In 2022, the total amount of assets in IRA accounts was estimated to be around $10.1 trillion. That’s a lot of money to be invested. But where should you invest your IRA funds, and what type of assets should you choose? If you are looking for something outside of the stock market, a self-directed IRA may be your option.
What is a self-directed IRA?
A self-directed IRA is a retirement account in which the owner has more investment options and more control over the account’s management. These options are typically outside of the stock market or bank deposits. A self-directed IRA may invest in real estate, gold and other precious metals, cryptocurrency, or private equity in a business.
Types of self-directed IRAs
According to Shane Enete, CAIA and author of Whole Heart Finance, there are three common types of self-directed IRAs. They are common “given their degree of interest by investors and the media.” These are the real estate, gold, and cryptocurrency IRAs. There is also a self-directed IRA that allows investment into every level of a company’s life cycle. Here’s a little more about IRA types:
- Real estate: Allows investors to buy investment real estate and hold it in the IRA. Assets cannot be for personal use.
- Gold: This involves using investment funds to buy and hold physical gold or other precious metals such as silver, platinum, or palladium. The metals must be in the form of coins, bars, or bullion.
- Cryptocurrency: Allows investors to include Bitcoin and other cryptocurrencies in their retirement accounts.
- Private equity: This type of IRA allows investors to invest in companies either in the seed stage, through angel investing, or during fully mature earnings cycles.
- Promissory notes: Lets investors loan out money in private loans.
- Foreign currency: Gives investors flexibility in investing in currencies around the world where they feel they can capitalize on the dollar’s strength.
How to set up a self-directed IRA
Self-directed IRAs have more rules than regular IRAs, so be sure to check with the custodian so that you remain compliant. Starting one can be accomplished by the following:
- Find an IRA custodian: You need to open an account with a qualified IRA custodian who deals in the type of self-directed IRA you want to open. These custodians specialize in real estate, gold, or cryptocurrency.
- Fund the IRA: Either make an IRA contribution, transfer funds, or roll over another IRA into the account so you have money to purchase the asset you desire.
- Invest the money: Buy the assets you wish to invest in with the assets in the account. Be sure to follow the IRA rules so that you don’t risk your IRA losing its tax-deferred status.
What you need to know before investing in self-directed IRAs
A self-directed IRA “is only as good as the analysis you’re putting in,” according to David B. Ronsenstrock, CFP, MBA of Wharton Wealth Planning. He explains that you won’t have as much diversification with self-directed IRAs as you would with other regular IRA options, and the risks are more complex to manage. You need to be comfortable with the investment option and fully understand under what circumstances you can lose money. Remember that while investing is about making a profit, managing risk is an integral component of it.
Not only do you have to manage risk in a different way, but you need to follow the rules of compliance with the investment option you choose. For example, having a real estate IRA means that you can’t use the property for personal purposes and must use IRA assets to pay all expenses for the upkeep of the property. So, you’ll need enough cash assets in the account to pay for maintenance and property taxes.
The takeaway
The self-directed IRA can be a good option for someone who wants to step outside the standard IRA investment options and wants to invest in something they are more comfortable with. But be sure to speak with the custodian of the assets to ensure you comply with the IRS rules. Failing to do so can result in the removal of the tax-deferred status of your IRA account, defeating the purpose of the IRA investment entirely.
About the contributors
Kimberlee Leonard is an expert contributor with more than two decades of experience covering personal finance topics. Her work has been featured on US News and World Report, Business.com and Fit Small Business. She brings practical experience as a business owner and insurance agent to her role as a small business writer.
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