Invest with a Self-Directed IRA

Education

Announcing JKAM’s Partnership with Alto IRA

Wealthy investors have long known of the advantages of investing in alternative assets through self-directed IRAs. In doing so, they were able to reap the high-yield potential of non-traditional assets with all of the tax benefits of individual retirement accounts.

Unfortunately, though, these types of investments were largely out of reach for many ordinary investors. As a result, the rich got richer while ordinary investors remained stuck with limited options.

That all changed with the creation of Alto

Alto was founded on the belief that everyone should be able to invest in alternative assets using their tax-advantaged retirement savings. So we set out to streamline the once-complicated and expensive process of creating a self-directed IRA. And today, we’re excited to partner with JKAM Alternative Investments to enable you to make investments using an Alto IRA.

However, you might still be wondering what a self-directed IRA is and how it differs from other IRAs. Let’s take a closer look.

What Is a Self-Directed IRA?

While the process for creating a self-directed IRA used to be complicated, the concept is anything but.

In short, a self-directed IRA is a type of individual retirement account that allows you to take an active role in “directing” how your money will be invested. As a result, you can invest in specific opportunities (e.g., a startup) and asset classes (e.g., real estate, cryptocurrency, securitized art, etc.) so long as allowed by the IRS.

This is unlike more conventionally managed IRA accounts, in which you might select a particular investment plan but don’t take an active role beyond that.

Now let’s take a look at the different types of IRAs, as they have different tax advantages and applications. (However, keep in mind that whichever type of IRA you choose, the earnings within your IRA are able to grow tax-free, although—as in the case of traditional and SEP IRAs—you will pay taxes on distributions.)

Types of Self-Directed IRA

It’s also important to note that a self-directed IRA can take many forms, including a traditional, Roth, or SEP (simplified employee pension) IRA.

Traditional IRAs

The original, traditional IRAs were created in the 1970s to provide Americans a new way to invest for retirement in response to the decline of pensions. Like the familiar 401(k), contributions to a traditional IRA are made using pre-tax dollars (alternatively, you can fund them with after-tax money and deduct the contributions on your yearly taxes). Currently, the yearly contribution limit for IRAs is $6,000 per year ($7,000 if you are 50 or older).

Also like a 401(k), you must wait until six months after turning 59 and-a-half to begin taking distributions without incurring a 10% tax penalty. And because you did not pay taxes on the money invested, you will pay income taxes on your distributions, which you must begin taking at age 72, although some exceptions apply.

Roth IRAs

The main difference between a traditional and Roth IRA is in when taxes are paid. Rather than contributing pre-tax dollars as with a traditional IRA, with a Roth, you contribute funds after taxes. The benefit is that you won’t owe any taxes at the time of withdrawal—assuming you wait until turning 59 ½ and have had your account for at least five years. That makes a Roth IRA a good choice if you anticipate a greater income (or higher taxes) in retirement than now.

Also unlike traditional IRAs, at the time of writing this, there is no required minimum distribution (RMD). That means you don’t have to begin taking withdrawals at a certain age.

Additionally, while the contribution limits are the same as with traditional IRAs, there is an income cutoff for contributing to a Roth IRA. Currently:

  • Individual filers who earn $140,000 or more per year cannot contribute
  • Individual filers who earn between $125,000 and $140,000 may contribute at a reduced amount
  • Married couples who file jointly and earn a combined income of $208,000 are ineligible to contribute
  • Married couples who file jointly and earn between $198,000 and $208,000 combined may contribute at a reduced rate

SEP IRAs

Simplified employee pension IRAs work in much the same way as traditional IRAs, with the same distribution rules. These retirement accounts are offered by employers as an alternative to 401(k) accounts and are funded solely by employer contributions. Typically, companies that offer SEP IRAs are smaller and may have highly cyclical earnings. However, people who are self-employed may open an SEP IRA.

Employers can contribute up to 25% of an employee’s salary per year (up to $58,000 per year), and employees are fully vested from the start.