What is a Self Directed IRA?
IRA’s that require the account owner to make investment decisions is called a Self Directed IRA. A trustee or custodian is required though, when actual decisions are made, due to IRS requirements. The IRA trustee or custodian is the person or entity that does all investing decisions as directed by the owner on their behalf. Having a Financial Advisor is the same, because the client makes all of the decisions and the Advisor takes those decisions directly to the company handling the assets. These IRA’s are also known as Traditional IRA’s and have the same rules and regulations. With a Self Directed IRA there is no limitations as to what types of investments that owners are allowed to consider. Also you have the luxury of changing out of certain investing objectives if you decide you are being too aggressive or not aggressive enough. If you feel that you are losing too much money then consider changing your allocation to 80% bonds and 20% stocks, or vice versa when you want to increase aggressiveness in the market to accumulate more income. The neutral, most general, asset allocation is 60% stock 40% bonds.
Asset allocation and diversification have a wider range when dealing with Self Directed IRA’s because of the vast array of investment vehicles offered. Depending on your risk tolerance and financial objectives, you will be able to choose what allocation best fits your needs. You may invest in anything from stocks, to bonds, to government securities with no limit to how much of which investment you can purchase. You may start contributing to your Self Directed IRA whenever you get it set up with monthly contributions. However, the majority of people use 401K rollovers and Pension plans to start up their Self Directed IRA and then make on going contributions until retirement. The maximum contribution limits to a Self Directed IRA is $5000 per year unless you reach 50 years old, and then you will be able to contribute $6000. These limits are subject to change at the beginning of each year, so as an investor you will need to stay informed.
When making a withdrawal, also known as a distribution, from your Self Directed IRA there are a few things that will be taken into consideration. If you are under 59 and 1/2 you will be assessed an early withdrawal penalty on any distributions that you take. Depending on the IRA you may have to pay federal and state taxes on your distributions as well. These taxes usually add up to about 14% and the early withdrawal penalty can be as much as 10%. Self Directed IRA’s are long term investment vehicles, which is why the fees associated with early withdrawals can be quite expensive.
The convenience of Self Directed IRA’s is that you have a wide range of investment ideas to choose from so that all of your needs are met. You also have the satisfaction of comparing different companies and asset allocations to get the best rates. There is also the peace of mind that you are in control of all buying and selling that goes on in your account, and can rest assured that you will always be in the loop about changes etc. As long as you do your research and keep well informed, your Self Directed IRA will provide a great income for your future and retirement.