Common Mistakes To Avoid With A Self Directed IRA

Mistakes to Avoid in a Self-Directed IRA

You may have heard that a Self-Directed IRA offers all sorts of great options for putting money aside for retirement. And it does. With a Self-Directed IRA administration firm in your corner, for example, you can invest in a wide range of retirement assets. That includes precious metals, real estate, private stock, tax liens, private notes, and more. But there’s still one thing that investors should consider when investing in a Self-Directed IRA: what mistakes to avoid. Let’s further explore by looking at some of the top mistakes to shorten the investing learning curve.

Mistake #1: Not Understanding Income Limits

You might be surprised to learn this, but you may be subject to income limits when investing in an IRA. As Investopedia notes for Roth IRAs, for example: “For the 2023 tax year, the income phase-out range increases to between $138,000 and $153,000 For married couples filing jointly, the phase-out range increases to between $218,000 and $228,000, The phase-out range for a married individual filing a separate return remains at $0 to $10,000.”

In other words, you’re looking at limits and “income phase-out ranges” which will hamper your ability to invest in a specific type of retirement account. You should be aware of these income limits, especially if you’re beginning to earn an income that is above and beyond what you’re used to in the past.

Mistake #2: Over-Contribution

When you have a retirement account—especially a Self-Directed IRA—the idea of having an enormous nest egg in retirement can be exciting. You might read articles about how increasing your savings rate is essential for building a long-term portfolio. And it is. But there’s only so much you can put aside into a retirement account before you might run into contribution limits.

For example, a Self-Directed Roth IRA will have a contribution limit of $6,500 in 2023. This is quite limited if you have a large income, because it essentially comes down to $541 or so per month. And while that might sound like a lot to a beginning investor, it might not seem like so much when you’ve gotten into an investing rhythm.

For that reason, you have to avoid over-contributions to your retirement accounts. This is true with SEP-IRAs, which can have variable contribution limits, as well. Be sure to speak with a tax advisor as you put together your budget for the year, as this will help you understand how to avoid over-contribution issues.

Mistake #3: Breaking the Prohibited Transactions Rules

When you use a Self-Directed IRA, you get a lot of control. And for prudent investors, that’s a very good thing. But if you’re not careful, you could run afoul of the rules. With any retirement account, you can’t acquire life insurance and put it in the retirement account, for example. That means that you’ll have to avoid certain specific types of assets within the IRA. You’ll also have to avoid transacting qualified assets with disqualified persons, such as family members, because the IRA is supposed to remain separate from your personal benefits.

If you want to invest for your personal benefit, you can do so with a general taxable account. However, if you’re using the retirement benefits that come from investing within a retirement account, you’ll have to keep those investments limited to valid retirement investments—and you can’t transact with people who might benefit you personally.

Want to know more about how it all works? Are you ready to sign up for a Self-Directed IRA and change your perspective of what it means to invest? Be sure to call American IRA at 866-7500-IRA.