Common investment mistakes to avoid with your self-directed IRA

Estimated reading time: 3 minutes(Last Updated On: November 30, 2018)

For as many different investment options that you have with your self-directed IRA, you have more opportunities to make common investment mistakes. Here are some of the most common investment mistakes made with self-directed IRAs.

Common investment mistake #1: not paying attention to fees and carrying costs. Many investors choose a custodian that offers self-directed IRA accounts so that they can invest their retirement funds in real estate. The value that’s inherent in developed properties and raw land is a strong draw to many retirement savers. But these types of investments also involve carrying costs for as long as they’re in your portfolio. These costs generally come in the form of annual property taxes, maintenance expenses and management fees. With the annual limitations on direct contributions to your account, you need to plan ahead to be able to pay these expenses from other funds from your account (you are not permitted to pay those expenses with funds from outside your account). In contrast, owning stocks or mutual funds won’t require you to pay any ongoing expenses. Learn more about why your IRA may owe taxes.

Common investment mistake #2: not researching your investments. Having more investment options for your retirement funds means that sometimes you’ll need to do more research before you invest. While you probably research any stock investments you make, the federal regulations that require public companies to disclose many different types of information to the markets make it relatively easy to learn about a particular public stock’s suitability. In contrast, private equity investments that are often available when you have a self-directed IRA generally do not have the same level of mandated disclosures, so it’s much more important that you take the initiative and ask as many questions as are necessary for you to become comfortable with investing your account funds.

Common investment mistake #3: prohibitions on self-dealing. As noted above, one of the most popular types of investments for self-directed IRAs is real estate. Buying real estate can be a great way to invest in individual properties to generate income, or even to have the ideal retirement property bought and paid for by the time retirement comes. But the standard rules for IRAs prohibit account owners from benefitting from their accounts before they take distributions. This means that you cannot use any property that you hold in your self-directed IRA, nor can you allow any of your family members to use it, until you take a distribution of that property from your account. Learn more pointers for buying real estate with your self-directed IRA.

Common investment mistake #4: not paying attention to traditional IRA rules. From a legal standpoint, there’s no difference between a self-directed IRA and an IRA that a traditional custodian administers. This means that the same set of rules applies to IRAs. These include not only the prohibition on self-dealing mentioned above, but also the yearly contributions limits and the rules on required minimum distributions.

The best way to avoid these common investment mistakes is to use an experienced IRA custodian, such as Quest Trust Company, who can provide you with guidance and educational assistance every step of the way.

Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.