Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

The Do’s & Don’ts Of Self-Directed Retirement Investing

Written by Than Merrill

Self-directed retirement investing isn’t for everyone, but I maintain that it warrants your consideration if you want to maximize your nest egg. It’s worth noting, however, that self-directed retirement investing is going to place all of the responsibility on your shoulders; nobody is going to be managing your funds except you. So with that said, you must have a firm grasp on the concept. For starters, you need to know what it is you should be doing and, perhaps better yet, what you shouldn’t be doing. Let’s take a look at some of the most important do’s and don’ts you need to consider when self-directed retirement investing becomes a reality.

What To Do With Self-Directed Retirement Investing

Self-directed retirement

Do make absolutely certain that your retirement fund is truly capable of being self-directed. Not all retirement accounts, like some IRAs for example, are capable of being fully self-directed. There are, in fact, some IRA custodians that will only allow individuals to invest in approved stocks, bonds, mutual funds and CDs. In other words, while most IRAs will allow you to invest in many different options, some come complete with their own restrictions. That said, if you intend to self-direct your retirement account into real estate, it’s imperative that your account will allow you to do so without penalty.

Do mind due diligence. As the name suggests, self-directed retirement investing is inherently dependent on the individual who owns the account. In other words, you — and you alone — are responsible for whatever transpires. There isn’t going to be a professional manager making all the decisions for you, so you had better know what you are getting into. I maintain that self-directing your retirement account is a great alternative, but I digress. Many experts, myself included, warn that self-directed retirement investing isn’t for everyone. If you are planning on investing your retirement savings into real estate, you must be absolutely certain you can handle anything on the horizon.

Do formulate a retirement strategy. If for nothing else, everyones’ retirement plan is going to be representative of their own personal goals and aspirations. What’s more, the age in which individuals will entertain the idea of self-directed retirement investing will run the gamut between young-adult to senior citizen, and everyone in between. In other words, self-directing your retirement will differ depending on where you are currently at in life and where you want to be by the time you retire. As a result, take a minute to reflect on what it is you want. First, try to pinpoint how much time you have until you retire. Next, determine your own appetite for risk. How much risk are you willing to take? More often than not, the risk should lessen the closer you are to retirement. Knowing these things, and more, will help you decide where to allocate your retirement funds in order to maximize your bottomline. Depending at where you are at in life, it may be better to buy rental properties than to invest in rehabs, and vice versa.

What Not To Do With Self-Directed Retirement Investing

Retirement plan

I want to make it abundantly clear: it’s equally as important to know what not to do as it is to know what to do when it comes self-directed retirement investing. In fact, you could very easily argue that the things you don’t do have a larger impact on your retirement savings than everything you end up doing. At the very least, you will find your retirement coffers barren if you neglect to take any actions at all. It’s an extreme example, but poignant nonetheless. You must familiarize yourself with the concept that inaction is just as important as action, if not more so. Having said that, let’s take a look at the things you absolutely can’t do when self-directed retirement investing is your priority.

Don’t underestimate the ramifications that may potentially coincide with self-directed retirement investing. At the very least, you — and you alone — are going to be responsible for where your money goes. Self-directing your retirement inherently means you are removing everyone else from the equation; nobody will be holding your hand. Admittedly, that’s exactly what most entrepreneurs covet the most: control over their own destiny. However, said freedom is a double-edged sword. While it’s certainly comforting to know you will have final say on how your own money is allocated, you must mind due diligence and understand exactly what you are getting yourself into. Anything less than a full, legitimate understanding of how self-directed retirement investing actually works is a recipe for disaster. You must see to it that you are prepared for what the future holds if you intend to self-direct your own capital, especially with what’s on the line.

Don’t expect to live in the property you buy with the money you self-directed from your retirement account. You simply can’t live in a property you buy with retirement funds. And the restrictions don’t stop there. Not only can you not live in the property you buy, but neither can your children, parents, grandparents or linear family members. Now, having said that, you can rent said property to non-lineal family members and just about anyone you see fit. So while there are some restrictions on who you may rent said property to, they are few and far between.

Don’t expect to spend the money you make off of self-directing your retirement accounts into real estate on anything you desire. If for nothing else, every penny generated by property owned by your self-directed retirement account must be paid back into the retirement account from which it was derived. That means you can’t buy that new Corvette you have had your eyes on, or even that new 4K TV. No, the powers that be want you to put said profits back into the account from which the initial investment came. However, it’s entirely possible to invest in more real estate, thereby potentially growing your profit potential and nest egg even further.

Self-directed retirement investing has become synonymous with todays most prolific investors. I, myself, am a huge proponent of the idea, as it gives individuals complete control over their retirement savings instead of some stranger. Moreover, self-directing introduces a whole new world of investing options that many may be unaware of. However, said freedom and potential doesn’t come without a cost. You must understand what is at stake and the weight of the situation, but I digress. In the right hands, self-directed retirement investing can be very lucrative.