How Do I Know If My IRA Is Self-Directed?

Key Points

With a Self-Directed IRA, you can invest in alternative assets rather than being limited to Wall Street products.
The benefits of a Self-Directed IRA include retirement portfolio diversification, potential for higher returns, and control of your investment decisions, all with tax advantages.
Madison Trust can help you set up a Self-Directed IRA quickly and easily.

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Census statistics show that nearly 20% of working-age Americans own an IRA account. The typical, standard IRA holds stocks, bonds, and mutual funds. But did you know an IRA can be "self-directed" to open up a broader selection of investment options?

Self-Directed IRAs may be lesser-known than standard IRAs, but they can be very appealing for people interested in alternative assets beyond Wall Street. Here’s what you need to know:

SDIRAs vs. Standard IRAs

two piggy banks with the word Self-Directed IRA vs. Standard IRA

A Self-Directed IRA (SDIRA) is a retirement account designed for alternative investments. Unlike a standard IRA, which usually restricts investment options to stocks, bonds, and mutual funds, a Self-Directed IRA allows the owner to invest in real estate, private businesses, precious metals, and more. You can put your retirement funds into the assets you understand the most and those that you believe offer the highest potential for returns.

This flexibility does come with added responsibility in understanding the rules for SDIRAs. A reliable SDIRA custodian like Madison Trust can help you understand the nature and nuances of an SDIRA. Learn more about choosing the best Self-Directed IRA custodian.

Understanding Your IRA Options: Self-Directed IRA vs. Standard IRA Infographic - Some of the main characteristics of a Self-Directed IRA include (1) Greater Investment Diversity – Invest in alternative assets such as real estate, precious metals, promissory notes, private companies, and more. (2) Self-Directed IRA Custodian Required – You must open a Self-Directed IRA at a regulated SDIRA Custodian, like Madison Trust. (3) Greater Independence – You are empowered to invest based on your knowledge and expertise. At the same time, you are responsible for completing thorough due diligence before placing an investment. (4) Greater Control - Best for experienced investors who want hands-on control of their investments. (5) Potential for High Returns – Although you may be taking a larger risk, including alternative investments can potentially lead to higher returns over the long term compared to Wall Street Products alone. (6) Hedge Against Inflation – Certain alternative assets can potentially help brace your retirement portfolio during times of inflation. On the other hand, the main characteristics of a Standard IRA, include: (1) Limited Investment Options – Standard IRAs are generally restricted to publicly traded stock market products. (2) Regulated Custodian Required – Standard IRAs must be held by a regulated custodian, such as a bank or brokerage house. (3) Potentially Work with an Advisor – You can work with an advisor to select investments based on your timeline, risk tolerance, and overall retirement goals. (4) More Hands-Off - Best for less experienced or more hands-off investors. (5) Less Risk – Generally, you are taking on more commonly invested in asset classes. (6) Returns Dependent on the Stock Market – Your portfolio is fully dependent on how the stock market is performing.

Self-Directed IRA Benefits

Self-Directed IRAs can be appealing for many reasons, including:

Retirement Portfolio Diversification: The ability to invest in alternative assets allows you to build a more diverse portfolio than a standard IRA allows.
Investments Aligned with Your Interests: If you have particular knowledge about rental properties or another alternative asset class, investing through a SDIRA allows you to leverage that expertise.
Tax Benefits: Like standard IRAs, Self-Directed IRAs offer tax advantages designed to encourage long-term saving for retirement. An SDIRA can be a Self-Directed Traditional IRA or Self-Directed Roth IRA.
Potential for Higher Returns: Including alternative investments in your retirement portfolio can potentially lead to higher returns over the long term compared to Wall Street products alone.
Hedge Against Inflation: Certain alternative assets can potentially help brace your retirement portfolio during times of inflation.
Control: With a Self-Directed IRA, you have greater control of your investments and many more opportunities to explore different asset classes.

Types of Self-Directed IRAs to Consider

There are a few different types of Self-Directed IRAs to choose from, including Self-Directed Traditional, Roth, SEP, and SIMPLE IRAs. Self-Directed Traditional IRAs offer tax-deferred growth of your retirement funds. By contrast, you fund a Self-Directed Roth IRA with after-tax dollars and therefore can benefit from tax-free growth and withdrawals in retirement. Self-Directed SEP and SIMPLE IRAs are designed for employers, with SEP IRAs catering more to self-employed individuals with no other full-time employees. Each option has its own benefits and use cases that a financial advisor can help educate you on. You can also choose to upgrade your SDIRA to a Self-Directed IRA LLC (also known as a Checkbook IRA) to gain checkbook control.

a visual with different types of account images

How to Open a Classic Self-Directed IRA at Madison Trust

Setting up a Self-Directed IRA at Madison Trust is as easy as 1-2-3:

Open: Open your account by completing our easy online application.
Fund: Fund your Self-Directed IRA by transferring or rolling over all - or a portion of - your funds from an existing retirement account, such as an IRA or 401(k), or by making an initial contribution.
Invest: Instruct Madison Trust to send your IRA funds by writing a check or sending a wire directly to your investment.

So, how do you know if your IRA is self-directed? It’ll only be self-directed if you specifically open an SDIRA. If you're interested in alternative investments and want to gain control of your retirement portfolio, a Self-Directed IRA may be the ideal investing tool for you. Our team is here to open exciting opportunities while providing you with exceptional service. Schedule a free discovery call today!

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Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.