Self-Directed IRA 101: What Is a Self-Directed IRA and Do You Need One?

The year 2022 is certainly off to an eventful start. Rising inflation, the pandemic, and skyrocketing energy prices have created concern for many Americans regarding the fate of their retirement investments. Longer life expectancies and the continued increase of the cost of living have those depending on their 401(k)s, IRAs, and Social Security benefits left on shaky ground. 

Most people have their retirement savings in traditional stocks and bonds and hope for the best — this is how it’s always been done. However, there is a more creative and lucrative way to invest and receive the same tax benefits as traditional IRAs: a self-directed IRA. 

What Is a Self-Directed IRA?

A self-directed IRA is an innovative way of investing in non-traditional assets while enjoying tax advantages. It allows you the flexibility to decide what you want to invest in and offers a much broader variety of assets to choose from. If you feel limited by your investment options and want to diversify your investments in lieu of traditional stocks and bonds — with the potential to earn higher returns — then a self-directed IRA may be a good option for you.

A self-directed IRA is similar to a regular IRA as it allows for the same tax advantages. It’s offered as both a traditional and Roth IRA with the same maximum contribution limits. In 2022, the limit is $6,000, or $7,000 if you're over the age of 50.

Through a self-directed IRA, you can diversify your investment strategy by investing in assets that aren't as vulnerable to the market volatility of stocks and bonds. Real estate and private equity are two of the most popular self-directed IRA investments, as they both have the potential to provide high returns. 

If you’re currently investing in real estate, capital ventures, cryptocurrency, or other assets with after-tax dollars, you may want to capitalize on your investments and receive the tax benefits offered through a self-directed IRA.

Wondering Why You Aren't Familiar With Self-Directed IRAs? 

Most of the large financial institutions that sell stocks, bonds, and mutual funds find that holding real estate or other non-traditional assets in their retirement plans isn't practical due to complex IRS regulations. They stick to their primary source of revenue, leaving many investors unaware of alternative investment options.

For this reason, most investors have only explored investing in alternative assets with after-tax dollars. While using after-tax dollars to invest in alternative assets isn’t a bad thing, these investors may be missing out on significant tax advantages.

Fortunately, there are retirement plan custodians who are experts in self-directed IRA investments and the IRS compliance requirements associated with them. Such custodians, such as Chicago Trust Administration Services, welcome investors to use alternative assets in their retirement accounts. 

Advantages of a Self-Directed IRA

What makes a self-directed IRA unique is the alternative investment choices available to investors. You can decide what assets you want to invest in, and you don't have to only invest in stocks, bonds, mutual funds, ETFs, and the like. 

Instead, you choose what interests you — real estate, cryptocurrency, precious metals, private equity, and more. All in all, there are 34 asset classes to choose from.

With a self-directed IRA, you decide how to reach your retirement goals. The freedom and empowerment to choose which assets to invest in can make the process more enjoyable, and a self-directed IRA lets you use your expertise and knowledge in any field you’re passionate about. A self-directed IRA can also give you leverage over other investors — making your potential for higher returns greater. 

Having the ability to design and diversify your portfolio across asset classes — especially asset classes that aren’t heavily affected by one another— can decrease your risk factor during economic fluctuations. A well-diversified portfolio is more resilient during uncertain times and fickle markets.

If one market is down in a given year and isn’t producing the returns you need, you’ll likely be able to rely on income from your other investments with a self-directed IRA. 

Disadvantages of a Self-Directed IRA

Investing outside of traditional stocks and bonds improves your diversification. But you have to make sure that your self-directed IRA doesn't lack diversity by ensuring that your portfolio isn't too concentrated in one specific asset.

A self-directed IRA lacks liquidity — although you have diversified assets, they are not always easily liquified. If an unexpected life event occurs and you need the cash, it can be difficult to access your assets quickly. Alternative investments may take longer to sell than cashing in stocks and bonds. 

Freedom is both an advantage and a disadvantage. Due diligence is your responsibility as the account holder — you have to know what you're doing and understand the laws involved in owning a self-directed IRA. The IRS has complex rules for self-directed IRAs that you must closely follow to avoid penalties. 

How Chicago Trust Administration Services Can Help

Self-directed IRAs are not managed by a bank or brokerage firm but by an administrator, more commonly referred to as a custodian. A good custodian will make the transition to a self-directed IRA a breeze. You can even choose to roll over an existing 401(k) from an old employer into a new self-directed IRA.

An experienced self-directed IRA custodian will guide you down the right path, safe-keep your investments, and ensure that you abide by the IRS and government regulations. If a self-directed IRA is something you would like to consider, the professionals at Chicago Trust Administration Services can help guide you through the legalities and taxes associated with self-directed IRAs.  

A self-directed IRA can make a lot of sense if you don't mind doing some extra work and want your retirement dreams to come to fruition faster! We have been helping self-directed investors for over seventeen years. To see how we can help you, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing  steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.