Although self-directed IRAs were created in 1974, it is only in recent years that they have emerged as an increasingly popular approach to retirement investing. Individual investors have the ability to take greater control over their investment assets, diversify their asset allocations, and grow their wealth. Investors establish self-directed IRAs with a specialized custodian. The custodian handles all administrative processes as well as reporting. They are not responsible for your investments or for providing advice. Using a self-directed IRA, investors can move beyond traditional stocks, bonds, and mutual funds to other assets including real estate, commodities, tax liens, and even precious metals.
Investing in real estate is a popular use of the self-directed IRA. Purchasing real estate in your IRA offers wealth growth opportunities as well as significant tax advantages. For example, if you have rental property that nets $5,000 a year, that profit remains in your self-directed IRA and is tax-deferred if you have a traditional IRA or tax-free if you have a Roth IRA. Additionally, when you sell the home, any profit is also tax-deferred or tax-free. The same rules apply to buying and selling a home. All profit remains in the IRA and has all the tax advantages of such an account.
Self-directed IRAs offer individual investors the opportunity to gain control over their retirement accounts. However, since the investments available are less traditional than standard stocks, bonds, and mutual funds, the risk is higher. There is less opportunity for advice with your investments, but the risk offers great rewards. If a self-directed IRA seems like an appealing investment strategy, be sure to do the necessary research and due diligence to understand the advantages and hurdles of such an approach. In this way, you can exercise the most control over your personal investments and take full advantage of any self-directed IRA investments.
