What is a Self Directed Individual Retirement Account and Why Should You as a REO Professional Care?
First, you need to know what an individual retirement account is before you can truly appreciate what a self directed individual retirement account is.
Per the Internal Revenue Service, you basically have two types of individual retirement accounts. Those are Traditional IRA or Roth IRA.
A Traditional IRA is just a way for you to save money for retirement with tax advantages. Some of those advantages are tax deductions for contributions and the fact that generally speaking, you aren’t taxed on those earnings and gains till the money is distributed. For more information on IRA, please visit the IRS website here: http://www.irs.gov/Retirement-Plans/Traditional-IRAs
A Roth IRA is a IRA with a few exceptions. Some of those are…..
You can’t deduct contributions to a Roth IRA
You can contribute to your Roth IRA after age 70
You can leave amounts in your Roth IRA as long as you live
My list of exceptions above is not a complete list. For a complete list of exceptions, visit the IRS website link here: http://www.irs.gov/Retirement-Plans/Roth-IRAs
Now, the biggest single difference between a IRA and a SDIRA or Self Directed IRA is the fact that a IRA is set up with a bank, life insurance company, mutual fund or stock broker whereas with a SDIRA, they are set up with a Trustee. This difference is very important for you to understand because, this difference goes t the very nature of what makes a SDIRA so different than a IRA.
You see, with a Traditional IRA or Roth IRA, the bank or organization you set it up with manages the money for you. Your bank will have different funds that you can pick from and those funds have all kinds of disclosures, prospectus and degree of expectations on performance. Sure, no investment is ever 100% safe and anytime you invest, you really should know your risk however, my point is, you aren’t doing any leg work. The bank you set up your IRA is doing everything for you and all you had to do was pick the fund to put your money in. This is where a SDIRA is different.
As I said before, with a SDIRA, you set up your account with a Trustee. This Trustee is nothing more than a place to hold your money. They do not offer you investment advice and they don’t make investments on your behalf. They aren’t going to send you a list of funds you can choose from….because they don’t have any. You aren’t going to get a prospectus telling you what to expect when you invest because, they have nothing for you to invest directly in. Think of the Trustee as a holding house for your money. That is really all they are. There purpose is to be a middle man between you and your retirement money. The reason they exist is to provide transparency, accountability and to enforce regulations over your money.
Finally, with a SDIRA, you don’t make money unless you get out there and invest it. Like I said, the Trustee is nothing more than a holding house, they don’t make investment on your behalf so, if you don’t get out there and find opportunities to invest in, your money will not make gains, it won’t grow. This is the attraction for many because it gives the owner of the money much more control of what gets invested in and likewise, the possibility for much greater gains……with much greater risk.
For many who decide to get a SDIRA, the typically already have substantial experience in one of the areas of allowed investments. For example, I am a Realtor and I have access to many different tools and substantial experience that allows me to assess value on real property pretty accurately. I can use my tools and experience to invest my SDIRA funds into real estate. That’s right, real estate is just one of the many SDIRA investment options. As a Realtor, naturally I would be drawn to invest my retirement in real estate that will create gains and grow my retirement funds, using my own knowledge and experience. The reason I do this is because, I realized I can use my expertise in my career field and create gains for my retirement much more substantially than some bank, insurance company, mutual fund or stock broker every could.
Granted, some people don’t have any experience in one of the approved investment areas however, those people partner with experienced investors in the field of interest they want to invest in. For example, maybe the only experience you have in real estate is buying and selling your own home however, you would like to invest in real estate. What you would need to do is find a real estate investor who has a proven track record of success and let them teach you. Maybe you know a Realtor who has a proven track record of success that would be happy to get out there and find you money making opportunities to invest in? My point is, just because you may not have experience in a particular investment opportunity, don’t let good opportunities pass you by. You can always find the expertise you need, just stand up and look around.
Finally, it’s important to know that I am not an Investment Advisor, Attorney or Tax Professionals. I am a Realtor who has used my own SDIRA to invest in real estate. What you have read above is my own experience and opinion and you should not consider it Investment, Legal or Tax advice because, it’s not. If you need Investment, Legal or Tax advice, go seek out licensed and insured professionals in your state.
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