There are so many taxpayers and professionals that tote the self directed IRA as the answer to all your problems. While there are uses for a self directed IRA, there are many pitfalls that most are not aware of. These pitfalls can often outweigh any positives, especially for real estate investments. Make sure you are able to make an informed decision!

About Eric:
Eric Freeman is a Principal at BeachFleischman PLLC, a Top 200 largest CPA firm in the United States. He leads the Real Estate Practice at his firm. He spends most of his career focusing on real estate transactions and partnership taxation. He consults with clients on complex transactions including multi-asset exchanges, mergers, consolidations, buy-outs, cost segregation studies and transaction formation. His client base includes real estate developers, property owners and property managers operating with 2 million to 7 million square feet of real estate or $500 million to $2 billion in assets.

Eric is a real estate investor, owner and operator of both residential and commercial property. He has over a decade of experience and has purchased multiple properties with no money down.

Eric regularly speaks at real estate, tax and investing conferences. Eric has shared the stage with Ken McElroy, Robert Kiyosaki, Thach Ngyugen, Robert Helms, George Gammon Jason Hartman and many others. He is also a contributor to multiple real estate and tax publications. Eric has also taught continuing education for other CPAs though the Arizona Society of CPAs.

Eric is a KenMcElroy.com Advisor and records videos for the Ken McElroy YouTube Channel. Eric is also Ken’s personal CPA.

YouTube.com/@kenmcelroy

The content produced on this channel is not affiliated with BeachFleischman, PLLC. You can separately obtain more information about BeachFleischman, PLLC from www.beachfleischman.com.

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There are Pitfalls with a Self Directed IRA

A Self Directed Individual retirement account (IRA) can be an excellent way to take control of your retirement savings and invest in a variety of assets that traditional IRAs do not allow. However, it is important to be aware of the potential pitfalls associated with a Self Directed IRA.

One of the main pitfalls is the lack of oversight and guidance. With a traditional IRA, you usually have a financial advisor or custodian who helps you make investment decisions and ensures compliance with IRS rules. In contrast, a Self Directed IRA puts you in charge of making investment decisions. While this can be empowering, it also means that you bear the responsibility of conducting thorough due diligence on potential investments and ensuring they are compliant with IRS regulations.

Another pitfall is the potential for prohibited transactions. The IRS sets strict guidelines regarding what can and cannot be done with funds in an IRA. Engaging in prohibited transactions, such as using IRA funds to invest in certain types of assets or personally benefiting from IRA investments, can result in severe penalties and potential tax liabilities. It is crucial to fully understand the IRS regulations before making any investment decisions with your Self Directed IRA.

Liquidity can be another challenge with a Self Directed IRA. Many alternative investments, such as real estate or private equity, are illiquid and may require a long-term commitment. It can be difficult to access funds in case of an emergency or unexpected financial need. It is important to carefully consider your liquidity needs and have a well-balanced portfolio that includes liquid investments alongside alternative assets.

Furthermore, Self Directed IRAs can be more complex and time-consuming to manage compared to traditional IRAs. With a broader range of investment options comes more paperwork and administrative tasks. From conducting due diligence on potential investments to keeping track of income and expenses associated with each investment, managing a Self Directed IRA requires significant time and effort. It is essential to be prepared for the additional administrative burden associated with a Self Directed IRA.

Lastly, the risk factor should not be overlooked. Investing in alternative assets inherently carries a higher level of risk compared to traditional investments such as stocks or bonds. Real estate markets can be unpredictable, private businesses may not perform as expected, and other unique investment opportunities come with their own set of risks. It is crucial to assess your risk tolerance and diversify your investments to mitigate potential losses.

In conclusion, while a Self Directed IRA can offer greater flexibility and potential for higher returns, it also comes with its own set of pitfalls. Lack of oversight, potential for prohibited transactions, liquidity challenges, increased administrative burden, and higher risks are some of the potential pitfalls that should be carefully considered before venturing into a Self Directed IRA. Seeking professional guidance and thoroughly educating yourself on IRS regulations can help navigate these pitfalls and ensure a successful self-directed retirement savings strategy.