Self Directed IRA Account
A self directed IRA account is for investors who are familiar with high-yield trading and don't mind making monetary decisions. Not many people travel by bus these days, but an old bus company advertising slogan used to suggest to travelers to, "Leave the driving to us." But an investor who holds a self directed IRA account wants to take the steering wheel when it comes to making investment decisions. Some investors have been trading on the stock market for several years and know the ropes of smart investing. Others feel more comfortable self-managing retirement monies and taking a hands-on approach when it comes to researching and making wise choices. Even though traders may consult investment bankers or stock advisors, some still enjoy the challenge of steering the bus and mapping out the directions assets will take. Self-managers are independent thinkers not afraid to gamble on new ventures, yet savvy enough to know when to hold em, fold em and when to walk away.
An Individual Retirement Account (IRA) is a tax-deferred savings plan designed to allow taxpayers to avoid paying income tax on contributions deposited into retirement each year. Tax-free contributions are also tax deductible, but account holders must comply with age and limits imposed by the IRS. Individuals under the age of 70 during the same year as contributions will be made are eligible to participate. Prior to 2002, contributions were limited to just $2,000 annually. From 2008 to 2010, limits for individuals under 50 years of age reached a maximum of $5,000 per year. Contributors aged 50 and up can deposit a maximum of $6,000 annually during the same time frame. But anyone wanting to invest needs to hurry; limits will once again cap at $2,000 in 2011. Single and married participants should take advantage of the higher standard contribution limits for larger account balances due to greater accumulated earnings. Participants may consult with bankers to determine potential earnings resulting from the 3-year contribution increase.
Deposits held in trust can be invested for greater earnings and to allow investors to build diverse portfolios, or a collection of hopefully, profitable ventures. In a traditional IRA, investment decisions are made by a qualified trustee who holds and manages retirement assets. But a self directed IRA account allows owners to decide on which investments are made. The Internal Revenue Service (IRS) mandates that IRAs be held by a self directed IRA custodian. The custodian safeguards the investors retirement funds by providing guidance and professional advice; managing assets under the direction of the owner; filing reports in compliance with IRS regulations; issuing statements of net gains and losses; and recording all transactions pertaining to the IRA. The self directed IRA custodian uses wisdom and discretion in governing the owner's affairs. Just as Pharaoh placed the administration of his household in Joseph's hands, so does the account holder place confidence and trust in the custodian. (Gen. 41:39-40): "And Pharaoh said unto Joseph, Forasmuch as God hath shewed thee all this, there is none so discreet and wise as thou art: Thou shalt be over my house, and according unto thy word shall all my people be ruled: only in the throne will I be greater than thou."
Custodians are like talent agents: an actress may have a pretty face and lots of skill, but she needs a seasoned professional to help her take advantage of every opportunity. The self directed IRA custodian can avail account holders of good opportunities to make prudent and timely investments, diversify portfolios, and manage assets to ensure a lucrative retirement. A traditional IRA is limited as to the type of investments that can be made, primarily mutual funds, stocks and bonds. But, there is virtually no end to the variety of investitures available for self directed IRA account holders. Portfolios may not only contain mutual funds, stocks and bonds; but domestic and foreign real estate holdings, franchises and partnerships, publicly and privately held corporations, private limited liability companies, secured and unsecured notes, tax liens, and mortgages. While almost an infinite number of choices exist, the federal government prohibits certain types. For instance, owners who invest in real estate are prohibited from employing the property for personal use or benefiting personally. In addition, assets withdrawn before contributors reach the age of 59 1/2 are subject to a 10% penalty for early withdrawal. The self directed IRA custodian is there to clarify IRS regulations and requirements and keep owners abreast of legislation and guidelines affecting retirement plans and investments.
Stock market novices or seasoned traders can set up a self directed IRA account by first consulting a financial advisor or logging onto the Internet to get familiar with the basics of stock purchasing. Potential participants should determine contribution limits based on age, income and marital status. The next step is to investigate the myriad of investment choices and select several that have a low level of risk and a track record of good returns. A self directed IRA custodian, investment banker, or financial planner can offer expert advice. Publicly traded stocks are safe investments for novice investors because information about the company is usually available online and in the public domain. The Internet is an investor's best friend: log onto NASDAQ Stock Market and NYSE Group web sites to find out about potential investment opportunities and whether selected stocks are performing favorably. Browsing corporate home pages will also give added insight into management, profitability, and longevity of ventures which may interest the investors.
Self Directed 401kWhen it comes to funding retirement, a self directed 401k plan may give employees more options and opportunities to realize greater returns and accumulate more cash. Employer-provided plans usually stipulate a select number of investment vehicles from which employees can choose; but self-directed plans offer unlimited choices and more control. The difference is diversity. Employees seeking to diversify portfolios and still take advantage of employer-provided traditional retirement plans may opt for a self directed 401k. Investment vehicles for defined contribution plans are generally limited to the mutual funds, stocks and bonds trustees and plan administrators recommend. But, employees who choose to self-direct assets may have other preferences that are not offered through the plan. Employees can elect to deposit retirement plan contributions into a self-directed brokerage account (SDBA), which gives them full control over where investments are made. Studies indicate that savvy traders are more prone to self directed accounts than stock market rookies; and that employees who choose SDBAs tend to be on a higher pay scale. Financially secure company executives or single, up and coming managerial types may be more prone to risk losing money on a particularly hot commodity or overseas venture.
In a traditional 401k, employer and employees make pre-tax contributions which are held in a trust account, separate from company assets. Business owners can either match employee contributions, deposit a percentage of each employee's wages, or make contributions which combine the two options. A plan administrator acts as a fiduciary agent to perform administrative duties in managing the daily operation of the plan. A trustee -- either an individual, a financial management firm, or bank -- is responsible for accurately accounting funds, issuing benefits statements, and ensuring that assets are protected until distributions can be made to plan participants or beneficiaries -- either at retirement, termination of employment, or death. Trustees are also responsible for investing plan assets in money market funds, stocks, mutual funds, and other vehicles so that contributions can continue to earn greater returns. While some plans are established to allow participants to control asset investments, generally, an employer-provided traditional 401k limits investment choices to those that have good track records of net gains. Trustees and employers can potentially be held liable for losses if disgruntled plan participants can prove that investments were not prudently made. But a self directed 401k leaves investment decisions solely up to participants, therefore, the liability is solely theirs.
One disadvantage of a self directed plan is that a high-rolling participant may gamble on investments and lose; and a series of losses could ruin a well-laid retirement plan. In addition, participants who go solo may also incur additional administration and transaction fees, which cut into retirement assets. From the employer's perspective, workers who elect to control asset investment through self directed plans also present a degree of liability. Some employers offer workers SDBAs, but in the event that an investment fails to pay off as expected, business owners are the first to be blamed. But what if a majority of employees decided to choose a self directed 401k? If each employee's assets were invested in a different mutual funds, publicly traded stocks, and bonds, how would it affect the plan? To prevent dismantling an employer-sponsored 401k, companies which offer SDBAs limit self directed investments to only a percentage of individual employee's contributions.
The average worker may do well to rely on trustees or plan administrators to choose reliable investments which have proven to be lucrative in the past. The purpose of a 401k is to pool individual resources, which are collectively invested, for the collective benefit of a group of participants. Monies collectively invested afford a better opportunity to purchase a larger number of stocks, bonds and mutual funds; which can result in far greater returns than individuals singly investing smaller sums. Thus, too much diversity and self direction could have an adverse affect on the company retirement plan. Biblically speaking, a collective effort always benefits the whole: "Neither was there any among them that lacked: for as many as were possessors of lands or houses sold them, and brought the prices of the things that were sold. And laid them down at the apostle's feet: and distribution was made unto every man according as he had need (Acts 4:34-35).
Retirement planning is not only a concern for 9-to-5 employees, but also for the self-employed. But, defined contribution plans have traditionally been only available through corporations, small business enterprises, and industries. But ,the 401k for self employed sole proprietors with zero employees (freelancers, consultants, lawyers, performing artists, and healthcare providers) can make the dream of funding retirement a reality. Unlike a traditional plan, which limits annual contributions to $15,500 for participants under 50, the 401k for self employed entrepreneurs allows contributions of up to a whopping $44,000 a year! The catch up contribution for individuals over 50 is the same: $5,000. Ideally, a self-employed senior could rack up assets of nearly $50,000 in the first year of enrollment! The 401k for self employed individuals acts like a SDBA in that it allows participants to invest in an almost unlimited range of investments: from private and publicly held companies, commodities, and real estate to private equity, mutual funds and stocks. Collectibles, like insurance policies, personal residences, or any investment that can be personally benefited from are prohibited. The 401k for self employed persons gives individual entrepreneurs the same advantages as those workers who punch a clock. Employees who prefer to take control of retirement plan assets and investments should consider the self directed 401k and consult with plan administrators to see if opening a self directed brokerage account might be advantageous. Whether employed by a company or working solo, seeking the advice of a professional financial planner and exploring investment options is a prudent plan for a profitable future retirement.