If you have ever wondered if you might invest in real estate, precious metals or even cattle as part of your retirement plan, then a so-called self-directed individual retirement account (IRA) might be just your ticket. While more traditional IRA custodians, such as larger financial institutions, generally limit your investment options to stocks, bonds, mutual funds and CDs, alternative custodians that allow you to invest in a wide range of alternative investments are emerging.
While these emerging instruments are not for everyone, even individual investors can get into the mix. However, most experts caution that these self-directed IRAs are not for everyone. Like any investment, it is critical to know the rules and also what your needs are with regard to your investment. With this in mind, what follows are some important guidelines for understanding self-directed IRAs.
In all cases, IRA owners cannot make investments that benefit themselves or certain family members, even indirectly. For example, you cannot use your IRA to buy a house and then rent it to yourself. Failure to abide by the intricate self-dealing rules risks significant tax liability.
IRAs maintain specific required minimum distributions (RMD) starting at age 70½ unless the account is a Roth IRA. These requirements can create problems if all your retirement assets are tied into non-liquid assets. With proper planning, these hurdles are overcome, but it is important to be aware of the potential pitfalls.
Traditional IRA distributions are taxed at ordinary federal income rates, which top out at 35%. Creating a Roth IRA ensures that all withdrawals by you or your heirs are tax-free as long as the five-year holding period is met. If you anticipate that an investment may significantly appreciate over time, such as real estate, you may want to consider a Roth IRA.
The more you know the better investment choices you make. While self-directed IRAs are not inherently dangerous, they may fall prey to fraudulent investment schemes. Remember, if it sounds too good to be true, it probably isn’t a good idea.