The Self-Directed IRA – Increasing Your Investment Options

A self-directed IRA (SDIRA) differs from standard IRAs as it allows you to take advantage of alternative investment strategies instead of limiting you to stocks, bonds, mutual funds, and other traditional investments. This turns SDIRAs into a retirement fund fit for the 21st century, as the old 60/40 investment model quickly becomes obsolete. And with CARL, you can even combine the benefits of a self-directed IRA with the power of quants, further growing your wealth while effectively controlling the level of risk you're taking.

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Individual Retirement Accounts vs. Self-Directed Iras

Nobody wants to work forever, and the most reliable way of preparing for your retirement is your IRA.

It's a safe way of investing your money while you're still working, generating tax-advantaged returns you can live on once you've reached retirement age. That being said, the IRA system is built with security in mind rather than maximum growth.

That's why ordinary IRAs aren't allowed to invest in many of the more high-yield options available. IRAs are limited to investing in stock, bonds, mutual funds and other "traditional" investment vehicles. This has led to the "60/40 investment model", which argues that an IRA should invest 60% of its money in stocks to generate growth and 40% in bonds as a risk control mechanism.

The 60/40 model is no longer tenable in the current global market situation – you need alternative investment options to make sure you're financially stable after retirement.

While this investment model provided financial security for many retired US citizens in the 20th century, it simply doesn't hold water in the 21st century. Thanks to rising inflation, stocks often don't provide enough growth to outpace the de-valuing of your money, while stagnating or even dropping interest rates decrease the returns that bonds can offer. Limiting investment options for IRAs has turned from keeping your retirement money safe to one of the main reasons why many US citizens don't have the financial stability needed to retire. Your IRA can't grow your wealth any faster since it can't invest in the best-performing alternative assets. At the same time, the only option you have to provide additional risk controls is to leave high-yield investment options entirely.

This is why self-directed IRAs are an overall more advantageous investment vehicle for retirement. SDIRAs are individual retirement accounts that are allowed to invest money into a greater variety of alternative investment opportunities, including real estate, precious metals, private equity, or hedge funds. While some investment limitations still apply to them, this means they can invest more freely, potentially leading to greater returns and more options to diversify your portfolio.

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More Growth, More Diversification

If your IRA is primarily investing in stocks and bonds, this opens you up to a particular type of risk, as stocks are effectively tied to the performance of market indices – the economy suffers, and stock prices drop across the board.

Meanwhile, a self-directed retirement account may instead choose to invest in a hedge fund which will typically outperform market indices thanks to techniques such as short selling. This serves as a risk control mechanism, as self-directed IRAs have greater freedom to invest in a variety of assets and financial vehicles.

Self-directed IRAs are typically seen as retirement accounts for investors who want to get the greatest returns for their retirement and are experienced enough to understand how to mitigate the risk associated with many alternative assets by diversifying their portfolios and investing only in reliable high-yield opportunities.

How Do Self-Directed IRAs Work?

SDIRAs are set up essentially the same as regular IRAs. The account owner puts money into their IRA, which is then invested, with the returns going back into the fund. Once retirement comes around, the account owner can withdraw this capital to fund their retirement. You can generally invest the money from your account tax-free, though owners of traditional IRAs still have to pay taxes when withdrawing money. If you're under 59.5 years of age, you also have to pay a penalty when withdrawing money – the money is meant for your retirement, after all. Self-directed IRAs are also subject to required minimum distributions (which means you have to regularly withdraw money from the account once you're 72 years old) as well as contribution limits IRA (as of 2021/2022, it's $6.000 each year, $7.000 if you're 50 or older).

There are only two important differences between traditional IRAs and self-directed IRAs: SDIRAs can put money into a larger variety of investments and they offer account holders a slightly greater amount of freedom when choosing investments.

"Self-directed" is a template that you can apply either to a traditional IRA or a Roth IRA, depending on which of these two you prefer.

Much like standard individual retirement accounts, self-directed IRAs have to go through a qualified IRA custodian or broker who will hold your assets for you and direct any investments. While you as the account holder can make investment decisions which your broker then needs to put into action, they can also invest the money on their own if you give them permission. Meanwhile, for most self-directed IRAs, the custodian is mainly there to put your investment decisions into action. The account holder typically decides which alternative assets to put their money in. In fact, the custodian of a self-directed account isn't even allowed to give you financial advice – they're just here to facilitate your investments.

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Keep These Things in Mind When Setting up an Sdira

While self-directed IRAs can offer significantly more growth than traditional IRAs, there are a couple of things you should be aware of before setting up such an account. First and foremost, neither CARL nor your IRA custodian can give you financial advice, and nothing of what you read here or in your custodian's business information should be taken as financial advice. You need to make your own investment decisions. As self-directed IRAs are subject to a number of IRS regulations, this also means that there are some risks you need to be aware of when setting up your account, putting money into it, or investing. Here are some examples:

  • Always follow the rules: Under IRS regulations, there are still some asset types you may not invest in and some types of financial transactions you cannot engage in, even with a self-directed account. This includes self-dealing transactions (such as renting an apartment in a building owned by your IRA) or other transactions which may constitute a conflict of interest. For example, you're not allowed to invest in life insurance via your account since life insurance benefits your heirs – not yourself.
  • Have a clear understanding of the fee structure of your SDIRA: While self-directed IRAs often have lower fees for brokerage services (since the broker only executes your orders), there are still some fees you need to pay, such as one-time establishment fees and annual renewal fees for your account. Be aware of these to prevent your bottom line from suffering.
  • You're on your own: Custodians will not give you financial advice, nor will they perform due-diligence checks on any investments you may ask them to make on your behalf. This means it's up to you to determine the validity of your investments. This is why you may want to secure the services of a professional financial advisor if you don't already have the necessary investing experience.
  • Keep your liquidity in mind: Under certain circumstances (such as in sudden medical emergencies), you may need to withdraw money from your IRA, either with a penalty or penalty-free if you're at least 59.5 years of age. This may not be possible if your money is tied up in highly illiquid assets. Also, unless you hold a Roth SDIRA, you are required withdraw required minimum distributions (RMD) from the age of 72 onwards. If illiquidity prevents you from doing this, you might incur a penalty.

One of the most important things when setting up an SDIRA is to study the current IRS rules carefully: If you're found to engage in prohibited transactions, your SDIRA will lose its status as a retirement account, which means you have to pay both a penalty and all the taxes you may owe on your now no longer tax-advantaged investment account.

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3 Easy Steps to Start Investing With CARL

Investing in quants is as easy as pie if you've got CARL on your side. Investors can set up an CARL account quickly and easily.

Set Up Your Account

Quickly and securely connect your CARL account to your bank and transfer investment funds.

Analyze Investments

Using the tools within the CARL app, determine which strategies at what allocations are right for your investment goals.

Fund Your Investment

Simply save your portfolio settings and on the next strategy funding cycle your investment will be live!

CARL's Self-Directed IRAs

Self-directed retirement accounts are a great way of opening up your retirement fund to investments that provide more growth than any standard IRA would have access to. And by investing in CARL's quantitative hedge funds, you can help your individual retirement account beat market indices while also benefitting from built-in risk controls.

While high net-worth individuals have been benefiting from these advantages for years, this is the first time ordinary retirement investors can gain easy access to these accounts. Contact CARL to set up your self-directed IRA and gain access to sophisticated quants with 15%+ targeted returns at the same time.

Set up a self-directed IRA with CARL

Listen to Our Podcast

Introducing CARL Self Directed IRA

The CARL Self Directed IRA is now live on the CARL app. Listen to this podcast episode where John Bowens from Equity Trust, our partner in this offering, and Jamie Uppenberg from CARL talk about self-directed IRAs and the benefits of alternative investments like the hedge funds available with CARL.

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