Some people like the convenience of letting payroll deductions build a 401(k) retirement account. Depending on where you work, the potential to benefit from an employer matching contribution doesn’t hurt. But building a 401(k) account isn’t your only option, and if you prefer to play a more hands-on role with your money, consider the benefits of opening a self-directed IRA.
Self-directed IRA accounts aren’t limited by the investment options that restrict 401(k) accounts. Investors are free to work with a custodian to choose which stocks, bonds or mutual funds make the most financial sense for them. Plus, self-directed IRA accounts allow investors to include other important investment types – such as real estate – in their portfolios.
What is a custodian?
In short, a custodian is a licensed financial worker who serves as the liaison between you and the IRS. Typically, a custodian represents one of any number of financial institutions, including brokerages, banks, mutual fund companies, credit unions and insurance companies. Each tends to specialize in different types of investments, so choosing the right custodian to help manage your self directed IRA can be nearly as important as the investment choices you make.
If you’re planning to invest in a wide variety of investment types, choose a custodian with a broad selection of options. Are you interested in CDs, mutual funds, or stocks? Do you plan on investing in annuities or real estate? And keep in mind that different IRA custodians charge different fees for their services, whether an annual maintenance fee, commissions charged for trades, or sales fees on mutual funds. Perhaps most important, a custodian should be someone whose knowledge you trust, because while you are ultimately in control of a self-directed IRA, you ideally want someone who can offer investment advice.
How else can a custodian help?
Even savvy investors can get lost in the legalese governing investments, particularly when it concerns IRA tax implications that can have a very real effect on an investor’s life today. Whether you want to approach a relatively simple task of rolling over an existing 401(k) into an IRA, or delve into more complex investment issues such as deciding between a traditional IRA or a Roth IRA, a qualified custodian has answers. And because an IRA opens up investment options such as real estate and privately held companies, complexities can surface that require a professional.
To make sure that you’re complying with federal rules and regulations, custodians take care of paperwork that is filled with the IRS to show, among other things, that Employee Retirement Income Security Act provisions are satisfied, and that taxes on any distributions are being assessed. If you’re considering rolling your 401(k) account into an IRA, finding an IRA custodian should be your first move. To learn more about how broadening your investment portfolio to include real estate can benefit you in the long run, contact Toucan Investments today.
Justin Velthoen of Toucan Homes is a real estate professional. The content presented above should not be considered tax or legal advice, and is intended only to assist investors in finding general answers to their questions. Toucan Homes recommends that homeowners seek professional tax and legal advice from a licensed lawyer and/or CPA.