Many people have taken the leap and began planning their own retirement using a self-directed IRA. While SDIRAs are a great option for anyone looking to take charge of their own investment plan for their nest egg, a few obstacles exist – especially around opening a self-directed retirement account.

Self-directed planning can be freeing, but there is also plenty of room for error. If you are considering self-directed investing for your future, you’ll want to prepare yourself for any pitfalls you may encounter. Here are the top seven mistakes people make when opening a self-directed retirement account.


1. Missed Asset Opportunities


Self-directed investing offers many customization options. The reason for taking the reins on your planning is to have the freedom to explore different possibilities to build your finances. SDIRAs allow account holders to explore investment opportunities beyond the typical stocks, bonds, and mutual funds. You can select from many different assets, such as real estate, precious metals, cryptocurrency, tax liens, and even private lending. If you’re considering an SDIRA and you aren’t looking into all the assets open to you, you aren’t taking advantage of what your SDIRA can do.


2. Choosing the Wrong Assets


While there are many assets to choose from, you have to be mindful of what the IRS considers a feasible asset. Plenty of great and lucrative assets are allowed, but the IRS is very clear on what is not allowed. Life insurance and most collectibles are not qualified options. Before you start picking your assets, make sure you research which assets are permitted.


3. Not Choosing the Right Custodian


All SDIRA accounts must be overseen by a certified IRA custodian, as per IRS regulations. Account-holders are tasked with choosing the best custodian for their account, and if you choose poorly, it can set you back. One issue SDIRA owners run into is finding an actual certified custodian – not an administrator. Only certified custodians are cleared to handle your account. In addition to certification, you need to select someone who knows and understands how your assets work.

Finally, you must find someone who suits your needs, both for your account maintenance and your pocketbook. Picking the wrong custodian could have you paying more in fees than you are investing. Don’t make the mistake of selecting just anyone. Perform your due diligence and select the best option for your assets.


4. Not Diversifying your Portfolio


You have many assets available to you; don’t make the mistake of putting all your eggs in one basket. Rather than selecting one and pouring all your money into it, or spreading your options way too thin, build a balanced portfolio. It’s a bad idea to get overly risky with your portfolio, but you won’t get anywhere playing too safe.

The best way to benefit from your SDIRA is by putting together a diverse set of assets to balance out the risk factor. Using this method, you’re more likely to be protected if an investment fails. Also, with a long-term investment paired with other higher-risk assets, you can still have a steady flow of cash long-term. Well-rounded is key.


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5. Choosing the Wrong IRA


Another potential mistake most new self-directed retirement account holders make is selecting the wrong IRA. Believe it or not, you have options, but it depends on your financial situation and how you would like to work your tax advantages. You can select a traditional IRA, where your funds will grow tax-deferred over time. Traditional IRA owners only pay taxes when money is withdrawn after retirement. Unfortunately, once you reach 70 ½, traditional IRA owners are subject to RMD, or required minimum distributions.

On the other hand, you can invest in a Roth IRA. If you choose this option, funds placed into your SDIRA are taxed up front. Your contributions will then grow, tax-free. Unlike traditional IRAs, Roth IRA owners don’t face RMD when they reach retirement. Before selecting your IRA option, perform your due diligence and make the right choice for you.


6. Making Prohibited Transactions


As mentioned previously, having the freedom to build and run your account can be freeing, but it can also come with some steep penalties if you don’t follow the rules. It can be easy to make a mistake if you’re not aware of Prohibited Transactions and what isn’t allowed by the IRS. Without some financial assistance, there is a lot of room for error and one mistake can mean big penalties. Be wary of prohibited transactions, like self-dealing. While it may be tempting to fix the rental property yourself or use that beach house, these actions are not allowed and can be met with heavy penalties.

Likewise, dealing with disqualified individuals can also forfeit your funds. Anyone who stands to benefit from your self-directed IRA, such as your spouse, children, or grandchildren, are considered “disqualified” and cannot use or take part in your IRA investments. Take the steps to double-check the regulations and avoid any pitfalls.


7. Skipping the Research


The worst thing anyone could do is jump into investing without doing the preliminary research. Planning your own retirement can be tricky, and with so many options, it can be very easy to make mistakes. Do the research and make sure to avoid any red tape. The simplest way to avoid any potential errors is by performing your due diligence. Make yourself aware of your options, explore what’s out there, and discover the rules. Putting in the time can secure your account, help you find the right custodian, and give you the knowledge needed to make the best choice for your retirement.


Finding the Right Plan for You


Creating a self-directed retirement plan takes time, patience, and plenty of research. If your goal is long-term success, then you must lay the proper groundwork. Careful planning can not only help you avoid any possible mistakes, but it can also help you build a comfortable nest egg for your future. Before making any financial decisions, consider consulting your financial advisor. Organize your efforts and build your self-directed IRA for a brighter tomorrow.