Self-directed IRAs Allow More Choice, but Aren't for Everyone

By Clifton Linton
Writer, mPower

In this article What is a "Self-Directed IRA"? Advantages: Greater Investment Freedom Drawbacks: Higher Fees and More Homework Who Might Consider A Self-Directed IRA?

If you've heard the term "self-directed IRA," you might wonder what it means. After all, by definition, Individual Retirement Accounts are up to the account-holder to direct.

However, if you're a more adventurous investor or one with a high net worth, an IRA with a mutual fund company may not give you the diversity you seek. In that case, you might want to open a self-directed IRA, a type of IRA that allows you to invest in a wider selection of choices than a 401(k) plan or regular IRA.

Let's take a look at these accounts and explore why or why not they may be appropriate for you.

What is a "Self-Directed IRA"?

At some mutual fund companies, brokerage firms or other financial institutions, if you open an IRA, you may only have access to the in-house investment options. The company simply may not offer extra products.

"A self-directed IRA is an instrument that allows individuals to pick and choose different investments under an IRA wrapper." - Don Boegel, a Minneapolis-based certified financial planner

A self-directed IRA lets you invest in almost any listed security or investment eligible to be held in an IRA.

"A self-directed IRA is an instrument that allows individuals to pick and choose different investments under an IRA wrapper," said Don Boegel, a Minneapolis-based certified financial planner.

Still, you won't have total investment freedom with a self-directed IRA. Commodities and precious metals are two items that the IRS says are no-nos for IRAs.

Commonly, you have to go to a brokerage firm to open a self-directed IRA. These financial companies may have alliances with many fund families and other investment providers.

Get Greater Freedom With a Self-directed IRA

Self-directed IRAs give you greater freedom of choice.

"You have greater flexibility. You have more investment options," said Kim Dignum, a Fort Worth, Texas-based certified financial planner.

In a self-directed account, you could invest in mutual funds from a variety of fund families, real estate investment trusts, individual stocks, corporate or treasury bonds or just about any other listed security.

Still, Boegel points out, your fund selection may be limited if you open a self-directed IRA with a brokerage firm that has a limited fund supermarket.

Higher Annual Fees With a Self-directed IRA?

"Self-directed IRAs often have higher annual fees than standard IRA accounts," Boegel said.

If you open an IRA with a mutual fund company, typically annual service fees run $10 to $15. Comparatively, a self-directed IRA account may charge annual fees of $30 to $50 a year. Further, you may have to pay extra commissions to buy or sell funds within that account, meaning that if you actively trade your IRA money, your commission fees could really add up.

Still, if you have a half-dozen IRAs scattered among different mutual companies or brokerage firms, you might end up saving on annual service fees by consolidating your holdings into a single account.

One caveat: if you roll money from an employer-sponsored retirement plan into a self-directed IRA with other IRA money, you may increase your investment choices, but you won't be able to roll it into a new employer's plan. As a result you'll lose the ability to take a loan on the money.

If you choose unconventional investments for your self-directed IRA you may also need to do more homework on them than if you limit yourself to a few well-chosen mutual funds. Be sure you are prepared to do this.

Should You Choose a Self-Directed IRA?

A self-directed IRA may not be for everyone.

The folks these accounts are most ideally suited for are those with high net worth, looking
to diversify their investment holdings.

Self-directed IRAs are best left to "high-end people," said Lorayne Fiorillo, author of Financial Fitness in 45 Days: The Complete Guide To Shaping Up Your Personal Finances. "Investors with smaller holdings might want to consider sticking with lower-cost traditional accounts," she added.

Important Tip: One way to save some money is by opening a self-directed IRA account with a brokerage firm offering what's known as a fund supermarket. At a fund supermarket you can buy funds without paying commissions or transaction fees. It's kind of like buying the fund directly from the fund provider. In 1992, discount stockbroker Charles Schwab & Co Inc. initiated this idea and currently offers 1,700 funds through its "One Source" supermarket. Other brokerage firms have started similar programs. But not all funds may be available through fund supermarkets.

The higher service fees and commissions could deplete the account of a small holder, financial planners warn.

The other group that might find self-
directed IRAs attractive is investors looking
to diversify their holdings.

"This account may be ideal for investors with a large account balance who don't feel comfortable with their money only in one mutual fund family," Boegel said.

A last group for which this account may be ideal is those who want the broadest selection of investment choices.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Self-directed IRAs Allow More Choice, but Aren't for Everyone

By Clifton Linton
Writer, mPower

In this article What is a "Self-Directed IRA"? Advantages: Greater Investment Freedom Drawbacks: Higher Fees and More Homework Who Might Consider A Self-Directed IRA?

If you've heard the term "self-directed IRA," you might wonder what it means. After all, by definition, Individual Retirement Accounts are up to the account-holder to direct.

However, if you're a more adventurous investor or one with a high net worth, an IRA with a mutual fund company may not give you the diversity you seek. In that case, you might want to open a self-directed IRA, a type of IRA that allows you to invest in a wider selection of choices than a 401(k) plan or regular IRA.

Let's take a look at these accounts and explore why or why not they may be appropriate for you.

What is a "Self-Directed IRA"?

At some mutual fund companies, brokerage firms or other financial institutions, if you open an IRA, you may only have access to the in-house investment options. The company simply may not offer extra products.

"A self-directed IRA is an instrument that allows individuals to pick and choose different investments under an IRA wrapper." - Don Boegel, a Minneapolis-based certified financial planner

A self-directed IRA lets you invest in almost any listed security or investment eligible to be held in an IRA.

"A self-directed IRA is an instrument that allows individuals to pick and choose different investments under an IRA wrapper," said Don Boegel, a Minneapolis-based certified financial planner.

Still, you won't have total investment freedom with a self-directed IRA. Commodities and precious metals are two items that the IRS says are no-nos for IRAs.

Commonly, you have to go to a brokerage firm to open a self-directed IRA. These financial companies may have alliances with many fund families and other investment providers.

Get Greater Freedom With a Self-directed IRA

Self-directed IRAs give you greater freedom of choice.

"You have greater flexibility. You have more investment options," said Kim Dignum, a Fort Worth, Texas-based certified financial planner.

In a self-directed account, you could invest in mutual funds from a variety of fund families, real estate investment trusts, individual stocks, corporate or treasury bonds or just about any other listed security.

Still, Boegel points out, your fund selection may be limited if you open a self-directed IRA with a brokerage firm that has a limited fund supermarket.

Higher Annual Fees With a Self-directed IRA?

"Self-directed IRAs often have higher annual fees than standard IRA accounts," Boegel said.

If you open an IRA with a mutual fund company, typically annual service fees run $10 to $15. Comparatively, a self-directed IRA account may charge annual fees of $30 to $50 a year. Further, you may have to pay extra commissions to buy or sell funds within that account, meaning that if you actively trade your IRA money, your commission fees could really add up.

Still, if you have a half-dozen IRAs scattered among different mutual companies or brokerage firms, you might end up saving on annual service fees by consolidating your holdings into a single account.

One caveat: if you roll money from an employer-sponsored retirement plan into a self-directed IRA with other IRA money, you may increase your investment choices, but you won't be able to roll it into a new employer's plan. As a result you'll lose the ability to take a loan on the money.

If you choose unconventional investments for your self-directed IRA you may also need to do more homework on them than if you limit yourself to a few well-chosen mutual funds. Be sure you are prepared to do this.

Should You Choose a Self-Directed IRA?

A self-directed IRA may not be for everyone.

The folks these accounts are most ideally suited for are those with high net worth, looking
to diversify their investment holdings.

Self-directed IRAs are best left to "high-end people," said Lorayne Fiorillo, author of Financial Fitness in 45 Days: The Complete Guide To Shaping Up Your Personal Finances. "Investors with smaller holdings might want to consider sticking with lower-cost traditional accounts," she added.

Important Tip: One way to save some money is by opening a self-directed IRA account with a brokerage firm offering what's known as a fund supermarket. At a fund supermarket you can buy funds without paying commissions or transaction fees. It's kind of like buying the fund directly from the fund provider. In 1992, discount stockbroker Charles Schwab & Co Inc. initiated this idea and currently offers 1,700 funds through its "One Source" supermarket. Other brokerage firms have started similar programs. But not all funds may be available through fund supermarkets.

The higher service fees and commissions could deplete the account of a small holder, financial planners warn.

The other group that might find self-
directed IRAs attractive is investors looking
to diversify their holdings.

"This account may be ideal for investors with a large account balance who don't feel comfortable with their money only in one mutual fund family," Boegel said.

A last group for which this account may be ideal is those who want the broadest selection of investment choices.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.