Setting up your retirement can be a tricky business, especially when you are handling the process on your own. Self-directed IRAs can be an excellent option to save for your future, provided you are prepared to do the research needed to set up your accounts properly.

Having the freedom to invest your hard-earned money as you wish does come with a few drawbacks, and if you aren’t careful, you could end up with little to no funds in your retirement account.

Not to worry! If you perform your due diligence and make yourself aware of the risks, you can build a strong and secure retirement fund with your SDIRA without any complication. When setting up your self-directed IRA, following are some risks to avoid.

1. Forbidden Alternative Assets

As you select your assets, there are certain guidelines you need to be aware of. While SDIRAs open up new investment opportunities beyond the traditional stocks, bonds, and treasury, not everything is approved. There aren’t any clear-cut rules about which alternative investments you can use for a retirement plan, but the IRS does have very clear guidelines on what is not allowed.

The IRS prohibits investing in the following items: life insurance, collectibles such as artwork, rugs, antiques, and certain metals, gems, stamps, coins, alcoholic beverages, and other tangible properties. By steering clear these items, you can avoid any issues with your alternative investments.

2. Choosing the Right Custodian and Keeping Your Account Current

Before you open up your self-directed account, the IRS states that you must have a certified IRA custodian oversee your investments. As you choose your custodian, select one based on their expertise, customer service skills, and BBB score. Perform your due diligence before settling on the best custodian for your needs.

Though you should have a good relationship with your custodian, most are passive when it comes to setting up your account. Because this is often misunderstood, fraud is one of the most common risk-factors with SDIRAs. It’s up to the account holder to make sure that all the information is represented in the self-directed IRA.

Information on rental properties and precious metals should be evaluated yearly. All values should be reported to your custodian and the information on your assets must be correct and up-to-date. Again, though a custodian holds on to your assets, they are not responsible for the upkeep.

3. Self-Dealing

Being in charge of your IRA doesn’t stop at reporting your asset information to your custodian. As you approach your account set-up, something else to keep in mind is avoiding “prohibited transactions.” There are certain transactions that the IRS does not allow when it comes to making investment choices. One of these prohibited transactions involves self-dealing.

Account holders cannot have any personal gain or personal use of IRA assets until retirement. Also, account holders cannot use property, or benefit directly from any investments made with their self-directed account. Additionally, while account holders can’t benefit immediately from their investments, they also cannot use personal funds to purchase assets for their SDIRAs. It’s crucial to perform your due diligence when handling your account investments.

4. “Disqualified Individuals”

Another risk factor with SDIRAs involves anyone who could benefit from your self-directed IRA. These “disqualified individuals” cannot be involved with any dealings with your retirement funds. Disqualified individuals cannot live in or rent properties held by your SDIRA, nor can they invest or borrow money from the account.

The IRS states these individuals include any of the following: spouses, children and their spouses, parents, grandparents, grandchildren and their spouses, or any financial advisors involved with the account.

Any of these prohibited transactions can ultimately disqualify your account or drain it with unwanted tax penalties. While most family is off-limits, there are no rules against lending to siblings, cousins, or other family members who do not stand to benefit from your IRA.

5. Risky Investment Choices

The benefit of investing in an SDIRA is making use of alternative investment options. As you select which assets work best for you, keep in mind that any choice is risky. Making the right selections for your account can earn you tax advantages, big savings, and overall long-term growth for your account. On the other hand, putting all of your eggs in one basket can have a devastating effect on your retirement savings.

Not knowing your investment or lack of diversity in your portfolio can hurt your retirement fund. If you invest heavily in high-risk assets like stocks or make a hasty real estate investment, you may lose more than you hope to gain.

In addition, investing in too many assets could spread your wealth too thin, making it more difficult to grow.
Consider how much you are willing and able to invest to avoid taking out loans that may result in tax penalties like UBTI.

Performing Your Due Diligence

As you prepare for your future, knowing your investments is key. Be sure to do proper research and select the best investments that work for you. Together, with a financial advisor and a prime IRA custodian, you can avoid the investment risks to build a strong account. Invest in your future, put in the time, and grow your nest egg for a comfortable retirement.