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Individual retirement accounts offer some amazing tax benefits and are ideal for storing and investing retirement funds.

However, with most IRAs, your investment options are usually limited to cash investments, bonds, and other investments related to mutual funds. Fortunately for you, there is an alternative IRA known as SDIRA or self-directed investment retirement account.

These accounts enable investors to diversify their portfolio beyond traditional assets and also offer tax advantages.

According to PwC, alternative assets are expected to reach $13.6 billion by 2020, further emphasizing the efficacy of these types of accounts in yielding substantial growth.

In this blog, we’ll understand how an SDIRA works and what sets it apart from other IRAs.

How an SDIRA works

With a self-directed IRA, investors can hold a multitude of alternative instruments otherwise prohibited for standard IRAs.

Even though the account is managed by a trustee or a custodian, it’s the account holder that acts as the main decision-maker—hence, the reason why this IRA is called “self-directed”.

The account is set up either as a Roth or a traditional IRA. SDIRAs are best suited for investors with sound knowledge and expertise of alternative investments.

With the help of this account, investors can even hold real estate and gold but to open one you’ll have to avail the services of a specialized firm that offers SDIRA custody services.

The main difference between a SDIRA and other IRAs is the ability to hold multiple types of investments in the account.

Examples include precious metals, limited partnerships, real estate, tax lien certificates, private placements, and commodities. Owing to the nature of investments, owners must exercise due diligence.

Examples include precious metals, limited partnerships, real estate, tax lien certificates, private placements, and commodities. Owing to the nature of investments, owners must exercise due diligence.

Roth vs. Traditional SDIRAs

As mentioned earlier, SDIRAs can be set up as Roths or traditional IRAs. Both accounts have different eligibility requirements, distribution rules, contribution guidelines, and tax treatments.

For a traditional IRA, there’s an upfront tax break, but you’ll have to pay on your earnings and contributions during withdrawal.

A Roth IRA, on the other hand, doesn’t have an upfront tax break but all of your earnings, contribution, and qualified distributions remain tax-free.

Traditional IRAs don’t have any income limits but with a Roth IRA you must earn a certain amount of money.

Also, Roth IRAs allow permit owners to withdraw their contributions without penalties or taxes, provided that the account is at least 5 years old and the owner is older than 59½ years.

Investment Routes for SDIRAs

SDIRAs open up countless routes for potential investments. In addition to the standard options of stocks, cash, mutual funds, bonds, and money market funds, owners can purchase investment real estate, tax liens, and hold partnerships.

It is worth mentioning that the IRS forbids certain investments for both traditional and Roth IRAs. These include S corporation taxes, life insurance, investments including prohibited transactions, and collectibles.

Collectibles is a broad term that encompasses items like artwork, antiques, baseball cards, alcoholic beverages, memorabilia, rare coins (affects the type of gold you can hold), and stamps.

If you are certain that you want to open up a self-directed IRA, it’s highly advisable to get in touch with a financial advisor to ensure you aren’t violating any laws.

In conclusion, with a self-directed IRA, you are the main decision-maker and can leverage your expertise to grow your retirements.

Orion Metal Exchange enables clients to set up gold and silver IRAs and make the most out of their self-directed IRAs. 

Get in touch with us today for more information.