How Due Diligence Works in a Self-Directed IRA

With a self-directed IRA, you can pick your own investments based on your own experience and expertise. This gives you the freedom to grow and build your retirement in ways most investors never imagine. But with this freedom comes some added responsibility, specifically, you need to perform due diligence, and vet your own investments. That’s not something Accuplan or any other self-directed IRA provider can do for you, you’ll need to do it yourself. So here’s how.

First, Why Does Due Diligence Matter?

The main reason you should be performing due diligence on any potential investments is risk and the potential for fraud. Not every investment or offer is fraudulent, but fraudsters tend to target the trusting and under-informed. Don’t be too trusting and make sure you’re informed to try and thwart these disingenuous offerings.

These investments will look okay on the surface, but don’t hold up to scrutiny. Scrutinize to protect yourself and your retirement savings.

REMEMBER, you also need to make sure you aren’t investing with any disqualified persons. Per the IRS, your IRA can’t engage in certain prohibited transactions. Any transaction with any lineal ascendants or descendants is prohibited, as is any investment advisor, provider, custodian.

Investigate Tangible Assets

Are you buying a bundle of raw land in an area prime for development? Or, is it a track of land unsuited for homes, a marshland, or right next door to a power plant? Is the house in an up-and-coming neighborhood that draws reliable renters? Or in an area with a ton of empty houses and low rents? Is the business doing well, making profits, and looking to expand? Or, are they in dire financial straights and barely holding on? Don’t just trust the seller, verify for yourself.

Vet All Involved

Beyond just the investment itself, are the people involved trustworthy? You need to completely vet the other people involved in the transaction as well, beyond just the investment itself. From the bank to the real estate agent, to the title company, and any other person or entity involved— they should all be vetted. Does the lawyer have a good reputation? Is the broker registered, does the representative seem knowledgeable? You can google this too. You can also check out the disciplinary history of brokers and advisers on FINRA.

Anyone can fabricate information— so make sure you’re getting your information from a legitimate and trustworthy source.

Thoroughly Research the Investment

One of the best ways to make sure your investment is sound is to do basic research. Ensure the offering is as advertised, and not just a Ponzi scheme based out of someone’s garage. Ask questions, demand financial statements and information, and check out the physical property in person (or hire someone to do so). See if anyone else is involved in the deal, if possible. Google the investment. If the business or your investment has a physical location, look it up on Google maps.

Find a Trusted Advisor to Assist

Though your initial review of your investment may seem promising, it may be worth it to consult an outside advisor or two to ensure you’re making the right decision.

Your lawyer, tax professional, or another advisor may have additional information about the investments you’re considering. And even if they don’t have any idea, they have better access to different resources and can give you better insight into the individuals in their industry. Maybe they know this provider or investment by name— and their insight can help you make a more informed decision.

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