Planning for retirement can be tricky, and with so many options, the process can be overwhelming. When looking into investment advice, the best way to approach planning is with an open mind and an understanding of what’s available. Beyond the traditional trusts and bank options, you can open your investment options by considering a self-directed account.

Self-directed IRAs allow account holders to explore alternative assets aside from the limited bonds and treasury deposits made into traditional funds. More options can mean a bigger, more secure nest egg for your golden years.

Before opening any type of SDIRA, here are some vital tips and buzzwords to consider when becoming an account owner.

1. Types of Self-Directed Accounts

One of the first vital steps in opening any retirement account is researching the options available to you. There is variety of different individual accounts, and it’s crucial to find one that best fits your lifestyle. Becoming familiar with all the self-directed accounts can make it easier to choose. The most common SDIRAs available include the following: Roth, Traditional, SEP, Inherited IRA, and SIMPLE. Having general knowledge of these accounts can make it easier to plan your investment path.

2. Alternative Investments

A benefit of having a self-directed account is the ability to invest in alternative assets. This opens up many possible investments to secure your future. SDIRA account holders can invest in the traditional stocks, bonds and treasury, but have the added bonus of considering real estate, precious metals, and many other viable options. With the assistance of an SDIRA custodian, account holders can utilize these alternative investments to build a solid, yet versatile portfolio to secure a comfortable retirement.

3. Reporting Fair Market Valuation

When utilizing alternative investments, account holders must make sure all documentation is up-to-date including the estimated value of their property. FMV, or fair market value is part of IRS reporting requirements when assessing the value of your investments. The FMV must be processed annually to determine the legitimate worth of your assets. Based on a knowledgeable and un-pressured buyer’s outlook, the fair market value must be calculated and reported accurately in order for your retirement account to grow.

4. Prohibited Investments

While SDIRAs offer many enticing alternatives to traditional assets, it’s vital to know what IRA investments are off-limits according to the IRS. Certain prohibited investments include most collectibles: artwork, stamps, rugs, antiques, and gems. Though particular precious metals are considered viable, certain coins are considered inapplicable. In addition to collectibles and coins, life insurance is also a prohibited investment. Knowing what assets are off-limits can help you avoid account hardships in the future.

5. Contribution Limits

When opening a new account, it’s important to know how much money you are allowed to invest in order to get the maximum benefit from your retirement fund. While all contributions must be made by check, wire transfer, cash, or custodian, each amount restriction is dependent on the type of account.

Some accounts have certain requirements, or need particular custodians to help you invest. Each account type has an annual contribution limit and a due date. For example: Traditional IRAs cannot exceed $5,500 for those under the age of 50, and cannot exceed $6,500 for those 50 or older. All contributions for a traditional IRA are tax-deductible. While these rules are in place for traditional IRAs, other IRAs and retirement accounts have different requirements, so perform your due diligence when selecting the right account for you.

6. Money Flow of Your IRA

One vital tip that can help you avoid issues with your self-directed IRA is keeping an eye on the money flow. Once you know the contribution limits and the prohibited assets, it’s easier to know what can be invested through your fund. One key factor in maintaining an IRS approved retirement account is keeping all investment funding within your IRA. Anything purchased through your IRA must be up kept and supported through your IRA. Any personal money used in conjunction with your IRA or to fund IRA investments can result in a penalty or a disqualification of the account.

7. UBIT & UDFI

Another issue account holders should be mindful of involves particular assets or interest owned by their IRA that produces unrelated business taxable income, or UBIT. This income comes from trade sales of goods and services, or other business activity. Any investments that incur debt financing are involved in UBIT. Whether through limited partnerships (LPs) or limited liability companies (LLCs), these transactions are subject to taxes.

In addition to UBITs, account holders may encounter UDFI, or unrelated debt-financed income. This occurs when an IRA borrows money to purchase real estate. It’s a result of acquisition indebtedness when your IRA builds debt to buy a new investment property. Both situations can create unwanted taxes and fees, so it’s best to factor the costs of any unforeseen expenses.

8. Prohibited Transactions

 The IRS doesn’t have specific guidelines for what is allowed for your self-directed IRA, but they clearly define what is not. In addition to certain prohibited investments, there are also transactions you need to avoid. Any transaction viewed as an abusive use of your IRA or annuity can result in a complete void of your account. These transactions include any investments with disqualified individuals, self-dealings or receiving indirect benefits from your account. 

9. Disqualified Individuals 

In addition to prohibited transactions and assets, there are certain individuals that are barred from engaging in any direct or indirect benefits of your IRA. These disqualified persons include direct family members and your fiduciary. Any individual who stands to directly benefit from your self-directed IRA cannot engage in transactions that involve leasing or exchanging property, money lending, or use any income from your account. This list includes anyone in direct lineage: grandparents, great-grandparents, parents, children or their spouses.

Any service provider involved in direct IRA investing, like a custodian, a CPA, or financial planner, are also considered disqualified individuals. While there is certainly a long list of unqualified connections, the IRS does not state that siblings, aunts, uncles, or cousins cannot take part in any IRA transactions. 

10. Indirect Benefits

SDIRAs are created in order achieve a financially secure future. If you were to receive any kickbacks from the transactions made for your retirement fund that would benefit you immediately it would be considered an “indirect benefit.” For example, you cannot purchase a vacation home for your family using your IRA fund, nor can you lend yourself money for any reason. These actions can disqualify your account, but indirect benefits are not limited to monetary transactions.

Account holders cannot take advantage of a property owned by their IRA. Whether it’s a vacation rental, an office, or a personal residence, account holders and other disqualified individuals cannot use them without penalty. Knowing what’s allowed is a step toward a more secure retirement fund. 

Concluding Thoughts

Using these vital tips can ease the burden of setting up your retirement account. Whether you are exploring your investment options, or choosing the right IRA for you, it’s crucial to perform your due diligence. Before becoming an account holder, be sure to research alternative assets and find the best custodian to help set up your future.