By Stephanie B. Mojica
Self-directed individual retirement accounts or IRAs are rapidly growing in popularity, but experts warn that it is important to only get into such an investment with proper education and professional guidance.
Kaaren Hall, owner of uDirect IRA Services in Orange County, Calif., says even after more than two decades in the financial industry and four years of running her company she too must continually stay on top of her investment education particularly regarding Internal Revenue Service guidelines for retirement accounts.
Self-directed IRAs allow people to invest their retirement funds into a variety of options outside of the traditional stock market, including real estate, land, and private notes.
“Financial literacy is not taught in schools, but our future depends on understanding it,” Hall says. “Only about 4 percent of u.S. investors have a self-directed IRA. Why? Because most investors and many advisors simply aren’t aware of it.”
But even those who are aware of the potential financial power of self directed IRAs often do not fully comprehend is the IRS guidelines of “prohibited transactions,” according to Hall.
“You’re not allowed to have any personal benefit from your IRA prior to retirement,” Hall says.
A common misconception among investors is that they can use the self-directed IRA funds to purchase real estate or other property from themselves or close relatives such as a spouse, a child, a grandchild, a parent, a grandparent and any spouses of such relatives. These transactions are not permitted under self-directed IRAs, according to Hall. However, an investor could purchase property from a more distant relative such as a sibling, a cousin, a niece, or an uncle.
“Make sure you know what you’re doing,” Hall says. “We’re here to help people so they understand the twists and turns as much as possible.”
The term self-directed in itself misleads some people because it is the IRA doing the investing, Hall adds.
“So that’s confusing because they get into trouble by maybe signing a purchase contract (in their own name),” she says. “Your IRA can’t buy an asset that you own.”
Consequently, people should wait until they actually open an account with a qualified custodian before funding it and making transactions, Hall says. Generally, a custodian rather than the actual investor should sign purchase contracts relevant to self-directed IRAs.
While representatives of companies such as uDirect IRA do not give actual investment advice due to potential legal liability, they can help people follow ever-changing IRS guidelines.
Hall, a former mortgage broker whose work history includes Bank of America and Indymac Bank, has educated tens of thousands of investors into deciding whether self-directed IRAs are right for them. She and her associates have directly worked with thousands of clients.
To learn more about self-directed IRAs, call 866-447-6598 or visit www.udirectira.com