Common Mistakes Made with Self-Directed IRA Accounts (SDIRAs)
A Self-Directed IRA (SDIRA) can be a powerful tool for those looking to diversify their retirement portfolio beyond traditional stocks and bonds. With the freedom to invest in real estate or other qualifiable assets. A Self-Directed IRA offers greater control, but also greater responsibility. Without proper guidance, it’s easy to make costly mistakes that can lead to penalties or even disqualification of your IRA.
Here are five common mistakes consumers make with Self-Directed IRAs—and how you can avoid them.
1. Engaging in Prohibited Transactions
One of the most common (and serious) mistakes is violating the IRS rules around prohibited transactions. These include buying or selling assets between your IRA and “disqualified persons”—such as yourself, your spouse, parents, children, or any entities they control. For example, you can’t use your Self-Directed IRA to buy a property that you or a family member lives in. Doing so could disqualify your entire IRA and trigger heavy taxes and penalties. Please abide by IRS guidelines to avoid prohibited transactions.
2. Failing to Understand IRS Rules and Compliance
Unlike traditional IRAs, Self-Directed IRAs require you to stay informed about compliance regulations. The IRS has specific rules about valuation, recordkeeping, and annual reporting. If you fail to provide accurate valuations or don’t maintain proper documentation, your account could fall out of compliance. Checkbook style IRAs allow account holders flexibility, but it is your responsibility to ensure your investments remain compliant and properly reported.
3. Overlooking Due Diligence on Investments
Because Self-Directed IRAs allow investment in nontraditional assets, the burden of research falls squarely on the account holder. Unfortunately, this can lead to investing in high-risk or fraudulent opportunities. Before committing your retirement funds, thoroughly vet each investment opportunity. Review financial statements, verify ownership, and assess long-term viability. If something seems too good to be true, it often is.
4. Neglecting Liquidity Needs
Self-Directed IRAs often hold illiquid (cannot be sold or exchanged quickly) assets like real estate or private equity. While these investments can yield strong returns, they can also create challenges when it’s time to take required minimum distributions (RMDs) or cover unexpected expenses. It’s important to maintain some liquid assets within your IRA to ensure you can meet obligations without forcing the flash sale of long-term investments.
5. Doing It Alone Without Professional Guidance
Managing a Self-Directed IRA can be complex. From IRS compliance to asset management, there are many moving parts that can trip up even seasoned investors. Working with your SouthStar Bank experts can help provide some oversight and structure needed to keep your account on track.
At SouthStar Bank, we believe that every customer deserves the freedom to shape their financial future, without unnecessary risk. Whether you’re exploring real estate investments or diversifying your retirement portfolio, our experienced team can help guide you through the process with personalized support and trusted service.
Have any questions? Ready to start your SDIRA journey? Contact your SouthStar Bank IRA experts today at 512.384.3948 or IRA@southstarbank.com.
SouthStar Bank does not provide tax, legal or investment advice. Any information communicated by SouthStar Bank is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or legal counsel.
