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Myths About Self-Directed IRAs That Need to Get Busted

true or false

For as great of an investment option that self-directed IRAs are, a lot of people don’t know much about them, if anything. A majority of Americans think that paying into their 401k monthly is enough to retire on, and give retirement no more thought after that.
As self-directed IRAs are not very well known, there’s a lot of misconceptions about them, and myths that might deter someone from opening one, so we’re here to bust those myths today.

Contributing to a 401k and an IRA at the same time

Myth: You can’t have a 401k and an IRA open at the same time.
False. Some people believe that because they already have a 401k plan through their employer, that they can’t also have a self-directed IRA. This is FALSE. You can make IRA contributions even if you contribute to your employer plan. But, keep in mind that there are income limits that could limit your ability to deduct those IRA contributions. For Roth IRAs, there are income limits that limit your ability to make a Roth IRA contribution. Here’s the list of contribution limits from IRS.gov.

What can be purchased through your IRA

Myth: You can only invest in the stock market with a self-directed IRA.
False. There are only a handful of items that are prohibited from being purchased with your IRA. The Internal Revenue Code for IRAs states that there are investments in life insurance contracts and in collectibles that are not allowed. Collectables are defined to include any work of art, any rug or antique, any metal or gem (with certain exceptions for gold, silver, platinum or palladium bullion), any stamp or coin (with certain exceptions for gold, silver, or platinum coins issued by the United States or under the laws of any State), and any alcoholic beverage. After those few things, you can invest in almost anything with a self-directed IRA.

Personally using real estate property

Myth: You can personally use property that’s owned by your IRA.
False. This might be one of the biggest slipups that IRA owners who invest in real estate make. Personal use of the property that’s owned by the IRA is prohibited by you, the IRA holder, or any of your relatives. The ability to use your IRA or other plan assets as a source of funds and to acquire real property as an investment is the goal, not to gain property for personal use.

Having a small amount in your IRA account

Myth: I have a small amount in my IRA account, there’s no point in opening a self-directed IRA.
False. Small balance accounts can absolutely participate in investing, and should participate in investing to help that account grow. Small balance accounts can be co-invested with larger accounts owned by you or even other people, it’s a pretty common occurrence as a typical IRA doesn’t reach large amounts many years in, so many see this as a piggyback to a healthy IRA.

It does take time to get your retirement accounts where you want them, but with the alternative investments that self-directed IRAs offer, you’re bound to reach those goals and then some.