Despite the popularity of managed funds, which puts retirement investing on automatic pilot, some bold individuals are considering pursuing the other extreme—they want to add alternative investments to their retirement portfolios.

These aggressive investors are planning on doing this with a different type of IRA, an exclusive kind of account that is known as a Self Directed Individual Retirement Account. Self-Directed IRAs may also be known by other names like the self directed IRA LLC, IRA LLC, checkbook IRA, or truly self directed IRA.

There are a lot of caveats about Self-Directed IRAs, but basically investors can use a self-directed account to compete for potentially much greater returns than associated with a traditional IRA, which usually conservatively invests in mutual funds or bonds. Using a Self-Directed IRA, they’re able to do different things when it comes to investing, like buying property, putting money into businesses, and holding gold or silver bullion.

Caveats

Since Self-Directed IRAs break away from the conservatism of traditional IRAs, a certain amount of caution is required. An investor is stepping off the beaten path and venturing into new territory.

Consequently, here are five guidelines to consider.

1. Plan to diversify.

When investing, it is always a good idea to diversify your funds into numerous sectors of the marketplace, choosing as broad a variety of asset classes as you can. Most seasoned investors quickly learn that the more investment options they have, the better off and more secure they will be over time. The self directed IRA may be well-suited to meet such diversification plans depending on your individual needs.

However, something more important than and just as vital as being able to diversify one’s portfolio is to have as much charge as possible of how and when your retirement money is invested. This rule of thumb is specifically true for those who wish to be more personally involved and manage their own IRA account. These investors are keen to reduce expenses and preserve their precious capital from both onerous custodial fees and bureaucratic red tape. Extraneous fees and bureaucracy are typically associated with traditional IRA custodians.

2. Investigate the investments as thoroughly as possible.

It should go without saying, but you should make every effort to do your due diligence prior to making any investment. If an offer you are investigating is too good to be true, then more than likely it is.

In contrast to publicly operated securities, financials for alternative investments may not be fully spelled out. If possible, see if the investment can be independently audited and verified by another party. Self-directed IRA owners may be the target of fraudulent investment schemers. This is due to the lack of transparency, as well as due to regulatory oversight.

3. Understand the rules on how to use a Self-Directed IRA.

In fact, it is a good idea to understand them inside and out. First, there’s the prohibited transaction rule for self directed IRAs. This means that these types of assets cannot be held within an IRA account regardless of what it is called. These are outlined by the IRS and are universal for all IRAs. For instance, they cannot include term life insurance, nor can they include assets considered as collectibles, which are things like artwork, rugs, antiques, or precious gemstones. Talk with an IRA specialist before making any decisions. They can’t provide investment advice, but they can help you to know better what is and what isn’t allowable in an IRA account. Resolve yourself to make this part of your due diligence. Also, make sure to talk with a self directed IRA custodian who knows and deals with the IRA LLC entity on a regular basis. They also can’t provide investment advice about whether you have a winning opportunity either, but they can help you fill in vital parts of how to navigate many of the functional requirements related to your newly self directed IRA once it is formed that you may not be aware of.

4. Investors who violate the rules against self-dealing can face substantial penalties and taxes.

If the IRS determines that the IRA owner has engaged in a prohibited transaction, he or she will have to pay taxes. Moreover, if IRA owner is under age 60, a ten percent early distribution penalty is incurred. This is based on the entire valuation on the IRA and not just the portion that was used for making a prohibited investment.

In order to prevent self-dealing, the entire investments have to be run very carefully.

5. Rolling over a personal 401K into a Self-Directed IRA when leaving a company.

A 401k or an IRA can be considered to be forms of retirement accounts. Traditionally, those who had their retirement accounts in a company called it a 401k. A personal 401k account should be rolled over every time a person leaves a company. They may either retire, leave the firm or maybe even get fired. A 401k rollover is done so that the money in the initial 401k can still grow when invested in the markets. Some people instead of rolling their retirement funds completely to another company decide to rollover their personal IRA account into a Self-Directed IRA account.

So if a 401k holder decides to rollover their assets into an IRA account, they could pick a self directed IRA. Typically, a 401k owner picks a traditional IRA where they are simply allowed to purchase the identical limited form of investment options, including stocks, bonds and mutual funds. However, choosing a traditional IRA doesn’t do much to further improve the possibilities for retirement diversification. For instance, if an IRA owner really wanted to seriously invest their retirement funds in other tangible assets like, for example, a single-family property, then they would struggle to do this with a traditional IRA structure.

Summary

A self directed IRA may be a good choice for someone who is looking for the best diversification of their assets, as well as looking for flexibility and control in future investments.