Individual Retirement Accounts (IRA) are restricted savings accounts that provide income for the post-retirement years.
The individual account owner makes contributions to the IRA, and depending upon the type of IRA; the employer also makes contributions. The funds of the IRA are held by a financial institution that invests the funds in assets.
Differences Between Self-Directed and Regular IRAs
The funds in a regular IRA usually are overseen by a brokerage house that invests the funds and manages the accounts.
But things are different for a self-directed IRA (SDIRA), which can either be a traditional or Roth IRA. The account holder makes all the investment decisions and instructs the IRA custodian to make investments on the assets which he chooses. And it is one of the differences between a regular IRA and an SDIRA, which allows a higher degree of flexibility in selecting investment options. As the custodian is not involved in investment transactions, and only the investor is, the fees charged by the custodian are also lower.
Although you will find a bit more challenging to set up an SDIRA than a regular IRA, the benefits you will reap will make the challenges worth undertaking.
Another difference is the degree of diversification. With an SDIRA, you can invest in a more diversified portfolio, comprising of assets beyond the traditional stocks and bonds. You can invest in alternative assets such as real estate, startups, precious metals, etc.
You should make yourself aware of the Prohibited Transactions rule if you want to open an SDIRA. As per the directives of the Internal Revenue Service (IRS), some transactions are prohibited for an SDIRA. The account holders are restricted from taking any personal loan against their funds or participate in self-dealing activities, such as business transactions in which they or family members are personally involved.
You should know the right path to traverse before you finally open an SDIRA. Read the infographic in this post to know what you should know.