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by Ken May

I don’t know about you, but I’m not one to have a “set it and forget it” mindset regarding my retirement accounts. I want to know what investments account managers make with my hard-earned money. I also want to understand every fee I’m paying and its impact on my wealth. Most of all, I do not want to lose a single penny of the money I worked so hard to save and protect.

Unfortunately, I meet many retirees and pre-retirees who don’t share my enthusiasm for the hands-on approach. Perhaps it’s because an advisor lured them into believing that since retirement is for the long haul, they should simply plunk their money into an account and forget about it. And, if there are ups and downs, their advisors reassure them that “the market will come back around.”

These investors may not realize that a loss of 50 or 60% of your qualified plan’s value is not something you can quickly and easily fix, no matter what your advisor or broker tells you. You probably have a gut feeling that losing money is not a great outcome, especially if you are within 5-10 years of retirement.

Take a look at this chart from Raymond James research. You may be shocked at what you see. Let’s say your retirement portfolio was to lose a mere 15% of its value in a market downturn. You’ll need a gain of 17.6 % to get back to where you were before. Where will you get those kinds of gains? Is it even possible to get that high a gain unless you take on much more risk?

This scenario has all the hallmarks of a cycle of chasing after gains and putting more of your wealth into volatile, risky assets. Crypto anyone?

Not only is a 15% loss possible, but it’s also fairly common in this volatile, unpredictable economy. If you recall the Great Recession of 2008-09, you might remember that some Americans lost 50, even 60% of their 401ks and IRAs. That’s bad enough when you are 20, but it is disastrous when you are over 50 and lack a long enough time horizon to make up those losses.

So, what if you had a 45% loss? It would take an 82% gain for you to recover. Bear in mind that is just what it would take, over time, to recoup lost account value. Don’t forget that you haven’t gained anything as you struggle to return to positive, so you have lost out on critical time necessary for growth. No growth in an inflationary, high-tax situation is a recipe for a less-than-successful life when you stop working.

Is there anything you can do to decrease your chances of running out of cash when you retire? Is there an alternative strategy if you are concerned about losing money or exposing your savings to market volatility, inflation, and taxes? Do I have time to develop a truly diversified portfolio design, a portfolio where I am actively involved in the maintenance, balancing, and investment selection processes?

One potential avenue to regain control of your finances

If you are a savvier, more conscientious, and informed investor, it may be time for you to take your retirement accounts off auto-pilot and dive in. One way to regain control is through a self-directed IRA (SDIRA). A trustee or custodian administers an SDIRA account, but you manage it directly as the account holder. A self-directed IRA allows you greater diversity because you can hold various “alternative” investments, such as real estate or precious metals.

SDIRAs can be established as either traditional IRA accounts to which you make regular, tax-deductible contributions or Roth IRAs, which give you tax-free distributions. SDIRAs are not the right choice for everyone.

These accounts are best suited for those who already have some knowledge of alternative investments and have the initiative to perform the necessary due diligence.

The main difference between SDIRAs and other accounts is the investments you can put into them. SDRAs offer a broader selection of assets that may include more complex investments such as limited partnerships, commodities, real estate, tax liens, private placements, real estate, farm animals, and other non-traditional investments. While there aren’t many, there are some IRS-prohibited items you cannot put into your SDIRA, such as life insurance, S Corp stocks, prohibited transactions such as collectibles, and so-called “self-dealing.” You can discover more about the IRS prohibitions at https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions.

Who can open an SDIRA?

If you currently have an account such as a Roth IRA, “simple” IRA, SEP IRA, or defined benefit plan, you can start an SDIRA. 401k, 403b, 457, or federal employee TSP participants can also roll their accounts into a self-directed IRA.

Moving money from one of your plans to an SDIRA is not taxable when done correctly. Tax liability depends on which account you transfer the money from and the kind of account to which you move those funds. The ability to directly roll over or transfer funds to an SDRIA is unlimited and typically straightforward and quick. Your SDIRA custodian will usually have the funds in two weeks or less. You can even do nontaxable partial amount transfers as well.

What’s the process for opening an SDIRA?

I can’t emphasize enough that locating a solid, reputable custodian is critical to opening an SDIRA.

When researching custodians, you’ll discover that there are administrators, facilitators, and true custodians handling the needs of SDIRA holders. The IRA approves only true custodians to hold assets.

And, if you intend to place non-traditional investments into your SDIRA account, you must be exceptionally cautious when selecting your custodian. IRS rules and regulations, as you probably know, can be complicated and easily violated, even by specialists. If you aren’t careful when you choose your custodian, you could make mistakes that land you some costly penalties.

Your chosen custodian should have a proven track record of success administering SDIRAs and a thorough awareness of prohibited holdings and other potential penalty triggers. Better custodial firms also provide a more extensive selection of investment options. If you know, for instance, that you’ll want precious metals, cattle, real estate, or a limited partnership in your account, ensure your chosen custodian offers those choices. Also, be sure you understand the fees charged by the custodian and how they will impact your account’s performance. Costs may include maintenance fees, loads, or trading fees, which can vary significantly from custodian to custodian.

Self-directing your finances, while often exhilarating, can be frustrating when your custodian fails to answer your questions or offers confusing information. Your chosen custodial firm must provide a high level of responsive customer service. While custodians are not allowed to give you investment advice, they can and should be able to help you find answers to other questions about your account. If you feel you need investment advice along the way, it’s a great idea to partner with a financial advisor or another investment expert.

The bottom line: Self-directed IRAs may make sense for more sophisticated investors wanting to self-direct their investment accounts. Many investors craving greater diversity in an unpredictable economy or tired of investing in Wall Street stocks or mutual funds choose SDRAs. SDRAs are also something to consider if you are an experienced passive investor who wants to use your cash in IRAs or other accounts as investment capital to purchase multifamily real estate or participate in syndications.

If you think an SDRA can help you regain more control of your financial future, it’s wise to talk to your financial advisor about all the pros and cons before acting.