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6 Do’s and Don’ts of Self-Directed Retirement Investing

6 Do’s and Don’ts of Self-Directed Retirement Investing

3 min read
Amanda Han

Amanda Han has been a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax...

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If you have taxes due for the September or October 15th deadline, you may want to work with your tax advisor to find ways to pay towards your retirement account rather than the IRS. The goal with retirement investing is to shift money that would otherwise go to the IRS into your retirement account. This is completely legal and specifically allowed by the IRS. In fact, the IRS wants you to do it.

Did you know that most people can put way more than the $5,500 or $6,000 into a retirement account? In fact, you may be able to put over $100,000 per year into a retirement account and take a $100,000 tax deduction for it.

Curious? Keep reading.

What to Buy With Your Retirement Money

Once your money is in a retirement account, you need to put it to work. Investing in what you know best via self-directed accounts is one way to accumulate massive amounts of wealth in a relatively short period of time. You can have total control over your retirement and invest in alternative assets outside of the choices provided by your financial advisor.

Self-Directed investing is not a brand new strategy. In fact, it has been around for over 30 years. But you need to know the rules before you begin! There are things you can do, and things you can’t. Here’s a quick run-down of the do’s and don’ts of self-directed retirement investing:

Self-Directed IRA Investing Quick Tips


1. Make sure you have a truly self-directed retirement fund with an independent trustee or custodian. Many plans may sound self-directed–as long as you only choose from the custodian’s list of pre-approved investments. Use one that really allows you to invest in what you want.

2. If you’re using a Roth IRA, make sure you keep it going for at least 5 years! Holding a Roth IRA for less than that can result in paying tax on the distributions.

3. If you want almost complete control over your retirement investments, consider using a special type of LLC, that we call an “IRA LLC” (although it applies to all kinds of retirement plans), that allows you to manage your retirement funds. If you go this route, make sure you understand how this LLC functions and how you fit into the equation. You don’t want to fall into the prohibited transaction trap!

4. If you buy property with your retirement funds, you can’t live in it! Neither can your children, parents or grandparents. However, you can rent that property to your non-lineal family members, including brothers, sisters and cousins.

5. You are not limited to only purchase houses with your retirement plan. Raw land, condos, commercial properties, franchise businesses, start-ups and notes are all permitted purchases with retirement funds.

6. When in doubt – even just a tiny doubt – check the proposed transaction with your CPA and IRA custodian first! If you self-direct, you are solely responsible for avoiding a prohibited transaction. A good CPA or custodian will try to offer their input if they see you heading for a prohibited transaction, but at the end of the day it’s your responsibility.   That’s the best way to stay safe that we can think of. Your IRA custodian is a crucial part of your investing team!


1. Your retirement fund can’t buy real estate, directly or indirectly, from you, your spouse, your kids, your parents, your grandparents, or your retirement account’s trustee or custodian. You can’t get around this by using your spouse’s IRA instead, either.

2. You can’t use business structures to get around #1 above. If you own 50 percent or more of a business structure, that structure can’t sell real estate to your IRA. The same goes for officers, directors and key employees who own 10 percent or more of a business structure that wants to sell property to your IRA.

3. You can’t use “others” to get around #1 above. For example, lending IRA money to your friend and having that friend lend it back to you is not allowed. The IRS looks at where the money started and where the money ended. In this case, the money ultimately went from the retirement account back to you and thus it is a prohibited transaction. 4. You can’t personally guarantee a loan for your IRA, or vice-versa.

5. If you are using the IRA LLC to manage your IRA, you can’t also be a member of that LLC. It may ONLY be owned by your IRA.

6. Do not co-mingle retirement funds with other money. Be sure to keep retirement money separate from your personal or business funds so that the IRS does not try to classify these as distributions or prohibited transactions.

Statistics Don’t Lie

A recent report revealed that less than 4% percent of advisors are up to par on understanding the tax strategies relating to retirement investing. This is extremely sad and unacceptable since these are the people who are advising you. Make sure you understand the benefits of self-directed investing and don’t miss out on this great perk!

Photo: Ken Teegardin