Top Tips for Investment Safety in Your Self-Directed IRA

Top Tips for Investment Safety in Your Self-Directed IRA

When choosing to invest in a self-directed IRA, it is important to do your due diligence when picking an investment; investment safety, especially in a self-directed IRA, is of the utmost importance. Some tips when reviewing different investments are:

  • Determine Why You’re Investing in the Asset
  • Do Your Homework
  • Be Sure You Understand Your Investment
  • Do More Research and Make Comparisons
  • Focus on the Future and a Long-Term Perspective

We will dive deeper into each tip below. First, it’s important to remember that even though all investments carry risk, not all investments are regulated the same. With a self-directed IRA, you (the IRA owner) choose the investment and make all the decisions related to that investment. The administrator or custodian (in this case, Midland) can only direct the funds to the chosen investment and handle the recordkeeping for the account; Midland is not involved in any investment decisions.  Investments inside any IRA are not guaranteed or insured. 

This means that Midland as the administrator of your self-directed IRA, is not responsible for researching the reliability or credibility of any investment. It falls on you to do the research and determine whether the investment is sound enough for your retirement account. The tips below will help you along this process.

Midland does not assure that following the tips below will guarantee the complete safety or trustworthiness of an investment. Again, that is up to you. Rather, these tips are meant to be a guide to helping you do the work on your own.

Determine Why You’re Investing in the Asset

Before making an investment, it’s important to understand the reasoning behind your choice. Self-directed IRAs are great because they allow you the ability to invest in what you want within IRS limits. You can choose an industry you are interested in or knowledgable about and invest there.

However, it is also important to look at other outside factors related to the investment. Is someone else pushing you towards investing because it might be beneficial for them or someone they know? Is the asset you’re choosing something that might not have long-term benefits and will teter out eventually, causing losses or damage? What is your rationale behind the investment?

Do Your Homework

DO YOUR HOMEWORK! Because determining the investment’s credibility falls on you, this step cannot be overlooked. Ask questions – to yourself, the investment company, and the internet. Some good questions to ask include:

  • Who is managing the money?
  • How long have they been in business?
  • Are they regulated? (Check state and federal websites)
  • Who recommended them to you?

Ask every question you can think of about the investment, then ask others if they have any ideas. You want to be as thorough as possible. Contact the investment company and ask them any questions you might have, then search for information outside the company itself to verify their answers. If you know anyone else who has invested with them, talk to them about their experiences.

Make Sure You Understand Your Investment

The beauty of a self-directed IRA is that it allows you to invest in an industry that you understand or have expertise with. IRAs traditionally require you to invest your money in some sort of stock or grouping of publicly traded stock. With a self-directed IRA, you can maximize your earning potential by investing in what you know best. Say you’re a real estate agent: a self-directed IRA gives you the ability to invest in a market about which you are extremely knowledgeable in.

All this said, you can invest in whatever IRS approved asset you would like. The benefit to investing in something you understand well means you have less research determining the ins and outs of the industry. Understanding how the asset functions is extremely important and necessary in order to ensure your IRA’s safety.

Do More Research and Make Comparisons

This might seem redundant but after you’ve done your first level of research, do more! Because you – the investor – assumes all of the risk of the investment, you can never be too thorough in your research. You want to make sure everyone involved in this decision is going to benefit, especially yourself. Risking your retirement funds on a potentially unsafe asset because you didn’t do research beyond the base level is not something to be taken lightly.

Once you determine an investment has the right amount of safety and risk and you are ready to jump in, take a minute to determine the ongoing costs of the investment. Using our prior example of real estate, will your IRA be able to withstand the ongoing costs of investing in real estate? Can it withstand the tax payments and maintenance costs? These costs can vary from state to state and even county to county and should be a part of your decision-making process.

Focus on the Future and a Long-Term Perspective

As is the case with most investments, there won’t be immediate rewards, and if there are, it could be a red flag. Look at how the investment will bring in potential gains or losses and the timeframe behind those. Certain investments offer faster gains than others and each offers them in a different way – from rent checks to returns from private stock or cryptocurrency.

If some gains from investments seem too good to be true, including very fast returns or extremely high returns compared to the industry, there’s a chance they might be. Keep industry standards in the forefront when determining the validity of any potential gains.

Check out some of the websites and sources below to start a preliminary investigation on your investment.

By doing your due diligence, you are maximizing security and doing your best to ensure a safe investment process. Making good investment decisions start with knowing who is investing your money.

Again, Midland does not guarantee that following these tips will ensure the security of your investment; they are a guide to get you started to determine its safety on your own. Remember, like with all investments, contact your financial or tax advisor before making any investment decisions.  Please feel free to call Midland Trust Company 239-333-1032.


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