What is a Self Directed IRA

 

What is a Self Directed IRA

With a self directed IRA you can take advantage of all the same tax benefits of a traditional IRA. The monumental difference is that with a self directed IRA you get many more investment options to choose from. This allows for the self directed IRA holder to have more control over their own portfolio because they can invest in things they actually know and understand. With any type of investment vehicle, self directed IRAs included, there are rules and regulations. CapSource aims to shed light on the different aspects of a self directed IRA with this informational page. To begin, let’s discuss the different investment options allowable by a self directed IRA.

A Wider Range of Investment Options

The term “self directed IRA” is used by the IRS to name a special type of IRA that allows investors to take part in a wider range of investment options. A traditional IRA is limited to more traditional investment types like stocks and mutual funds, but with a self directed IRA there are more options such as:

  • Trust Deeds
  • Real Estate
  • Corporations
  • Gold
  • Farms
  • Raw land
  • Stocks
  • Mutual Funds
  • And More…

The IRS maintains guidelines on what can and cannot be invested in with a self directed IRA. Forbidden investments generally fall into the category of “self dealing investments” and should be avoided. More on the exact rules and regulations can be found at irs.gov or at uselfdirect.com. Now that we understand a little about the different investment options, let’s discuss the different types of self directed IRAs.

A Selection of Different Self Directed IRA Account Types

Beyond the actual investment choices allowable, a self directed IRA can be classified in different ways as well. Some of examples of these different self directed IRA types are:

  • A Traditional Self Directed IRA
  • A ROTH Self Directed IRA
  • A SEP Self Directed IRA
  • An Individual Self Directed 401(k)

Just like normal IRAs, these different account types have different tax implications. Making the right account type decision can help you save thousands when it comes to taxes. Whatever self directed IRA type a person chooses, every account is held with a specially licensed self directed IRA custodian.

 

A Self Directed Way to Hold Your Account

If you currently have an IRA or 401(k) then you probably know who your custodian is. If not, take a look at your statement sheet and it will be very easy to determine. Basically, a custodian is the company that actually holds your IRA and directs investments for you. When a person has a self directed IRA, the situation is very similar. You would still keep your IRA with a custodian, but there are a few big differences between a traditional IRA custodian and a self directed IRA custodian:

First, a self directed IRA custodian carries a special license to hold self directed IRAs. This license is issued by the FID and is not easy to obtain.

Next, a self directed IRA custodian will typically have lower fees than a traditional IRA custodian. This has to do with the fact that many self directed IRA custodians do not have a team of advisors that investors have to pay commissions to; that actually leads to the next point.

Finally, self directed IRA custodians cannot give their investors investment advice. Their role is to facilitate your money how you see fit.

Understanding the basic functionality behind a self directed IRA is key. Self directed IRAs are not that complicated once you take the time to understand them, and they can lead to much different results compared to traditional IRAs or 401(k)s. Now, simply having a self directed IRA isn’t everything you need to do in order to be successful with it.

A New Investing Philosophy

On a final note, self directing your IRA is a decision to adopt a self directed investing philosophy. Making this choice means that you believe that you are the best person to make decisions with your portfolio. Self directing is a journey, one filled with new places, people, and experiences. Most importantly, self directing allows you to have more control over your financial future. This is something that can be handed down from generation to generation and lead to a long road of investment success. This is the exact reason why CapSource promotes this investment concept.

At CapSource, we believe that investors should have the ultimate say with their portfolios. Our team of experts is here to assist you with knowledge and information, but at the end of the day you are always the one who makes the choice with your investments.