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While Self-Directed IRAs have been in the industry for several decades, investors have evolving preferences. On the one hand, experienced investors have learned all the nitty-gritty about a Self-Directed IRA and are investing in their financial future. On the other hand, many new to the concept of retirement investing haven’t heard about what Self-Directed IRAs are and what they can offer.
There are several resources explaining what a Self-Directed IRA is. However, there are several tips and factors to know before setting up an account. In this article, we’ll dive into these tips to better understand Self-Directed IRA investing.
Choose Your IRA Custodian Wisely
Most banks, financial institutions, and trusts in the U.S. offer Self-Directed IRAs to income earners looking to invest for their future. However, not every custodian has your best interests in mind. It is essential to take your time to review a Custodian before signing up with them.
One of the first things you should consider is the custodian’s industry experience. A custodian who has been in the industry for several years has sufficient background on what services to offer to prospective investors looking to invest in Self-Directed IRAs.
Another factor to consider is their knowledge of traditional and alternative investment opportunities for you. Coupled with industry experience, the custodian will be able to guide you through the process of setting up an account. Also, their scope of service should be extended, not limited to some selected states. You need a custodian that can serve your best interest no matter where you are.
Choose Between Accounts Like a Traditional or Roth IRA
In the typical sense, Self-Directed IRA is a term roped up in an IRA investment plan for income earners. Self-Directed IRA can be either Traditional or Roth IRA. It’s up to you to choose what you invest in.
Traditional IRA allows you to save for retirement on a pre-tax basis. That means you won’t pay taxes on any contribution to your IRA until you withdraw it during retirement. Roth IRA allows you to save towards your retirement on an after-tax basis. This means you’re going to pay taxes on every contribution and allow it to grow tax-free in investment.
Watch Out For/Identify Prohibited Investments
When self-directing, there are strict rules surrounding what you can invest in. The IRS has clear rules regarding these prohibitions, and every income earner looking to set up a Self-Directed IRA should know them. Self-Directed IRA Custodians do not offer financial, legal or investment advice.
Some prohibitions include no personal use of the real estate investment, no self-dealing, no investment in S corporations, and removing disqualified parties such as spouse, children, and parents from having direct relationships with the investments.
Review The Alternative Investment Options
A Self-Directed IRA is quite different from the typical IRA plans. This is because alternative investment opportunities are open to investors. Some examples of alternative assets include real estate, tax liens, precious metals, privately held companies, private lending, and many more.
You should review these options and determine which ones suit your investment strategy best. Ensure that you’re comfortable with your decision before finalizing your investment. After all, with a Self-Directed IRA, the ball is in your court.
Carefully Select Your Investment
The job of selecting an alternative investment for your Self-Directed IRA is solely your decision to make. Custodians are tasked with ensuring that your investment asset is suitably qualified to be held in your IRA. You should discuss this with a financial advisor before selecting an investment option.