Regular IRAs (traditional and Roth) allow taxpayers investment choices such as commonly traded securities, bonds, mutual funds and exchange traded funds (ETFs) to invest their retirement funds into. Self-Directed IRAs (SDIRAs) offer investment choices in cryptocurrency, precious metals, real estate and other less commonly held investments which are not allowed to be held in a regular IRA.
In order to open and invest your assets into an SDIRA, you need to work with a custodian that specializes in working with these types of accounts. You cannot custody the assets personally yourself. Additionally, with one of the primary benefits of the SDIRA being that the IRA owner now has the option to invest in unconventional assets not allowed to be held in a regular IRA comes investment risks to be on the lookout for – such as liquidity. For instance, SDIRAs that hold investments in real estate could encounter problems when the account holder nears retirement age. If the account holder is age 72, required minimum distributions (RMDs) most likely are required to be taken annually by the IRA owner. The SDIRA account should be able to provide liquid assets at the time of RMDs. However, as an example, when real estate is held in the SDIRA that isn’t easily able to be sold nor able to generate cash flow, the underlying asset in the SDIRA would run the risk of not being able to generate an RMD payout for the IRA account holder.
Thus, before opening an SDIRA, taxpayers need to do their homework. They should thoroughly research the custodial institution to be used. Taxpayers should also be sure to do research with regard to what may qualify as a “Prohibited Transaction” within the SDIRA, as such mistakes can be costly and result in significant penalties. And finally, the account holder of the SDIRA needs to understand any specific qualifications and rules with regard to the investments within the SDIRA as well as any potential pitfalls in the future.