One of the big lessons from the financial crisis is that professional does not always mean effective. Many investors would like more control over the management of their investments, especially their retirement investments. One vehicle for greater control over these investments is the self directed Roth IRA. These accounts allow for substantially greater flexibility in account management than the professionally managed variety. In these special investment accounts, an investor is allowed to purchase assets typically not allowed in the other IRAs such as real estate, business ventures or foreign currency trades.
The Roth IRA account is a special retirement investment vehicle that allows post-tax dollars to be contributed to an account and withdrawn tax-free under certain conditions, typically after having reached a certain age. These accounts are popular with many saving for retirement who want to protect their savings and associated capital gains from taxation. The downside for the investor is that the dollars contributed are post-tax and thus cannot be deducted from income at tax time. A professional fund manager typically manages traditional Roth IRA accounts and per IRS, rules are only allowed to invest in safer assets like mutual funds or certain equities.
With a self directed Roth IRA comes all of these benefits, plus the ability to invest in a much more diverse set of investments like property, businesses, or almost anything else. One frequently used option with the self directed plans is to invest in a LLC that is controlled by the investor. This allows even more flexibility for the investor in how the assets of the IRA are invested since all profits will flow into the IRA account and will be treated as assets of the IRA.
However, with this flexibility come some numerous risks. These self directed plans are meant for sophisticated investors who may be more experienced with managing and profiting from different asset classes than allowed with professionally managed plans. In addition, there are some limits on how the account’s assets can be invested. For example, a self directed Roth IRA cannot invest in collectibles or antiques. In addition, the account’s assets cannot directly benefit the owner. An example would be if an IRA bought a home that was lived in by the account owner. This could lead to the revocation of the tax status of the account with significant penalties and tax liabilities.
A self directed Roth IRA can be a unique vehicle for certain investors who want a different kind of investment strategy. These accounts come with a number of very interesting ways of profiting from non-traditional investments while accruing a substantial tax benefit. However, with the power to control the investment strategy of the account comes a certain risk. The IRS requires that these accounts have a qualified trustee to manage the legal particulars of the account’s transactions at the owner’s direction. Those looking to direct their IRA’s investments should always seek the advice of a qualified financial advisor before making any transactions to ensure compliance with IRS regulations.
