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Investor Insights Blog|5 Reasons to Consider a Self-Directed IRA

Self-Directed IRA Concepts

5 Reasons to Consider a Self-Directed IRA

Like any other IRA, a self-directed IRA is a tax-advantaged retirement account investors can use to build wealth for retirement.

Self-directed IRAs are unique because they offer the freedom and flexibility to invest in a wider range of assets beyond traditional investment options like stocks, bonds and mutual funds.

Five potential benefits of a self-directed IRA

1. With a self-directed IRA, you can take control of your financial future.

It’s your retirement. Who better to decide how to reach your goals than you?

With a self-directed IRA at Equity Trust, you are in control of all decisions for your account and have the freedom and flexibility to invest in what you know best and how you are most comfortable.

Like any other IRA, a self-directed IRA is not tied to an employer – with limited investment options such as some 401(k)s, 403(b)s, Thrift Savings Plans, pensions, etc. – it’s your individual retirement account.

And if you change jobs, it may be possible to roll over a previous employer 401(k) or other qualified plan to a self-directed IRA so you can continue saving and investing for retirement wherever your life and career may go.

But you don’t have to change jobs to open a self-directed IRA. It’s also possible to have an IRA in addition to a 401(k), pension or other employer-sponsored plans you may already have.

Finally, “self-directed” doesn’t have to mean alone. You’re encouraged to work with a trusted advisor, CPA or financial professional for your retirement planning and investment decisions. With a self-directed IRA, you’re in control and can choose whatever method works best for you.

Many investors don’t realize they aren’t limited to stocks, bonds and mutual funds and that it’s possible for their IRA to invest in real estate, notes, private equity, precious metals, private stock, and a wide variety of “alternative” investment opportunities as well.

2. Self-directed IRAs allow you to invest beyond the stock market with more investment options.

The primary difference between a self-directed retirement account at Equity Trust and an IRA or other qualified retirement account at other financial institutions is the increased freedom and flexibility to invest in both alternative and traditional asset classes.

Many investors don’t realize they aren’t limited to stocks, bonds and mutual funds and that it’s possible for their IRA to invest in real estate, notes, private equity, precious metals, private stock, and a wide variety of “alternative” investment opportunities as well.

15-minute guide to self-directed investing

IRS Publication 590 only identifies which investments are prohibited (shown below):

  • Collectibles (such as art work, rugs, antiques, gems, stamps, certain coins, etc.)
  • Certain Precious Metals*
  • Alcoholic beverages
  • Life insurance policies

*Exception: a retirement account can hold gold, silver, platinum and palladium bullion which meet minimum fineness requirements.

All other investment types are generally permitted as long as the IRS rules governing retirement plans are followed. For more information, see IRS Publication 590 and Internal Revenue Code 4975.

3. Self-directed IRAs can provide tax advantages.

As long as IRS rules are followed, there are several potential tax advantages of a self-directed IRA or qualified retirement account. There are two main types of IRA – a Traditional IRA and a Roth IRA – each with a unique set of characteristics and tax advantages. For information on both accounts, view the comparison chart.

Whether you have a Traditional IRA or a Roth IRA – funds and investments remain in a tax-advantaged environment until distributed from the account after age 59½.

All income, profit and appreciation from an investment in a self-directed account return directly back to the IRA without being taxed and without adding to your personal, taxable income for that year.

Here’s a hypothetical example of the potential benefit this could provide on a single investment, let’s consider a scenario where an investor purchased a property for $125,000 – invested another $25,000 in rehab and holding costs – and sold it for $200,000 within one year.

Assuming a 25-percent marginal tax rate, they would save $50,000 in taxes on the $200,000 sale by using a self-directed IRA instead of using personal funds. Furthermore, the $200,000 would return directly back to the IRA to be used for another investment, rather than included in their taxable income for the year.

The tax advantages of a self-directed IRA become even more powerful when compounded over many years. Because funds return directly back to the IRA without being taxed, those tax savings can be reinvested into another opportunity and can compound in the tax-advantaged environment instead of being paid to the IRS.

Here’s another hypothetical scenario to demonstrate the power of tax-advantaged, compounded returns using a self-directed Roth IRA.

Let’s assume an investor invests $50,000 using a Roth IRA at the age of 40. Over the next 20 years, they receive an annual rate of return of 8 percent and have a marginal tax rate of 25 percent.
As you can see in this graph, the tax-advantaged, compounded returns in the Roth IRA resulted in over $72,000 more than if the same investments were conducted outside an IRA over the same 20 years.

4. Self-directed IRAs can serve as an untapped source of investment capital with the potential to positively impact communities.

For real estate investors, business owners, and those currently investing in alternative assets outside their IRA – another potential benefit is realizing IRA, 401(k) or other qualified retirement funds (whether your own or others) can be used as an additional source of capital for their business or investment opportunities.

With over $12 trillion invested in IRAs across the country, there is an enormous amount of capital available in retirement plans.

Once investors learn about self-directed retirement accounts, and work with an advisor or financial professional to determine if it’s the right fit, it may be possible to tap into the multi-trillion-dollar IRA market.

While the primary purpose of a self-directed IRA is to build tax-advantaged wealth for retirement, it may also be possible for the investments to positively impact others.

We’ve seen Equity Trust clients do extraordinary things with their retirement accounts – for themselves and for others. From rehabbing blighted neighborhoods and providing affordable housing opportunities, to financing local businesses, another potential benefit is the potential positive impact to communities.

5. Self-directed IRAs can be used to create a tax-advantaged legacy for your family, loved ones or charity.

It’s possible to extend the potential benefits of self-directed IRAs beyond your own lifetime.

You are able to elect one, or multiple, beneficiaries for your IRA. You can select your spouse, children, grandchildren, charities or whoever else you would like to inherit your account when you pass away.

Generally, once a retirement account is passed down, any remaining cash and assets are tax-advantaged while inside the account and can be distributed to the beneficiary. As an example, let’s assume a Roth IRA is inherited with $50,000 in cash and $150,000 of rental properties producing $1,500 per month in rent.

In this example, the beneficiary would be able to distribute the full $50,000 in cash if they wish, (tax-free, since it’s a Roth IRA and has met all eligibility requirements) plus they could distribute $1,500 in tax-free rental income from the Roth IRA each month. They’d also have the option to keep the funds in the account and continue investing if they wish.

As always, you should consult with a tax attorney or financial professional to help with your estate planning and to navigate the rules pertaining to beneficiaries.

These five potential benefits are just a few of the reasons investors turn to self-directed IRAs to build wealth for retirement. Though growing in popularity, a vast majority of investors are still new to the concept.
For more information about self-directed accounts at Equity Trust, start a conversation with an IRA Counselor or  Call 855-673-4721


What are the advantages of opening a self-directed IRA?

Some advantages of self-directed IRAs include:

  • Tax-deferred or tax-free profits
  • Investment diversity (it is possible to invest in an array of assets in your retirement account)
  • Potentially building wealth for future beneficiaries

What investments can I make using a self-directed IRA?

With a self-directed IRA, your investments are up to you, within the bounds of the IRS rules and guidelines. The IRS does not provide guidance on what investment types are permitted, but dictates only what is NOT permitted. Examples of prohibited IRA investments include collectible (such as artwork, stamps, rugs, antiques and gems), certain coins and life insurance. See IRS Publication 590 for more information about prohibited investments.

Download Equity Trust's 15-minute guide to self-directed investing

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