What Assets Can You Hold in a Self-Directed IRA?

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Written By Mark

Mark is the co-owner of RetiringStrategy.com and has many years of experience in financial markets. 

Perhaps you have or are considering investing money or other valuable assets in a longer-term individual retirement account but are unsure about what assets that you are allowed to hold in these types of savings plans. Do you find the whole process of investing a confusing affair?

What about self-directed IRAs? Are you wondering if this is a better investment choice but have questions on how to go about this? Read on to discover all your current options in opening a self-directed IRA versus the more familiar and often termed traditional IRAs.

Many investors open a self-directed IRA in order to take advantage of being allowed to use a wider variety of assets. These savings plans are a terrific opportunity for investments especially if you desire to expand your current investment portfolio to include a wider range of IRS approved assets with the purpose of diversifying your IRA.

Make Sure That You Understand the Differences Between Traditional & Self-Directed IRA Rules

Opening a self-directed IRA helps investors gain tax advantages that these plans offer. Self-directed IRAs are somewhat different than the common traditional IRA, and the kinds of assets that are allowed in these accounts do differ.

Definition of a Self-Directed IRA Explained

The current definition of the newer self-directed IRA can be best described or defined as an individual retirement account able to hold both the expected typical assets of worth and a wide variety of other kinds of investment choices not allowed in the past.

There are lots of formerly prohibited options in investments previously denied or prohibited from being used in a traditional IRA that can be included in these novel self-directed IRAs.

This gives the account holder alternative investments that are usually less risky and provide opportunities to take advantage of greater tax savings over time.

It should be noted here that a SDIRA, or self-directed IRA, is required to have a custodian or qualified trustee that manages these accounts. However, an account holder of a self-directed IRA is largely able to directly manage their accounts which is very different from traditional IRAs.

A Brief Description of Traditional IRAs Versus Roth or Self-Directed IRAs

A traditional IRA is one where the account holder makes regular contributions that are tax-deductible meaning each contribution is taxed later. A Roth IRA means that you can take distributions that are tax-free which is a significant benefit to the holder of the account.

Overview of Traditional IRAs

Many employees take advantage of employer offered retirement accounts that are often termed traditional individual retirement accounts or IRAs. These savings and retirement plans allow an investor to contribute funds that are either pre or post taxed dollars.

The funds that are held in these IRAs are allowed to increase or grow without any further taxes applied until the account holder withdraws funds at a later point in the future.

However, traditional IRAs will be taxed upon the withdrawal of savings funds when the account holder is over the age of 59 1/2 years.

Overview of a Roth or Self-Directed IRAs

The name of this self-directed retirement account is often termed a Roth IRA. This IRA carries the name of the senator who sponsored a tax related bill that then became available to the general public taxpayers in the year 1998.

Since that time, there have been several major changes in Roth or self-directed IRAs. The changes made in recent years have benefited more citizens with regards to saving retirement funds invested in these IRAs.

More citizens have been able to profit from these self-directed or ROTH IRA and IRS approved tax changes.

Due to the rules and regulations on investments held in individual retirement accounts, self-directed IRAs can be complex and hard-to-understand for newer investors.

New investors are urged to seek out expert advice when considering these savings plans to gain greater knowledge about specific IRS and IRA related investment opportunities.

These investments are better for those with more experience but can be a fantastic opportunity to take full advantage of tax-related investments especially for investors interested in diversifying their current investment holdings.

Differences Between Traditional IRAS & Roth or Self-Directed IRA Investment Plans

The main difference between these two types of individual retirement accounts involves the various asset choices currently approved for self-directed IRAs along with IRS and IRA allowed usage of such investment holdings.

A Breakdown of Common Investment Asset Options in IRA Plans

Traditional IRAs are limited and must follow strict IRS and IRA related investment rules with regards to kinds of allowable investment assets.

Types of assets generally approved for traditional based IRAs include:

  • Stocks
  • Bonds
  • CDs or certificates of deposits
  • ETFs also termed mutual funds

Types of assets currently approved for self-directed IRAs include:

  • Real estate holdings
  • Commodities
  • Tax lien certificates or limited partnerships
  • Private placement
  • Approved precious metals – gold, silver and others

Remember These Key IRA Takeaways

Some essential things to keep in mind related to these two IRA choices include:

  • Self-directed IRAs are handled and managed by qualified custodians
  • Traditional forms of IRAs have limited asset IRS approved selections
  • Investors may hold alternative forms of assets in self-directed IRAs
  • Custodians cannot give professional investment counsel but can give helpful tips
  • Investors should watch out for scams or frauds related to self-directed IRAs including hidden fees and unexpected costs

Top Self-Directed IRA Investment Plan Advantages

There are some excellent and profitable advantages that are often related to investing in a non-traditional self-directed IRA.

Allowable self-directed IRA assets include private equity and private lending options, precious metals that include specific forms of gold, silver, platinum and others, limited liability companies, also termed LLCs, real estate and other alternative assets or holdings.

Limitations on Approved Assets for Self-Directed IRAs to Remember

Investors interested in setting up a self-directed IRA plan should carefully consider the limitations regarding approved assets before opening such an account.

These limitations include precious metal instructions that authenticate specific amounts, forms and origins of these valuable and physical wealth forms.

There are also some specific limitations on real estate holdings, companies with a limited liability rating among other limits and specific investment cautions and rules.

Several Self-Directed IRA Approved Assets to Ponder

There are a few lesser known but approved self-directed IRA assets that include:

  • Show horses
  • Gaming arcades
  • Retirement homes and other real estate holdings
  • Bowling alleys
  • Life settlements
  • Certain cryptocurrencies
  • Art galleries
  • Vineyards
  • Specific renewable energy options – waterpower, wind or solar power, energy-efficient home investments among others

Take Time to Review These Top Pros and Cons Related to Self-Directed IRAs

Any being considered investment should involve lots of research and careful consideration beforehand to help avoid investment disasters or problems.

Pros Related to Self-Directed IRAs

  • Terrific opportunity for diversifying current investments
  • Greater potential for higher returns on investments
  • Alternative investment asset selections and more flexibility
  • Account holder retains more control over IRA management

Cons Related to Self-Directed IRAs

  • Requires more investor effort
  • Greater potential for complicated tax reporting rules
  • Elevated risks for some asset forms
  • Invester must follow strict IRA rules requiring increased diligence

Evaluate Lesser-Known Assets Approved for SDIRA Holdings

These possible SDIRA assets include:

  • Vacation homes or cottages
  • Single family rental homes
  • Farms
  • Condominiums and apartment units or complexes
  • Ranches
  • Commercial properties and buildings

Important Cautions:

Investors are required to understand the rules before investing alternative assets into a SDIRA plan. These rules include not being permitted to rent a home or other real estate or rental property to someone known by the account holder like a friend or family member.

Other assets for SDIRA holdings include:

  • Auto or commercial paper
  • Precious metals
  • Convertible notes
  • Private company stocks
  • Public stocks
  • Mutual funds
  • Royalty rights

Remember These Leading Tips About Self-Directed IRAs and Traditional IRAs

Account Holder Income Limit Requirements

There may be income requirement limits for opening a Roth account or other self-directed IRAs. Always inquire about such limits before opening an IRA account.

Early Withdrawal Related Limits

In most traditional IRA plans, the account holder is able to withdraw funds penalty free once they reach a certain age typically at 59+ years. The holder will be taxed for early withdrawals though.

A Roth IRA, or self-directed IRA, plan typically also offers penalty free withdrawals after the holder reaches retirement age or 59+ years in most cases.

The difference is that self-directed IRA plans often allow the account holder to withdraw from their contributions made into these accounts at any time and for almost any reason.

However, account holders may not be able to withdraw the account earnings early but only the contributions.

Inquire About Additional Self-Directed IRA Rules Before Investing

There are a few other rules that apply in a self-directed IRA that potential account investors should know and consider before making their investment choices. These rules can vary depending on location, amount and type of holding assets, worth of assets and age of the account holder.

SDIRA Holders Should Understand Which Assets Are Not Allowed

Although the newer self-directed IRA requirements do allow many more assets to be held in the account, there are some assets that are not allowed. This can be a bit tricky for an inexperienced investor especially when dealing with assets like cryptocurrencies and precious metals.

For instance, precious metals approved for SDIRAs must meet specific fineness grade amounts, and most collectibles cannot be held in these accounts. This is especially true for coin and other precious metal collections that are stored at the home of the account holder.

Risk and Caution Information Regarding Self-Directed IRAs

The account holder is responsible for understanding investments that may be held in a self-directed IRA and any changes that occur during the account lifetime.

Each rule must be followed exactly, or there will be a risk of having to pay the full amount of taxes owed if a transaction mistake occurs. This can result in a steep tax penalty as well as other fines and fees that may accumulate.

Understanding the Differences for Exit Plans for SDIRAs

In most investment IRA related exit plans, it is a simple matter to sell off stock or other investment types of assets held in a traditional IRA. The account holder simply uses a broker’s services to set up this transaction which is generally swift in nature.

This may not be the case when desiring to sell assets held in a self-directed IRA. It may take much longer and require some effort by the account holder when trying to sell certain assets commonly held in these accounts. It can take longer to find a suitable buyer.

Watch Out for IRA Related Scams & Frauds

Financial experts caution self-directed IRA holders to keep an eye out for IRA related investment frauds and scams. This includes incidents where IRA investment companies misrepresent certain IRA related transactions resulting in the account holder paying unexpected hidden fees and incurring other last-minute or fine print only revealed surprise expenses.

Final Thoughts Regarding

Experienced investors, and newer ones willing to do their due diligence, can benefit immensely from investing a more diversified selection of assets into a self-directed IRA plan.

It also is a good idea to get sound expert financial counsel and recommendations for your specific IRA plan needs and desires. This could be a smart and valuable investment opportunity to build a retirement savings account intended for your future financial stability.

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