Are You Exploring Self-Directed IRA Options to Diversify Retirement Solutions? (Form 443) It may be worth considering self-directed IRA investments as a means to expand beyond traditional stocks, bonds and mutual funds in retirement planning – however it’s important to remember that the IRS has rules regarding these types of investments including prohibited transactions that must be avoided.
These include investing in real estate that you own and co-investing with someone disqualified to invest, as well as purchasing collectibles that do not comply with purity standards.
The Custodian
Custodians of your IRA assets are institutions such as banks, credit unions and financial institutions who specialize in administering retirement accounts. Custodial service providers adhere to stringent policies and procedures designed to keep your account secure.
Self-directed IRA custodians differ from traditional ones in that you can invest in nontraditional assets like real estate, startup equity and tax liens – investments which often present more complexity and come with increased risks than their more straightforward counterparts.
As part of investing in alternative assets, you must also take care not to engage in prohibited transactions that could incur severe IRS penalties. These may include purchasing personal property using your IRA funds as payment for debts or lending them out unlawfully – these activities often lead to fraud and financial misconduct.
The Investments
If you’re interested in investing in nontraditional assets such as real estate, precious metals or shares of private companies, a self-directed IRA might be right for you. But remember these investments have their own set of rules to abide by and may take more research and time management than traditional investments.
Know what investments you can and cannot invest in as the IRS has strict rules regarding prohibited transactions, which includes not purchasing property you intend to live in or hiring yourself for services on that property (this practice is known as self-dealing and should always be avoided).
Due to their illiquid nature, self-directed IRA assets must be verified through independent third-party valuation or researching tax assessment records. Hiring an advisor with experience managing self-directed IRAs could assist with due diligence procedures.
The Taxes
As with other IRAs, a self-directed IRA enables you to use funds from either your traditional or Roth account to purchase traditional financial assets like stocks, bonds and mutual funds; but its flexibility also permits investments in more nontraditional assets, like real estate and precious metals.
As the custodian and trustee of your self-directed IRA, it’s up to you to ensure any investments are viable – that includes undertaking due diligence with both of these institutions.
Professionals should look out for signs that indicate fraud, such as brand new investment companies or claims of unrealistically high returns with no third-party audits conducted by independent parties. Furthermore, it is crucial to understand the rules surrounding investments of this nature as breaking them can have severe repercussions.
The Fees
Self-directed IRAs incur additional fees and costs associated with using them, including custodian fees to process transactions, as well as investor expenses such as investment advice or services provided.
Some assets, like precious metals, require storage fees. With real estate investments, IRA investors are responsible for finding, vetting and monitoring properties as well as updating the fair market value annually.
Additionally, the IRS strictly forbids investing in investments through certain people known as disqualified persons; any violation could expose an IRA investor’s account to severe taxes and penalties.
With that in mind, it’s important to determine whether the increased investment options and flexibility offered by self-directed IRAs make sense for you. If not, traditional financial investments with proven track records of strong returns at reasonable fees might be better options for retirement savings.
