Five Common Misconceptions of a Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: August 13, 2019)

The self-directed IRA account is becoming the new norm for those individuals who want to play a more active role in their retirement funding. With so many resources out there it can be hard to weed through the information to find the truths about how to properly direct your own IRA account. Today, we’re going to look at five common misconceptions that individuals have about self-directed IRAs. Let’s jump in below.

1.) You Must Possess An LLC To Invest 

This is simply not true at all. You don’t need to be an LLC investor to invest in your own self-directed IRA fund. In fact, this could potentially cause major problems later down the road. You should realize that setting up an LLC to invest in a self-directed IRA is a marketing tactic that firms are using to get consumer business. They market that consumers need an LLC to set up their IRA and the company offers a secondary service of setting up the LLC for the consumer. Don’t get caught up in this trap as you absolutely don’t need an LLC to invest in your own self-directed IRA.

2.) They Require Specialized Tax Forms 

The word taxes tends to scream complicated for individuals and business owners alike. When it comes to a self-directed IRA fund you don’t have to worry about any complicated or specialized tax forms. This type of IRA basically functions as the other types when it comes to tax reporting. Those who have a self-directed IRA account need to report their annual contributes to that account on each year’s taxes. The only other time you will be responsible for reporting anything to the tax agencies on your personal return is when you distribute the funds of your IRA account for non-investment purposes.

3.) They’re Difficult To Setup 

Again, this is another myth setup by the companies that offer IRA setups. Self-directed IRAs can be easily setup by the individual owner at any time. There are many online websites you can use to setup your IRA account within a few minutes. It doesn’t take knowing a plethora of financial terms in order to establish your own self-directed IRA account.

4.) They Have The Same Investing Options As Standard IRA Accounts 

This is simply false. When it comes to standard IRA accounts, your only options are bonds and stocks. While there may be various options to choose from, there is a restriction of your investing to the options on Wall Street. With self-directed IRAs, you can invest in other endeavors such as private businesses, tax liens, gold, and real estate. There are so many options with self-directed IRAs that you simply can’t get with standard IRA accounts.

5.) You’ll Be Penalized When Switching From A Standard IRA Account 

When you switch from a standard IRA account to a self-directed IRA account you won’t be charged a penalty if you do it correctly. You need to roll your existing IRA account into your new self-directed IRA account. This will prevent you from paying any penalties. If you instead withdraw the funds from your standard IRA account and use them to open a new self-directed IRA account, you will be penalized due to the early withdraw.

Understanding more about self-directed IRAs can allow you to better grasp just how convenient these accounts are. As you can see by the list above, there are many common misconceptions out there about these types of accounts. We encourage you to do your research instead of just going by word of mouth.

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