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If you’ve never heard of a self-directed individual retirement account (IRA), or you’ve heard of one but aren’t quite sure what they are, I understand. After all, I worked in the trust and wealth management business for 30 years before opening my first self-directed IRA.

As president of the Retirement Industry Trust Association (RITA), I’m working to improve investors’ knowledge of self-directed IRAs. With 73% of surveyed Americans planning to work while claiming Social Security benefits, it’s crucial for investors to understand how to use retirement savings tools to build a nest egg. 

Regular IRAs opened at a traditional bank or brokerage allow you to invest in exchange-traded assets such as stocks, bonds and mutual funds, which have been the bread and butter of the IRA industry for years. You decide where to invest your IRA dollars by selecting from a preapproved list of securities vetted by your account provider.

With self-directed IRAs, there are no preapproved lists. When you work with an IRA custodian who specializes in alternative assets, you decide where to put your money. You can invest in traded assets, or you can invest in alternatives such as tech startups, investment property, wind farms and promissory notes. The law only prohibits IRA investors from owning life insurance or collectibles.

Investors often choose self-directed IRAs because they want more control over their retirement dollars. Some investors want to avoid the wild ups-and-downs of the stock market. Others want to diversify their retirement portfolio by owning noncorrelated assets, such as real estate or private equity. Amid the pandemic, some IRA owners are using retirement funds to support causes they are passionate about, like arranging loans for small, local businesses.

What does ‘self-directed’ mean?

With a regular IRA, guardrails are installed. Your investment choices are narrowed down and vetted for you, and you cannot invest beyond your financial institution’s approved securities list.

With a self-directed IRA, you set your own guardrails. You “self-direct” your account by deciding how much risk to take and what type of assets to own. It’s your responsibility to choose investments, conduct due diligence and keep tabs on investments after purchasing them. Self-directed IRA custodians do not approve or endorse investments, nor can they offer you tax or legal advice.

Given this, investors are recommended to work with a financial advisor or tax professional who understands alternative assets and self-directed IRAs and can help conduct due diligence and ensure you fully understand the risks of any investment opportunity. An advisor can also help determine how an investment may play out in your portfolio over time and how it lines up with your long-term financial goals.

Watch out for self-directed IRA scams.

The SEC and RITA estimate that 2% to 5% of the $10.8 trillion U.S. IRA market is held in self-directed IRAs. At 3%, that equates to $324 billion. Unfortunately, these large dollar signs attract scammers. Given this, it’s crucial investors know how to spot and avoid potentially fraudulent investments.

Scammers are known to use manipulation, unsolicited offers and high-pressure sales techniques to entice investors. Fraudsters may claim an investment is “safe” or “guaranteed,” or they’ll tout high returns that seem too good to be true. We all know if an investment’s projected returns seem too good to be true, they most likely are.

Conduct your homework and verify an investment before moving forward. Approach any opportunity with healthy skepticism. Don’t be shy about asking lots of questions — the more questions you ask, the more information you’ll have to make an informed decision. RITA provides a list of questions you can use to vet investments and their sponsors.

And remember, vetting doesn’t end once you own an investment. Review your account statements regularly, and follow up immediately if something does not make sense or seems suspicious.

Get your retirement savings on track.

Self-directed IRAs have existed as long as IRAs have, but as retirement savers become increasingly sophisticated, these accounts are catching the eye of more investors. Self-directed IRAs enable you to build a nest egg by investing in opportunities close to your heart or your expertise.

If this past year has taught us anything, it’s that life is never predictable, and markets can shift quickly. Using a self-directed IRA to ensure your account is diversified and aligned with your risk tolerance can put you on a path to reaching your financial goals despite life’s inevitable curveballs.

View this article on Forbes

Pacific Premier Trust performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Pacific Premier Trust is not affiliated with any financial professional, investment sponsor, or investment, tax or legal advisor.

INVESTMENT PRODUCTS: NOT FDIC INSURED  |  NO BANK GUARANTEE  |  MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL