There has been much criticism of the self-directed IRA from various parties inside and outside the financial industry. The vast majority of these criticisms have little basis and represent a fundamental misunderstanding of this type of investment vehicle, however.
The fact is this is very much like the self-directed 401k. It’s fundamentally designed for the investor to take control. It’s not a general type of investment, and this is what investors need to understand before they get involved. It’s not for everybody. It’s for the active type of investor.
Let’s address some of the criticism leveled at the IRA and explore the truth of the situation.
It Doesn’t Have Enough Regulation
Those within the industry have said that there’s not enough control over self-directed IRA. It doesn’t have a sufficient amount of regulation to make it safe. To introduce more regulation would fundamentally undermine the spirit of this investment, though.
The idea is that it doesn’t have a significant amount of regulation, otherwise it would completely kill the freedom provided by it. Other types of investment do have lots of control, but they also restrict investors heavily. It’s why there’s room for a self-directed alternative in the first place.
Furthermore, there’s far more regulation than a lot of outsiders think.
Most investors rely heavily on their custodians to deal with the mountains of administrations. These accounts are regularly inspected to ensure they’re complying with the rules.
Many people point to the fact that you can lose a lot of money with an IRA. You can, but that’s what the investment is all about in the first place. You have full control and you can put your money into practically anything, including precious metals and real estate.
This type of criticism shows a serious lack of knowledge about what the IRA truly is.
One of the disadvantages of an IRA is that it’s difficult to get accurate valuations for commodities like real estate and private businesses. Critics, in this case, are completely right.
Again, though, this type of investment isn’t for everybody. The idea is you take control and you make the decisions. It’s part of your responsibility to evaluate whatever commodity you’re trading in.
It’s also important to mention that this isn’t the case for every type of investment. If we look at gold, for example, this is a relatively stable commodity. Its price is dictated by the markets. It’s a price we can see that won’t differ from investor to investor.
The beauty of the IRA is you have the decision as to whether you take advantage of riskier markets like real estate.
The Risk is Too High
There’s a higher risk when working with accounts that you take responsibility with yourself. We can’t deny this, but again you don’t have to take a particularly high risk with your account if you don’t want to. You have the choice as to whether you stick with relatively safe assets.
And the risk might be higher in terms of what you make back, but the self-directed variety of IRA carries a lower fraud risk. A managed account leaves you open to a higher level of risk because someone else is controlling your money. Corruption does spring up sometimes in the industry, but there’s no chance of any damage if you’re the one controlling the account.
Overall, any disadvantages associated with the IRA can be largely avoided with shrewd management. As already mentioned, this isn’t an investment for everyone. If you’re a sound investor and willing to put the time and work in, this can be the ideal way to save for a better retirement.