The Intricacies of a Self-Directed IRA


One of the most important financial responsibilities that all people share is having to save and prepare for retirement. People today need to prepare to save enough money to last at least 20 to 30 years after they retire. With the amount of defined benefit plans and social security decreasing, the amount of money that you need to save on your own continues to increase.

One of the best ways to save for retirement would be to invest through a Self-Directed IRA. A Self-Directed IRA is a particular type of IRA, which provides a user the ability to invest in a wide range of different investment options, which those with standard IRAs may not have access too.

There are several characteristics of Self-Directed IRAs which make them different than standard IRAs.

Enable Custodianship or Trustee Guided

One characteristic of a Self-Directed IRA is that they have to be managed and maintained by a custodian or trustee appointed by the IRA owner. As opposed to having an IRA through a bank or brokerage firm, someone with a Self-Directed IRA can pick a custodian or trustee to manage the IRA. The custodian or trustee will then be required to choose the investment options, allocate the asset selections, and prepare all of the reports that are required by IRA laws and guidelines.

Explore Investment Options

An additional characteristic of Self-Directed IRAs, which separate them from other IRAs, is that there are typically far more investment options available. With normal IRAs, your investment decisions are typically limited to stocks, bonds, mutual funds, and other similar investments. However, with a Self-Directed IRA, you can invest in other asset classes as well. Many investors use Self-Directed IRAs to invest in precious metals and other commodities, partnerships, mortgages, and even franchises. Those that want to invest in real estate will be able to purchase residential, commercial, farmland, and even invest in property renovations through their IRA. Having all of these investment options allows someone to maximize their return on investment while also being able to diversify into many different asset classes.

Establish an LLC

When looking to invest in real estate, a franchise, or other business, many Self-Directed IRA owners choose to establish an LLC with the IRA being the primary owner or beneficiary of the LLC. An LLC is a corporation structure that limits the financial loss potential for the owners of the business. Also, the LLC never pays any income taxes on the money that is earned. Instead, the beneficiaries of the LLC end up paying the taxes on the money received from the LLC. Since the IRA is the beneficiary and an IRA does not have to pay income taxes, money that is earned from businesses or investments owned by the LLC will not be taxed. However, taxes on the money will occur eventually when the funds are withdrawn from the IRA.

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