Just like retirement planning isn’t one size fits all, self-directed investing isn’t for everyone. But it’s good to know it’s out there. Our knowledge is always expanding. Needs and opportunities pop up unexpectedly. Maybe someone shares a story that piques our interest in a new frontier. One day, it might make a lot of sense.
Folks who choose self-directed investing have to educate themselves on what they’re investing in: Vetting deals and partnerships is the responsibility of the investor. One of the most common examples of alternative investing is in real estate. For the best chance at success, you must be well informed about the real estate market you’re buying into and the processes and costs related to buying, fixing, and renting or selling property. You’ll be using the funds from your 401(k) or IRA to purchase and renovate as needed, yes, but your self-directed IRA custodian can’t tell you which deals are good and which are bad — that’s up to you to research and decide.
Apply this need for due diligence to any type of nontraditional investment and it sounds like a lot of work for the self-directing investor. It is. But like anything, once you know the space you’re working in, maintenance becomes routine.
Self-directing investors are in many ways their own financial advisers, but they often consult with finance and tax professionals — as is strongly recommended — to assess the risks associated with their transactions and to make sure they’re compliant with IRS rules. The penalties for a misstep can be steep, and self-directed investors are not immune to fraud, so due diligence is imperative.
With these caveats, having a self-directed IRA may sound intimidating, but lots of people find value in the diversity it offers and feel more confident about investing in tangible assets. Some even find it less stressful knowing they’re in control instead of a faceless entity. Using your own knowledge and expertise can also be very rewarding, and because the choices are up to you, the sky’s the limit.•
These articles are not intended as investment or financial advice. Before making any investment decision, talk to your financial, tax, or legal advisers.