Taking control of your financial future can be a daunting task, especially if you are the one responsible for it. While overseeing your own retirement fund can be beneficial, it could also be disastrous for those who do not perform their due diligence. As a result, investors find themselves falling victim to common self-directed IRA mistakes.

When investing in an SDIRA, you become responsible for all your investments. While traditional or Roth IRAs do grant a wide variety of assets to build your funds for a comfortable nest egg, there are many missteps that can easily disqualify you from ever collecting on it. When setting up your self-directed IRA, it’s best to keep the following mistakes in mind. Avoiding these pitfalls will ensure you keep hold of your retirement assets without fear.

1. Using IRAs For the Benefit of Disqualified Persons

One of the most common issues account holders encounter is using their SDIRAs for the benefit of a disqualified person, whether it is for themselves or someone else directly involved with the fund. As a rule, an IRA owner cannot borrow from their IRA to purchase big ticket items for personal use. For instance, it’s prohibited for account holders to purchase a home for personal use using their retirement funds.

Under the same rule, you cannot give out loans from your IRA to a disqualified person. While owning an SDIRA allows you the freedom to loan out to corporations or projects, you cannot have business dealings with anyone who may benefit directly from the loan, such as: family members, friends, or other relationships of a personal connection. In short, it’s best to keep close and personal relationships apart from your directed IRA investments. When loaning out cash or making purchases, it’s best to research who qualifies as a “disqualified person.”

2. Not Knowing Allowable Investments 

One of the benefits of having a self-directed IRA account is the option to invest in alternative assets. When you plan to invest in alternative ways, it’s important to be clear what the IRS allows and doesn’t. While this route opens quite a few possibilities, another mistake account holders make is not knowing what is considered off-limits.

The IRS has issued limitations on the types of investments allowed with SDIRAs, but they are only specific about what you cannot use. The basics can be summed up on a small list: most collectibles, derivatives, and coins. Collectibles can include items like antiques, stamps, gems, artwork and rugs, which puts a limit on which collectibles are allowed. In addition, life insurance is restricted as well, and cannot be rolled over into an IRA account. Knowing what is limited can assure that your account is well-rounded and protected. 

3. Neglecting to Brush Up on Prohibited Transactions

Much like knowing what is allowed by the IRS, when opening your account, it’s best to have thorough knowledge of prohibited transactions. Any prohibited transaction can immediately disqualify your IRA and all your hard-earned money with it. If the IRS discovers that a directed IRA investor performed any prohibited transactions, the best-case scenario is that the transaction is treated like a fund distribution. It is taxed with added penalties for early distribution. The worst-case could mean disqualification of your entire fund.

For example, some prohibited transactions center on collateral and guarantees. The rules for these issues are pretty tricky. You are not allowed to guarantee any loan, deed of trust or mortgage with your personal assets. Any transaction made with your IRA must be covered by the IRA account itself. This mistake can also occur when investing in several alternate assets.

4. Dishonest Dealings

An easily-avoided self-directed IRA mistake involves making proper deals with your account. Mishandling any of your assets or using them dishonestly is a quick way to void your retirement fund. For instance, a common investment that is abused is an LLC account. IRA LLC accounts can be very beneficial; however, some investors attempt to use them to avoid paying taxes. While this may seem like a sure-fire way to avoid the fees, whether by design or by accident, this is one of the quickest ways to be penalized. Whenever investing with this alternative asset, it’s best to consult a tax professional.

While tax dodging is one way to get the attention of the IRS, mishandling property owned by your IRA is another way. Any repairs made to any property must be funded directly through your SDIRA and not out of pocket. The specific rules in place allow for a separation between your personal involvement and the account. While it may seem like an honest mistake, any disrepair that befalls your IRA owned property can also reflect badly on your account. Regardless of the mistake, the result may end in a drain on your retirement fund.

5. Lack of Due Diligence

One of the biggest downfalls of account holders is the easiest to fix: the lack of due diligence. Opening an SDIRA account can be tricky if you haven’t done your research. While a self-directed retirement fund has many opportunities, like many other ventures, there is big risk involved if you do not educate yourself. The listed pitfalls are some of the most common mistakes, but there are far simpler issues that you may overlook.

When making investments or starting a new business venture, part of the due diligence is researching what you are investing in. Likewise, when putting money into these investments, are making sure that your net is being cast over a wide area for a fully formed portfolio? Or are you sticking to one or two investments that may hold more risk? Are you contributing too much or too little to your account? Who are your custodians and experts? Are you overpaying them? All of the questions should be answered before opening your retirement fund.

Concluding Thoughts

When investing money in your future, it’s crucial to ask these questions to get the best out of your retirement account. Knowing the most common issues that befall account holders can you bring you one step closer to having a secure nest egg. With any venture, it’s best to educate yourself on all possible outcomes to prepare for and avoid any possible errors. With the proper prep work, your self-directed IRA can set you up for your golden years.