What is the Difference Between an IRA and a Self-Directed IRA?
While all investments involve some level of risk, self-directed IRAs carry extra-serious danger. Not only is there increased fraud risk with self-directed IRAs; their legal and regulatory protection are limited and liquidity concerns increase compared with traditional IRAs.
However, if you’re comfortable taking risks and looking to expand your investment options, an SDIRA might be ideal for you.
Taxes
No matter what kind of IRA you own, taxes will still apply. For instance, withdrawing funds before reaching age 59 1/2 incurs a 10% early withdrawal penalty as taking an taxable distribution is frowned upon by the IRS. Furthermore, capital gains tax must also be paid when selling investments from your IRA.
Your retirement account requires the assistance of a custodian with both expertise and infrastructure to administer alternative assets, including SDIRAs. A good custodian should be capable of overseeing their administration according to IRS rules while protecting you against fraudulent investments – which is especially crucial as criminals often use legitimate custodians to distribute fraudulent investments that cause serious harm to retirement accounts. A trustworthy custodian should have a proven track record, be a member of a national professional association, and offer additional protection measures.
Investments
Self-directed IRAs allow you to invest in areas that best suit your interests, knowledge and experience. These accounts offer diversification for retirement portfolios while meeting all IRS restrictions governing them; for example you cannot invest in collectibles or live in real estate you purchase through one. Furthermore, the IRS has prohibited transactions which could incur substantial tax penalties which should also be avoided.
Investment strategies that utilize index-related investments require less knowledge and may take less time, while self-directed IRA investments require specialized custodians with experience handling alternative assets. Fraudsters sometimes attempt to sell fraudulent investments through legitimate custodians; to avoid this from happening to your investments it is best to utilize a custodian that specializes in self-directed IRAs so your investments are monitored and validated properly.
Rollovers
Rollovers can be an efficient way to move funds between retirement accounts. But you should abide by certain important rules in order to complete one successfully – for instance, only one direct rollover per year; otherwise you will incur taxes and penalties on its distribution.
Direct rollovers require that plan administrators send you a check in the name of your new retirement account, withhold 20% for taxes and deliver your distribution plus withheld amount into it within 60 days to avoid penalties and incurrence of penalties.
Self-directed IRAs allow you to invest in alternative assets such as real estate, private business entities and tax lien certificates – helping diversify your portfolio against stock market volatility while potentially increasing income growth potential. Before opening one yourself though, make sure you consult a financial advisor first.
Fees
At the time of account establishment, an initial one-time fee is assessed; should an account owner choose a management company for investment management transactions, an ongoing management fee may also apply. Fees will also apply when withdrawing money from an account, terminating it or moving assets between custodians.
SDIRAs give investors greater investment flexibility by enabling them to access alternative investments outside the stock market, including real estate, private equity, precious metals and hard-money lending. Although such investments typically require greater initiative and research from their account owner, their potential returns often offset any extra expenses involved.
Be mindful that even with a self-directed IRA, it’s still possible to lose money – the stock market, for instance, can experience short-term fluctuations that result in significant dips. But by investing for the long term with an eye toward stocks and bonds as your goal, your returns should exceed those from traditional IRAs that only invest in stocks and bonds.
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