Self-directed Roth IRA – Pros and Cons

A self-directed Roth IRA allows you to take active control of your investment portfolio and also provides you the flexibility to invest in asset classes which otherwise are not permitted as part of a traditional Roth IRA. Rules pertaining to taxation of a self-directed  Roth IRA are the same as with traditional Roth IRA. But, when it comes to the intricacies of managing a Roth IRA, you need to know the pros and cons.

The Pros

1) Offers a larger array of choice when it comes to selecting the right assets for your portfolio

A self-directed Roth IRA offers you an active control of your investment decisions. The account also empowers you with the flexibility of choosing from a broad range of asset classes. Apart from stocks, bonds, mutual funds, etc., which a regular Roth IRA can invest in, a self-directed Roth account allows you the opportunity to invest in real estate, private stock offerings, mortgages, and deeds of trust. The key benefit of this flexibility is that you can choose the option that is most lucrative at that point in time. Not all classes are equally attractive from a return stand point. So, if you are looking to maximize the return on your retirement assets, you need to frame your investment decisions accordingly.

2) Allows you to invest in a promising start up

With a self-directed Roth IRA, you get an opportunity of investing in the equity of a promising start up business. Though investing in a start up is extremely risky, the rewards are commensurate. In fact, the best returns can be earned when you invest early in the life cycle of a company. Just imagine what if you had invested in Facebook when it was in its formative stages. So if you think you have the knack of spotting such opportunities, a self-directed Roth IRA is for you.

The Cons

1) Higher risk of getting it wrong

Unlike traditional investments like stocks, bonds and mutual funds, alternate investments carry a much higher risk. The risk is sometimes driven by lack of liquidity, a smaller scale of business, improper disclosures and inadequate information on investment opportunity. To mitigate or reduce the risks involved, the investor should exercise prudence while carrying out the due diligence on the investment opportunity.

2) Chance of being duped

It is not uncommon for the investors to be greedy of a few extra percent returns on their investments. They are often tempted to indulge in phony schemes. Quite often, individuals who run these fraudulent schemes, convince investors about their authenticity and genuineness. They mislead investors into believing that it is the responsibility of the custodian to validate their legitimacy, and hence, they need not be concerned. But this is not true as the responsibility of the custodian is limited to holding and administering the asset you buy into your Roth IRA account.

It is important that when you  manage your self-directed Roth IRA account , you are sure to check the legal sanctity of the investment vehicle you may be contemplating. It is best to avoid investment opportunities that you do not appreciate or understand well.