Self-Directed IRA

What Are the Potential Pitfalls When Funding a Self-Directed IRA?

When you open a Self-Directed IRA, you do more than just open an account. You also open up a world of retirement investing opportunities. Using a Self-Directed IRA, you can use retirement funds to invest in nontraditional retirement assets, including real estate, precious metals, tax liens, private companies, and more. But when many people think about this process, they forget that there is one small hurdle they have to leap over first: funding the IRA.

In some processes, like directly contributing to a Self-Directed IRA, the process of funding is extremely easy. But let us say you have something like an IRA rollover in mind. What are the individual nuances of a rollover, and what sorts of pitfalls should you avoid? Here are some of the most common ones.

Missing the 60-Day Deadline on a Self-Directed IRA Rollover

In a previous post, we have talked about this process like a “hot potato.” Simply put, you have to pay very close attention to your responsibilities when you’re in charge of a rollover.

If you take money from an existing IRA, rolling it over to a Self-Directed IRA, you will have 60 days to get that money over. Otherwise, the IRS considers it an early distribution, in which case there are taxes and penalties to pay.

There may be some confusion here, because there are instances in which it is possible to create a direct transfer of funds between retirement accounts. However, it is worth noting that this is entirely based on context. You may not always have the ability to initiate a direct transfer. A direct transfer is what happens when you move assets between institutions. For example, if you have a Traditional IRA with one company and want to move it to a Traditional IRA with another, it is easy to initiate a direct transfer, since there are minimal tax implications here.

However, it is when you want to start moving funds in different ways that you may incur different responsibilities that you should examine first.

Not Understanding the Differences in Funding Styles

How is a transfer different from a rollover? How is a rollover different from a contribution?

We admit that understanding everything can be a little bit difficult. But it is important to get the basics down before you initiate anything—this will help you understand the consequences and peculiarities of each funding method.

  • Conversion. This is what happens when you convert, say, a Traditional IRA into a Roth IRA, which incurs a tax.
  • Contribution. Every year, you will have contribution limits, depending on the type of account. This is money you can put directly into the retirement account.
  • This is a movement of funds from a non-IRA account into an IRA without creating a taxable event.
  • A transfer is a simple way of moving money between the same type of account between two institutions.

This is obviously a brief guide to these concepts, and when you look into what’s best for you, you’ll certainly want to read up on what is involved. For example, that 60-day deadline with an IRA rollover is essential information before you begin such a transaction. You need to know what your responsibilities are as the individual, as well as the best approach for funding your Self-Directed IRA.

When it comes down to it, the potential pitfalls all revolve around lack of information. That is why it is important that you read up, know your stuff, and take a methodical approach. And it does not hurt to have a great Self-Directed IRA administration firm in your corner.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at