As individual investors look to improve the performance of their portfolios, they are increasingly hearing more about self-directed IRAs (SDIRAs). This approach to investing offers the tax benefits of the individual retirement account, but with the added bonus of investors being able to buy and sell assets outside the typical offerings of stocks, bonds, and mutual funds. However, as with all financial tools, it is important to fully understand the rules and risks associated with the SDIRA before committing hard-earned money into such vehicles.
At the most basic level, the SDIRA is an account that allows the individual investor, not a custodian, to make all investment choices. More importantly, these accounts provide avenues for asset diversification; your retirement funds can move beyond traditional stocks, bonds, and mutual funds, and into real estate, precious metals, businesses, and tax liens. The SDIRA does require a custodian to handle administration and paperwork chores; many traditional investment firms shy away from the SDIRA so interested investors will have to seek out specialized firms.
For investors looking to take an active role in their wealth accumulation, the SDIRA is a potential good fit. With increased accessibility and control, investors stand a chance to earn a greater rate of return on their money than with the stock market. Additionally, there are the added tax benefits of tax-free growth of the investments while held in the accounts until withdrawal.
The first step in any investment decision is to understand your own goals and then evaluate if a tool such as the SDIRA fits your situation. Understanding how the account works and what risks are involved are the best steps to guiding your decisions. Once you decide that the SDIRA is right for you, you can shop around for a custodian, complete the necessary paperwork, and then deposit money or roll over funds from an old IRA or 401(k) account into the new SDIRA.
Like any investment vehicle, there are risks with the SDIRA. For example, the complex rules associated with such accounts means more responsibility on the individual to make the right choices to avoid penalties. Additionally, alternative assets can be hard to evaluate. However, in the end, the savvy and interested investor who does their due diligence may find that the SDIRA offers an ideal way to diversify their portfolio, build wealth, and enjoy the retirement they deserve.