If you own a Self-Directed IRA, you probably chose it because it gives you more options and control over your retirement assets. But with that extra control comes added responsibilities, the biggest of which is to perform due diligence. In other words, it’s up to you to research all of your investments thoroughly to ensure that everything is legal, you understand the tax ramifications, you are aware of the risks, and you will not disqualify your account by investing.
Here are some questions you should be asking your investment advisor, so you are not venturing into the unknown:
What is the total cost of the investment?
The total cost includes the price of the asset plus any commissions and fees. You might feel reluctant to ask how your advisor is paid, but it’s important to know that, especially if your relationship will be ongoing.
How much experience do you have with this type of investment?
You want to make sure that you are working with an advisor who is knowledgeable in this type of asset. Experience in certain alternative assets is not just a plus; it’s essential.
How often do you plan to meet with me?
Communication is the key to you feeling empowered and confident. An annual account checkup probably will not do that. Make sure right up front that the advisor is willing to meet or check in by phone as frequently as you wish.
Does your firm hold my money and investments?
The answer you want to hear is no. You want an investment firm that manages your assets and an independent custodian who holds them. If the firm that manages your money also holds it, there is a greater opportunity for investment fraud.
What are the tax consequences of the investment?
While your tax situation should not steer your investment decisions, taxes should be a consideration and part of the conversation. For instance, your advisor should know your tax bracket, if you are in the Alternative Minimum Tax, and whether you have carryover short-term or long-term capital losses. With this information in hand, it’s easier to recommend purchases that fit your particular situation.
Will these investments violate the prohibited investment or prohibited transaction rules?
The IRS does not have a list of investments that are allowed in a Self-Directed IRA. But they do have a short list of prohibited investments:
- Life insurance contracts.
- Collectibles such as artwork, rugs, antiques, gems, stamps, alcoholic beverages, and most metals or coins (with some exceptions).
- Subchapter S corporations.
There are also certain prohibited transactions between a retirement plan and a disqualified person inside a retirement account that could result in the entire amount being distributed to you and taxes due on that full amount. That’s why you want to make sure your investment is not related to any disqualified individual or entity.
Will the investment require more money from me in the future?
Is this a type of investment that will require funding down the road that goes beyond your initial purchase amount? Your advisor should help you determine if you can maintain the investment if additional capital is needed.
When should I expect to see returns on my investment?
You ask this question to make sure the rate of return and lead times correspond to your long-term goals. Think about your retirement income needs and any required minimum distributions you will face. If the investment is not going to start providing returns for several years, you might not be in a position to wait that long.
While it is prudent to discuss these questions with your advisor, you should be performing your own independent research on any asset you add to your portfolio. Due diligence can add an extra layer of protection to your retirement savings.