If you're saving for retirement and feel limited by what your current IRA allows you to invest in, you should consider opening a self-directed IRA. Self-directed IRAs allow you to diversify your assets more than a traditional IRA would. In return, you'll be required to decide what to invest in on your own. They retain the same tax advantages as a traditional IRA, as your assets are only taxed when you cash them out after retirement. To find out more about self-directed IRAs and to learn three reasons why it's beneficial to use one to save for your retirement, read on.
1. You Can Reduce Risk by Diversifying Your Assets
The biggest reason to use a self-directed IRA for your retirement savings is that you can limit the amount of risk that you take on by diversifying your assets. One of the downsides of using a traditional IRA is that they're limited in what investments they can make. Most people will invest the majority of their money into stocks with a traditional IRA since they typically have a good rate of return compared to other investment options. If the stock market crashes when you near retirement, however, a good portion of your assets could be wiped out.
With a self-directed IRA, you're able to invest in other asset classes such as precious metals and real estate. These often have a comparable rate of return to stocks, and diversifying your investments away from stocks means that you won't be overly exposed to a stock market crash. While the market for precious metals or real estate is capable of crashing as well, diversifying your investments means that the impact of a crash in a single market will make less of a dent in your overall financial situation.
2. You Can Grow Your Asset Portfolio Faster Through IRA Tax Advantages
While you could always choose to diversify your asset portfolio by investing in real estate with your own personal finances, it's advantageous to invest in real estate through an IRA. Like a traditional IRA, you're allowed to deduct personal contributions to your IRA from your income when you file your annual taxes. In addition, assets in the self-directed IRA aren't taxed. You're only taxed on the assets when you decide to sell them after retirement.
Due to the fact that you'll avoid taxation on assets held in your IRA, you're able to grow your investments much more quickly. The money that would have been paid in taxes can instead be put towards purchasing more assets, such as additional rental homes or precious metals. Overall, you'll typically end up with more assets by the time you retire when you avoid taxation by investing through your IRA, which helps make your retirement more comfortable.
3. You Can Make Unconventional Investments With a Potential High Return
Finally, using a self-directed IRA to save for your retirement opens up unconventional investment opportunities. With savvy investment, you can use these to obtain excellent returns. You can use the IRA funds to invest in anything that's not prohibited by the IRS, and the only things they prohibit are investments in life insurance and in collectibles (such as art or vintage cars.)
This means that you can use the IRA funds as a tax-free way to make loans to small businesses or individuals as long as they're not connected to you, your business or your family. Investing in local businesses that show promise can give you greater returns than investing in large corporations, and it's only possible to do it in a tax-free way by investing through your self-directed IRA.
Overall, self-directed IRA investing allows you to protect yourself against risk by enabling you to diversify your portfolio more than a traditional IRA. While you'll need to manage your investments on your own, you're better able to protect yourself against market crashes by holding a diverse portfolio. If you think that a self-directed IRA would be a good fit for your retirement strategy, contact a financial institution that offers self-directed IRA investing services — you can either start a brand-new IRA or roll over an existing one into a self-directed IRA in order to begin diversifying your assets.