Risks with Self-Directed Investing
March 26, 2010
Even as returns in the equity markets level off to more historical averages, evidence is emerging that more and more people are increasingly turning to non-traditional or alternative investments. With self-directed investing, investors can use the cash in their retirement plans to choose from a variety of alternative investments that have potentially higher returns with less risk to your principal, and at the same time reap the benefits of real portfolio diversification not typically available with traditional investments.
However, there are a number of inherent risks with Self-directed Investing:
- Lack of proper due diligence. It’s easy sometimes to get excited about a potential opportunity. When something seems too good to be true, it probably is.
- Not using professional guidance. Self-directed investing gives you control over your investment decisions and financial future, however, it doesn’t instantly give you the experience and knowledge regarding tax and contract law.
- Stay away from self-dealing. There are many instances where the IRS will consider a transaction to be self-dealing. If you purchase any stock in a corporation that is closely held by you, the IRS will deem the transaction as self-dealing. Another example is using the funds in IRA accounts to purchase a vacation home that will be used by you.
Since all potential situations and IRS rules are not explained on this website, we suggest first reviewing the rules and regulations of your Self-directed plan. If you still have questions or concerns refer to IRS website or consult with a tax professional.