For years, many Americans have used individual Retirement Accounts (IRAs) as a way to both save for retirement and gain tax advantages with their earnings. Both traditional and Roth IRAs offer individuals the opportunity to invest money in stocks, bonds, and mutual funds. The contributions are limited annually, but tax advantages apply either up front or upon withdrawal of the money in retirement. The significant advantages of growing wealth in an IRA can be amazing.
In recent years, the self-directed IRA (SDIRA) has gained recognition as a way to diversify one’s portfolio and grow wealth outside of the traditional brokerage firms and Wall Street mentality.
Self-Directed IRAs work in most ways just like regular IRAs. There is a cap on annual contributions and the money earned in the account is tax-deferred or tax-free depending upon the type of account established. The primary distinction of a SDIRA is that investors have the opportunity to put their money into other assets, including real estate, precious metals, oil and gas leases, tax liens, and many other vehicles. In fact, the IRS actually only stipulates that you do not own life insurance and collectibles in your account.
Investors must follow the stringent IRA rules when establishing and investing in a SDIRA. A trustee is established to administer the account; specialized firms have emerged to handle these duties as most banks and brokerage firms shy away from SDIRAs. Once established, individuals can use the accounts to, for example, buy, manage, and sell commercial real estate.
The rules and regulations of SDIRAs are complex. For example, you must at all turns avoid self-dealing. You cannot buy property and then rent it out to even your family! Failure to comply with the tax laws results in severe penalties. In addition to these rules, SDIRAs are more susceptible to fraud so investors must exercise proper due diligence before entering into relationships with trustees or custodians. In the end, like all investments, proper research, careful consideration, and a solid sense of your financial goals will drive you to make the best decisions. With that in mind, SDIRAs open up many possibilities to diversify your portfolio while building the wealth you need to retire in comfort.