6 Reasons to Avoid a Self-Directed IRA

These specialized retirement accounts let investors do things they can't in an ordinary IRA, like invest directly in alternative assets. But this opportunity also comes with these risks.

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Self-directed IRAs are not for the average retiree or the faint of heart. These specialized retirement accounts let investors do things they can't in an ordinary IRA, like invest directly in alternative assets, including cryptocurrencies, real estate or a private business. A second property, which many retirees invest in for income, could be purchased as an IRA asset using a self-directed account.

Like ordinary IRAs, assets grow tax-free inside a self-directed account, giving a real estate investor, for example, a way to rent properties or buy and sell them using IRA savings while postponing the taxes on any income or capital gains. "A self-directed IRA would delay those taxes until you withdraw from your plan so you can re-invest all the profits from the sale without having to reduce the net gains by paying taxes now," says Grey Merryman, head of wealth planning at Atlantic Union Bank (opens in new tab)'s Wealth Management Division.

This freedom, however, means more ways for retirees to land in trouble with their hard-earned savings by investing in something that isn't remotely suitable. In fact, partly because of the problems with alternative assets, these accounts have a lot more going against them than for them, and even investing in a second home this way has disadvantages. Consider these risks.

David Rodeck
Contributing Writer, Kiplinger's Retirement Report