The traditional method of wealth building, especially in the context of using IRAs is to establish an IRA. Most people are familiar with Roth IRAs, SEP IRAs and SIMPLE (i.e. incentive matching) IRAs that help in creating a nest egg for employees as they build towards their retirement. However, an unheralded IRA is gaining traction in the marketplace, and we will highlight it through this post.
Essentially, investors are gaining familiarity with the use of self-directed IRAs. Essentially, self-directed IRAs are like the traditional investment accounts we mentioned earlier, but these accounts allow the investor to determine what will be included in the IRA. Unlike the aforementioned accounts, which are governed and directed by institutional investment firms, a self-directed IRA is directed by the account holder.
This gives a great deal of freedom and latitude to the investor. Basically, self-directed IRAs can be used to purchase rental real estate, to secure loans for real estate, to purchase precious metals or to invest in limited liability companies. With the breadth of investment options, there are restrictions to the use of self-directed IRAs. Essentially, they cannot be used in transactions with disqualified persons and there are certain investments cannot be used. For instance, transactions with certain family members are prohibited, and the same can be said with investments involving S-corporation stock and life insurance policies.
With the growing emphasis on estate planning with a purpose, it follows that investing with a purpose can be achieved through a self-directed IRA. If you have additional questions about how this investment vehicle works, an experienced estate planning attorney can help.