Before you open a Self-Directed IRA, it’s imperative that you understand that your investments are your responsibility. Of course, you may have enlisted the help of a financial advisor, and you are required to secure a custodian for your account. Understanding that you have more responsibilities with a Self-Directed IRA is paramount; however, remember that you will have more freedom as well.
The holdings you choose to include in your portfolio are your – and only your – choice. That’s why it’s important that you exercise due diligence when managing your portfolio. Do you want to learn more about due diligence? Let us explore the concept further.
What is Due Diligence?
Due diligence could be described as a series of steps you take to ensure that your investment is legal, safe, and legitimate. In other words, it means you will need to do your research before investing your hard-earned money through your Self-Directed IRA.
There is a series of questions you should ask yourself before adding an investment to your portfolio. These questions may seem like common sense, but with a growing number of scams and “opportunities” that are not legitimate, it’s important to review the answers to each of these questions regardless. Let’s take a look at some questions you should ask to protect your Self-Directed IRA.
Does this investment make sense with my portfolio?
It’s perfectly fine to have a broad range of investment types within your portfolio. However, it’s still best to ask yourself whether each new investment fits with the general goals you have for your IRA. For instance, a real estate investment may require that you constantly monitor and invest. If this type of hands-on strategy is not right for you, speak with your financial advisor about alternative options.
Does my custodian understand this type of transaction?
Your trustee or custodian will be handling the administrative aspects of the (perhaps non-traditional) investment you are considering? It’s important that your custodian is experienced in and familiar with all that managing your investment account will entail. This includes precious metals, startups, crowdfunding projects, and even tax liens.
What are the costs, benefits, and risks of the investment?
There is obviously no way to control or predict the markets you invest in. However, you should consider the risks, costs, and potential gains you may encounter when you add a particular item to your portfolio.
If you have questions about the soundness of an investment for your portfolio, it’s fine to ask your financial advisor. Remember, however, that neither your custodian nor your advisor can make the final decision about what you invest in.
Do I have the right custodian to manage this investment?
Every Self-Directed IRA needs a custodian. However, selecting this custodian is up to you. Ensure that your custodian is, first and foremost, approved by the IRS. If you cannot find your prospective custodian on the list published by the Internal Revenue Service, do not choose that entity. Secondly, do a bit of research into the experience of the firm. How long have they been in operation? What do they specialize in? What have other investors said in reviews? Knowing the answers to these questions can help guide your decision as you exercise due diligence.
As you can see, much of due diligence includes common sense and a bit of background research. However, as simplistic as it may seem, it’s critically important to the health of your retirement account.