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By:  Tye Bostick

What is a Self-Directed IRA?


The Internal Revenue Service defines an Individual Retirement Account (IRA) as, “an individual account or annuity set up with a financial institution, such as a bank or a mutual fund company. Under federal law, individuals may set aside personal savings up to a certain amount, and the investments grow, tax deferred.” 

There are several types of IRAs that you can set up, depending on your current tax situation and income.  A Roth IRA for example, will allow all earnings in the account to grow tax-free.  All of your contributions are taxed in the year which they are made.  A traditional IRA is different in that the contributions are not taxed until they are withdrawn, often years down the road, along with their earnings.

When it comes to a self-directed IRA, this term simply refers to the fact that the individual owning the account has complete control over the investments in the account, and the investment options are typically far more diverse than a conventional bank or brokerage firm would offer.  At classic institutions, investors can find the traditional assets, such as stocks, bonds, and mutual funds –Wall Street investments.  An administrator of self-directed IRAs, such as The Entrust Group, allows alternative investments, such as real estate, precious metals, LLCs, notes, commercial paper, and a plethora of other asset types.  In fact, the Internal Revenue Code limits just a few assets: life insurance, collectibles, and “S” Corporations.

Currently, nearly five trillion dollars are invested in IRAs, with roughly 2% held in self-directed IRAs.  With the recent economic downturn, more and more investors are looking for alternatives to traditional investments.  Self-directed IRAs offer the perfect vehicle for those alternative assets with freedom and flexibility.

What Are Some Benefits of a Self-Directed IRA?

Provides you the ability to invest in a wider range of investment categories

Allows you to have direct control and empowerment over your retirement investments.

Investment earnings can grow tax-deferred or tax-free.

What Responsibilities Does The Investor Hold?

When utilizing a self-directed retirement account, the investor bears the most responsibility.  Too often, investors do not realize this until it is too late.  Although the administrator has responsibilities such as bookkeeping assets and tax reporting, they are not responsible for making sure that investments are legitimate.  It is up to the investor to research and conduct due diligence on investments that they are considering.

Self-directed IRAs place the power with the investors, which is not ideal for everyone.  But for those with an understanding of real estate, precious metals, or whichever non-prohibited investment they prefer, they provide options that cannot be found within typical IRAs.

For anyone looking to direct their own future and their own portfolio, self-directed IRAs are a perfect place to start. 

Author:  Tye Bostick, Education Coordinator at The Entrust Group

Date:  October 3, 2012 

 

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Basics of Self-Directed IRAs

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