Self-Directed IRA Setup Checklist and Basics

Opening an IRA and depositing your funds is only half the battle, regardless of whether you completed a direct rollover or an indirect rollover from your previous employer’s plan. For a self-directed IRA, you must choose what to invest your assets in, or your funds will sit idle.

Whereas your 401(k) likely offered a small range of mutual funds or ETFs, with an IRA, you typically have access to a broader range of investment choices, including precious metals or real estate, depending on the IRA custodian.

So now that you’re an IRA owner, it’s wise to speak to a financial advisor to get some guidance about how to make the most of your IRA. Some brokerage accounts come with a free consultation with a qualified financial planner — even if you’ve decided to use a robo-advisory firm. Explore your options and ensure you’re investing your money in a way that aligns with your financial goals.

You have a lot of investment choices: stocks, bonds, and even crypto and other alternative investments. Generally, an allocation with a higher percentage of stocks is set up for more growth. This is best for younger people who typically have many years until retirement.

Conversely, people nearing retirement might opt for lower-volatility investments, like bonds or cash.

If you invest in mutual funds and ETFs, make sure you know what’s in them to understand your whole portfolio’s allocation accurately. Periodically revisit your overall allocation to ensure it aligns with your age and retirement goals.

• Remember: There are numerous types of IRA accounts, including traditional IRAs, Roth IRAs, checkbook IRAS, SEP-IRAs, and more, so always read the fine print of your plan type to ensure you’re seeing the guidelines that apply to you and your account. Different rules apply to each one, like Required Minimum Distributions, tax advantages, and more.

A mutual fund’s (or ETF’s) expense ratio indicates how much you’ll pay in fees to invest in the assets — the higher the expense ratio, the more you pay in fees. As a rule of thumb, a mutual fund charging more than 1% would be considered on the higher end.

ETFs should have lower expense ratios (The popular SPY ETF has an expense ratio of 0.09%). There are plenty of low-fee options, and providers vary in terms of what they charge – don’t let your savings get eaten up by high fees. Fees that sound small can ultimately add up to take a big bite out of your retirement account.

Remember, you can keep contributing to your IRA each year. When you have a Traditional IRA, the investments are tax-deferred, like a traditional 401(k). If you have a Roth IRA, you make investments after you pay income taxes on the funds so you can withdraw them in retirement tax-free, like a Roth 401(k).

Try to avoid waiting for the end of the year to contribute – the earlier you contribute, the more time your assets have to grow. Just make sure you review the IRA contribution rules to stay within IRS guidelines.