The Benefits of Investing in a Self-Directed IRA

Many investors find themselves choosing between their retirement account and their own personal investment portfolio. Why not have both?

Investors are used to thinking of their retirement accounts as being controlled by their brokerage, but they don’t have to be. A self-directed IRA is the perfect tool for knowledgeable investors who want to take control of their financial future. Self-directed IRAs have all the benefits of a regular IRA, including being tax advantaged, while letting you control the investments made.

IRAs Let You Build Tax-Advantaged Wealth

First, let’s start with why people should invest in IRAs at all: because it’s a tax-advantaged account. You’re building wealth on your pre-tax dollars, which is often significantly more than building wealth on your taxed income. You don’t need to wait a decade to see the results of this; you’ll see yourself reaping the gains within just a few years.

Of course, you can only contribute $5,500 to an IRA a year as of 2018 — but that’s nothing to sneeze at. If you’re in the 25 percent tax bracket, contributing a full $5,500 will save you $1,375 on your tax bill. And because the limits on the IRA are so low, maxing out your IRA is easy to achieve every year.

As time goes on, this wealth is gaining you a lot more than it might seem. If you continue investing $5,500 over the course of 30 years in a tax-advantaged account (assuming a rate of 8% and a tax rate of 25%), you’ll have $672,902. If you do the exact same thing with a non-tax-advantaged account, you’ll have $460,909.

Self-Directed IRAs Let You Diversify and Control Your Wealth

That explains why an IRA is so incredibly important, but why is a self-directed IRA better? Self-directed IRAs let you control your investments. If you have a knack for investing, you may be able to outperform the market.

Consider the above example: at an 8% return, your retirement account will net you $672,902. But at a 10% return, you’ll have $992,189 — nearly a million dollars.

Of course, this comes with risk. You may not be able to balance your account or hedge for risk as well as the professional who is currently managing your retirement account. You could over-extend yourself and end up losing money in your retirement account, something that rarely happens unless there’s a market crash or a market correction. However, if you’ve shown yourself to be a prudent and knowledgeable investor in the past, there’s no reason why you shouldn’t be in control of your own financial future.

If you want to invest in real property, precious metals, or foreign currency, you can do so through your personal IRA. And if it’s between investing in your IRA and starting your own investment account, putting money into your IRA is nearly always the better choice. You would have to lose quite a bit on your stock market bets to compensate for the tax-advantages that an IRA provides.

An IRA Has Retirement Protections

What happens to a self-directed IRA during bankruptcy? The same thing that happens to any other IRA: nothing. Self-directed IRAs are shielded from creditors during bankruptcy proceedings. Investment accounts are not. When you invest in a self-directed IRA, you’re giving yourself protection for the future. Though no one wants to think that they might go through bankruptcy, high reward sometimes necessitates high risk.

Naturally, this is only a reason to invest in an IRA before you invest in an investment account, not to invest exclusively in an IRA. When it comes to retirement, most individuals should be maxing out their IRA and then switching to investing in their 401(k).

IRAs Create Generational Wealth

In addition to the above advantages, self-directed IRAs offer the ability to pass your wealth to future generations with few tax implications. This can create generational wealth that will stay within your family rather than transferring to the government. If you’re focused on developing wealth within your family, an IRA is the way to do so.

A self-directed IRA isn’t for every investor. It’s only for investors who are confident in their ability to out-perform the market. For those who don’t know a lot about investing, investing in a standard IRA is still going to convey many benefits.

Regards,

Ethan Warrick
Editor
Wealth Authority