New Direction IRA Educational Series: Who Performs Due Diligence with a Self-Directed IRA?

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New Direction IRA, a self-directed IRA plan administrator with half a billion dollars in assets, is launching a series of educational articles about self directed and alternative investment topics. The first in the series: New Direction IRA Educational Series: "Who Performs Due Diligence with a Self-Directed IRA?"

New Direction IRA Educational Series, #1 : "Who performs due diligence with a Self-Directed IRA?"

A genuinely attractive feature of “Self-Directed” or “Alternative” IRAs is that the IRA holder gets to make choices as to what assets their retirement account acquires. The Self Directed IRA can be invested in private stocks, real estate, precious metals, etc. When an investor is using an IRA provider like New Direction IRA, which handles these varied asset types, it is not uncommon for the due diligence work on that investment to be the responsibility of the IRA holder, not the IRA provider.

In most cases, the self-directed IRA provider is only performing the work to document (and perform the bookkeeping for) the assets such that the IRS recognizes them as part of the retirement account. Neither the IRS nor New Direction IRA has a stake in whether the investment is a good one. This can be a startling revelation since most consumers are inculcated into a system where they are either taking advice from a financial services person or agreeing to buy something from a salesperson.

When dealing with the neutrality of an IRA provider like New Direction IRA, which simply provides the retirement vehicle but no information on the investments themselves, a consumer can easily fall into the pattern of thinking that if the company funds the asset acquisition that it must be a good investment. In other words, the great thing about self-direction is that it is self directed and the tough thing about self-direction is that the investor takes on not just the risk involved (as they do with all investments) but also the due diligence work prior to investing.

Alternative assets can be vetted, but it is not a skill that many non-professional investors have.

There are two broad categories of assessment that come into play when deciding on whether to purchase an asset:
(1) Is it a viable investment?
Meaning, what is the rate of return? Does it make financial sense? And
(2) Is it a real investment?
Meaning, is there fraud or misrepresentation occurring to secure the investors’ money?

When it comes to viability, numbers can be the key to an analysis. Even a novice investor can assemble the costs associated with acquisition and compare that to an estimated return, and yet some don’t. The viability assessment gets a little more sophisticated when it comes to making sure that the numbers that the are being used are real ones, how the returns of one asset type compare to the returns of other assets, and whether the risk involved is consistent with the investor’s risk tolerance and circumstances.

For a person who has retirement funds that they would like to invest but has not spent a lot of time vetting opportunities, it may be prudent to consult their CPA, attorney, or financial planner, particularly fee-based financial planners that do not make money from getting the investor into a specific asset. Even trusted friends may be a good source of input if they have knowledge and experience with the investment being considered. Remember, New Direction IRA will never endorse any kind of investment, nor encourage or discourage any decision made by the self directed investor.

For those who are performing their due diligence, there are some basic ideas that can inform one’s analysis and keep them from falling into a poor investment or one that is fraudulent. Consider the following investment types and questions, the answers to which, may provide revealing information to be incorporated into the decision making process:

Real Estate
Have you made a physical inspection? In what condition is the property?
Does the seller have clear title? Can they prove it?
Have you talked to the neighbors?
What are the HOA fees, utility costs, insurance premiums, and other expenses?
What is market rent and what is the rental history of the property?
It is absolutely acceptable for an IRA to pay for professional services like a title company, inspector, insurance agent, etc. The IRA holder is the person responsible for choosing and engaging these professionals even though the IRA pays for them.

Private Stock or Fund Participation
Have you looked up the company/fund and the principals of the company on the internet search engines and websites that provide reliable information?
Have you talked to other investors to hear about their experience?
How transparent are the financial dealings?
How experienced are the company/fund principals?
Sometimes being skeptical isn’t appropriate, but, when it comes to finding out about an entity that is going to be an asset for your IRA, it may be a very helpful orientation.

Precious Metals Dealers and Depositories
Is the metals dealer/broker specifying what their fees are?
What is the dealer’s record for delivering the metals?
What do other customers say about the dealer and depository?
What security measures are in place at the depository? Is the storage segregated or not? What insurance does the depository carry?
As always, using the internet can be a way to gather some information about vendors. Note that it is not uncommon for a dealer to have a preferred (or even exclusive) depository, but the choice of vendors or vendor partners is up to the IRA holder.

Notes and Lending
What is the credit worthiness of the borrower?
What is the contingency if the there is a default on the loan?
If there is collateral associated with the note, does the borrower actually own it? Have you secured your claim to the collateral if there is a default?

When it comes to financial dealings, most people have developed some expectations about the roles of the investor, the financial services provider, and the resulting monetary performance. When it comes to self-directed IRAs, preconceived ideas are as likely to get in the way as they are to help. When performing one’s due diligence, it is essential to find out the roles and responsibilities of each entity involved. While New Direction IRA is responsible for the administration and good-standing of the account, they are not necessarily responsible when it comes to the choice of assets and the performance of those assets. When a consumer chooses a self-directed account, he or she assumes the responsibility of making the choices associated with that arrangement.

That is the beauty of these accounts: taking control, investing in something about which you have knowledge, having the ability to create real diversity. However, it takes some work to realize these benefits. The use of curiosity and common sense is vital when vetting investment opportunities. Investing has risks, but there is no reason to add unexamined assumptions to the equation. In the end, it is the IRA holder that must be satisfied with the terms and conditions of the asset acquisition as well as the terms of the account as well.

New Direction IRA, Inc., a self-directed IRA plan administrator with half a billion dollars in assets, also offers self-directed Health Savings Accounts and can be reached at 303-546-7930 or toll free at 877-742-1270. New Direction IRA teaches hundreds of free webinars and classes to educate new and experienced real estate investors and real estate professionals, so even a person with a small IRA fund can make big money for their IRA. Visit their website at

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John Sheflin
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