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7 Questions to Ask Yourself Before Choosing Your Next IRA Investment

Ready to invest your retirement funds? Have you asked yourself these important questions?

Posted on July 10, 2024

7 questions

How many times have you heard the horror stories of someone jumping into an investment before doing the proper research or planning? The stock market will have a winning day, social media will buzz, and the next thing you know everyone wants to start buying the latest hot stock. Fix and flips became all the rage after they were popularized by a glut of reality TV shows making it seem like an easy way to make money. How many of those people that jumped into the market without really assessing if they had the skills or follow-thru to be successful at this type of venture?

There are thousands of investment opportunities out there and each one has its own benefits to offer, so how do you know if an investment is right for you? Sometimes narrowing down the best choice can be confusing and overwhelming. Whether you're just getting started or an experienced investor, the following remains true: no one wants to lose money because they jumped into an investment too quickly that turned out to be bad. Take the time to ask yourself this set of questions to ensure you're investing in the best possible assets to achieve your retirement goals.

1. How much are you looking to diversify?

First and foremost, decide how much you're looking to diversify your investment portfolio. Most people think that portfolio diversification simply means spreading your funds across different stocks and bonds, but it actually goes much further. There are certain investments that are public, meaning these are openly traded on the stock market, and there are also privately held assets which you can invest into using a Self-Directed IRA (SDIRA). Not only can diversifying into private assets give you more security since your eggs aren't all in the same basket, but it opens you up to a wide range of alternative investment possibilities that are not available at a more traditional custodian.

2. What investments are you knowledgeable about?

Take a moment to think about investments in areas that you know a lot about or have a high level of interest. Typically, these investments are going to be the ones that give you a better return potential. Most people find that they make more money and feel more confident in their investment decisions when they are able to invest into things they know and understand.

For example, if you work in real estate, then real estate investments may be a better option for you than purchasing stock in a company you know nothing about. Investing into tangible assets you're knowledgeable about will more likely than not give you better financial returns than if you were to invest into something you don't understand. 

3. Can your IRA hold the type of investment you want?

Not all IRAs are created equal. As mentioned above, there are certain custodians that hold traditional investments like stocks or mutual funds, and others that hold private investments such as real estate. You'll first want to determine which one is best for you. The good news is the only investments the IRS does not allow in an IRA are collectibles, like art, and life insurance contracts. That means there are an almost endless list of possibilities you CAN invest into with a Self-Directed IRA. SDIRAs give investors options to invest into a wide range of alternative assets like real estate, oil and gas, private placements, and more. It's just important to understand the rules concerning which people you can and can't do business with if you choose to hold a private investment in your SDIRA.

4. How much money do you have to invest?

You have to ask yourself the obvious question: how much do you have to work with? It goes without saying that in order to invest you have to have money to invest with, but even if you're just starting with a small amount of money, the investment possibilities are endless with a SDIRA. There are even some strategies such as partnering that can help you grow your money now and for the future at the same time. Figure out how much money you can put towards an IRA each year, and you'll quickly see how fast your account can grow when you put your money to work. Plus, you can rollover money from a 401k with a previous employer to invest in your IRA, and there is no limit on how much you can rollover in year, giving you more funds to work with and put to work for you!

5. How much effort do you want to put into investing?

Often people don't understand how much time and effort can sometimes go into Self-Directed investing. Decide how much of yourself you are willing to give to your investments, and this will help you figure out which one might be a good fit for your lifestyle. There are those who want to dedicate a lot of their time to their SDIRA investments and others who don't. Real estate has proven to be a great investment for people who can dedicate the needed time and effort that involves buying and selling properties. On the other hand, for those who may not have as much time to spend, a more passive approach like private loans or note investing can be a great option.

6. What is your risk tolerance and comfort level with the investment?

Selling an alternative asset isn't the same as selling stocks or bonds. You can't just call a broker and quickly liquidate it if you realize it's too risky for you, so it's important to know what degree of risk you are comfortable with before you make the investment. Consider your investment objectives, how far you are from retirement, and how much time you have to recover from a loss to help you decide which risk option would be better suited to your needs.

Also, before choosing your investment, ask yourself if it's something you're comfortable holding. For instance, if you invest in a promissory note secured by real estate and the borrower defaults on the loan and you had to assume responsibility for that property, would you feel okay with that? You don't want to find yourself wishing you had thought about those things after it's too late.

7. What is your timeline?

This last one is something that often gets overlooked but is important to consider. Determining the period of time you're comfortable holding your investment can help shed light on which ones might be better suited for you and your IRA. Some investments require a long-term commitment, which may not be the best option for you if you think you'll need access to those funds in the near future. Long-term investments are not a bad thing, especially if your goals are to create wealth for retirement, but they may not be the best for your current situation. If you're not looking to commit to something long-term, picking an investment that can produce a quicker return may be a better choice.

When a great investment opportunity comes along, it can be hard to pause and thoroughly evaluate if it's right for you when it sounds like the deal of a lifetime. But it's important to be honest with yourself and your situation before making any investing decisions. Ask yourself these seven questions before making your move. It's always better to spend more time on the front end doing a little bit of preparation rather than wishing you had later down the road.

If you ever have questions about a potential investment or want to open a SDIRA so you can do your first deal, give a Quest Trust Company Certified IRA Specialist a call at 855-FUN-IRAs (855-386-4727). To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

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