There are many advantages that come with opening a self-directed IRA when saving for your retirement. SDIRA owners are put in the driver’s seat as they navigate the possible investment options and take personal control of their future.

All investment decisions are put in your hands; as fund manager and account holder, you choose how to set up your retirement portfolio for the best possible outcome. From alternative assets to tax-advantaged investing, an SDIRA could be the best choice for your future.

While exploring the idea of an individual retirement account IRA, it can become a difficult task if you aren’t prepared. It’s essential for any account holder to perform his or her due diligence to avoid any entanglements that can be detrimental to the funds. Having personal control of your account can have added risk, especially if you don’t do your research. As you consider investment options, here are five common misunderstood facts about self-directed IRAs any investor should be aware of.

1. You can’t invest in just any assets.

One of the biggest perks of SDIRAs is the option to invest in alternative assets. Traditional IRAs and Roth IRAs through bank trust companies only allow you to invest in stocks, bonds, or treasury. Self-directed traditional IRAs and Roth IRAs have much more flexibility. Account holders can dive into the real estate market, become private lenders, or even invest in the new wave of cryptocurrency like Bitcoin.

While there are many opportunities with these alternative investments, the IRS doesn’t allow for just anything. Though there aren’t clear guidelines about what you can invest in, there is a very specific list of alternative investments which the IRS does not allow. This list includes most collectibles, certain precious metals, term life insurance, and other items such as artwork, coins, and stamps. Before choosing your alternative assets, be sure that they will not disqualify your account.

2.  You cannot lend or sell to everyone.

When making your investments, it’s important to keep in mind the certain people you cannot lend or sell to. While most people are fair game, “disqualified individuals” cannot engage in any transaction involving an account holder’s SDIRA fund.

These particular individuals include anyone who could benefit from your self-directed account: fiduciary planners, service plan providers, your spouse, your children and their spouses, parents, grandparents, or grandchildren and their spouses. Additionally, disqualified individuals cannot live in, rent, or purchase any property owned by your SDIRA.

Though most of your direct lineage is prohibited from pursuing any transactions dealing with your retirement account, family is not entirely off limits. You can invest with individuals who do not stand to benefit from your retirement funds. Perform your due diligence when making any investments or renting out your properties to avoid any possible issues.

3. Though your SDIRA needs to be monitored/handled by an IRA custodian, they are not responsible for your IRA.

As an SDIRA holder, you are responsible for your account investments. Though the IRS requires that all your assets are handled by a certified IRA custodian, any issues involving your investments will fall on you. While it’s beneficial to choose an IRA custodian that is well-versed in the type of assets you want to invest in, they serve as your account monitor. IRA owners oversee selecting alternative investments, allocating funds, making investment decisions, and keeping the account information up-to-date. Custodians report to the IRS, but do not provide legal or financial advice.

In addition to a passive custodian, it may be wise to seek the assistance of a financial professional when setting up your SDIRA. As you build your account, it’s essential to keep your custodian in the loop as far as marketing prices and new investment ventures.

4. Your SDIRA account can incur taxes based on situational investments.

Any investment made with your SDIRA must be paid through your IRA. It’s important to keep enough funds in your account to perform maintenance on anything you may own, such as rental properties. You cannot use your personal funds. However, if your investment should exceed the amount held in your individual retirement account, you can fund the purchase using a non-recourse loan. The downside to this is that this transaction opens your account to UBTI, or unrelated business taxable income.

While most investments are tax-deferred or tax-free, certain investments or transactions can result in UBTI. This can put a dent in your retirement savings. Also, failing to follow the rules associated with UBTI can result in heavy tax consequences. Before making any investments, perform your due diligence and seek the guidance of a tax attorney or financial advisor to avoid any unwanted penalties.

5. While you will eventually benefit from your SDIRA, you cannot do so immediately.

As a self-directed IRA account holder, you cannot immediately benefit from your account. The IRS has strict rules about how and when account holders can reap the benefits of their labor. While it may seem like an easy pitfall to avoid, often, it can ensnare any uninformed investor. Much like a ‘disqualified individual,’ you cannot use any of your investments for personal use, such as rental properties, offices, or vacation homes. You cannot invest in a home you currently own or live in. Any real estate purchases must be made and held by your IRA.

In addition, account holders cannot invest in any personal businesses, own the majority stock of a company, or lend themselves money. Also, they cannot use any personal funds for any investment owned by their IRAs. The key to any SDIRA is keeping personal funds and self-directed funds separate from each other to avoid any legal entanglements.

Embrace the Possibilities

The first step toward financial success is being prepared. Armed with the proper research, investing with an SDIRA can prove to be very beneficial for your future. Any investment carries a certain risk; to avoid any issues and build a solid nest egg, perform your due diligence as you take on the responsibilities of IRA owner. Seek the advice from a financial professional, choose the right IRA custodian, and select the assets that would benefits you the most.