Recently I read an article in Forbes’s where the author shared some information about risks in self-directed IRAs that many investors may not be aware exist. While all investments carry some risk, sometimes average consumers aren’t told all the negatives, so it’s important to educate yourself and seek resources to verify data facts. The internet can provide some great information, but to really understand and break down the data, a professional financial expert is the best resource--preferably one that is independent and has access to all investment choices – not one who is limited to the brand of agency for which he/she works.
Pro Tip: vet your resources
Let’s discuss the types of self-directed IRAs. The majority of mutual funds and brokers claim their IRAs are self-directed, meaning your IRA can invest in any of the options on their platforms which are normally publicly traded securities. Under the IRS code, an IRA can own anything excluding insurance and collectables, so a true self-directed IRA can own anything permitted within the tax code. Investments allowed within the tax code include mortgages, non-publicly traded assets, real estate, small businesses as well as a few others.
In the article, the cause for concern was in the second category of self-directed IRAs.
The point of concern has to do with the definition of a “good” asset. More importantly it states that it is not a good idea to rely on the fact that the investment is allowable within the tax code to predict if it is a “good” asset. A key point is that the self-directed IRAs’ custodians do not usually screen or evaluate the assets, so the burden falls upon the IRA owner. “It’s up to the IRA owner to be sure the asset is real, it’s actually owned by and set aside for the IRA, the fees and expenses are reasonable, the price is fair, and there eventually will be a market to sell the asset.”1 Knowing that there are professionals who can and will vet opportunities for you is something that many average consumers do not know that can utilize. You can reach out for more educational resources below.
A publicly traded asset in a self-directed IRA is not liquid. This can potentially create challenges if the owner wants to sell, and the buyer doesn’t agree upon the value of the asset. An example of an asset that regulators have been raising the alarm on is cryptocurrencies. Self-directed IRAs have been subject to Ponzi schemes and other scams where in some cases fake custodians have been set up upon where to make deposits. Or in some cases consumers have placed their trust in friends and the results have been lost assets.
Not all friends are going to steer you wrong but, knowing a friend’s experience and integrity by example and by other testimonials is highly appropriate when vetting with whom you feel comfortable investing your hard-earned money.
Fees on self-directed IRAs are usually higher, because custodians have more work involved in the transaction and accessing values on non-publicly trades assets.
While a self-directed IRA can be a great tool for acquiring and investing in unconventional assets – usually those assets are a higher risk, so it’s most likely not going to be as attractive to the average, more conservative investors who do not want a high level of risk. Also, because this type of IRA does require more work, an investor should be more sophisticated in the investment world. If you want to learn more about investing in self-directed IRAs, or if you are looking for more conservative options and tax-free options, reach out to us at firstname.lastname@example.org or call us at 775-365-9429.