stocks while leaving your investments to the care of a trustworthy custodian. Still, if you are knowledgeable enough and know the best areas to invest in, then you will definitely see great profit.
More ‘Liquid’ Investment
Another great advantage to availing a self-directed IRA instead of a traditional one is that your investments can be much more liquid according to your needs. With this type of IRA, you’ll have lesser restrictions as compared to other forms of IRAs. In other IRAs, it can take up to thirty days for the fund custodian to release your money after you have requested release. Thus, in cases of emergencies or other immediate needs, you cannot use the money you invested, or you could wait a quite a length of time before you may receive it. With a self-direct IRA on the other hand you can receive your money in only as short as one to two days.
So those are the benefits to choosing self-directed IRAs in favor of traditional IRAs. Now here come two of the downsides of investing in self-directed IRA...
Higher Set-up and Maintenance Fees
One of the negative things about self-directed IRAs is that you will need to pay higher fees to a specialized custodian who would nonetheless only be doing relatively lesser work for your account such as annual reports and checking of documents. Additionally, a self-directed IRA trust typically charges $50 dollars just to get your account activated, plus a $250 dollar transaction fee if you’re investing in real-estate. A $125 dollar holding fee for each asset is also required and finally a $300 dollar annual maintaining fee.
NOTE: It IS Not All Useable!
Finally, in self-directed IRA, if you’re investing in certain assets such as a business or real estate, you would need to make sure that the funds in your account can cover all of the required fees so you can maintain your investments.
Also, you cannot use your personal funds to repair, upgrade, or maintain a property if it is already covered in your self-directed IRA investment, or in other words if one of your businesses or real estate properties needs renovation, then money in your IRA account would be the only way you can pay for it.
In addition all the profits you would get from your investments would also need to be re-placed into your IRA account until your investment plan has culminated.