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Top 5 Tips to Know Before Opening a Self-Directed IRA

Every self-directed IRA investor is different. Some are professional investors with years of experience self-directing their Traditional IRA or Roth IRA investments. Others are new to the space and are looking for more control over their retirement investments. Many simply want to escape volatility associated with the stock market.

While everyone’s journey is unique, here are 5 tips you can follow to help put you on the path to success as a self-directed IRA investor:

1. Choose your IRA Custodian Wisely

While it’s possible to open an IRA at almost any financial institution, only a handful have the know-how to hold alternative assets in an IRA. Good custodians can guide you through the complexities of self-directed IRA ownership and also educate you about potential pitfalls, such as prohibited transactions and fraud red flags. To help you choose an IRA custodian, we’ve created a checklist that you can access here. You can also read our blog, 7 Questions to Ask Before Choosing a Custodian, to make the selection process a bit easier.

2. Decide Between a Traditional IRA or a Roth IRA

This may come as a surprise, but the IRS does not recognize the term “self-directed IRA.” That’s because a “self-directed IRA” is actually either a Roth IRA or a Traditional IRA where you are self-directing -- or managing -- the investments in the account. When opening your self-directed IRA, you’ll need to choose either a Traditional IRA or a Roth IRA. For more information on how to decide which IRA might work best for you, visit our IRA overview page.

3. Be Sure to Avoid Prohibited Transactions

When it comes to self-directed IRA investing, there are certain transactions that the IRS considers to be prohibited, and you’ll want to steer clear of them to avoid any unintended tax consequences. Prohibited transactions include using IRA funds to buy a property for personal use or loaning money to yourself or family members from your IRA. Before investing, be sure to familiarize yourself with the IRS rules regarding disqualified persons and prohibited transactions. PENSCO’s Opportunity Analyzer can help you figure out if a deal you’re considering might be prohibited. You can also call 866-818-4472 to talk to one PENSCO’s IRA Specialists.

4. Mull Your (Almost) Endless Investment Possibilities

While you need to steer clear of prohibited transactions, self-directed IRAs open up a world of investment possibilities beyond stocks and bonds. The IRS is very specific about what you cannot invest in (e.g., life insurance and collectibles). Beyond that list, everything from raw land to private placements to Bitcoin can be held in your self-directed IRA. Before you open your self-directed IRA, spend time deciding what it is you want to invest in and make sure you’re comfortable with the asset class. However, just because it’s possible to invest in something doesn’t mean you should. And that brings us to Tip 5.

5. Choose your Investment Carefully

No matter which custodian you work with, choosing your investment and conducting any due diligence are your responsibility. The role of an IRA custodian is to ensure the asset is qualified to be held in an IRA, but self-directed IRA custodians do not provide any investment, tax or legal advice. We encourage all of our clients to conduct careful due diligence before making an investment decision. You can visit our blog for tips on conducting due diligence.