Self-direction in the context of an IRA means that you can choose and manage your own investments within the account, rather than relying on a financial advisor or a pre-set menu of investment options.
While many traditional IRAs are managed by financial institutions that offer a limited selection of investment options, a self-directed IRA allows you to invest in a much broader range of assets, including real estate, private equity, and beyond. This can give you greater control over your investments and potentially higher returns.
However, with greater control comes greater responsibility. Self-directed IRAs require more active management than traditional IRAs, and investors must be well-informed about the risks and regulations associated with different types of investments. Additionally, self-directed IRAs may have higher fees and administrative costs than traditional IRAs.
It’s also worth noting that self-directed IRAs are subject to the same contribution limits, withdrawal rules, and tax treatment as traditional IRAs. However, because of the greater investment flexibility, self-directed IRAs may be more appealing to investors who are comfortable taking on more risk in pursuit of potentially higher returns.