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Self-Directed IRA For Recent College Graduates

Self Directed IRA's Best Investment for College Graduates
3 Minute Read
Key Points
  • College graduates need to save for retirement
  • Early is better than late
  • The US Retirement system can work for everyone

College Graduates And Retirement

What does a Self-Directed IRA for college graduates do? Financial experts highly recommend that everyone should start planning for financial freedom and security early enough. If you’re a recent college graduate, you’re in a very good position to achieve that goal, and the Self-Directed IRA (SDIRA) may be a good option for you.

Why not other types of IRA? The Self-Directed IRA offers you the opportunity to diversify your investment. This means you can invest in other things aside from stocks and bonds, and this can increase your returns.

This article will tell you more about the SDIRA and how much you can contribute to this IRA account.

What is a Self-Directed IRA?

A Self-Directed IRA (SDIRA) is an alternative type of IRA. Just like other types of IRA, you contribute to the IRA and choose investments to grow your retirement funds. But, the striking difference is that the self-directed IRA allows you to hold a variety of alternative investments.

Generally, the regular IRAs only allow you to hold common securities like bonds,  stocks, certificates of deposit, and mutual or exchange-traded funds (ETFs). But, a Self-Directed IRA makes room for other investments like:

  • Precious metals
  • Livestock
  • Private mortgages
  • Real estate
  • Tax lien certificates
  • Crypto currency
  • Other foreign currencies
  • Commodities such as oil or gas

In summary, the self-directed IRA affords you an opportunity to diversify your retirement investment, and thereby increases your potential for higher returns. Apart from these two key benefits, the SDIRA also has other benefits, they include:

  • The option of choosing investments that may be more promising.
  • Tax advantage on your investments.
  • An opportunity to choose investments according to your experience, passions or knowledge.
  • The possibility of putting your  money in a self-directed IRA and other traditional investments or retirement accounts.

However, this IRA account might also come with higher risks.

How Does a Self-Directed IRA Work?

First thing you should know is that an IRA custodian – usually a brokerage firm or financial institution – manages your IRA. However, in some cases, you may need the services of special trust companies to act as your IRA custodian. This need arises when traditional IRA providers like banks, credit unions or Fidelity cannot offer a Self-Directed IRA.

The job of the custodian is to ensure that you keep to the regulations guiding the IRA account. So, for this purpose you’ll have to report the value of your investments to the custodian annually.

However, the IRA custodian does not provide financial advice, so you’ll need a  financial advisor to help you properly evaluate your investments. Or you can direct your investments yourself, for an exciting opportunity. The Self-Directed IRA LLC with “checkbook control” has quickly become the most popular vehicle for investors looking to make alternative assets investments, such as rental real estate that require a high frequency of transactions. Under the Checkbook IRA format, a limited liability company (“LLC”) is created which is funded and owned by the IRA and managed by the IRA holder. The “checkbook control” self-directed IRA allows one to eliminate certain costs and delays often associated with using a full -service IRA custodian.  The Checkbook IRA LLC structure allows the investor to act quickly when the right investment opportunity presents itself cost effectively and without delay.

How Much Can You Contribute to a Self-Directed IRA Per Year?

The contribution limits for a Self-Directed IRA are no different from other IRAs. From 2020, through 2021, the annual contribution limit is $6,000 for those under 50 and $7,000 for those 50 or above.

This contribution limit applies to all IRA accounts. The implication of this is that if you have another IRA account, your contributions to it will reduce how much you can contribute to your Self-Directed IRA for that year.

Bottom Line

If you are looking to invest in an IRA, the Self-Directed IRA is an attractive option. Not only does it offer you a tax advantage, you get the chance to diversify your investment options. So, the SDIRA might just be the right path to the financial freedom you desire.

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