First and foremost, let us define Self-Directed IRA. This Self-directed Individual Retirement Account is a retirement account that gives the investors the freedom to have the control of their finances for their future.
Similar to the typical IRA, a self-directed IRA allows you to enjoy the tax benefits and wait while your money increases with combined interest. With this kind of retirement account, you have all the gifts you have already expected from a regular retirement account, with these two additional privileges, a lot of investment options and greater authority in handling of your retirement documents.
This allows the investor to choose the manner he decides to invest his money. Looking back to old system used by insurance companies and banks, they are the ones having the authority as to the type of investments with the individual retirement account. However, with self-directed IRAs open to various set of options of investment and permit the investor to buy alternative properties through the IRA.
Furthermore, there are also six types of Self-directed IRAs. The first type of self-directed IRA is the traditional type which is a tax-delayed retirement account. The contributions that you give to a traditional IRA can be optional, either fully or partially deductible.
Next is the SEP IRA or the Simplified Employee Pension IRA is also a tax-deferred retirement account for those who are self-employed and are running small businesses. Any business owner, even though they just have one employee, anyone having freelance job, is qualified to open a SEP IRA. Their contributions which are tax-conclusive for the individual or the business, go into the traditional IRA taken in the employee’s name.
Another type of self-directed IRA is the Rollover IRA, which is a traditional IRA that is utilized by the investors who have a lot of employers. This type of retirement account is simply like a regular account, except that it is sustained by transferring the money or rolling over the money from the previous employer’s retirement plans. The rule is that you are not yet allowed to make any withdrawal unless you pay the complete tax rate, along with the 10% penalty.
The fourth type of self-directed IRA is the Roth IRA, which is free from federal income tax and can be paid with after-tax dollars. Contributions may be given even after you are 70 1/2 years old, and you are not obliged to take distributions. Also, the Roth IRA account holder is permitted to withdraw the principal amounts or contributions he has already invested, anytime, without the burden of any tax obligation.
Finally, the last type of self-directed IRA is the Self-employed 401(k), which is an option for those who have small businesses without any employees. This type of retirement account is appropriate for solo consultants who desire to obtain a retirement plan similar to those who are working in huge companies.