Investments are a modern way to earn enough money for a smooth and trouble-free retirement. Buying a small house near the riverbank or a top-notch yacht to sail around the sea — everything is possible when you have a secure nest egg.
However, the current state of the economy makes us move from traditional forms of investments. Such a shift affects retirement savings too, and a self-directed IRA can help you here. It opens new possibilities for investing and puts you in charge of your financial life. But there are also some downsides that you should bear in mind.
In this article, we will describe the common pros and cons of creating an SDIRA to help you make an informed decision.
Pro #1: Alternative assets
If you opt for a traditional IRA, you don’t have a lot of ways to invest. The range of choice is limited to basically three positions: stocks, bonds, and treasury. Even though these investments are proven to be safe and profitable, it’s time to move further.
With a self-directed IRA, which is an individual retirement account, you will get access to making investments in more diverse assets. They will include trust deeds, real estate, precious metals like gold, and many more. New items will ensure steady account growth and secure your savings.
Pro #2: Taxation advantages
Depending on the type of your IRA, the tax rules applied to it will be different. If you have a regular IRA, it will be using a tax-deferred approach. It means that you will be given a tax break while contributing to the account. However, the moment your funds are withdrawn at your retirement age, they are subjected to taxation as income.
A self-directed IRA has a kind of vice versa approach. It will not give you a tax break, but your funds will be safe from taxes when you reach the golden age.
Pro #3: You are in control
An SDIRA gives you more freedom regarding finances. It’s up to you to choose the types of assets you want to invest in. You will be able to acquire them with the funds you already have and all the activities are managed by you.
Con #1: Less liquidity
A self-directed IRA provides you with more options to invest in, but some of them are not as liquid as the others and are hard to exchange. For example, stocks will be in demand even if the market is down, but you will barely be able to get rid of a house in these conditions. You can avoid such a situation by building a balanced portfolio.
Con #2: Third-party participation
Yes, you have full control over your investments, but you will still need a dedicated custodian. It’s an obligatory measure applied by the IRS. Such a custodian is a mediator between you and the government. You should report all changes to them so they can safely follow your account.
Con #3: Paperwork
Creating and managing an SDIRA requires a lot of paperwork. The transactions and contracts need a lot of attention so there won’t be any problems. If you don’t have enough experience in finances, it will be pretty hard to handle. The custodian will definitely help you sort it all out, but they can charge you for providing some services.
Summing it up
Both traditional and self-directed IRAs have two sides. If you feel safer and more comfortable with what you are used to, creating an SDIRA may not be your best option. However, to build a solid nest egg and be completely sure about reaching your retirement goals, you should try all options available. Despite what people say, the golden years are another beginning in your life, so you’d better come fully prepared for them.