Retirees Be Warned: Avoid This Retirement Account If You Don't Want To Bleed Money

Investing through an Individual Retirement Account (IRA) is touted as one of the best ways to accumulate wealth for retirement. And with a variety of IRA account types available, including traditional IRAs, Roth IRAs, SEP IRAs, and self-directed IRAs, you may think it's as simple as choosing one and using it to invest. And if you're dedicated enough, you may even hit specific savings milestones to retire early. However, choosing the wrong account can have serious financial and tax implications. According to Kiplinger, one account retirees should avoid if it doesn't suit their financial situation is a self-directed IRA (SDIRA).

At first glance, a self-directed IRA can seem like any other retirement investing account. After all, it enables individuals to purchase and hold assets. For investors wanting to optimize their savings, it could even seem like a more beneficial option, as it affords more investment options and along with the tax advantages of an IRA. However, SDIRAs also have high opening, operating, and asset fees. For example, investing in precious metals through an SDIRA typically comes with yearly maintenance and storage fees; meanwhile, buying real estate assets could set you back up to $250 per transaction in fees. Together, these fees can eat away at your precious returns.

Much like figuring out if a 401(k) or Roth IRA is right for you, determining if a self-directed IRA makes sense requires considering various factors. Retirement-focused investors should assess their investment experience, risk tolerance, and portfolio diversification before opening an SDIRA and incurring all the fees that come with it. The main draw of a self-directed IRA is the freedom to invest in a wider range of assets. However, that freedom means that individuals will have to spend a significant amount of time researching assets and carrying out their due diligence to abide by tax regulations. For this reason, SDIRAs may be best suited for experienced investors who want to fully manage their retirement account.

If a self-directed IRA is out of your comfort range, there are a number of alternative IRAs that can still build wealth for retirement as long as you invest consistently for a number of decades. To choose the right account, it is important to assess current employment and financial status, as IRAs have different contribution levels or may be more optimal for individuals in specific employment conditions. For example, SIMPLE IRAs work for self-employed individuals or people working at small companies. But for the average individual, a Roth or Traditional IRA can be as good a tool as any to build wealth, as both accounts can be used to purchase stocks, bonds, mutual funds, and exchange traded funds. However, they have slight differences when it comes to income eligibility and tax advantages. You can easily convert a Traditional IRA to a Roth IRA before a certain age for tax-free investment growth.