Take Control of Your Future with a Self-Directed IRA
If you have ever held a regular job, chances are you have heard of or even opened a 401K or IRA plan-both tools to help you save towards retirement, available through your employer. But what you may not have heard of is a self-directed IRA.
The way 401K's and IRA's work is that you open them through your employer, then each month you deposit a portion of your paycheck into your retirement account. Those funds are then invested with the intent of accumulating to provide for your retirement years. As an added incentive, both retirement tools typically include the likelihood of tax-free income and the ability to cushion a portion of your earned income.
With a self-directed IRA, every small business or individual has access.
What is a Self-Directed IRA?
Usually, employer sponsored retirement plans provide a limited amount of brands and investments to select from, which typically include mutual funds, bonds, stocks, and certificate of deposits, depending on the custodian of the account; however, with a self-directed IRA, you dictate what the IRA invests in. Therefore, the options available to you are widespread.
For instance, you could invest in mutual funds, stocks, and bonds, but you also have the option to invest in notes, options, real estate and more. In other words, you get to rely on your own creativity to select the most favorable investments for your account.
Furthermore, the accumulation of your IRA is tax deferred, and you can also safeguard a portion of your income by investing the $5,500 limit, $6,500 for those 50 and over, each year.
However, with a self-directed IRA, certain restrictions apply, including:
You Must Set Up the IRA Through an Authorized Custodian
To set up your IRA, you must go through a custodian who holds actual title to house your self-directed IRA and hold it for your gain.
Your Income Cannot Exceed a Certain Amount
Unfortunately, if you are a high-wage earner, you may not quality for a self-directed IRA. Check with your chosen IRA custodian to see if you are eligible.
You Cannot Directly Participate in the Upkeep of Your IRA's Investments
For instance, if you own rental property in your IRA, you may not participate in the maintenance of the property, including painting, repairs, cutting the grass, or fix it up etc. Instead, you must hire someone to perform these tasks for you, and you compensate them with monies directly from your IRA. If you are caught performing maintenance of your IRA rental property, you risk losing your IRA and will in turn be obligated to pay the back taxes that would have been owed along with interest and penalties.
You Cannot Receive Direct Gain From any of the Investments or Funds in Your Self-Directed IRA
For instance, you are not permitted to pay yourself for managing your IRA, nor can you buy property in your IRA and pay yourself a commission if you are a real estate agent. You are also prohibited from living in a property owned by your IRA until you retire.
You Forego the Benefits of Depreciation
Provided you hold real estate in your IRA, you do get the possible benefits of tax-free income in addition to the offset of any IRA deposits; however, you do not get to take the advantages of depreciation to offset your other income.