What Is a Self-Directed IRA, and Do I Want One?

Is a Self-Directed IRA Right for Me?

September 2012

A self-directed IRA works like a traditional or even a Roth IRA, except that you - the account owner -make the investment decisions.

Typically, this approach lets the account owner invest in things beyond the stocks, bonds and other vehicles that usually are available in the traditional or Roth IRA. Thus, a self-directed IRA might include investments in certain real estate, mortgages and business partnerships, among other things.

Although the account owner picks those investments, a trustee or custodian - such as a bank or brokerage-handles the administrative details and actually holds the assets. And although Ally Bank doesn't offer a self-directed IRA, our goal is to help you make informed choices about your retirement savings. Learning more about our IRA CDs and savings accounts may help you reach your goals sooner.

With a self-directed IRA, like any IRA, you 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.

In general, when people still are working and adding to their IRAs, they will want to have a fair amount invested in higher-risk, higher-potential-return vehicles, such as stocks. The idea is that, the longer you have until retirement, the more market risk you can handle, because there is more time for the upturns in the market to cancel out the downturns.

"That is not to say that CDs do not have a role in an IRA," Chad O'Brien, a Certified Financial Planner(R) with Lassus Wherley, a financial management firm in New Providence, New Jersey, recently told Ally Bank. Often, using a CD for the cash portion of a balanced IRA portfolio can make sense, Wherley explained, because of its relative safety.

"One of the good things about a CD is that [most deposit owners] are FDIC-insured, so there is not really much risk of losing principal, like you might with a bond mutual fund or something of that nature," he said.

To help ensure that the money is periodically accessible, 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.

In addition to the making certain that you understand the financial underpinnings of your retirement planning, you also should assess your own comfort level. "Some investors just aren't willing to assume the risk that equity markets have, or they just don't feel comfortable with bonds or things of that nature," said O'Brien. "So a CD could play a role in that situation."

If you do decide to have a self-directed IRA, make sure you do your homework. Self-directed IRAs offer a great deal of leeway and flexibility in terms of what you can invest in, but there are also restrictions - and they can get complicated. To that end, you may want to enlist the aid of a tax professional or accountant.

Learn more about Ally Bank IRA products at AllyBank.com or call live customer care at 877-247-ALLY (2559), where help is available 24/7.

Related articles: