What are Self-Directed IRAs?
Unlike conventional IRAs, a self-directed IRA provides individuals with full control of their financial future. The term ‘self-directed’ simply means that you, as an individual, have complete control over how your retirement funds are invested.
Permitted in 1974 under the Employee Retirement Income Security Act (ERISA), this powerful financial tool empowers individuals to select and direct their own investments, opening the door to much more than stocks, bonds and mutual funds.
Like all retirement accounts, self-directing requires a financial institution to “custody” the account, provide tax reporting, and facilitate investment transactions on behalf of the account holder. By working with a licensed, regulated custodian like Preferred Trust Company, you can protect your the tax-free or tax-deferred status of your retirement account.
Why Self-Direct?
Traditional IRA and 401ks are limited to broad investment vehicles like stocks and mutual funds. By selecting assets and opportunities based on your individual knowledge, research, and experience, you can make your savings work for you and open the door to higher returns – all with the tax-free and tax-deferred benefits of investing through a retirement account.
A self-directed IRA (SDIRA) enables investors to diversify, break free of conventional investments, and explore higher returns from alternatives like:
- Real Estate –
- Cryptocurrency
- Precious Metals
- Private Lending – you act as the bank, earning interest with your dollars
- Natural Resources –
Diversification
Investing in one type of investment asset is potentially disastrous. By diversifying your portfolio, you can mitigate risk and limit losses from market fluctuation. Integrating a self-directed IRA into your wealth strategy can help diversify your portfolio, mitigate risk, and limit your loss potential during major market changes.
Tax Deferred or Tax Free Income
Income and gains generated by self-directed IRA investments are tax-deferred. Therefore, a self-directed IRA claims 100% of the income generated by your investments and grows without restriction.
A self-directed IRA permits tax free withdrawals of contributions, interest, and earning after the age of 59 ½. Opening an SDIRA account and transferring funds from another retirement account is a simple transfer of funds, and is NOT taxable.
Offset Higher Tax Rates
Consult your tax professional about possibly reducing your taxable income based on your filing status and individual or household income.
- Traditional IRA Maximum Annual Contribution Limit – in 2023 under 50 years $6,500, over 50 years $7,500 (in 2022 under 50 years $6,000, over 50 years $7,000).
- Roth IRA Maximum Annual Contribution Limit – in 2023 under 50 years $6,500, over 50 years $7,500 (in 2022 under 50 years $6,000, over 50 years $7,000).
- SEP IRA Maximum Annual Contribution Limit – lessor of $66,000 or 25% of compensation (which is an increase from 2022 lessor of $61,000 or 25% of compensation).
- IRA allows all taxpayers under 72 years to contribute to an IRA.
If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on joint return. It doesn’t matter which spouse earned the compensation. If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.
You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you may not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. (Roth IRA contributions may be limited based on income level.)
Consult with a qualified CPA or tax specialist to verify your maximum contribution limits. See IRS Publications 560 and 590 for further details.
Asset Protection
Under US Bankruptcy law, self-directed IRA assets are exempt from bankruptcy in amounts up to $1,000,000.