A self-directed IRA is a type of individual retirement account that allows you to invest in assets that are off-limits for conventional IRAs. If you’d like to purchase precious metals, real estate assets or cryptocurrencies with your retirement savings, check out self-directed IRAs. Just beware that they are more complicated to manage and come with more additional fees than regular IRAs.

A self-directed IRA allows investors to hold unique and varied investment options inside a retirement account. Unlike traditional IRAs or Roth IRAs, which often consist of stocks and bonds, a self-directed IRA provides a broader selection of investment options. What Is a Self-Directed IRA?

In some ways, a self-directed IRA is like a traditional IRA or a Roth IRA. The account is designed to provide tax advantages, and participants must follow the same eligibility requirements and contribution limits. The maximum contribution limit for 2021 is $6,000, or $7,000 if you’re age 50 or older. You’ll be able to start withdrawing funds without penalty when you are 59 1/2 years old.

The difference lies in the type of investments you can hold in the account. While a traditional IRA or Roth IRA might be used to invest in CDs or mutual funds, a self-directed IRA can be invested in many other alternatives.

Funds in a self-directed IRA might be used for:

• Real estate Mortgage Notes.
• Undeveloped or raw land.
• Promissory notes.
• Tax lien certificates.
• Gold, silver, and other precious metals.

How to Open a Self-Directed IRA

A self-directed IRA is not a plan you manage completely on your own. To open a self-directed IRA, you can take the following steps:

• Find a custodian or trustee for the account.
• Select the investments you would like to make.
• Carry out any due diligence needed for the investment.
• Find a broker to purchase the investment.
• Ask the custodian or trustee of the account to carry out the desired transaction.

Some institutions that offer other types of IRAs may not provide a custodian service for self-directed IRAs. Organizations that offer custodians for self-directed IRAs include The Entrust Group, Equity Trust, Madison Trust and Millennium Trust Company. There are usually fees involved for establishing and monitoring the IRA funds.

Every transaction requires a process, and a self-directed IRA is usually used for long-term investments. “Investors should be aware that these types of investments tend to be less liquid,” says Chris Kampitsis, a certified financial planner for Barnum Financial Group in Elmsford, New York. “They are not typically entered and exited with the click of a mouse within the trading day.”

Advantages of Self-Directed IRAs

Investing through a self-directed IRA provides several unique perks that can help bolster your retirement savings. The key advantages of a self-directed IRA are:

• Greater flexibility in the investments you’re able to hold in the account.
• Built-in tax breaks on the earnings from your investments.
• The opportunity to make investments that line up with your passions, knowledge or experience.
• The chance to diversify funds by keeping some money in a self-directed IRA and other funds in traditional investment accounts or other retirement accounts.
• The option of selecting investments that may have higher potential for appreciation.

Disadvantages of Self-Directed IRAs

Even if you thoroughly research an asset before investing in it through a self-directed IRA, the stakes can be high. Some of the main disadvantages of self-directed IRAs include:

• You can’t invest in collectibles, life insurance or real estate you live in.
• The investments tend to have higher risk.
• The account maintenance fees can be relatively high.
• The record keeping and tax reporting requirements are complex.
• The IRS prohibits various types of transactions.
• You’ll have to pay penalties or taxes if certain IRS guidelines aren’t followed.