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If you have an appetite for risk and you don’t necessarily want to follow the crowd when investing, you may want to consider a self-directed IRA (SDIRA) for retirement purposes.

If you’re a savvy investor and think stocks and bonds are monotonous, a SDIRA may appeal to you.

Let’s go over some of the rules and reasons you may want to choose this type of investment.

Self-directed IRA, defined

What is a self-directed IRA? A self-directed IRA  is similar to a traditional or Roth IRA, and designed to provide tax advantages. While traditional IRAs can be limited to stocks, bonds, CDs and mutual or exchange-traded funds (ETFs), self-directed IRAs may have a bit more flexibility when choosing investment opportunities. Those opportunities can include not only stocks and bonds, but real estate, precious metals, commodities and other alternative investments typically not available within a traditional IRA. You choose the investments and a trustee or certified custodian such as a bank or broker will handle the administrative details and hold the assets.

What are the contribution limits for 2022? For investors under 50 the annual contribution limit is $6,000, and for those 50 and over, you can contribute up to $7,000 annually.

In a SDIRA, your assets grow tax-free, which means you can put the brakes on any taxes on income or capital gains until retirement.

Can I set up my own self-directed IRA?

A self-directed IRA is not a plan that you manage completely on your own. You’ll need a certified custodian or trustee to open a SDIRA. A certified custodian is responsible for maintaining and administering the IRA. They also have the responsibility of complying with all IRS reporting requirements regarding the IRA and will hold your plan’s assets for safekeeping. However, they don’t have investment authority. The trustee, on the other hand, is empowered to make investment decisions and they can manage your financial assets.

Rules for self-directed IRAs

It’s important to know the rules of a SDIRA and breaking them can result in severe tax consequences.

Disqualified Persons

Per IRS rules, Internal Revenue Code Section 4975 Section 11 on Prohibited Transactions (4.72.11.3.1 Disqualified Person), the investor or his or her beneficiaries cannot engage in transactions with disqualified persons. They generally include those who offer plan services and members of your family or business entity, including:

  • You
  • Your spouse
  • Your employer
  • Your ascendants and descendants, including their children
  • Those that offer plan-related services (such as custodians, advisors, fiduciaries or administrators)
  • Entities of which you are at least 50% owner
  • Any entity where any disqualified person has influence over that entity

Investment restrictions

A prohibited transaction in an IRA refers to the misuse of an SDIRA by you, your beneficiary or any disqualified person, typically based on the disqualified persons listed above.

Other prohibited transactions with an IRA could include borrowing money from it, selling property, using it as security for a loan or buying property for personal use with funds from the IRA.

What transactions are prohibited in a self-directed IRA?

The SDIRA is to benefit you when you retire and engaging in transactions for personal gain is not allowed. Here are a few examples of prohibited transactions: selling, exchanging or leasing property, life insurance, lending money or extending credit, furnishing goods, services or facilities. Taking part in any of these transactions may disqualify your SDIRA.

Advantages of self-directed IRAs

Some of the major benefits of an SDIRA include having complete control over your investments, the ability to invest in alternative investments, potential wealth building for future beneficiaries and achieving more diversification in your portfolio.

Full control over your investments

Putting yourself at the steering wheel means you may be able to choose what you put in your account. You have the ability to control the direction you want your investments to go. If you choose to have a specific amount of cryptocurrency or real estate in your portfolio, you can do that. You’re not limited to what an employer’s 401(k) may offer you.

Alternative options available

In addition to mutual funds, stocks, ETFs and other more “traditional” investments, you can expand your portfolio with real estate, promissory notes, private equity, options, cryptocurrency, precious metals, foreign currency and more. You don’t have to limit yourself to just one investment opportunity.

Instant diversification in your portfolio

Diversification means that you spread your investments out in several ways. When you invest in a SDIRA, you have the opportunity to broaden your portfolio. Also, when investing in more than just a single asset, you may reduce the risk of losing a significant portion of your portfolio if that one asset significantly declined in value.

Risks of self-directed IRAs

What are the risks? It’s important to evaluate the risks of a SDIRA before you invest in one. Let’s take a look.

Rules to follow

As mentioned earlier, there are a few rules you need to be aware of. If you don’t want to pay penalties or taxes, keep track of the rules the IRS has laid out for SDIRAs. You may want to consult with a tax professional who is also aware of those rules. Keep in mind, you’ll still have to take the required minimum distributions (RMDs) in your traditional IRA, which means you must begin taking money out of the account once you turn 72.

Full control over your investments

While you have control over your investments, there may be some disadvantages if you do not fully understand how a SDIRA works. Because custodians aren’t allowed to give you any financial advice, you may want to do your due diligence when it comes to this type of investment.

Fees

SDIRA fees can vary across custodians and providers. Custodians may charge three types of fees: a setup fee, an annual fee and transaction fees. So it might be wise to do a cost comparison before opening an account.

How to set up a self-directed IRA

To open up a self-directed IRA, you can take the following steps:

  1. Find a custodian. You’ll need to find a certified custodian that will allow you to set up a SDIRA.
  2. Set up your account. Set up your account according to the guidelines and include the necessary fees to set it up.
  3. Choose your investments. Once you have the account set up, you can fund your IRA and choose your investments.

While Ally Bank doesn’t offer a SDIRA, Ally Invest does. Our goal is to help you make informed choices about your retirement savings. Always be sure to consult with a financial advisor who’s familiar with your situation to create a retirement plan.

In addition to making certain you understand the financial underpinnings of your retirement planning, you also should assess your own comfort level as you consider a self-directed IRA.

Is a self-directed IRA worth it?

The answer: It depends on your situation. If you think of yourself as a confident investor who has plenty of time to investigate various options, you may want to consider investing in a SDIRA. However, it does come with risks. The fees alone may cause you to shy away. Before you take the deep dive, it’s a good idea to consult with a tax professional to help you make the best decision for your situation and a fiduciary to help you choose the best SDIRA. Shop and compare IRAs to make the best decision possible.

With a SDIRA, like any IRA, you may want to consider having a mix of investments so that you balance out some of the riskier holdings with low-risk vehicles, which can include CDs. To add flexibility to security, you can spread your funds across a number of CDs with different maturity dates, so that a portion of your money is available on a regular basis.

Ally Bank offers a variety of CDs and IRA products that can help you meet your goals with just the kind of flexibility that smart retirement planning requires. For example, with the IRA Raise Your Rate CD, you have the option of a one-time rate increase if our 2-Year CD rate goes up; you have the option to increase your rate twice  if our 4-Year CD rate goes up.