How Does A Self-Directed IRA Work? | Zynergy Retirement (2024)

If you’ve ever found yourself frustrated by a lack of investing options with traditional retirement accounts, a Self-Directed IRA might be a good option for you. This type of IRA allows you to invest in some alternative assets that you won’t have access to through most brokerages. However, they come with higher annual fees and a risk of volatility. Here is a breakdown of Self-Directed IRAs, and whether they are a good fit for your portfolio.

What Is A Self-Directed IRA?

A Self-Directed IRA (SDIRA) is a type of Individual Retirement Account that offers greater flexibility in investment choices compared to traditional or Roth IRAs. While standard IRAs typically allow investments in stocks, bonds, and mutual funds, SDIRAs enable you to invest in a wider range of assets, including real estate, private equity, cryptocurrency, precious metals, commodities, and more.

Key Features:

1. Investment Variety: SDIRAs allow investments in non-traditional assets, providing opportunities for portfolio diversification.
2. Control: Investors have direct control over their investment choices, offering a personalized approach to retirement planning.
3. Tax Advantages: Like other IRAs, SDIRAs offer tax-deferred or tax-free growth, depending on whether it’s a traditional or Roth account.
4. Regulations: SDIRAs must adhere to IRS rules, including restrictions on certain types of transactions and investments to avoid penalties.

Overall, SDIRAs can be a powerful tool for experienced investors looking to take advantage of unique investment opportunities within their retirement portfolio.

How To Create A Self-Directed IRA

Creating an SDIRA involves several steps. Here’s a guide e to get you started:

1. Research Custodians: Find a custodian or trustee that offers SDIRAs. Ensure they have experience with the types of investments you are interested in, such as real estate, precious metals, or private equity.
2. Open an Account: Complete the necessary paperwork to open an SDIRA account with your chosen custodian. This typically involves providing personal information and selecting the type of SDIRA (e.g., Traditional or Roth).
3. Fund the Account: Transfer funds into your SDIRA. You can do this through contributions, rollovers from other retirement accounts, or direct transfers.
4. Choose Investments: Select the investments you want to include in your SDIRA. The custodian will execute transactions on your behalf based on your instructions.
5. Due Diligence: Conduct thorough research on each investment to understand the risks and potential returns. Ensure compliance with IRS regulations to avoid prohibited transactions and penalties.
6. Monitor and Manage: Regularly review and manage your investments. Keep detailed records of all transactions and stay informed about regulatory changes.
7. Consult Professionals: Work with a fee-only financial advisor to ensure your investments align with your retirement goals and comply with all regulations.

How Much Money Can I Put In A Self-Directed IRA?

The contribution limits for an SDIRA are the same as those for traditional and Roth IRAs, as set by the IRS. For 2024, the limits are:

• Under Age 50: You can contribute up to $7,000 annually.
• Age 50 and Older: You can contribute an additional $1,000 as a catch-up contribution, bringing the total to $8,000 annually.

These limits apply to the combined total contributions to all of your IRAs, including traditional, Roth, and SDIRAs.

Rollover contributions from other retirement accounts (such as a 401k) are not subject to these annual limits. However, contributions must come from earned income, and exceeding these limits can result in tax penalties.

Is A Self-Directed IRA A Good Idea?

A Self-Directed IRA can be a good idea for certain investors, but it comes with both advantages and disadvantages that should be carefully considered:

Advantages:

• Investment Flexibility: SDIRAs allow investment in a wide range of assets, including real estate, private equity, precious metals, and more, offering greater diversification than traditional IRAs.
• Potential for Higher Returns: The broader selection of investments can potentially lead to higher returns, especially if you have expertise in specific areas.
• Control: Investors have more control over their retirement portfolio and can tailor it to their specific financial goals and risk tolerance.

Disadvantages:

• Complexity and Risk: SDIRAs are more complex and require a thorough understanding of the investments and associated risks. Poor investment choices can lead to significant losses.
• Regulatory Compliance: There are strict IRS rules governing SDIRAs, including prohibited transactions and disqualified persons. Violating these rules can result in penalties and tax consequences.
• Higher Costs: SDIRAs often come with higher fees for account setup, maintenance, and asset custody. These costs can eat into your investment returns.

Suitability:

An SDIRA may be a good option if you:

• Have a high level of knowledge about alternative investments.
• Are comfortable with the associated risks and complexities.
• Seek greater diversification in your retirement portfolio.
• Are willing to comply with IRS regulations and manage the account actively.

On the other hand, if you prefer simplicity, lower costs, and less hands-on management, a traditional or Roth IRA might be a better fit.

Have questions about Self-Directed IRAs? Contact Zynergy Retirement Planning to determine if an SDIRA aligns with your retirement goals and investment strategy.