5 Ways to Perform Due Diligence on Investment Options for Your IRA

Self-directed IRAs come with a great deal of freedom, giving you control over your retirement funds and the unique ability to choose your own assets. However, the responsibility of performing due diligence on investment options also falls on your shoulders, as well—and it is critical to the overall success of your investments.

2 Reasons Due Diligence on Investment Options Is Important

1. It helps you avoid fraud.

No one is safe from scams and fraud, but when you are in control of choosing Investor in a blue business shirt sitting at his desk performing due diligence on investment options for his IRA.investments, you must go the extra mile to discern the viability of each opportunity. Proper due diligence on investment options is key. The more you investigate a potential asset along with the people involved, the better your chances are of ferreting out the bad apples and benefiting from the good. These tips to spot investment fraud can help.

2. You must avoid prohibited transactions and dealings with disqualified persons.

Prohibited transactions and dealings with disqualified persons can trigger tax implications, hefty fines, and even impact the tax-sheltered status of your IRA.

Transactions with disqualified persons, even by accident, are prohibited by the IRS. For example, your IRA cannot purchase an asset from or sell an asset to yourself, your spouse, your lineal descendants, or lineal ascendants. This rule also applies to investment advisers, managers, fiduciaries, and anyone else providing services to your IRA. Dealings with corporations, partnerships, trusts, or estates in which disqualified persons have a 50 percent or greater interest are also not allowed.

Prohibited transactions include investing in assets the IRS does not allow in IRAs. There are many alternative investments to the stock market—so many that the IRS cannot create a list of them all. But there are a few assets that are not approved as IRA holdings: life insurance and collectibles (art, antiques, most coins, and stamps). Avoid purchasing these assets in your IRA, and when in doubt, consult a professional who can help.

Learn more by reading Internal Revenue Code 4975.

5 Ways to Research Investments for Your IRA

1. Research the investment thoroughly.

Make sure the asset is real, viable, and not a grand Ponzi scheme someone’s peddling or oceanfront property that doesn’t even exist. Ask questions. Request financial information for private equity, hedge funds, multifamily real estate syndications, or other options that should have statistics for review. Find out who else is involved, if possible.

If anything seems sketchy—politely decline participation and move on.

2. When performing due diligence on investment real estate, explore the property.

Is it a parcel of raw land in an area that is under consideration for eventual development? Or is it a swamp that will only benefit the alligators? Is that piece of rental property in an area that generally attracts consistent, reliable tenants? Or is it located in an undesirable area where many homes are vacant, run-down, or riddled with crime?

Whether you’re looking at commercial or residential real estate, determining these elements is critical to the success of your return on investment.

3. Ensure the parties you are working with are legit.

You should fully vet the parties involved in any investment opportunity. From the bank to the realtor to the broker to the individual seller—get access to their credentials. Is the attorney involved reputable? Is the realtor respected? How experienced is the broker? Are they listed in good standing within their industries?

Answers to these questions and more can help you avoid becoming a victim of fraud.

4. Seek the advice your own trusted CPA, realtor, attorney, or financial advisor.

Your own research may prove the persons facilitating an investment are legitimate. But you should still enlist the help of your own trusted advisors to help perform due diligence on investment options. These people may have solid knowledge (good or bad) of the others you’re dealing with. And if they don’t know, they have better access to get reliable information on people within their industry.

Perhaps they have merely heard whispers of negativity within their peer groups about the asset and people involved—which may help you determine whether you buy in or not.

5. Ask other investors.

Joining investment clubs and attending investor networking events is beneficial in many ways. Meeting others whose interests are in line with yours increases your resource base of knowledge. All share secrets and tips, success stories and failures to help each other out. If you have a particular asset in mind, broach the subject and get the opinion of others. You never know—someone in one of these groups could possibly have experience with the asset you’re considering, and the people involved.

Any news helps arm you with the information you need to move forward or step away from the opportunity.

Protect the Tax-Sheltered Status and Integrity of Your IRA

Self-directed retirement plans offer account owners great freedom and flexibility in choosing alternative assets to build income in their portfolios. However, as the saying goes, freedom is not free—so, you must do your part to perform due diligence on investment opportunities. Sometimes it’s easy; other times it can be exhausting. In any case, it’s worth your time. The success of your financial future depends on it.

If you have questions about due diligence or wish to learn more about self-directed retirement plans, please contact Advanta IRA.

This article was initially published in 2018 and has been updated for accuracy.

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About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.