Self-Directed IRAs might sound like an unconventional approach to retirement, and they can be. But usually when people give advice about this, they often reveal that they do not understand much about how Self-Directed IRAs can work. These IRAs can be as speculative and risky or as diversified and conservative as an investor wants. It’s the bad advice about Self-Directed IRAs that can cause the trouble, and for that reason, we’ve put together a list of “bad advice” that we’ve heard over the years.
Bad Advice: Avoid Self-Directed IRAs because they are risky.
Risky? There are a few ways to respond here. For starters, a Self-Directed IRA means that an investor gets to choose their own investments from a broad pool of possibilities. That can include something as conservative as a stock market fund and something as risky as an individual private stock. It can include real estate assets that generate income, or real estate speculations that have a chance at not generating income. The key to understand? You get to choose. Just because you can choose a risky course of action doesn’t mean you have to.
Bad Advice: Self-Directed IRAs are too technical to understand.
One of the most important notes here is that if you work with a Self-Directed IRA administration firm like American IRA, you will have someone in your corner. We work as an administration firm without being a financial advisor. That means we help simplify the process to a point where you simply make the investment decisions, and we carry out the administration of the paperwork. That doesn’t sound too technical, does it? The truth is, lots of people use Self-Directed IRAs all the time, and just because they are more independent than some other investors does not mean they have unique or special knowledge. It just means they know how to utilize a Self-Directed IRA administration firm.
Bad Advice: Self-Directed IRAs give you carte blanche to invest in whatever you like.
It’s true that Self-Directed IRAs afford you a lot of freedom to invest in a broad range of retirement assets. But “whatever you like”? That’s a bit extreme. The truth is, you cannot invest in life insurance, certain kinds of precious metals, art, alcoholic beverages (like wines), and collectibles like baseball cards. This may sound restrictive, but it’s important to note that there’s a broad range of what is acceptable to invest in as well. You can invest in real estate, precious metals, tax liens, private notes, private stock, single member LLCs, and much more. Within real estate alone, there are dozens of different types of investments you can make to generate retirement income, such as investing in apartment buildings or single-family homes. The key is how well you understand what you can invest in and what you cannot.
Bad Advice: Use a Self-Directed IRA to get around the retirement investing rules.
Someone with a Self-Directed IRA should feel freedom, but they should also feel a sense of responsibility to live within the rules. For example, you cannot use a Self-Directed IRA to invest in a property and then turn around and rent that property to someone in your immediate family, such as your child or grandchild. This would be receiving personal benefit from the investment, rather than building long-term equity within a retirement account. For that reason, you cannot do whatever you like within a Self-Directed IRA. But if you follow the rules and stay true to those, you can accomplish a lot.