Are you looking for an alternative to traditional stocks and bonds for your retirement accounts? If so, you're not alone. Especially since the recession, many investors have felt little control over their financial futures and are searching for other ways to invest. The good news is that there are other options. One that has been gaining traction in recent years is the self directed IRA.
What is it? Simply put, it's an Individual Retirement Account (IRA) that offers alternative investments, including real estate, private stock, intellectual property and mortgages. While considered more risky, this type of IRA can yield significant returns and avoid market fluctuations.
So, how can you know if a self-directed IRA is right for you? Here are some signs.
- You have enough assets in your retirement account. A self-directed IRA is often less diversified than traditional mutual funds or stock portfolios, meaning that it generally carries higher risk of losses. The assets you choose may also call for higher initial investments.
- You have time and energy to devote. Self-directed IRAs are not 'set it and forget it' investments. The added level of control over your money is often very rewarding, but the ideal investor should be informed and experienced enough to do the research and seek out counsel about potential investments.
- You are knowledgeable in the investments. Because they are by nature self-directed, these IRAs don't come with the same level of guidance that managed accounts enjoy. Custodians of self-directed IRAs hold money, perform administrative tasks and make transactions. They do not, however, provide investment advice or guide you in tax matters.
- You understand the tax implications. The tax-deferred benefits of IRAs can make your returns in alternative investments very attractive. But be sure you fully research the types of income returns and tax status of each investment to avoid losing those tax benefits. For example, real estate investments may be partially taxable income if there is debt associated with the property.
Aside from the financial benefits of having more control and higher returns, many self-directed IRA investors enjoy being able to direct their money to personal passions or causes. While it is prohibited to invest in yourself or your immediate family members' endeavors, it does open up a new world of possible ways to put your money in things that are important to you. This can include private companies, new ideas, local real estate or businesses, startups or environmentally-friendly operations.
While there are pros and cons to any investment, more and more investors have been turning to self-directed IRAs to satisfy their investment needs. No matter which idea appeals to you - increased individual control, the ability to direct money into personal interests or just the lack of worry about stock market adjustments - it may be the right time to look into something different and rewarding.