Retirement planning can create a lot of headaches. If you play it safe and invest in bank Individual Retirement Accounts, your money may not grow. If you roll the dice and play the stock market, your retirement plans may go up in smoke if the market tanks. Self directed retirement accounts give you another alternative with more investment options, though they do come with some restrictions.
When you open an IRA, your bank or broker assumes the role of custodian. You can only invest in items the bank can hold for you, such as a certificate of deposit or savings account. Brokerage houses can hold stock certificates or insurance policies, but your options are limited by your custodian's capacity to hold your assets. In contrast, when you open a self-directed IRA you employ a trustee to manage your account. You make the investment rules rather than the trustee. You can invest in a small business, buy a herd of cows or even a house, and your trustee must take the necessary steps to manage the investment.
Very little thought goes into managing an IRA CD. You deposit your money, and your bank pays interest on the CD at maturity. When you invest in stocks or bonds, your broker may help out with tips and advice. When you create a self-directed IRA, you're on your own. You decide what you want to invest in, which means you're responsible for all of the research into those investments.
Banks do not typically charge custodial fees for IRA accounts. Investment brokers do, but you can limit these fees if you set up an online account through a discount broker. Self-directed IRAs are much more expensive to operate because you must appoint a trustee to manage the account. The trustee's duties may include everything from filing taxes, negotiating real estate transactions, or overseeing the operation of your business. You may have to pay the trustee a full time wage just to manage the account.
Even within a self-directed IRA, you still have to contend with Internal Revenue Service rules. You can't, for example, invest in an S-corporation, art works, antiques, gems, stamps or rugs. You also can't use some of the things you buy without falling foul of tax laws. You can buy a home, for example, but you must pay a 10 percent tax penalty and income tax if you actually move into it. You also can't buy or sell IRA investments to family members. This all means that self-directed IRAs give you a degree of choice, but your options are still limited.