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Military Finances 201: 5 Things to Know About Self-Directed IRAs

Retirement Funding

Are you looking for more control over your retirement investments? A self-directed IRA can be a beneficial plan for some people and enables holders to invest in unique assets, like real estate and precious metals. However, it also comes with increased responsibility and regulations and for the majority of military investors a Plain Jane Vanilla IRA is the better option. To find out if a self-directed IRA (SDIRA) is right for you, consider the below factors.

What is a Self-Directed IRA?

A self-directed IRA is a kind of individual retirement account (IRA) through which you can hold a range of investments that are usually not permitted with a typical IRA. However, participants must follow the same eligibility and contribution limits as a traditional IRA or Roth IRA. While account holders primarily manage their accounts, SDIRA’s are still administered by a custodian or trustee and are opened through specialized firms that offer SDIRA services.

1. Investment Variety

Unlike the traditional IRA or Roth IRA, you can hold many alternative assets in addition to standard investments when you open an SDIRA. For example, you can allocate funds in real estate, precious metals, cryptocurrency, livestock, water rights, tax liens and more. If you’re interested in taking advantage of a wider variety of investments, a self-directed IRA gives you the freedom to do so.

2. Increased Accountability

Because SDIRA custodians can’t give investment or financial suggestions, the onus falls on the account owner to research all investment details. This includes exploring the risk level of the different types of investments available and understanding their varying regulations and rules.

3. Fees, Regulations & Rules

Different types of fees are associated with an SDIRA and may include annual custodian fees and a minimum number of transactions. Account holders also have to follow certain rules. For example, you can’t interact with certain disqualified persons, such as family members, using your self-directed IRA. Additionally, there are prohibited transactions through an SDIRA, and if you navigate these transactions incorrectly, you may face significant fees or penalties. Finally, a diverse pool of investments can also mean increased exposure to risk along with additional regulations according to each type of investment, which you must understand and adhere to.

4. Available Through Specialized Firms

Many brokerage firms don’t offer self-directed IRAs. To open an SDIRA, you’ll have to choose a company, bank or trust company that offers or specializes in SDIRAs. Though you will have a custodian or trustee administer your account, SDIRA custodians are not permitted to give investment advice.

5. Self-Directed Traditional and Roth IRAs Available

Similar to a regular IRA, you can choose between a traditional and Roth IRA, as both can be self-directed. The main differences between each are the same as with a normal IRA. With a self-directed traditional IRA, you only pay taxes when you withdraw earnings during retirement. When contributing to a Roth IRA, you don’t get a tax break; however, your contributions and earnings grow tax-free, and distributions are also tax-free.

So, is a self-directed IRA a wise choice for military members and retirees? In most cases, we don't think they are. But if you have a passion of a certain asset you can't get in an IRA and you don't want to invest in that asset in a taxable account...its your money. We don't specialize in SDIRAs, but we do specialize in military finances and taxes. If you'd like to chat about what we do, give us a call.


If you found this article interesting, you might like the following blog posts useful:

Military Finances 201: How Do Retirement Accounts Affect Each Other?


Retired Military Finances 201: Understanding Depreciation Recapture


Military Finances 201: Take Social Security Early and Invest It?



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