Written by: Emily Joswiak • May 26, 2022• Money

5 Mistakes To Avoid With a Self-Directed IRA

When you’re planning to start investing in your self-direct account, it’s best to avoid to these key mistakes to ensure smooth sailing to retirement.

Learning how to plan for your retirement and fund your self-directed IRA can be challenging, but it’s for the best. It’s not a topic taught in school, so we must educate ourselves and seek advice from financial advisors to ensure we’re doing things correctly. However, we should also know what to steer clear of when planning our retirements and setting up our IRA accounts. Here are five mistakes to avoid with a self-directed IRA.

Lacking Due Diligence

Having the freedom to invest in your choice of assets comes with the responsibility to do your due diligence on your investment. It’s up to you to make the appropriate decisions and understand the different ways you can lose money on a specific investment.

Making Transactions With an Disqualified Person

You, your spouse, direct ascendants or descendants, and their spouse are all considered disqualified persons. This means your IRA cannot interact with them directly. The IRS prohibits transactions with disqualified people, which could therefore have serious consequences.

Incorrectly Titling Investment Documents

When you invest in a noncash asset with your self-directed IRA, your IRA account is the owner of that investment. Therefore, correctly titling your investment documents is essential, and it will save you from lawsuits and stress.

Making Prohibited Transactions

The most common mistake to avoid with a self-directed IRA is making prohibited transactions. Lending money to a disqualified person, receiving money for managing a property that an IRA owns, spending the night in a property that the IRA holds, and more can lead to hefty consequences.

The most severe consequence is that you could lose your account, in which case your money would be distributed. That money would then be taxable, and if you’re under 59 years old, you would have to pay the 10 percent early withdrawal penalty.

Not Giving Yourself Enough Time To Fund Your Account(s)

Investors often wait until the last minute to begin funding their accounts before investing. However, the process doesn’t happen overnight, so you should take your time to allow your account to build over time.

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Last modified: May 30, 2022