Is a Self-Directed IRA Right for You? Pros and Cons

A Self-Directed IRA puts you in the driver’s seat of your retirement investments. For many, this is the number one selling point. They want to call the shots, and they want more control over what they put in their retirement portfolio. But are there cases where another approach may work? Before you dive into Self-Directed IRAs, first consider the pros and cons. If the pros align with your goals, you know you’ve got a winning strategy.

Pros of a Self-Directed IRA

Greater Investment Control

One of the most appealing aspects of a Self-Directed IRA? The level of control it offers. You’ll be the one making the investment decisions. Maybe that involves investing in real estate, precious metals, private equity, or other alternative assets.

This gives you the freedom to diversify your portfolio beyond the stock market. You can get into investments that you understand or are passionate about. For example, if you're an experienced real estate investor, a Self-Directed IRA allows you to purchase rental properties, flip homes, or even invest in real estate crowdfunding platforms.

Broader Range of Investment Options

Unlike traditional IRAs (limited to stocks, bonds, and mutual funds), a Self-Directed IRA opens the door to different paths to retirement investments. From physical assets like gold or silver to digital currencies such as Bitcoin, you have the flexibility to invest in what suits your goals.

More freedom also includes options like tax lien certificates, private loans, and even businesses. In short, you’ll have the ability to construct a diverse portfolio uniquely suited for you: your risk tolerance and your specific skill set.

Potential for Higher Returns

Self-Directed IRAs offer the potential for higher returns than the more traditional investments typically found in standard IRAs. While stocks and bonds tend to have moderate, steady returns, real estate, and private equity can yield higher returns when chosen properly. Of course, every valid investment contains a degree of risk. If you can tolerate that risk, you’ll have the chance to build a more robust retirement portfolio. That’s particularly true if you're an experienced investor who knows how to spot lucrative opportunities.

Cons of a Self-Directed IRA

Responsibility

The most significant downside to a Self-Directed IRA? It’s more complex than a set-it-and-forget-it solution. While it might sound appealing to have full control over your retirement investments, it also means you have the responsibility of compliance. The IRS has strict regulations regarding what is and isn't allowed in a Self-Directed IRA, and making a mistake can result in heavy penalties. For many, handling these regulations can feel daunting and time-consuming. That’s why we recommend working with a Self-Directed IRA so that this doesn’t become a “con” in your book.

The Risk of Illiquid Investments

Another potential downside? The illiquidity of certain investments within a Self-Directed IRA. Assets like real estate or private equity can take a long time to sell or convert into cash. That can potentially pose a problem if you need quick access to funds. If you’ve tied up a significant portion of your retirement money in assets that are difficult to liquidate, it could leave you in a tough spot. This is a particularly important factor for those who may need to access their retirement funds sooner than expected.

Want to know more about what it’s like to invest in Self-Directed IRAs? It doesn’t have to be a mystery. The more you learn, the more you’ll understand how to mitigate the cons and make the pros work for you. We encourage you to reach out to us by dialing 866-7500-IRA so we can help.