If you want to use your IRA to invest in something other than stock market based investments you can open a self directed IRA with a custodian that will allow you to invest in alternative investments. While this type of retirement account will give you more control over where your money is invested, it may be risky for the average investor. It has the same advantages and disadvantages that a stock market based retirement account has if you as the investor makes uneducated investment decisions. Any financial planner worth his salt would tell you to invest in what you know and understand. In classes I teach I will ask my students “who in here has mutual funds?” most everyone in the room will raise their hand. Then I will ask “who can tell me the name of your mutual fund and who can tell me the name of the fund manager?” No one knows that. The point is we put our retirement futures into the hands of someone we don’t know and into something we don’t understand.
You can invest in a wide variety of choices which is one of the biggest pros associated with a self directed IRA. These investment choices include but are not limited to real estate, tax liens, private companies and even gold and silver bullion coins. The truth is you can invest in anything that isn’t on the IRS’ list of “prohibited transaction.” About the only investments that aren’t allowed are life insurance, S-Corporation stock and collectibles, that’s it.
Another obvious pro is diversification. If you have your IRA truly diversified across many asset classes you would have less exposure to the different markets as they fluctuate. If you have a portion in stock market based investments, a portion in real estate, a portion in loans, and a portion in precious metals you have less exposure to any one particular market.
One of the cons associated with taking control of your retirement account is you need to educate yourself regarding the rules of investing. What you can invest in and who you can invest with. It is your responsibility to understand the rules and to follow them. One of the biggest things you want to avoid is what the IRS calls self-dealing, which can result in large penalties. This refers to receiving a benefit today from the transaction your IRA has engaged in.
Another Con associated with a self directed IRA is higher fees. The few custodians that offer a truly self directed IRA tend to charge more because of the extra work associated with handling alternative assets. It’s important that you find a custodian that has experience working with the specific alternative investment you are interested in.
Only you can weigh the pros and the cons. Only you can decide if self direction is right for you. Remember it’s your retirement future we are talking about. I don’t know about you but as for me I want to be in control of my retirement future. I will do my homework and know the rules so I don’t commit a prohibited transaction. I can’t leave my retirement future in the hands of someone else, it’s mine.
For more information on taking total control your retirement funds contact us today.
Timothy Schubert CISP