Investing for retirement is a crucial financial goal for individuals of all ages. While traditional retirement accounts, such as 401(k)s and individual retirement accounts (IRAs), offer a range of investment options, some investors seek greater control over their retirement funds. In this blog, we will explore the benefits and mechanics of investing using a self-directed retirement account - such as a self-directed IRA.
A self-directed IRA is a retirement account that grants individuals the ability to take charge of their investment decisions. Self-directed IRAs provide account holders with more control and a wider range of investment options. With a self-directed IRA, investors can expand their retirement savings beyond the conventional options by venturing into what the financial industry calls “alternative investments”.
Alternative investments can include mortgages, mortgage funds, real estate, private equity, precious metals, tax liens, and much more. This level of flexibility allows self-directed IRA account holders to diversify their retirement portfolio, potentially reducing risk and increasing potential returns.
Self-directed retirement account custodians handle the administrative tasks and ensure compliance with Internal Revenue Service (IRS) rules and regulations for self-directed retirement accounts. Investors open a self-directed retirement account with a financial institution that specializes in same. The account custodian ensures adherence to IRS rules, and handles account administration, including documenting transactions, issuing statements, and preparing tax-related documents. Contributions made to a self-directed retirement account generally have tax advantages, depending on the type of account chosen. Assets held in such accounts can generally grow tax-deferred or tax-free, providing potential advantages over taxable investments.
Self-directed retirement come in various types, each tailored to specific retirement savings needs. Here are common types of self-directed retirement accounts:
A traditional IRA is an individual retirement account designed to help people save for retirement, with taxes deferred on investment growth. Dividends, interest payments and capital gains compound each year allowing a Traditional IRA to grow faster than a taxable account. Contributions are generally made with after-tax money but may be tax-deductible if you meet income eligibility.
A Roth IRA is an individual retirement account to which you contribute after-tax dollars. Funds deposited into the account grow tax-free, and you can withdraw them tax-free and penalty free after age 59 ½ once the account has been opened for five years.
A SEP IRA, or Simplified Employee Pension Individual Retirement Arrangement, is a popular retirement account among self-employed individuals, entrepreneurs, and small business owners. With SEP IRAs, an employer can contribute funds to their employees' retirement accounts, providing a tax-advantaged retirement savings plan. SEP IRAs offer higher contribution limits compared to traditional IRAs, enabling individuals to potentially save and accumulate more retirement funds. Contributions made to a SEP IRA are tax-deductible, reducing taxable income in the contribution year. However, withdrawals in retirement are subject to regular income tax rates.
A SIMPLE IRA, or Savings Incentive Match Plans for Employees, is a retirement savings option that benefits small businesses and their employees. These plans offer an uncomplicated way for employers to help employees save for retirement through salary reductions and employer matching contributions. While contribution limits for SIMPLE IRAs are lower compared to other self-directed IRAs, employers must make contributions on behalf of eligible employees. Both employee and employer contributions to a SIMPLE IRA are tax-deductible, reducing taxable income in the contribution year.
A 401(k) plan is a company-sponsored retirement account in which employees can contribute a percentage of their income. Employers often offer to match at least some of these contributions. There are two basic types of 401(k)s - traditional and Roth - which differ primarily in how they're taxed. Employer contributions can be made to both traditional and Roth 401(k) plans.
One of the main advantages of self-directed retirement account is the ability to invest in a wide range of alternative assets. Here are some examples of assets you can own:
Investors are increasingly turning to self-directed retirement due to the potential benefits they offer for retirement savings. Here are some examples of the benefits and advantages.
Different financial institutions and custodians offer self-directed retirement accounts to investors. These providers offer a range of account types and help investors comply with related government rules.
For example, Red Tower Capital and its investors have worked with several popular self-directed retirement account providers. If you're interested in Red Tower Capital’s mortgage fund RTC VI, it turns out that RTC VI is directly available for investment via some of the providers as detailed on the Red Tower Capital website. Other investors have invested in RTC VI via those other self-directed account providers.
In conclusion, a self-directed retirement accounts can be a wise investment choice for those seeking higher returns, returns that aren’t necessarily correlated to "traditional investments", increased diversification, and tax benefits. Opening a self-directed retirement account involves finding the right custodian, choosing suitable products to buy and completing the transaction. If you have any questions or need assistance, don't hesitate to get in touch with our team of experts.