Common and Costly IRA Mistakes

Common and costly IRA mistakes can be divided into two categories; those things that cost you money or increase your taxes and those things that decrease your profits or returns.  Let me give you some examples.

If you are afraid of taking risks, you decrease your returns.  By sticking with the safest investment types, primarily certificates of deposit and government bonds, you will only earn a return of 3-5%.

Sticking solely with the stock market can be common and costly IRA mistakes, today.  Most analysts advise that over the long run, a stock will increase in value, but lately, that hasn’t been true.  If you were holding GM or Ford stock, for example, they have hit an all time low, recently. 

Changes around the world that include technological advances are changing the way that we look at stock holdings.  If you can find companies that are new and growing that offer the latest technology, unavailable elsewhere, then you have a good chance of seeing good returns in the future.  Otherwise, things are pretty stagnant in the stock market.

Failure to diversify your portfolio is one of the most common and costly IRA mistakes.  You should look at all of your investment options.  Put some of your money in secure bonds, some in exciting new stock holdings, some in real estate and perhaps even some of the less traditional investments, such as buying out structured settlements or tax liens.

Since, I am very familiar with the common and costly IRA mistakes that apply to real estate. I’ll give you some of those examples.  Basically, anything that could be considered self-dealing or indirectly beneficial should be avoided.

If you decide to buy a house at the beach for families to use for their summer vacations, you can earn a pretty good yearly income for your retirement account.  But, if you or your close family members take a vacation in the house, it would be considered an indirect benefit and the tax status of your account could be jeopardized.

You cannot live in a property owned by the account and neither can your close family members.  You can’t rent an office in a complex that the account owns and your kids can’t rent a house held within the account.  The rule does not apply to brothers or sisters, but sometimes business and family doesn’t mix.

Another of the common and costly IRA mistakes has to do with financing real estate transactions.  The best deals to look for are those that you can pay for with cash already in the account. The account can take out a mortgage or a bank loan, but profits and income from the transaction would be subject to UBIT or unrelated business income taxes.

Normally, the advantages of investing retirement funds in real estate are no capital gains taxes and no taxes on rental income or other profits.  But, having to finance reduces those advantages somewhat. 

Of course, you have to weigh the pros and cons.  If it’s a really good deal that you don’t want to pass up, seeking additional funding is understandable, but you might want to consider inviting other investors to get in on the deal, rather than a bank. 

In the investment world, it’s called creating a “private bank” and doing so can give you access to unlimited funds for buying and rehabbing, if that’s what you’re in to.  In order to avoid the common and costly IRA mistakes, get a good accountant and/or tax lawyer.  As your balance grows, their advice can be invaluable.