Arizona attorney Andy Fowler and Ohio attorney Jeff Watson discuss self directed IRAs….(read more)

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What is a Self-Directed IRA?

When it comes to planning for retirement, individual retirement accounts (IRAs) have long been a popular choice among individuals due to their various tax advantages. Traditional IRAs and Roth IRAs are the most common options that individuals consider, but there is another type of IRA gaining attention in recent years – the self-directed IRA.

So, what exactly is a self-directed IRA? As the name suggests, a self-directed IRA gives the account holder greater control over their investment choices compared to traditional IRAs. While traditional IRAs typically limit investment options to stocks, bonds, and mutual funds, self-directed IRAs open up a vast array of alternative investments, including real estate, private businesses, precious metals, and more.

One of the primary benefits of a self-directed IRA is the ability to diversify your investment portfolio beyond traditional investments. By including alternative options, such as real estate investing, in your retirement plan, you can potentially achieve higher returns or add more stability to your portfolio. Real estate, for instance, is a tangible asset that is often seen as a stable and appreciating investment over the long term.

Another advantage of a self-directed IRA is the potential tax benefits. Like other IRAs, self-directed IRAs offer either tax-free growth (in the case of a Roth IRA) or tax-deferred growth (in the case of a traditional IRA). This allows your investments to grow without being subject to annual taxes on capital gains, dividends, or interest income, providing you with substantial savings in the long run.

However, it is important to note that self-directed IRAs come with certain rules and regulations that must be followed to maintain their tax advantages. The Internal Revenue Service (IRS) has specific guidelines and restrictions on what types of investments are permissible within a self-directed IRA. Transactions must be conducted at an arm’s length from the account holder and certain prohibited transactions, such as investing in collectibles or life insurance policies, are strictly forbidden.

Furthermore, self-directed IRAs require the account holder to take an active role in managing their investments. Unlike traditional IRAs where an investment advisor or custodian may handle the transactions, in a self-directed IRA, it is the responsibility of the account holder to research, analyze, and make investment decisions. This means that individuals considering a self-directed IRA should have a thorough understanding of the investment they intend to pursue and be willing to dedicate time and effort to managing their own retirement funds.

In summary, a self-directed IRA provides individuals with greater control over their retirement investments by allowing a wider breadth of alternative investment options beyond traditional stocks, bonds, and mutual funds. This heightened autonomy enables potential opportunities for higher returns and portfolio diversification. However, it is essential to understand the rules and regulations established by the IRS, as well as the responsibilities that come with managing your own investments. Consulting with a financial advisor or tax professional is highly recommended before establishing a self-directed IRA to ensure compliance with applicable laws and to make informed investment choices.