6 risks with investing your money in self-directed IRAs

What is a self-directed IRA? 

A self-directed IRA allows for alternative investments, and investors have more say in the types of assets that the IRA holds. While regular IRAs hold stocks, bonds, and bank deposits, self-directed IRAs can hold any number of alternative investments, such as gold, real estate, cryptocurrency, and foreign currency. 

Self-directed Gold IRA risks 

While self-directed IRAs can be attractive alternatives, they do come with their own set of risks. It’s important to understand the risks before investing so that you can mitigate the risk or look at diversification options. 

High fees are often hidden

“The opaqueness of the investment allows managers and middle-men to take advantage of investors with high fees that are often hidden,” according to Shane Enete, CAIA and author of Whole Heart Finance. For example, to make a deal happen, there may be an exorbitant fee associated with the transaction that isn’t readily disclosed at the onset of the deal. Higher fees are also associated with the custodian, who must ensure that the accounts comply with IRS rules and regulations. 

Risk of fraudulent scheme

The state of Oregon warns that self-directed IRAs are commonly the subject of fraudulent schemes, leading to consumer investment losses. Schemes can take many forms, including Ponzi schemes, where the assets are bogus and the funds are misused. This is, in part, the result of the lack of regulatory oversight in the self-directed IRA space. It can make it difficult for investors to protect themselves from illegal activities. 

Assets can be volatile

Investors need to be aware of their volatility when considering gold, cryptocurrency, or foreign currencies. High volatility can lead to investment losses that consumers can’t easily sustain or recover from in a retirement account. The assets may not have a well-established market, making pricing difficult and sometimes arbitrary.

Assets are often illiquid

Because the assets are not always traditional, investors may have trouble liquidating the asset when they want to cash out or when the market becomes volatile. Real estate and private equity assets may not be able to be liquidated in a timely fashion. In fact, liquidating the private equity may be impossible if there is no one else willing to take on the asset. This is a risk investors need to understand before putting their retirement funds into these assets. 

More rules and regulations

Each type of self-directed IRA has its own set of rules that must be followed in order to retain the tax-deferred status of the IRA account. For example, real estate IRAs must not be personal property, meaning you can’t live or vacation on the property. It’s not for personal use, and all maintenance must be paid for by the IRA, not the IRA owner. Failure to follow the rules can lead to significant penalties from the IRS, including the loss of IRA status. 

You don’t get dividends or interest

According to David B. Rosenstrock, CFP, MBA of Wharton Wealth Planning, “Gold (and other non-traditional assets) doesn’t pay interest or dividends like stocks and bonds do.” This is why he feels that gold investments are better outside of an IRA account, where you can see asset growth without the annual tax consequences that stocks with dividends might have. When investing in gold or real estate, you are exclusively relying on the appreciation of the asset over time. This can limit your returns and annual yields. 

The takeaway 

Self-directed IRAs, such as gold IRAs, are designed to give investors more options when putting money aside for retirement. However, these alternatives do come with risks that can lead to financial loss or the inability to access funds when they need them. Investors should consider all the rules and regulations involved in these investments prior to investing. Talk to a knowledgeable IRA custodian before making any final decisions.