Any Self-Directed IRAs Horror Stories?

Question

Does anyone have a Self-Directed IRA horror story they would like to share?

I attended a national REIA meeting last night on Self-Directed IRAs (presented by Equity Trust). I can definitely see all the PROS, but I'm looking to see what the CONS are. Last night I learned the basic benefits, how to do it correctly and what not to do. I read several articles about it on BP, but I haven't come across any real-life horror stories. What's the worst thing that can happen if you do it wrong?

Carl Fischer · Answer

@Kyle Wilson

Prohibited transactions can result in your Ira being distributed at the time of the transaction thus all of the tax free and or deferral income is subject to penalties and taxes. If this is discovered after years of transactions that could add up.

Examples : signing personally on a loan for your Ira owned property, using your Ira property for personal gain, investing money out of your Ira to a scamming con artist, not understanding when and how an Ira investment can have UBIT UDFI tax. Look at some court cases-Rollins vs the Irs commissioner and there are many others  if you want a list PM me  as I don’t think I can point to a website on this forum

Don’t get me wrong I love self direction and have been working with it since 1994. It’s allowed me to turn real estate into tax free income for life.  The irs has not had a lot of manpower or tools to investigate SDIRAs in the past but that is changing as more people are using SDIRAs. Government reporting rules are also changing providing better insight for the IRS. It was a tool for the very wealthy since the late 70s.

Do things correctly and SDIRAs can provide tax free income for life and beyond. Stay out of the grey areas or at least partition the risk if you are not sure.

Brian Eastman · Answer

@Kyle Wilson

I do have several horror stories.  Been around this space for a dozen years.  Fortunately most are from clients who setup plans elsewhere and then contacted us once they got in trouble, and not our own client base.  That said, we like any business do get a few clients who operate on the "ready, fire, aim" principal.  If someone does not read the instructions or call for help, they get what they create.

All IRA horror stories have one common root - failure to educate oneself on the process.

This can stem from several sources:

• Plan providers that focus on marketing, not education.
• Plans that do not come bundled with access to quality ongoing support.
• Investors who just think of this as "an account" or "a pile of money" and do not respect the fact that with the freedom to take more control over their investment portfolio comes a responsibility to be aware of and operate within the rules.

For investors who take the time to be properly educated and work with a quality provider, there is very little risk.  It all has to do with attitude and approach.

The IRS rules themselves are a pretty basic framework that is easy to operate within as long as you stop and ask questions of a qualified professional before taking action.

BTW, there are about 4 dozen providers of self-directed plan services that outperform the company you mentioned.  They are by far the leading source of "problem" calls we receive from investors who have setup a plan and lost their way.  I can think of two just this week.