When you open an IRA, you quickly learn that there are rules limiting the types of investments you can make. But what if those rules were relaxed and you could be a little more creative?
If this sounds appealing, you might want to consider a self-directed IRA, sometimes known as a SDIRA.
Here is a closer look at how the wealthy leverage these types of IRAs to get ahead financially, and why they may work for you as well.
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What are self-directed IRAs?
A self-directed IRA is an individual retirement account that offers broader investment options. That means you may hold alternative investments not typically allowed with a regular IRA.
Such investments include commodities, precious metals and real estate. While it’s described as “self-directed,” and while you directly manage it, a custodian or trustee actually administers a SDIRA.
Before you start investing by opening a SDIRA, it helps to understand the following ways the wealthy leverage self-directed IRAs.
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They take full control of their investing experience
SDIRAs are not for the faint of heart or those looking for a more hands-off approach to investing. You are in control with an SDIRA, which means you make the decisions and drive the train.
Self-directed IRAs are complicated investment tools that require you to do research to understand your best options. Some investors love this aspect of the SDIRA, because it gives them the ability to have more control — and possibly to make more money.
They take advantage of tax benefits
Like other types of IRAs, SDIRAs allow you to grow your money in ways that lower your tax burden.
Wealthy folks understand that postponing — or even eliminating — the requirement to pay taxes is one of the best ways to build wealth over the long haul.
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They invest in more than stocks and bonds
One reason the wealthy like SDIRAs is that they can choose investment options beyond stocks and bonds.
Many people feel limited by the options available when investing with a traditional IRA. By contrast, a SDIRA allows you to invest in things such as private equity, real estate, cryptocurrency, and commodities.
A SDIRA allows you greater flexibility and more opportunities for diversification. For example, you might use a SDIRA to purchase a rental property as part of your investment strategy.
Overall, a SDIRA can open many possibilities if you are willing to put in the work.
They seek out higher returns
Investing in things such as private equity and commodities can be risky, but there is also a chance for greater returns than you might get with more traditional IRA options.
Those who seek higher returns — and who are willing to accept the downside of big losses if things go south — are attracted to SDIRAs.
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They understand the complexity of these IRAs, so they use caution
When investors decide to go with SDIRAs, it’s not because they are looking for simple solutions. These types of accounts can be complex and require a certain level of caution.
Those who invest with a SDIRA understand the need to do their research and to navigate the complexities and rules surrounding these accounts. They keep good records and avoid prohibited moves.
Bottom line
A self-directed IRA can be a valuable tool that helps build your wealth. This type of IRA gives you more options than a typical IRA. But it also requires a great deal of attention to detail.
It’s important to do the research necessary to understand your investment opportunities and the rules that come with a SDIRA. If the option sounds appealing to you, consider reaching out to a financial advisor for help and advice.
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- Hedge against inflation and diversify your portfolio
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