Ups and downs in the current market and recent corporate and banking scandals have prompted many people to seek ways to have more control over their retirement funds. Self-directed IRAs allow consumers to use their knowledge and expertise to invest in assets beyond stocks, bonds and mutual funds. While self-directed IRAs provide a new way to grow retirement savings, they may not be the best option for everyone.
It’s important to note a self-directed IRA, such as plans offered by Ohio-based IRA custodian Equity Trust Company, is not a different type of IRA. Plans such as a traditional IRA or Roth IRA follow the same rules and guidelines set by the IRS, whether they are held at a custodian who can only hold “traditional” investments or a company such as Equity Trust Company, which can provide for clients who want traditional or alternative investments. In the end, it’s about determining the best plan for your needs and which investment options you should pursue.
Self-directed IRAs combine the power of tax-advantaged accounts with the freedom to invest in alternative assets. This allows investors to truly diversify their portfolios and potentially generate greater returns than typically seen with traditional investment options. While traditional IRA investments are primarily defined as publicly traded stocks, bonds or mutual funds, alternative investments can be loosely defined as "everything else" the IRS doesn’t list as prohibited.
Alternative investments can range from real estate, tax liens and shares of private equity to heavy equipment, windmills and even cattle. While these assets are sometimes considered “non-traditional,” they are simply investment opportunities many investors take advantage of every day.
The majority of self-directed IRA investors leverage their knowledge and careers that have made them successful and use that experience to grow their IRA savings. Investors with experience in buying property or engaging in private lending and investing can put their expertise to work in a self-directed IRA.
Since self-directed IRAs allow for a wide range of investment options, they can sometimes be targets for fraudulent schemes. It’s vital to understand that while IRAs are administered by custodians and fall under the tax code, you shouldn't make an assumption about the quality or legitimacy of assets. Not all custodians are permitted to evaluate assets or potential investments. Passive custodians, which often hold self-directed IRAs, do not sell investments or provide tax, legal or investment advice. The IRS can provide educational material, such as Publication 590 for IRAs, but does not endorse or review investments.
Equity Trust Company’s fraud awareness center helps give investors a starting point when it comes to watching out for con artist schemes, fraud and other scams. According to the U.S. Securities and Exchange Commission, U.S. investors held around $94 billion in self-directed IRAs in 2011; given the size of these funds, investors should thoroughly investigate potential opportunities before making any investments.
A self-directed IRA requires a stronger hands-on approach, but the ability to diversify, potentially earn greater returns and invest in areas they have knowledge often lead investors to pursue this lesser-known option.