In this episode, we break down the 5 Common Mistakes when Self-Directing IRAs.
1. Buying or selling an asset between yourself and Your Self-Directed IRA
2. Loaning money to yourself from your IRA
3. Self-dealing, Personally making money from your IRA investments
4. Personally Living, Using, Or Working on your IRA Property
5. Using personal funds to pay expenses for IRA owned properties
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Self-directing Individual Retirement Accounts (IRAs) can be a valuable tool for investors who want more control over their retirement savings. However, there are several common mistakes that people make when managing their self-directed IRAs. In this article, we will discuss five of these mistakes and offer suggestions on how to avoid them.
1. Not fully understanding the rules and regulations: Self-directed IRAs offer flexibility in terms of investment options, allowing individuals to invest in assets like real estate, private placements, and precious metals. However, with this freedom comes the responsibility to understand and abide by the rules and regulations set forth by the IRS. Many investors make the mistake of not thoroughly researching or getting professional advice on what is allowed and what is prohibited. It is essential to educate yourself and consult with a professional to avoid any tax penalties or disqualifications of your IRA.
2. Mixing personal and retirement funds: One of the primary benefits of having a self-directed IRA is the tax advantages it offers. However, this advantage can be jeopardized if you commingle personal funds with your IRA funds. Mixing these funds can lead to the disqualification of the entire IRA and result in substantial tax liabilities. It is crucial to keep personal and retirement funds separate and use only IRA funds for investments.
3. Investing in prohibited assets: While self-directed IRAs provide you with a wide range of investment options, there are certain assets you are not allowed to invest in. These include collectibles, life insurance, S Corporations, and certain types of derivatives. Investing in prohibited assets not only risks disqualifying your IRA but also subjects you to significant penalties and taxes. It is crucial to read and understand the IRS rules regarding prohibited assets to avoid any costly mistakes.
4. Not conducting thorough due diligence: When investing in alternative assets through a self-directed IRA, it is vital to conduct proper due diligence on each investment opportunity. Many investors make the mistake of not thoroughly researching the investment, the sponsor, or the underlying asset. This can lead to investing in fraudulent schemes or illiquid assets, resulting in a substantial loss of retirement funds. Always conduct thorough research, seek professional advice, and understand the risks associated with any investment before committing your IRA funds.
5. Failing to diversify: Diversification is a fundamental principle of investment. However, some individuals make the mistake of investing their entire self-directed IRA into a single asset class or investment opportunity. By doing so, they expose themselves to substantial risk. It is essential to diversify your retirement portfolio by investing in different asset classes and spreading your investments across various opportunities. This will help mitigate risk and increase the chances of achieving your retirement goals.
In conclusion, self-directing IRAs can be a powerful tool for investors seeking more control over their retirement savings. However, it is crucial to avoid common mistakes that can jeopardize the tax advantages and the integrity of your IRA. By educating yourself, seeking professional advice, conducting thorough due diligence, and diversifying your portfolio, you can maximize the potential benefits and ensure the long-term success of your self-directed IRA.
In one of your next self directed podcast episodes you guys should talk about the new IRS rule for Substantially Equal Periodic Payments (SEPP) offers higher penalty-free withdrawals for early retirees. The new IRS rule is a way to retire early and access retirement funds early. The IRS previously capped interest to match the previous two months federal mid-term rates, you can now use a higher rate of 5%, according to new guidance, significantly boosting payments.
I imagine how useful this could be to do something like say transfer/rollover my 410k/IRA/etc to your company to open a self directed 401k/IRA/etc brokerage account, and then growing it by investing or trading crypto/futures/stocks/options, and then using all that tax advantaged growth to retire earlier by being able to take higher SEPP.
Heres some excerpts for more info about this:
Those younger than 59 years old can now withdraw more from IRAs, 401(k)s or other qualified retirement accounts without the early withdrawal penalty because the IRS changed how to calculate Substantially Equal Periodic Payments (SEPP).
You can withdraw from your qualified accounts (401(k), IRA, Roth IRA, etc.) before age 59 if you take "Substantially Equal Periodic Payments" (SEPPs). This is often referred to as the "72(t) exception".
72(t) payment interest rates can now be the greater of 5% or 120% of the (US) federal mid-term rate
The IRS has updated its guidance regarding when payments from qualified retirement plans (including 401(k) plans, other tax-qualified plans, and IRAs) are considered substantially equal periodic payments that are not subject to the 10% additional tax on early distributions.
Under the #5 section, Mark brought up an example of not being the property mgr of your LLC rental. Would the same hold true for an adult child? Could they be paid to manage property, or would that be a conflict? Thanks