Do you have an IRA to use as a vehicle to build wealth for retirement? An Individual Retirement Account (IRA) is a common way for people to set money aside and grow their finances for future expenses and retirement living. As with all investment decisions, some pros and cons need to be considered. It is important that you understand the self-directed IRA risks before committing your cash to the investment.
Difference Between Traditional and Self-Directed IRAs
Regular IRAs, such as a Roth IRA or Traditional IRA, have a financial strategy team that oversees the management and acquisition of assets like mutual funds or precious metals in the portfolio. As an investor, you put the funds into the account, but you don’t have any control to decide how that money is invested after it is added to the IRA.
When you use a Roth IRA, it means that the money that goes into the account has already been taxed. So, taxes are not due when the funds are withdrawn from the account. These tax benefits can be very powerful. Consider that the taxable rate when you withdraw retirement funds will almost certainly be higher than when you deposit funds. In comparison, a traditional IRA is funded with pre-tax money, which means that taxes are due when the funds are received.
One misunderstood type of IRA is a self-directed account. The unique aspect of a self-directed IRA is the investor has a say in the way the money is invested. For example, you can choose to put the funds into commercial real estate opportunities instead of putting the money into stocks or bonds.
Self-Directed IRA Risks
The upside potential of a self-directed IRA can be great if you are using the right investment strategy. You have the opportunity to choose alternative assets such as rental property, tax lien certificates, or other real estate investments. But there are also risks that need to be understood before you choose this type of investment. Education is the best way for you to avoid common pitfalls and protect your money. Some of the most common self-directed IRA risks include:
- Forbidden Investments: Regulations are in place that manages prohibited transactions for self-directed IRAs. As you are choosing the options, it is important to avoid these forbidden investments, such as certain metals, life insurance, coins, alcoholic beverages, gems, artwork, antiques, and more.
- Custodian Experience: You need to choose an IRA custodian to hold the funds that are put in your IRA. This custodian oversees the investments, so it is important that you have a good relationship with the custodian. Consider expertise, history, customer service, and more.
- Investment Risks: While there is an opportunity to profit from alternative investment options, don’t be fooled by putting your money into risky investments. Most financial professionals will agree that all investments are risky, but there are ways that you can minimize your risks to optimize profitability. Work with an expert who can advise you on tax advantages, long-term strategy, and optimal dividends for your investments.
As you are performing due diligence about self-directed IRA risks, you are welcome to talk to our team for more information about your investment options. Your IRA account can be a powerful tool for your financial future. First National Realty Partners is here to help you choose the right investment opportunities that match your needs. Call to learn more about how crowdfunding and partnerships are gaining in popularity.
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