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7 Deadly Sins To Avoid With Your Self Directed IRA

If you are not aware of the responsibilities involved with opening a self directed IRA, then there are a lot of possible mistakes you can make that can cost you now and in the future, including problems stemming from an IRS audit. If you make a mistake or break an IRA rule, then you will most likely face stiff penalties. Worse yet, if you don’t know how to properly evaluate a suitable investment for an IRA, or find a capable tax advisor, you could fall victim to an unscrupulous investment fraud where you could lose out on some or all of your retirement funds.

Avoid These Deadly Sins And Preserve Your Retirement

Sin #1. Neglecting Proper Due Diligence Prior to Making an Investment

The first big mistake that can have serious consequences is not completing proper due diligence. With the self directed IRA, your custodian is not likely to do very much for you in terms of researching your investment. They are strictly there to act as the IRA custodian, do the IRS reporting and serve in a limited capacity. As a third party that helps facilitate the legal processing requirements, they will not give advice in terms of the legality and economic soundness of any specific investment. Hence, the investor is responsible for all their own due diligence. When making an investment, it’s always a good ides to do your own research and make sure you know that it is appropriate for you in terms of your goals and level of sophistication, in order to stay out of trouble.

Sin #2. Committing a Prohibited IRA Transaction

Another big sin to make with an IRA is performing a prohibited transaction. IRS Code 4975 explains what transactions are prohibited. Anytime you do business with a disqualified party such as yourself, your spouse or any lineal family members these are considered a prohibited transaction. Involving your IRA in a prohibited transaction is one of the worst things that you can do and it is definitely an action you want to avoid.

Sin #3. Stepping Into A Step Transaction in Order to Side-Step The IRS Rules

The next deadly temptation you should avoid at all costs with your IRA is participating in what is known as a step transaction. A step transaction is another form of a prohibited transaction, but since most people who commit this sin have some foreknowledge of the IRA rules they are trying to exploit what they think is a loophole in the tax code. Since this is generally the case, this type of transaction could really be considered outright fraud on the behalf of the IRA owner. Unfortunately, in most cases this type of fraudulent transaction is promoted by unscrupulous advisors who really just do not know any better.

Most people that fall into this sin are hell bent on doing one of the following or both. Either they have a personal asset that they want to get inside the IRA to shelter it from taxes or they want to extract some of the funds out of their IRA before age 59 1/2. To illustrate, let’s say you personally own a piece of property and you are hell bent to out smart the IRS. So, you decide to sell the property to someone else who is non-disqualified party, such as a brother or a close friend for peanuts, and then have them sell that to your IRA and laundry the IRA monies back to you personally. Since you doing this transaction in order to place a personally owned asset inside your IRA and to avoid a prohibited transaction, the IRS calls it a step transaction. Once you get caught using this scheme, you will have to pay taxes and penalties on that investment and worse yet you might lose your IRA status.

Sin #4. Getting Involved in a Fraudulent Investment with a Silver-Tongued Investment Promoter

This sin is getting involved in a fraudulent investment scheme, and again goes back to deadly Sin #1 and doing your own due diligence and research. As a sophisticated investor, you want to make sure that you’re not getting involved in a Ponzi scheme. It’s easy to become fooled by these schemes, so to help you our firm has a video at our website that shows warning flags for these types of fraudulent transactions. Just remember if a deal seems too good to be true, then it probably is or at the very least there is a lot of inherent risk involved in engaging in this transaction.

Sin #5. Thinking the IRS Won’t Catch You For Obfuscating The IRA Rules

The next deadly sin in handling an IRA is underestimating and thinking the IRS won’t catch you if you bend their rules. The IRS is very good at what they do, and it’s not uncommon for IRAs to be audited. Unfortunately, if you are audited and they find out that you’ve done a prohibited transaction or one of the step transactions, the penalties are very severe, so it’s best to avoid them. If you know it’s not the right thing to do, then just don’t do it!

Sin #6. Cutting Corners to Save a Buck

This sin is cutting corners to save a buck, and it is never a good idea to cut corners or to do something incorrectly in your IRA, just in order to save a little bit of money. Always speak with a CPA or a tax professional, and make sure you’re getting good investment advice. You also want to make sure that you’re getting all the documents required done correctly. For example, if you’re buying a piece of property, make sure you go through a title company. The worst thing that you can do is buy a piece of property or something and then later down the road find out there’s leans on the property or the person that sold it to you isn’t really the owner of the property. Those are all issues that a title company can help you avoid beforehand. So make sure you don’t cut corners just to save a couple of bucks in your IRA, as it is possible to lose your entire investment.

Sin #7. Soliciting Free Unskilled, Non-Qualified Advice To Save a Buck

Finally, the last deadly sin is getting free bad advice from unskilled individuals. This goes back to sin #6, when self directing your retirement you always want to talk to a CPA or a tax professional before committing your hard earned money to an investment. You may have to pay them a little bit more money for their time to get good advice. Unfortunately, if you just talk to somebody who says they know what they’re doing and they end up not knowing what they’re doing; it could cost you a lot more in the future. So it’s always good to get it done right the first time. It’s best to look at both their credentials and obtain client recommendations before selecting a professional expert.

II summary, these are some of the worst things that you can do in a self-directed IRA, and hopefully our video and this post will help you avoid costly mistakes in the future. If you have any questions regarding opening a self directed IRA, then please give us call at 800-642-7167. Also, new videos are posted every Tuesday at 2 o’clock; so make sure to subscribe to our video channel to enjoy the latest investment and self directed IRA wisdom.

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.