What are the Potential Pitfalls With a Self-Directed IRA?

Opening up and operating a self-directed IRA is more intensive than a traditional IRA. It can be more intensive because you’re the one in charge. You choose the investments and do all the work that generally someone else does. The other awesome and daunting thing about a self-directed IRA is that there are endless investing opportunities. Your self-directed IRA can invest in alternative assets like real estate, private lending, precious metals, crypto, and so much more. The issue is that most people focus on the possibilities of their self-directed IRA that they tend to overlook a critical aspect of operating an alternative account, and that’s funding the account.

Directly contributing to your Accuplan self-directed IRA is easy, so let’s talk about the aspect of rolling over an existing IRA and the most common pitfalls that investors can avoid with the right self-directed IRA provider.

Account Funding Options

All of this can feel a bit stressful and confusing, but we’re going to try our best to sum it up.

Conversion: A conversion is converting (for example) a Traditional IRA into a Roth IRA. And since both of those account types have different tax rules, conversions usually incur taxes.

Contributions: Contributions are the amounts set by the IRS that each account holder can contribute to their IRAs. There are annual limits and catch-up limits for each account type. Learn about them all here. Contributions are made with either pre-tax dollars or are made at a tax-free rate depending on the account type.

Transfers: Transfers are simply moving money between similar institutions. For instance, if you have a Roth IRA with one provider and decide to transfer your account to another Roth IRA provider. Generally, both providers will handle this for you, and minimal effort of the account holder is required.

The Big 60-Day Rollover

When rolling over an existing account from one IRA provider to a self-directed IRA provider, you have 60-days from the time the money was first taken from the current account to the new account. You’re essentially playing a financial game of hot potato, and you don’t want to drop it.

If you fail to roll the money into the new account before 60 days, the IRS will consider the money a distribution, and in that case, there will be taxes and penalties to the account holder.

Some of this information might seem simple or obvious to some, but it’s startling how often simple rules like these can be missed or forgotten by the self-directed IRA owner. When regulations get ignored, things fall through the cracks, fees rack up, accounts might get taxed, and the account holder will always be the one paying the price. It all comes down to a lack of information. If you’re always in the know, then you will never be tripped up.

The best advice that any successful investor will give a new investor will be to do their due diligence. You need to know what your responsibilities are as an individual, as well as the best approach for funding your self-directed IRA.  

Learn more about these pitfalls or other self-directed IRA rules today by scheduling a free consultation with our experts below.