Why Use a Self Directed IRA?
One of the primary reasons that many investors choose to put money into individual retirement accounts is so that they can gain access to more investment options. At the same time, many traditional IRA providers limit account holders' options to stocks, bonds and mutual funds. If an investor wants more options and more control, he should consider a self-directed IRA.
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What is a Self-Directed IRA?
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A self-directed IRA is a type of account that you open with a custodian as a way to save for retirement. Instead of allowing a traditional brokerage to be in charge of your account, you are technically in charge of all of the moves for the account. You can invest in anything that could bring in a return for your account. The custodian has to actually distribute the money for investments and receive returns without you touching the money personally.
Diversifying Your Portfolio
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Of the primary advantages that the self-directed IRA provides is the ability to diversify your portfolio. When you put money into a regular IRA, the fortunes of your account are tied to the performance of the stock market, in most cases. By putting money into a self-directed IRA, you can gain returns that move more independently from the market. For example, you could invest in precious metals, real estate or something else that can retain its value.
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Earn Higher Returns
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Many people get into self-directed IRAs because of the potentially high returns that they can earn. For example, some people are more comfortable investing in real estate and they can do it very successfully. This could allow the investor to earn returns that he would never be able to earn in the stock market. While you are not guaranteed to earn higher returns when you have a self-directed IRA, it can give you the chance to do so.
Caution
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When you set up a self-directed IRA, you have to be careful that you do not violate any of the rules that are enforced by the Internal Revenue Service. If you use any of the money to engage in a prohibited transaction, you could have to pay significant penalties. For instance, using the money to buy life insurance or collectibles is a prohibited transaction. Mingling the funds with your personal assets is also a violation of the rules.
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