Top Tips for Investment Safety in Your Self-Directed IRA

Investment safety tips

When choosing to invest in a self-directed IRA, it is important to do your due diligence when picking an investment; investment safety, especially in a self-directed IRA is of the utmost importance. Some tips when reviewing different investments are:

  • Determine Why You’re Investing in the Asset
  • Do Your Homework
  • Be Sure You Understand Your Investment
  • Do More Research and Make Comparisons
  • Focus on the Future and a Long-Term Perspective

We will dive deeper into each tip below. First, it’s important to remember that even though all investments carry risk, not all investments are regulated the same. With a self-directed IRA, you (the IRA owner) choose the investment and make all the decisions related to that investment. The administrator or custodian (in this case, Midland) can only direct the funds to the chosen investment and handle the recordkeeping for the account; Midland is not involved in any investment decisions.

This means that Midland as the administrator of your self-directed IRA, is not responsible for researching the reliability or credibility of any investment. It falls on you to do the research and to determine whether the investment is sound enough for your retirement account. The tips below will help you along this process.

Midland does not assure that following the tips below will guarantee complete safety or trustworthiness of an investment. Again, that is up to you. Rather, these tips are meant to be a guide to helping you do the work on your own.

Determine Why You’re Investing in the Asset

Before making an investment, it’s important to understand the reasoning behind your choice. Self-directed IRAs are great because they allow you the ability to invest in what you want within IRS limits. You can choose an industry you are interested in or knowledgable about and invest there.

However, it is also important to look at other outside factors related to the investment. Is someone else pushing you towards investing because it might be beneficial for them or someone they know? Is the asset you’re choosing something that might not have long-term benefits and will teter out eventually, causing losses or damage? What is your rationale behind the investment?

Do Your Homework

DO YOUR HOMEWORK! Because determing the investment’s credibility falls on you, this step cannot be overlooked. Ask questions – to yourself, the investment company, and the internet. Some good questions to ask include:

  • Who is managing the money?
  • How long have they been in business?
  • Are they regulated? (Check state and federal websites)
  • Who recommended them to you?

Ask every question you can think of about the investment; then ask others if they have any ideas. You want to be as thorough as possible. Contact the investment company and ask them any questions you might have, then search for the information outside the company itself to verify their answers. If you know anyone else who has invested with them, talk to them about their experiences.

Make Sure You Understand Your Investment

The beauty of a self-directed IRA is that it allows you to invest in an industry that you understand or have expertise with. IRAs traditionally require you to invest your money in some sort of stock or grouping of publicly traded stock. With a self-directed IRA, you can maximize your earning potential by investing in what you know best. Say you’re a real estate agent: a self-directed IRA gives you the ability to invest in a market about which you are extremely knowledgeable in.

All this said, you can invest in whatever IRS approved asset you would like. The benefit to investing in something you understand well means you have less research determining the ins and outs of the industry. Understanding how the asset functions is extremely important and necessary in order to ensure your IRA’s safety.

Do More Research and Make Comparisons

This might seem redundant but after you’ve done your first level of research, do more! Because you – the investor – assumes all of the risk of the investment, you can never be too thorough in your research. You want to make sure everyone involved in this decision is going to benefit, especially yourself. Risking your retirement funds on a potentially unsafe asset because you didn’t do research beyond the base level is not something to be taken lightly.

Once you determine an investment has the right amount of safety and risk and you are ready to jump in, take a minute to determine ongoing costs of the investment. Using our prior example of real estate, will your IRA be able to withstand the ongoing costs of investing in real estate? Can it withstand the tax payments and maintenance costs? These costs can vary from state to state and even county to county and should be a part of your decision-making process.

Focus on the Future and a Long-Term Perspective

As is the case with most investments, there won’t be immediate rewards, and if there are, it could be a red flag. Look at how the investment will bring in potential gains or losses and the timeframe behind those. Certain investments offer faster gains than others and each offers them in a different way – from rent checks to returns from private stock or cryptocurrency.

If some gains from investments seem too good to be true, including very fast returns or extremely high returns compared to the industry, there’s a chance they might be. Keep industry standards in the forefront when determining the validity of any potential gains.

Check out some of the websites and sources below to start a preliminary investigation on your investment.

By doing your due diligence, you are maximizing security and doing your best to ensure a safe investment process. Making good investment decisions start with knowing who is investing your money.

Again, Midland does not guarantee that following these tips will ensure the security of your investment; they are a guide to get you started to determining its safety on your own. Remember, like with all investments, contact your financial or tax advisor before making any investment decisions.

IRS Form 5498: IRA Contributions Questions and Answers

Alternative Investments

As the tax filing deadline approaches, people have questions about the forms and filing requirements related to their IRAs. Form 5498 is a tax document that reports contributions and other IRA-related information to the IRS. Form 5498 is generated for any individual who has completed any of the money movement-related activities listed below, such as contributions or IRA conversions. It is generated after the tax deadline and is not necessary for tax filing purposes. The form is used by the IRS for required minimum distribution (RMD) calculations based on the value of the account from the prior year. Check out the rest of the article below for some basic questions related to form 5498.

What is IRS Form 5498?

Form 5498 is the tax form used to report certain activities in IRA accounts, including Roth or Traditional IRAs and Simplified Employee Pension (SEP) IRAs. Health Savings Accounts (HSAs) are reported on a separate form.

Form 5498 reports any of the follow actions to the IRS:

  • Contributions
  • Rollovers
  • Conversion or recharacterization of accounts
  • Required minimum distributions (RMDs)

Your IRA company – in this case, Midland – files the form with the IRS for you, usually by May 31st.

Who receives Form 5498?

Any individual who has completed any of the actions listed above will receive a 5498. If you did not complete a contribution, rollover, conversion, or any other action listed above, you will not receive a Form 5498. If you have multiple accounts, you will receive one for each account. In the case of an inherited IRA, a 5498 will be generated for both the deceased and the beneficiary. If you have an account with Midland, it will be uploaded in your online portal. Preliminary 5498s may be uploaded before the deadline of May 31st. Please remember these are not the final forms because contributions can still be made until the tax deadline of April 15th. Although you do not file Form 5498, it is still good practice to keep a copy for your records, in the case of any errors. You can also use it to cross-reference your personal files if you’d like to confirm.

Do you need Form 5498 to file taxes?

No, you do not need Form 5498 to file taxes. Midland does not send 5498s to the IRS until the end of May because you can continue to make contributions for both Traditional and Roth IRAs until April 15th. For tax purposes, all that you need to report is your rollovers and contributions. These can be found on an annual statement.

Can Form 5498 be corrected?

In the case of any misreporting or incorrect coding on the form, the 5498 can be correct for the current tax year. No corrections can be made for any previous tax years, and a correct 5498 will not automatically be sent to the IRS after the corrections are made. To discuss any perceived errors on the form, please contact us at (239) 333-1032 for assistance.

What about Required Minimum Distributions (RMDs)?

Once you reach the age of 72 – or 70 ½ if you reached this age prior to January 1, 2020 – you must take an RMD. It is based on your age and the account’s fair market value from December 31st of the prior tax year. This is why it is important to submit your fair market values to Midland each year so your RMDs can be properly calculated. Form 5498 will report the amount that needs to be taken.

For more information on IRA accounts and the opportunities available at Midland Trust, be sure to visit our website or call us at (239) 333-1032.

Midland Trust Fort Myers has Moved

Midland is excited to announce the move to our new headquarters in Fort Myers, FL!

On March 21st, we officially moved into our new building, located at 15671 San Carlos Blvd., Fort Myers, FL 33908. This spacious new location, located at the corner of San Carlos Blvd and Beachwalk Blvd, is 15,500 square feet. It comfortably fits all of our employees with room to grow. The space boasts private rooms for clients and company meetings, and our new large event space can accommodate in-person events that we plan to host. Join us if you’re in the area, or watch our next event online!. We look forward to the exciting opportunities this new building offers.

The building will allow us to maintain our growth so we can continue to help our wonderful clients. Please don’t hesitate to stop by and see us when you’re in town. Look for the blue Midland sign!

Midland is a multifaceted financial services company that has been located in Southwest Florida since 1994. Its proudest accomplishment is it is structured as an employee-owned company. The Midland ESOP allows the employees to share in the growth of the companies.