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Self-Directed IRA Risks

One of the most common concerns we hear from investors is that they’re worried they don’t know enough to maintain and grow a self-directed IRA, or feel that managing their own investments is just too risky. iPlanGroup works to educate self-directed investors, so today we’ll talk a little bit about risk.

There’s inherent risk with any investment, including self-directed investments, but knowing what the risk potential is in advance can often help mitigate it. Below are three risks associated with a self-directed IRA and how you can minimize these risks by being in-the-know. Read on, then contact the team at iPlanGroup for a free consultation.

Not Doing Your Due Diligence

To have a self-directed IRA, you need to have a custodian or administrator. These should be companies that you trust to maintain and protect the tax status of your IRA account. But there’s a huge caveat: neither the custodian nor the administrator can give you actual financial advice.

That means it’s the responsibility of the investor to determine whether or not a specific investment is a good option. For those who don’t have the expertise or industry knowledge to choose investments alone, we recommend using a financial advisor who can provide more insight into specific investment options.

Not Knowing What Actions are Prohibited

Because a self-directed IRA is managed by you, it’s your responsibility as the investor to know what you can and cannot invest in and what types of transactions are not allowed. Failing to stay informed on the rules and regulations or failing to follow any of the rules means your account could lose its tax benefits and it could result in penalties.

The biggest rule to be aware of with self-directed IRAs is the rule against self-dealing. You cannot borrow funds from your IRA, purchase property for your own personal use from your IRA, or interact in any real way with your IRA. For example, if a piece of real estate owned by your self-directed IRA needs a repair, the IRA needs to pay for it, not you – even if it’s as simple as replacing a deadbolt.

Another way in which the law prohibits self-dealing is that it prohibits the IRA from interacting with immediate family members. This includes a spouse, descendants, and ancestors. Whether you’re estranged or very close, these people are considered prohibited persons in the eyes of the law and any interaction could result in penalties.

Not Thinking Like an Investor

Sometimes owners of a self-directed IRA get excited about a particular investment. But putting all of your eggs in one basket is never a good idea. What if interest rates bottom out? What if the real estate bubble pops? What if there’s a new tax or tariff? These market changes could drastically affect your account if all your money is focused in one investment.

As a self-directed IRA owner, it may be best to maintain a diverse portfolio and continue maintaining that diversity throughout your investing years. This is not only a good security net, it’s just good business sense. Having a mix of traditional investments (stocks, bonds, and mutual funds) as well as alternative investments (precious metals, promissory notes, and real estate) is a good way to keep a portfolio healthy – and mitigate your risk.

Learn More

To learn more about self-directed IRAs and find out whether it might be a good fit for your financial goals, contact the team at iPlanGroup for a free consultation.

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