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Why You Need a Self-Directed IRA

By Dan Caplinger - Updated Apr 6, 2017 at 3:21AM

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Get more variety in your retirement accounts.

Are you tired of seeing your retirement balances go down? If so, a select group of IRA providers have just the product for you.

Most investors stick with ordinary types of investments in their retirement accounts, opting for stocks, bonds, mutual funds, and ETFs. But while those may be the most popular assets you'll find within retirement accounts, they definitely aren't the only ones allowed. In fact, IRAs can handle a wide variety of assets, including real estate and private business interests.

But in order to own these special assets in a retirement account, you'll have to find a firm that offers a self-directed IRA. And while lots of brokers, banks, and other institutions will let you open an IRA, most of them don't want to deal with the hassle of working with investments other than ordinary stocks and funds.

Why it's worth it
There are quite a few reasons why having a self-directed IRA can make sense:

  • If you've been working for a while, you may have most of your life savings locked up in a retirement account. As a result, if you want to take advantage of an opportunity to make a large investment in something unusual, your IRA will often be your best source of money to make your investment.
  • You may see more profit potential in a private investment than stock of public companies offers. Just as venture capitalists look to get in on the ground floor of businesses with good ideas, using your IRA to make an early investment in a promising business can give you a huge payoff if it proves successful.
  • If you want to invest in real estate, it's hard to find stocks that give you the same type of exposure that owning a particular property gives you. You could buy publicly traded REITs like Vornado Realty (NYSE:VNO), Simon Property Group (NYSE:SPG), and Equity Residential (NYSE:EQR). But those are huge, diversified companies with holdings nationwide -- which provides stability, but at the cost of potential profit.
  • The same idea holds true for other investments. The opportunity to invest in a franchise business is much different from owning shares of McDonald's (NYSE:MCD), Blockbuster (NYSE:BBI), or Tim Hortons (NYSE:THI). And an investment in shares of a miner like Newmont Mining (NYSE:NEM) won't have the same returns as owning actual gold and silver bullion coins.

What it boils down to is that if you have a lot of money in an IRA and want to expand your investments beyond ordinary securities, a self-directed IRA can help you do what you want with your money.

Watch out
Self-directed IRAs can get extremely tricky, especially if you want to play an active role in the business or property you're investing in. Numerous tax rules limit the types of investments you can make even in a self-directed IRA. In particular:

  • So-called self dealing rules prohibit you from owning a business in an IRA if you are an officer of that business or own a controlling interest. Similarly, if you own an asset like a vacation home in an IRA, you can't use it for your own personal benefit.
  • While buying real estate outright for an IRA is OK, the rules get complicated if you only have enough money to make a down payment and need to borrow to complete your purchase. It's critical that your personal funds not get commingled with your IRA.
  • Other complicated provisions, such as unrelated business income rules, present additional obstacles to some types of investments. You'll want to check with your accountant before committing to any investment through an IRA.

After realizing that a self-directed IRA isn't quite as simple as just opening an account, many investors may feel more comfortable sticking with stocks, bonds, and mutual funds that most IRAs hold. But if you have an entrepreneurial spirit and want to tap your retirement accounts for financing, a self-directed IRA can open the door to a bright future.

For more on making the most of an IRA, read about:

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$251.87 (1.52%) $3.78
Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
SPG
$113.73 (1.52%) $1.70
Newmont Mining Corporation Stock Quote
Newmont Mining Corporation
NEM
$68.71 (0.00%) $0.00
Tim Hortons Inc. Stock Quote
Tim Hortons Inc.
THI.DL
Vornado Realty Trust Stock Quote
Vornado Realty Trust
VNO
$35.54 (1.46%) $0.51
Equity Residential Stock Quote
Equity Residential
EQR
$78.13 (2.32%) $1.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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