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Holding alternative investments, such as real estate, in a self-directed IRA can help build retirement funds. However, because these accounts allow for more investment freedom, they are also associated with increased risk.
Remember that self-directed IRA administrators do not generally research investments, so due diligence is necessary from investors to limit the risk associated with their retirement savings. Here are three reasons you should be performing due diligence on investment opportunities:
1. Identify Scams
The only way to makesure that your self-directed IRA savings do not become the victim of fraud is to perform due diligence! Research investment opportunities, do not be afraid to ask questions, and remember that if it seems too good to be true, it probably is!
2. Avoid Penalty Taxes
Self-directed IRAs are governed by rules and regulations that outline a series of prohibited transactions, some involving disqualified persons. Investors should be able to determine that an investment opportunity does not break any of these rules before moving forward, or they risk hefty penalty taxes. Learn more about prohibited transactions here.
3. Expand Your Expertise
The more you learn about various investment opportunities, the more you expand your expertise. Due diligence allows you to grow your knowledge and learn “the game” and “the players” involved throughout the various investment markets. The more you know, the more empowered you are to take control of your financial future.
To learn more about the importance of due diligence, as well as tips and strategies for avoiding fraud, check out our educational video: Outsmarting Investment Scams.
For more information on due diligence best practices, check out our report, What Due Diligence Is, Why It Matters, and How To Do It Well.