3473: Are Self-Directed IRAs a Good Idea? by Cynthia Meyer with Financial Finesse on Retirement Planning

What It Covers

Cynthia Meyer of Financial Finesse examines self-directed IRAs, covering alternative investment risks, high fees, prohibited transactions, tax pitfalls, and a six-point checklist to determine whether this retirement account structure suits your financial situation.

Key Questions Answered

• •Self-Directed IRA Fees: Costs run significantly higher than traditional IRAs, including setup fees, custodial fees, and annual valuation fees. Some custodians suggest establishing an IRA LLC for checkbook control, but this adds legal risk and substantial setup costs on top of existing fees.
• •Tax Trap with Real Estate: Holding real estate inside a traditional IRA forces distributions to be taxed as ordinary income rather than at lower capital gains rates. Investors also forfeit immediate depreciation deductions and rental loss write-offs that are available when holding property in taxable accounts.
• •Prohibited Transaction Rules: Self-directed IRAs cannot transact with linear family members, including spouses, parents, children, grandchildren, or their spouses. Family members cannot work on behalf of the investment or reside in IRA-held property, eliminating common strategies like selling a family business to the IRA.
• •Six-Point Suitability Checklist: Aim for at least four of six criteria before opening a self-directed IRA: accredited investor status, retirement fully funded elsewhere, diversified liquid investments outside the IRA, professional expertise in the target investment, precious metals diversification goal, or a small high-risk Roth IRA private equity bet.