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Are you looking for a way to have more input when it comes to your IRA? Are you frustrated by the limitations imposed by attempting to work with a financial adviser whose plans for your retirement account may not match your own? Perhaps you’re simply interested in knowing more about how retirement investment options work, and becoming more involved in the planning and investment processes that lie behind your IRA.
After all, the performance of those assets pertains directly to your future, and there’s a sense of security inherent in the concept of understanding and overseeing how the assets in question are handled.
If any of the above scenarios apply to you, you have likely come across the term “self-directed IRAs,” either in your own research or during conversations with financial advisers. Knowing what a self-directed IRA entails is an important first step; understanding the self directed IRA rules is another, and is a key part of determining whether this type of account is the right choice for you and your particular financial situation.
What exactly is a self-directed IRA? The definition is simple. Just as the name implies, a self-directed IRA gives the account holder the ability to direct the account and its investments himself.
With traditional individual retirement accounts, typically an account trustee (often a financial manager or certified accountant) is in charge of directing the way the holdings within the account are handled. With most typical IRA accounts, the trustee may approach the account holder for input on some general decisions, but ultimately the handling of investments and what money is spent where is in the hands of the trustee. In the eyes of the IRS, the account trustee is essentially holding the account for the client, and is responsible for its overall direction.
A self-directed IRA, on the other hand, gives the account holder a much larger variety of choices – and a much larger slice of the responsibility – for investment decisions.
A self-directed IRA is an appealing option for many investors because they want the ability to control specific decisions about the account, without the required input of a financial trustee. For some investors, particularly those with education and experience in the world of stocks and bonds, the choice of a self-directed individual retirement account can be an excellent one. Along with the benefit to these holders of greater control, this type of account opens up multiple doors regarding investment choices, giving the account holder a greater sense – and reality – of freedom in how their assets are invested and handled.
The idea of self-directed IRAs isn’t a new one. In fact, this type of account has become increasingly popular in recent years, as more and more clients are drawn to the idea of having greater access to, and control over, how their money is handled in an increasingly unpredictable economy. Whether or not this choice is actually right for everyone who makes it, however, remains to be seen.
As with any investment decision, the choice to open and maintain a self-directed IRA is one that should be made only by investors who have the ability to handle their assets and investments in an informed, educated way.
The three self directed IRA rules below are an excellent place to start for investors considering this route.
Rule #1: Account trustees won’t play the same role as they will with a typical IRA account, but they’re still a required part of account management.
As explained above, with typical IRAs, the IRS requires a specified, certified financial trustee of some type to hold the account and to handle transactions within it. The first rule to understand regarding self-directed IRAs is that investing in one won’t remove the requirement for a custodian from your plans.
The difference lies in the expectations of the role of the custodian. While a custodian for a traditional IRA will handle all assets and make investment decisions, they will also be in charge of filing paperwork with the IRS, issuing statements to the client, and ensuring compliance with various rules and regulations for tax purposes.
With a self-directed IRA, on the other hand, the custodian performs these same duties, but is simply involved less in the process of selecting investments and directing their actions. Custodians of self-directed IRAs will typically offer clients a choice of investments to make – in other words, the account holder has the final say in what actions to take, but the custodian will explain the available options and offer them as a selection from which the client can choose. The variety of choices available is based on IRS regulations and is typically quite wide-ranging.
Rule #2: Investment and income limits still apply.
Self-directed IRAs may give account holders a wider range of options, and greater control, than typical accounts. However, many of the same limitations that you encounter with typical IRA plans will still apply when it comes to limitations and maximum amounts. Whether you choose to own a typical or Roth self-directed IRA, the same income restrictions and investment limits that are placed by the IRS upon regular accounts are still in play in the case of a self-directed one. The difference, of course, is that self-directed account holders will be deciding what happens to the assets within that maximum amount.
Rule #3: Enjoy your options… but know how to handle them wisely.
Self-directed IRAs aren’t for everyone. Needless to say, account holders who choose to go this route should be well aware of how the world of investment works. Leaning on an account custodian for guidance can be helpful, but doing so without the intention of moving on into making your own informed decisions raises the question of whether going self-directed is worth it. The risks involved with a self-directed account for an uninformed consumer, say experts, are certainly high – perhaps higher than the benefits that come from the choice.
The upside to self-directed accounts, of course, is that those who have the know-how can be fully in charge of what happens to their investments – and they’ll also have a wider range of options to consider. While many traditional IRAs give the account holder (via the medium of the account custodian) a range of mutual funds from which to select, self-directed IRAs open up even more possibilities, from the usual mutual funds to stocks, bonds, treasuries, real estate, and more.
This wide vaeriety of options can be fantastic for an educated investor – and can be real trouble for an inexperienced one. Moving forward in the proper direction is a matter of knowing the self directed IRA rules, and then proceeding with the type of IRA that best suits your level of investment knowledge as well as your future retirement needs. Make sure you read this article on the best Roth IRA providers.