Self-directed IRA

What is a self-directed IRA?

A self-directed individual retirement account (IRA) is a savings account for retirement that lets the account holder invest in assets of her choosing. While traditional IRAs are administered by a custodian who chooses the type of investment, usually something more liquid like stocks or mutual funds, self-directed IRAs let the account holder place her retirement funds in virtually anything.

Deeper definition

A self-directed IRA is a type of retirement account that is unique from other forms of IRA and 401(k) investments. Instead of investing in a mutual fund or public holdings, self-directed IRAs allow for investments in nonliquid assets, such as cryptocurrencies, commodities, intellectual property, and liens. There are are almost no limitations on what assets the account holder can invest her retirement savings in, with the exception of collectibles like antiques.

As with other IRAs, the main advantage of the self-directed IRA is that investments are made tax-free and are taxed at the point of withdrawal.

Self-directed IRAs, like other IRAs, must be administered by a trustee. However, they carry an additional risk that other IRAs may not have, namely that the securities in which the trustee invests the account holder’s money could be unregistered and difficult for the account holder to evaluate.

Self-directed IRAs are subject to the same restrictions as traditional IRAs. Account holders who withdraw their money before the age of 59 ½ may be subject to a 10 percent tax penalty. Contributions may also be tax-deductible. Self-directed IRAs can be created directly with some financial institutions or by rolling over investments into a new self-directed IRA.

You can complement your retirement savings with a savings account you can withdraw from now. Let Bankrate help you choose.

Self-directed IRA example

Ron doesn’t trust traditional investments in mutual funds. He wants a more direct relationship with the money he’s investing, so instead of owning shares in a company, he wants to buy into real estate the company uses. The trustee of his self-directed IRA suggests investing his retirement contributions into rigging equipment for drilling shale, which oil-and-gas companies can lease from him and help build his investment.

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