A Self-Directed IRA (SDIRA) expands the scope of investment types that can be held in a retirement account which regular IRAs do not allow. SDIRA can be set up as either traditional or Roth type, providing tax advantages of those regular IRAs. Participants of SDIRA must still follow the same contribution limits and eligibility rules as required for the regular IRAs.
How to Open a SDIRA?
Typically, brokerage firms and banks offer only regular IRAs. To open a SDIRA, one needs to work with a firm that specializes in SDIRA and will act as the custodian for our account. These custodians will often specialize in the types of investments they will support, so one may need more than one SDIRA to invest in a full range of alternative investments. One must carry out all due-diligence for the investments one would like to make, because the SDIRA custodians cannot provide financial advice.
Why Would We Want a SDIRA?
The main advantage of a SDIRA is the ability to diversify one's retirement funds in alternative investments, which are not allowed in regular IRAs. With regular IRAs, the accounts are limited to publicly traded instruments such as stocks, ETFs, mutual funds, or bonds. SDIRA can hold alternative investments, such as real estate, precious metals, or cryptocurrency, which could offer potentially higher gains and diversification with assets which may be uncorrelated to the public equity markets.
What Are the Disadvantages of a SDIRA?
- SDIRA fees. While regular IRA accounts typically don't have fees related to opening and maintaining the accounts, most SDIRA custodians will charge to create the account as well as an annual fee. Most transactions will also have fees.
- Prohibited investments. While a much larger universe of investments is available for SDIRA, not all investment types are allowed. SDIRA cannot hold assets such as life insurance, S Corp stocks, and collectibles.
- Not as easy as clicking a button. Investments tend to be illiquid and require a lengthier process to enter and exit.
- Valuation. Many alternative investments are illiquid and there may be no easy market pricing to determine valuation. This can cause complications in the case of RMD or required minimum distribution at age 72. Not only is the valuation difficult to properly assess, liquidating only the proper fraction needed for RMD can be challenging.
A SDIRA can be a great vehicle to expand investment types for retirement funds, but it requires careful consideration of both advantages and disadvantages.