Is a Self-Directed IRA a Good Investment?
Some investors looking for a more hands-on and do-it-yourself style of investing have been looking into investing in self-directed IRAs (individual retirement accounts). Recently the Financial Industry Regulatory Authority shared an alert regarding these types of investments.
In the alert, it was shared that self-directed IRAs come with a unique set of risks that should be considered before investing in one. There were also warnings of complicated tax requirements and high fees.
What is a Self-Directed IRA?
With a self-directed IRA, there is a different structure that allows for an investor to retain assets they are unable to put into traditional IRA accounts like a Roth IRA. These assets have the potential to grow tax-free. Alternative types of assets including real estate, tax lien certificates, promissory notes, private placement securities, precious metals, cryptocurrencies, etc. are permissible in self-directed IRAs.
Important information about the pros and cons of self-directed IRAs
Benefits of self-directed IRAs
Despite the warnings put out against these investments, there may be some situations where a self-directed IRA might be a good choice. They can be a helpful investment for anyone who has specialized knowledge of alternative assets, for example. It can be helpful for people who have extensive experience in real estate investments where it can offer a higher potential return as compared to other investments.
Drawbacks of self-directed IRAs
With the knowledge of the risks and complications of these investments from the Financial Industry Regulatory Authority, there could be even more drawbacks you will want to avoid.
If an investor is not savvy and knowledgeable in alternative investments there could be mistakes with this type of investing. Some of the mistakes of not having extensive knowledge could include not completely understanding the fee structure and the market risks. It could also mean not understanding the term and or liquidity of alternative investments.
One of the biggest concerns from financial advisors includes not understanding the applicable IRS code for a self-directed IRA. Especially concerning is, where the IRS code relates to taxation and access or distribution of the underlying assets. It is advised that these types of IRAs be used with caution and much knowledge from investors that have a strong understanding of the tax code. There's also a potential for fraudulent investments.
Before putting your investment dollars anywhere it is always good to talk it over with a trustworthy financial advisor if you are not already experienced in the financial world yourself.
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