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Traditional IRAs limit investments to publicly traded stocks, bonds, or mutual funds. A Self-Directed IRA (SDIRA) allows you to take advantage of alternative investments, such as real estate, private mortgages and business credit, startup equity or debt crowdfunding, oil and gas, limited partnerships, precious metals, horses, and intellectual property. These alternative asset classes can bring not only diversification but higher financial returns to your portfolio – and can often add social impact as well.

The benefits of SDIRAs include:
  • Diversifying your portfolio by investing in alternative asset classes that may protect you from market fluctuations. For example, when stocks go down, other asset classes—such as bonds—may go up. You may also want to have some of your portfolio invested in cash equivalents, such as money market accounts. Unlike stocks and other assets, many cash equivalents have a fixed market price that doesn't fluctuate.

  • The flexibility to invest in asset classes that have the potential for greater return. But, since it’s self-directed, it's up to you to evaluate the risk and reward of these investments.

  • You can have “checkbook control” over the IRA funds without needing permission from a custodian to access your investments or make new ones.

  • Often there are fewer costs as financial institutions make money off the traditional investments they sell you.

  • Private market investments such as shares in growing companies, or participating in loans to these entities, provides the benefit of social impact.

Private Market Investments

To take advantage of a SDIRA, it’s best to work through a qualified custodian such as Broad Financial, Entrust Group or Millennium Trust. The trustee or custodian holds the assets, processes all transactions, maintains required records, files required IRS reports, and issues client statements, among other things, on behalf of the self-directed IRA account owner. Do shop around for pricing and service.

Once you have identified the custodian you want to work with and opened an account, you can rollover or transfer funds into your account. If you already have an existing traditional or Roth IRA account, you can transfer all or part of the account funds into your SDIRA account. You can also roll over all or part of the funds from a 401(k) account with a prior employer. Rolling over SIMPLE or SEP IRA accounts into an SDIRA is also possible.

Once set up, you can contribute to your account, just like any other IRA. You will be subject to the same contribution limits that regulate traditional Roth IRAs, and that are set annually by the IRS (the annual contribution limit for 2020 is $6,000, or $7,000 if you're age 50 or older). The IRS does forbid some types of investments in SDIRAs. The majority of prohibited transactions stem from any involvement in a “self-dealing” transaction where you as the account holder  - or your spouse or lineal descendants – benefit from the asset purchased (for example, if you buy real estate as an investment but then reside in it for your personal use – this is not allowed).

Once your SDIRA account is opened, you can direct your custodian to send funds to the investment you've chosen. Custodian fees will vary depending on whom you choose to manage your SDIRA so you should balance costs with the services provided when making your choice.

Finance 101
Post by Team Worthy
March 22, 2021