Planning for retirement can be a tricky task, especially if you are trying to handle all the details yourself. Take the reins on your retirement plan and selecting your investments can be an empowering experience. However, it can land you in some hot water, financially speaking, if you don’t follow the rules.

Have no fear! You can successfully take control of your financial future and build a quality nest egg for you and your family by performing your due diligence and managing the red tape. Here are the top five self-directed IRA investment rules you need to follow.

1. You Definitely Need A Custodian.

While owning an SDIRA gives you the freedom to choose your investments and explore different assets such as real estate, precious metals, and private lending, you still must report your investments to someone. The IRS mandates that SDIRA accounts must be managed by a certified IRA custodian.

Finding the right custodian can be difficult in itself; there are plenty of imposters and high-priced firms that can make this task tough. However, with a little research and planning, you can select a custodian that fits your budget, investment ideals, and assets.

Keep in mind, you cannot open a self-directed IRA without a certified custodian; administrators do not fit the bill. Before making your selection, put in the time to find the best fit for you and your account.

2. Avoid Prohibited Investments

One of the benefits of opening a self-directed IRA is the wide pool of assets you can draw from. While traditional IRAs allow investors to grow their accounts with stocks, bonds, and mutual funds, SDIRA owners can cast a much larger net.

Real estate, cryptocurrency, private lending, and tax liens are just a few of the many options open. In fact, there are very few options that aren’t open for investment. The IRS has no clear-cut list of what options are allowed. They are, however, very clear on what is not permitted.

Self-directed are barred from the following prohibited investments: life insurance, beverages, S-Corporation stock, and most collectibles, such as artwork, rugs, antiques, most metals, gems, stamps, and coins.

While there is an option to invest in precious metals, like gold, silver, and platinum, the items on this list are strictly forbidden. Before you invest, it’s a good idea to map out your assets to avoid any possible missteps.

3. Don’t Deal with Disqualified Individuals

While self-directed investing opens your investment opportunities, keep in mind there are certain rules that must be followed for your assets to remain valid. One of the most important things to avoid is dealing with those deemed as “disqualified individuals.”

This includes the IRA holder, his or her spouse, children, and their spouses, grandchildren and their spouses, and so forth. Additionally, investment advisors, managers, trustees, and custodians cannot receive any benefits from your SDIRA investments.

Any individual that stands to benefit from your self-directed IRA investments is considered off-limits. They cannot take part in your business investments, rent your property, or any similar activity that would interfere with the earnings of your SDIRA.

Taking part or engaging with a disqualified individual can result in heavy account penalties or even the cancellation of your account. As you select your investments and partners, tread carefully to avoid this pitfall.

4. Avoid Prohibited Transactions

Here’s one of the self-directed IRA investment rules that affect many.

Much like avoiding disqualified individuals, another danger to avoid is prohibited transactions. The most common of these issues is “self-dealing,” or the act of benefiting from your retirement investment before you’ve reached retirement.

This can take many forms, from using your SDIRA-owned vacation rental to investing in a business you hold high stakes in. An easy way to commit this error is by using personal funds to finance rental property repairs for an SDIRA-owned investment.

As you make investments and choose your assets, be very mindful of your plans. If you are unsure if what you are doing is considered self-dealing, it’s good form to check in with your financial advisor to avoid any costly mistakes.

5. Contributions and Distributions

Depending on the type of IRA you choose, keep in mind the contribution limits and distributions you’ll need to take upon retirement. Traditional and Roth IRAs have a maximum dollar amount that can be contributed to yearly, and these limits are strictly enforced.

Before selecting the IRA type for your retirement plan, perform your due diligence; see which IRA you qualify for, discover the requirements, and how much you can contribute per year. For instance, traditional IRAs grow tax-deferred; account holders will receive an upfront tax break, while Roth IRA owners must pay their taxes on their contributions.

In addition to contributions, it’s a good idea to take note of how each plan works when it comes to distributions as well. Traditional IRA owners must pay a tax on their withdrawals upon reaching retirement; in addition, once the account holders reach age 70 ½, they must take required minimum distributions (RMD).

Roth IRA owners, on the other hand, can take their distributions tax-free, since they’ve already paid taxes on their contribution upfront. Also, Roth owners don’t have to worry about RMD; they can allow their contributions to keep growing for as long as they wish. Before making your selection, devise a plan and select the best IRA that suits your needs.

Clearing up the Confusion

Self-directed investing can be a difficult yet rewarding opportunity. SDIRAs grant you the ability to control your own IRA investments and select the assets you want to round out a diverse and well-balanced portfolio.

The key is to perform the proper research and avoid any potential pitfalls along the way. Before planning for your future, consult your financial advisor and discuss the best option for your financial growth. Perform your due diligence and see what self-directed investing can do for you.

And make sure to know the self-directed IRA investment rules, the top five explained above.