Deciding on an investment strategy is important for your financial future. Before you decide on any one type of investment, its important to consult with a financial advisor, accountant, and or attorney in order to maximize your investment potential while minimizing your potential liability or risks to the greatest extent possible.
Here we will look at steps to take before starting a self-directed IRA, which for many has become an attractive alternative investment to traditional IRAs, 401(k)s, and other retirement investment options.
1. Educate Yourself about the Self-Directed IRA Options
There are three primary options available for self-directed IRA investments:
* Bank controlled self-directed IRA
* Custodian controlled self-directed IRA
* Self-directed IRA LLC (checkbook control)
Of course the only one that is truly self-directed is the checkbook control IRA. However, compliance risks are greater with a truly self-directed IRA account. The IRS has very specific ideas and requirements related to retirement accounts. Falling outside of compliance, even accidentally, carries hefty fees, fines, and penalties that could set your retirement savings back years, if not longer.
This is the stage at which you should also choose your custodian if youre electing to go the custodian controlled route. There are additional fees and less freedom with this route, but there is an added safety net when it comes to compliance as they are accountable for keeping accurate records of your investment and providing appropriate reports to the IRS.
They are not, however, responsible for ensuring the soundness or compliance of investments. It is up to you to do these things.
2. Decide on the Type of Investment You Want to Make
Different rules mean different things for different investments. Bank and custodian controlled self-directed IRAs offer fewer options than checkbook controlled IRAs, though you do have more options than traditional IRA investors have. Real estate and precious metals are among the most popular choices, though you have a wide variety so dont limit yourself while exploring your options.
Once you decide which investment option is best for you, its time to move to the next step.
3. Create an Investment Account
One of the beauties of a checkbook control IRA is that you can create an account in your local community thats designated for your self-directed IRA. This means the funds are local and you have access to them when youre ready to make an investment. It truly places you in control of your retirement investments in a way no other retirement account does.
Of course, once youve created your retirement account, you must fund the account. The IRS only allows up to $5,500 in a year, currently, for investors under the age of 50. Investors 50 or older may invest an additional $1,000 as of 2014 in their IRA accounts.
4. Check for Compliance with the Rules
This is the single most important thing you can do to protect yourself, your investment, and your future retirement. You should check before the investment, as well as during. Things can change over time and often do.
For instance, if you invest in real estate, its important to leave an adequate amount of funds in the IRA to cover the costs of damages and repairs if needed. Only funds from the IRA can be used to make these improvements and changes. Failing to follow the rules is an expensive mistake you dont have to make.
These steps arent life-altering, but taking them in order can help you make wiser decisions about your retirement investing.