Advantages of a Self-Directed Individual Requirement Account (SDIRA)

Self-Directed IRAs (source: ramseysolutions.com)

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

What Is an Individual Retirement Account (IRA)?

An Individual Retirement Account (IRA) is a tax-advantaged retirement savings account. It is an account that must be established at a financial institution, like a bank, a brokerage, or a mutual fund company. A custodian must hold an IRA on behalf of an individual where these retirement investments grow on a tax-free or on a tax-deferred basis. All custodians must be approved by the Internal Revenue Service (IRS). 

There are two types of conventional IRAs. There is the traditional IRA where contributions to the account are made with pre-tax dollars. And there is the Roth IRA where contributions to the account are made with after-tax dollars.

Both the traditional IRA and the Roth IRA have their own rules and restrictions regarding fund accessibility, tax consequences, and eligibility.

What is a Traditional IRA?

Contributions to a traditional IRA are tax-deductible but there are strict eligibility requirements. These requirements are mandated by the IRS and are based on an investor's income, filing status, and availability of other retirement plans.

Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while the funds remain in the account. However, when funds are withdrawn from the account, withdrawals are subject to federal income tax. Investors might find traditional IRAs beneficial if their tax rate in retirement might be lower than when contributions are made.

What is a Self-Directed Individual Requirement Account (SDIRA)?

A Self Directed Individual Requirement Account (SDIRA) is an IRA type that must be set up as a conventional IRA, that is, either a traditional IRA or a Roth IRA. Whether you select either a traditional or Roth IRA for your SDIRA, the same limitations and eligibility guidelines apply to SDIRAs as conventional IRAs.

An SDIRA allows the account holder to invest in alternative assets for retirement savings. For example, these alternative assets may be real estate, precious metals (gold and silver), private equity, commodities, or digital assets (such as cryptocurrencies).

Importantly, SDIRAs have the same contribution and income limits as conventional IRAs. All individual retirement accounts including SDIRAs are covered under Internal Revenue Code 408.

What are the Advantages of an SDIRA?

First and foremost, an SDIRA allows investors to experience tax-free growth of its holdings. Investing over time in an SDIRA provides tax-deferred or tax-free growth that can positively affect future retirement earnings.

SDIRAs also give investors control of their retirement savings and allow investors to become more active in directly handling their retirement savings.

For example, if you are interested in holding cryptocurrencies in an SDIRA, investors can actively trade these currencies 24/7, 365 days a week.

Investors add a certain amount of alternative asset exposure to their overall investment nest egg because of the potential upside for greater returns. As just one example, some cryptocurrencies have had meteoritic growth in their prices over the last few years. For example, Bitcoin has seen a 600% increase in valuation over the last five years.

Alternative investments, such as precious metals or cryptocurrencies are not typical assets like a stock, a bond, or a mutual fund. They, therefore, bring diversification to a retirement portfolio. Such assets can therefore act as a potential shield from stock market swings and volatility.

Many see alternative investments as also offering some type of an inflation hedge. Traditional currencies like USD, EUR, or GBP lose their value over time to Inflation. For example, today US inflation is estimated at 7.0% Unlike certain fiat currencies, cryptocurrencies such as Bitcoin are designed to have a limited supply. These cryptocurrencies cannot be devalued by government actions or by a central bank printing too much of them.

Therefore, some SDIRAs can act as anti-inflationary investments. For example, some people refer to Bitcoin as “digital gold.” Why? Because just like gold, Bitcoin will not lose its value over time. The crypto markets never sleep and are therefore active 24/7. Therefore, a crypto-based SDIRA will provide owners the ability to continuously monitor and invest in their investment portfolio at any time of the day.

Indeed, most crypto IRA custodians, like iTrustCapital, provide 24-hour/day, 365 days account access

All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice.

Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.