Debunking the Top 5 IRA Investing Myths

Many investors may not realize the full range of opportunities available within IRAs, often seeing them as simple retirement accounts with limited options. However, IRAs offer significant potential for long-term growth, tax benefits, and retirement security. Taking advantage of these benefits requires a deeper understanding of how IRAs work and the flexibility they offer.

Unfortunately, common misconceptions about IRAs can prevent investors from maximizing their potential. Many assume IRAs have rigid restrictions or limited investment choices, which can lead to missed opportunities. This blog will take you through the top five investing myths surrounding IRAs and reveal the truth behind them.

Myth 1: You can only hold traditional stocks, bonds or mutual funds in an IRA.

While many people believe you can only hold traditional investments like stocks and mutual funds in an IRA, this is not the case. You can hold almost any type of investment in an IRA. This includes assets like:

• Real estate
• Private equity
• Precious metals
• Cryptocurrency
• Notes & mortgages
• Other investments

To invest in alternative assets, you need to have a self-directed retirement account. A self-directed IRA isn’t a separate type of retirement account like a traditional or Roth IRA, but one that offers greater flexibility and control, enabling investors to choose from a wider variety of assets. It describes how the account is managed, giving investors the ability to include alternative assets.

Myth 2: You can take as long as you want to roll over an IRA into a new IRA.

IRAs are subject to IRS guidelines when completing a rollover or transfer that determine the length of time you have before the rollover or transfer needs to be completed. The IRS has a rule known as the 60-day rollover rule, which requires that a rollover must be completed within 60 days of receiving the distribution from the old IRA. Failure to meet this deadline can result in taxes and penalties on the account and investor.

There are a few exceptions to this rule including transferring from a traditional to Roth IRA – known as a Roth conversion – trustee-to trustee transfers to another IRA, and IRA-to-plan rollovers which includes moving funds from one account type like an IRA to a different account type such as a 401(k).

Myth 3: You can purchase a property you own personally in your IRA.

Although self-directed IRAs allow investors to choose from many different investment types, the IRS does have some restrictions, known as prohibited investments. While real estate and investment properties are allowed in an IRA, your IRA cannot purchase a property you already own personally from you.

As the account owner, you are a disqualified person; therefore, your IRA can’t buy the property from you. You also cannot sell the property to someone else who isn’t a disqualified person, and then buy it from them. This would be considered self-dealing and a prohibited transaction. The IRS doesn’t tell you what you can invest in, but rather what you can’t.

Myth 4: You must have accounts with multiple custodians to invest in traditional and alternative assets.

As we have previously determined, investors can choose from both traditional and alternative assets in their retirement accounts. However, another misconception is that these assets must be held in different IRAs by different custodians due to the account rules.

Historically, this might have been true with many financial institutions offering traditional investments in their retirement accounts, while others would custody only alternative assets. This is no longer the case.

With a Universal IRA at Equity Trust, you can hold public and private market assets in one IRA, which includes both stocks and mutual funds alongside real estate, crypto, and more. This gives you easy access to investments in our online account management system, myEQUITY, to move funds between investments.

Myth 5: You can take income or profits generated from your IRA investment into an outside or personal account.

Some investors mistakenly believe that they can take income or profits generated by their IRA-owned investments, such as real estate, and transfer them to a personal account. However, any earnings in an IRA must stay within the account – whether from rental income, property sales, or other gains. Improper withdrawals can result in taxes and penalties.

In fact, any funds taken out of the IRA are considered distributions and are subject to specific withdrawal rules depending on your age and the type of IRA. If you withdraw income or profits before reaching the eligible age or without meeting necessary requirements, you could face both income taxes and early withdrawal penalties.

Overall, IRAs offer significant opportunities for growth, flexibility, and tax advantages, but it’s important to have a clear understanding of the rules to maximize their potential. The myths surrounding IRAs can lead to confusion and missed opportunities. By dispelling these myths and becoming more informed, you can better navigate your retirement strategy and make the most of your IRA’s capabilities.
If you want to learn more about self-directed IRAs and if they’re the right fit for you to grow and diversify your portfolio, download our Self-Directed IRA Rules Guide.