Understanding the rules of a self-directed IRA

Selecting the right retirement account to use for your financial planning efforts is critical to your long-term financial health and security. There are many options to consider, such as 401ks, IRAs and more, and each offers pros and cons for investors to consider. A self-directed IRA is less well-known than many of the other options available, but it provides you with considerable opportunities for financial growth over the years. With a closer look at what you can expect from this investment option, you may decide to set up self directed IRA today.

Understanding What You Can Invest In With a Self-Directed IRA

With a traditional IRA account, you can make regular contributions to the account as desired and enjoy great tax benefits that can help your money to grow more quickly. There are variations in the rules and requirements for traditional, Roth and Simple plans, but one constant holds steady with each of these options. You essentially are limited to investment options offered by the broker you choose to open your account with. In some cases, the investment options may be severely limited. In most cases, you are only permitted to buy stocks, mutual funds, bonds and CDs with your money or to place the money in a money market account. While this can help you to partially diversify your funds, it prevents you from fully diversifying your portfolio and taking full advantage of many other investment vehicles that could help you to amass more growth.

Understanding Your Investment Options

As you take time to learn more about a self-directed retirement account, you may take time to examine the different investment options available through this type of account. By doing so, you may be astounded by the wide range of investment options that you currently do not have access to. For example, you can directly invest in energy, oil and gas investments. In addition, you can consider investments such as contracts of sale, crowdfunding, life settlements, joint ventures, factoring and much more. The reality is that a traditional retirement account limits your investment options severely, and this can jeopardize your ability to grow your portfolio.

Exploring Real Estate as a Financial Investment Option

Most significantly, you generally cannot invest directly in real estate with a brokerage IRA. You may be able to purchase shares in a REIT or some other indirect real estate investment, however, you are not able to use your funds to purchase individual properties. When you set up self directed IRA, you will be able to directly access your retirement funds for real estate investments. More than just using the proceeds to purchase real estate, the income that you receive from your investments can be deposited directly into your retirement account. This means that you can enjoy tax-free growth on the income. The asset becomes a part of your retirement account, which is a true financial advantage in your retirement planning efforts.

The Taxation Consequences for IRA Investments

If you are thinking about moving forward with the option to set up a self-directed IRA, you may be wondering what the consequences are for this type of investment vehicle. The growth off of your assets  in the IRA is tax-free. This means that the money that you use to purchase your real estate investments or other types of investments may not be taxed. In addition, the income that is generated from these assets is also tax-free because it is growth. You will not have to file a typical Schedule E or K-1 when you prepare your return, and this can dramatically ease the tax reporting burden associated with owning real estate investments. You simply have to report the value of your total retirement account at the end of the year.

Your primary purpose for opening a retirement account is to prepare for the future, and by doing so, you may want to amass as much wealth as possible. When you set up self directed IRA, you are able to expand your investment options dramatically. This gives you the ability to maximize growth, diversify your portfolio to mitigate risk and take advantage of retirement account tax benefits more fully. You may consider learning more about self-directed retirement accounts in your effort to better manage your finances.