- 1 Using a Self-Directed IRA for Personal Use or for a Disqualified Person
- 2 Not Knowing the Types of Investments Allowed in a Self-Directed IRA account
- 3 Not Staying Updated on the Prohibited Transactions
- 4 Not Doing Your Research Before Setting up a self-directed IRA
- 5 Mismanaging Repairs and Upgrades of a Real Estate Property
- 6 Choosing the Wrong Self Directed IRA Custodian
Setting up a Self-Directed IRA is a smart move to secure your future. A Self-directed IRA is a versatile retirement plan that lets you invest in a wide range of profitable assets unlike traditional retirement accounts. But this same lucrative IRA account can prove to be a financial disaster for you if you don’t do your due diligence.
So if you don’t want to fall victim to costly mistakes that most people make, avoid these 6 pitfalls
Using a Self-Directed IRA for Personal Use or for a Disqualified Person
This is the most common problem that self-directed IRA account holders face. As a rule, an account holder cannot use the funds in their IRA account for personal use or for a small group of people who are considered disqualified persons. Generally, the group consists of the account holder, spouse, children, grandchildren, parents, grandparents and their spouses. A disqualified person cannot receive any immediate benefit nor extend any immediate credit to the plan.
For instance, account holders are prohibited to purchase a property for personal use using their retirement funds. The same rule prohibits IRA account holders to give loans to a disqualified person or have any business dealings with any person who can benefit directly from the loan including family, personal connections, and friends.
Not Knowing the Types of Investments Allowed in a Self-Directed IRA account
Setting up a self-directed IRA gives you the freedom to invest in alternative assets but it is very important that the IRA account holder has complete clarity on the allowable investments. One more thing that account holders need to be updated with, is the off-limits issued by the IRS. There are three investments which are prohibited transactions – life insurance contracts, collectibles and shares of an S Corp.
Not Staying Updated on the Prohibited Transactions
It is also very important to have thorough knowledge of prohibited transactions as they can disqualify your IRA account immediately with your lifelong savings in it! If the IRS identifies that an IRA investor is involved in a prohibited transaction then it may be treated like a distribution and taxed with additional penalties for an untimely distribution. You run the risk of having your entire fund can be disqualified. The best way to safeguard your fund is to consult a financial advisor when you are investing in different alternate assets.
Not Doing Your Research Before Setting up a self-directed IRA
One of the biggest pitfalls of IRA account holders is also the easiest to avoid: lack of knowledge. So before setting up a self-directed IRA, do your due diligence and educate yourself. A few questions that you would want to find answers to include the following:
- Is your financial portfolio diversified between the traditional and non-traditional world?
- Are you sticking to specific investments that involve more risk?
- Are the assets you want to invest in, approved by the IRS?
- Are your contributing too much or too less to your IRA account?
- Who are the custodians of your IRA account?
- Do you have a financial advisor to give you expert guidance?
You should have answers to all of these questions before setting up a self-directed IRA.
Mismanaging Repairs and Upgrades of a Real Estate Property
There are certain rules that apply to a self-directed IRA for governing how the account holder pays for repairs and renovations made to any real-estate property in the IRA account. You are not allowed to pay out of your own pocket or from the earnings of your personal assets. You are allowed to manage the repairs but you should not do them yourself.
Choosing the Wrong Self Directed IRA Custodian
If you end up with a wrong type self-directed IRA custodian, your entire IRA experience becomes more risky and complex. So before choosing a self-directed IRA custodian, make sure you check their license and registration against the state regulatory resources. Also read through and understand their fee structure. The right custodian will guide you through the complexities of setting up a self-directed IRA and protect you from the pitfalls of prohibited transactions and frauds.
When you are investing money to secure your future, do it with an expert and make sure that your retirement dollars are giving you the maximum possible returns. Self-Directed Retirement Plans LLC has helped thousands of clients take check book control of their retirement funds for over 15 years. Call (866) 639-0066 today for honest advice on how you can make the most of your money without making costly mistakes!
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He brings over 30 years of diverse experience as a financial advisor. Rick takes great pride in giving honest and very experienced advice. Rick can readily converse with business owners and people looking to take control of their retirement accounts.