Self-Directed IRA Information
Investing for one's retirement is good financial planning, and it can be a lot easier with an IRA (individual retirement account). Many IRAs are managed accounts, which means that once it is set up the management of the account and, generally, investment choices are under the supervision of a professional financial manager. But some people prefer to manage their own IRAs, which is straightforward as long as you keep on top of it and comply with IRS rules.
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Custodian
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Although you are able to choose and manage your own investments with a self-directed IRA, the IRS requires you to have a custodian to oversee the administration of the account. If it is set up through a broker or bank they often act as custodian for a yearly fee. However, these financial institutions often have their own rules and limit the types of investments you can make. For individuals who want more flexibility there is the option of getting an independent custodian, who can be either a professional or someone you know and trust.
Options
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A self-directed IRA may be either a traditional or Roth IRA, and all of the same rules apply that govern managed IRAs. The ability to choose your investment strategy offers options that aren't available with regular IRAs. In addition to the usual stocks, bonds, CDs and mutual funds, you can invest in certain types of precious metals, for trading options, or on the Forex (foreign currency exchange market). You may even invest in real estate, although you usually need to set up a limited liability company (LLC) with an operating agreement that makes you the manager.
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Prohibitions
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There are some types of investment you may not make even with a self-directed IRA, such as collectibles, which includes antiques and rare stamps or coins. You also cannot engage in a securities transaction such selling stock short that requires the use of margin. Finally, precious metal investments are limited to bullion (gold, silver, palladium and platinum bars) or to U.S. Mint-issued gold or silver investment coins. Keep in mind that, as with any IRA investment, all funds or holdings must remain in the account except under specified circumstances until retirement. For details, see IRS Publication 590: Individual Retirement Arrangements (link below).
Conflict of Interest
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The purpose of an IRA is to prepare for retirement, not to provide short-term returns. This raises the possibility of a conflict of interest that must be avoided. In general you may not carry out any investment or transaction that provides an immediate benefit to you or a member of your family. For example, you cannot rent real estate you own through an IRA or loan yourself money. If you have any questions about the legal propriety of a transaction consult your financial advisor before you act.
Considerations
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An investor should not assume the tax benefits of an IRA automatically make it the best vehicle for all investments. For example, it's usually better to hold tax-exempt municipal bonds outside an IRA since they aren't taxed anyway---but the earnings will be taxed as regular income with a traditional IRA when withdrawn after retirement (in this case you actually pay more tax). Care should be taken with stock investments, as well. You can take capital gains on profits from stock held one year or more outside an IRA, but those profits will be subject to regular tax if earned and then withdrawn from a traditional IRA. The best strategy is to consult with a knowledgeable financial advisor on a regular basis to be sure you make investments using your IRA that take full advantage of its potential benefits.
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