A complete guide to self-directed individual retirement accounts

By Rick Pendykoski

Provided by financial partners, custodians and CPAs amongst other licensed and authorized entities, having a self directed individual retirement account (IRA) is one of the most effective and easy ways through which you can save on the taxes  you pay and accumulate significant savings for good use in the future.

A self-directed individual retirement plan is an arrangement where you establish a retirement account and reserve the sole rights to dictate on what types of investments your accumulated funds are invested in, on behalf of your retirement plan. Your custodian or trustee merely serves the role of maintaining the assets and records of transactions relating to the same. Your custodian also has the responsibility of filing reports as required under IRS regulations.

 

IRA benefits

There are several benefits that you obtain by establishing a self directed IRA. They include:

• Doing so expands your investment options, meaning that you are no longer restricted to such traditional investments as CDs and stocks.

• Establishing an IRA provides you with the best opportunity to diversify your investment portfolio.

• You have the freedom of choosing where to invest your IRA funds.

• Establishing a traditional IRA means you enjoy tax reprieve on your deposits.

 

Investment Prohibitions

The fact that establishing a self directed IRA gives you the freedom to dictate how your funds are invested does not mean that you can invest in any vehicle you choose. Under IRS regulations, you are prohibited from investing in such vehicles as life insurance, collectibles (artwork, rugs and antiques) and particular metals. 

You are also prohibited from irregularly using your IRA such as borrowing cash from the account, using it to secure a loan and selling property to the account amongst other prohibitions. You are however allowed to invest your funds in real estate, mortgage, stocks, partnerships, precious metals (gold, silver and platinum) and franchises amongst other investment vehicles.

 

Types

There are basically three types of IRA you can establish to grow your retirement funds as an individual:

• Traditional IRA – At times referred to as Regular IRA, traditional IRA gives you the opportunity to contribute and at the same time take out a deduction from your contributions. Withdrawals are however only permitted after you have attained a specified age. Although your contributions remain tax-free, your withdrawals are subjected to tax using IRA calculators.

• Education IRA – This is the most suitable IRA you may establish in case you have a child below the age of 18 years. The account gives you the opportunity to save for specified higher education expenses for your child or other beneficiary with all your savings being tax-free.

• Roth IRA – This is probably the simplest types of IRA that you can establish. It tax regime differs from the other two in that you pay any applicable tax before making any contributions. This means that any both your contributions and resultant growth are never subjected to taxation. Furthermore, you can withdraw your funds at any time that you wish.

An IRA is not only available to individuals. Self directed retirement IRA plan is also available for small businesses. You can opt to establish this in case you operate a small business and reap the tax benefits that accrue. Like with a personal IRA, all contributions to a small business IRA are also tax deductible.

Your retirement investment options have never been that open with IRA. You only need to ascertain the most suitable type of IRA to establish. In choosing a type of IRA to establish, it may be necessary to make use of IRA calculator to ascertain the level of taxation you will be subjected to. You may also choose to establish a personal IRA, small business IRA or both, depending on your retirement investment need.

Rick Pendykoski, is an expert on retirement savings plans. In this article, he discusses various self directed IRA however, he finds self directed IRA to be the most suitable one. To learn more about LLC retirement plans, visit sdretirementplans.com

* All images US-PDGov