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

by | BiggerPockets.com

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

About Author

Amanda Han

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 years with a focus on long-term hold residential and multi-family assets across multiple states. Formerly a tax advisor at the prestigious accounting firm Deloitte in the Lead Tax Group, focusing on tax strategies for the real estate industry and high net worth individuals, and at an international Fortune 500 Company in the high-tech industry in the Corporate Tax department, Amanda’s goal is to help investors with strategies designed to supercharge their wealth building. Amanda’s highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s best seller list. A frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies, Amanda has been featured in prominent publications including Money Magazine, Realtor.com, and AllBusiness.com. Amanda was a speaker at Talks at Google and is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine. She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.


  1. Great summary of SDIRAs!

    One thing that I am getting a different answer on (I’m in the process as we speak of setting up a multi-member IRA/LLC) is that you CAN also be an owner of the LLC that your IRA owns part of, BUT! (Did you see the BUT!) you MUST have it set this way from the beginning of it’s inception. Meaning if you wanted to buy a property with 50% your SDIRA money and 50% non-SDIRA money, that is OK, but EVERYTHING must ALWAYS be split in that original ratio. That is my understanding at least.
    Dan Dietz

    • Hi Dan:

      I know some attorneys interpret the code that way. It is definitely a gray area so would go with what you and your tax advisor are comfortable with. Most of the attorneys that our clients use have stayed away from that model in the past.

    • Dmitriy Fomichenko

      Many are not aware of this but another consideration is that if the only reason IRA partners with the account owner so that it can have enough funds to execute certain transaction – it is called enabling and likely to be a prohibited transaction. If the IRA has enough funds on its own to do it – then partnering would be fine.

    • Gautam:

      Both of these accounts allow you to self-direct into real estate or other alternative assets. From a tax perspective, the SoloK is a much more powerful plan than the traditional IRA as it generally allows you to put in much more per year than what an IRA will allow. For this year, there are ways to put $50k or more into a SoloK depending on your income. If you think you may be eligible to fund a SoloK, then I would definitely suggest that you strategize with your CPA on that as there are a lot of benefits that SoloK provides.

      • Hi Amanda,

        I agree the Solo 401K allows you to put in more funds than an IRA but what I do not quite understand is if you can only borrow $50,000 max out of your Solo 401K how can it be better than an SDIRA?

        Thanks for your input.

        • Dmitriy Fomichenko

          Gautam, you don’t need to borrow from Solo 401k in order to invest. And there is no limit on the amount you can invest in your 401k. If you have $1MM you can invest the entire amount without any limitations.
          The $50K limit is for a personal loan you can take out of the Solo 401k, which can be used for any reason. The loan is not available at all with the IRA.

  2. Amanda, I have a business partner who wants to self-direct her abandoned 401K from an old job. If she elects for the IRA-LLC and uses money from it for a down payment on a house our partnership LLC purchases, is that acceptable or part of the gray area you are discussing?

    I used to understand SDIRA’s completely until the new LLC option came out. It has me a bit confused as to what you can and can’t do. I understand it gives you ultimate control, but my partner also lives in California, so she’d have the $800/year franchise tax due too. Is there no way to have control w/out using a IRA-LLC?

    Thanks for your help.

    • Hi Sharon:

      Yes that would definitely fall within the gray area so there are a lot of things you will want to watch out for and work with your custodian and CPA on if it involves her personal IRA and your joint entity.

      IRA LLCs have the same rules and restrictions as regular SDIRAs except it gives you checkbook control. Unfortunately,the LLC $800 per year is not easily avoided if the account holder is a CA resident.

      • Darn, I was afraid that was what I was understanding to be true.

        It used to be about 6 or 7 years ago these IRA-LLCs didn’t exist and you could still have checkbook control. Do you have any idea why you can’t now? Checkbook control, especially if you are using your SDIRA to invest in real estate, seems like a must have to me. But to have to set up an IRA and pay annual franchise taxes just for that ability is really quite obnoxious, in my opinion.

        Thanks for this timely blog – I really enjoy your articles.

  3. Hi, Amanda — good article. You indicate that “most people” can put large sums (as much as 100k or more) into retirement accounts each year, tax deductible. I assume you are referring to plans for self-employed people? Most people are not self employed, for starters, and only a small subset of self-employed have significant earnings. Or are you referring to techniques for W-2 employees as well?

    Please just clarify a couple of cases of what you were referring to, since a huge number was tossed out there. Thanks.

  4. Jeff Brown

    Hey Amanda — Really solid info, especially the part about contributing $50K to the SoloK. Most so-called experts don’t know that. One clarification if you would. You said, “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.” Were you alluding to a married couple in a SoloK? I wasn’t sure to what you were referring. Thanks

  5. Hi Jeff and David:

    I can address both of your comments since they are very similar. The SoloK is only available if you have active income. Whether there is a business entity involved does not matter. So yes, it may be available for self employed individuals and it can also be available for someone with a W-2 job provided that they also have earned income outside of the “job” to allow for contributions. Of course if you are self-employed where you are on your own company payroll this may be eligible as well. Because most of our clients have either their own business or at least a side business, I often tend to make the statement of “most people” when you are correct in that the larger population percentage is probably not in this bucket. Although on BP that may be the case that a larger % of people may be somewhat self-employed.

    The example of $100k can actually go either way. With a SoloK it would need to be based on husband and wife. On the other hand, we have clients who can put $100k or more into retirement account per person and self-direct it with a DB plan if they are older. DB plans are by definition self-directed so you can generally use that for RE.

  6. Amanda,
    I have not read up on the Solo401K in the past, but you have gotten my attention here.
    Say a person has a W2 Income of 50K, and a ‘side business’ that might bring in 5K, which it sounds like would make them eligible for the Solo401. Can they contribute ‘in excess’ of what they make *at the ‘side business’* (say 10K) or are they limited to only that ‘side business’ income as their max contribution?
    Also, if a person’s, main income is self employed, but it is in a multi-member LLC (my case) with no employees (just the 3 owners), does that still qualify for the Solo401K? What if we were to add employees?
    Thanks, Dan

    • Dan:
      In your example yes a person with a side business may be eligible for a SoloK. The contribution each year is however limited to a calculation based on income so it is not possible to contribute more than the net profit. For your second question, there are certain instances where multi-member LLCs allow you to still be eligible for a SoloK and other times when it would not be. I would definitely suggest that you speak with your tax advisor to get into the details to see which one applies to you.

  7. Great article! I’m very new to REI so please help me to better understand this. If I own property and rent it out, can my cashflow go into my self-directed IRA if the rental property was not purchased with funds from this IRA? Am I on the right track here? Thanks!

    • No, the property must be purchased with your IRA funds in order for it to receive the tax-free or tax-deferred treatment of IRAs. So in your example, you cannot simply put rents into an IRA and consider that IRA money.

    • Well…that is a hard question to answer but I would say that if you are educating your CPA on SDIRA (or anything else tax related for that matter) then it is time to change. I would suggest that you ask self-directed custodians for recommendations as they would work with advisors who specialize in that industry. Also, other fellow investors is another great reference source.

  8. SDIRAs are such a great resources but of darn confusing.
    I have recently gotten an advisor that specializes with self directed accounts and it is going pretty well so far.
    At the very least it has eased that paralyzing fear that I was going to mess something up and have the IRS unwind my account.

  9. Amanda first let me say this was a clear, well-written explanation of a very complex topic, kudos! Second as a financial advisor who does understand self-directed IRAs I must say that they mostly scare the hell out of me and I generally would advise most people to avoid them. They scare me because there are far too many scamers hawking these things. Here is a link to a sight in which the SEC warns of some of the fraud connected with these accounts. http://www.sec.gov/investor/alerts/sdira.pdf

    That said if a self-directed IRA is right for an investor be sure to hire an advisor who understands them and equally important a legitimate custodian who also does. I would also caution investors to fully evaluate the potential benefits vs. the risks of using retirement money for real estate, to fund a business, unregistered securities and the like.

    • Hi Roger:

      Thanks for your comment. I completely agree that SDIRA investing, just like any type of investment, should be carefully considered. I don’t necessarily think it is more risky than traditional investments…the risk of course is if an investor jumps into what seems to be a “great deal” without doing the due diligence first. I think this is probably where you come in. I have advised clients to work with their financial advisors in terms of doing due diligence on these types of deals as I think it is very valuable what financial advisors can bring to the table in terms of assessing the risk and returns on a syndication for example. This way the investor can make a more informed decision and to reduce their risks.

  10. @Amanda Han I know one of the issues with using a self-directed IRA to invest in real estate is that profit from Real Estate sales are taxed as regular income, at the time of distribution. Am I right that switching to a Roth account bypasses that issue as long as it is a sale based on buy and hold, not fix and flip? If so that could make it quite worth paying the taxes now and converting to a Roth plan.

    • Hi Walt:

      Yes generally distributions from a Roth IRA would be tax free so you may get away without paying taxes on ordinary income or capital gains taxes on the sale of a rental property. If you are flipping inside of a Roth IRA distributions will still be tax free in the future. The thing you may need to watch out for is unrelated business income taxes within the IRA in the years where there is flip profit as the IRS looks to that as ordinary business income and not investment income. There may be other ways to avoid or minimize UBIT taxes so just make sure you speak with your tax advisor to help you analyze your options if you are planning on flipping in a retirement account as it can get tricky.

  11. Wow, Thanks so much! This was really helpful.
    Do you know if I am able to do the startup of a rental agreement for a rental property in my IRA myself? (e.g. can I hand the renter the lease and sign the bottom of the lease as long as I title landlord as:
    “my ira custodian company” FBO “Jonathan [my name]”
    And sign it:
    “Jonathan [my name]”?
    Or, Does that lease have to be signed by the IRA custodian directly? Thanks again!

    • Dmitriy Fomichenko

      Jonathan, if you have a custodial IRA (which seems to be the case based on your description) – you can not sign the lease on behalf of the custodian, they would have to sign all the related documents on behalf of your IRA.
      If you have Checkbook IRA and you are the manager of the LLC – then you can sign documents as the manager if the transaction is done inside of the LLC.

  12. These are some good quick bits of info. The thing with self directed IRA investing and retirement investing in general is that you need to know as much information as possible. It is very smart to get professionals to help you out. They should know all of the rules and can help you out when trying to figure out what you can invest in and sometimes even more importantly what the rules associated to investing with a retirement account. Great brief article but just as a bit of info there are more things you should be aware of but that is where a professional comes in.

  13. Hi, Thinking about setting up a self directed IRA. I spoke to a potential custodian today and asked if my IRA could sell it to me. The rep said no but you could take in kind distributions. I thought I saw an article on the WSJ that said you can avoid a tax hit on an IRA distribution if you do it over a number of years. Does that same principle(if true) apply to the SDIRA? Thanks!

    • Hi Les:

      Yes any benefit available to regular IRAs are available to self directed IRAs as the IRS treats them as one and the same. Having said that, if you take out money or property from your retirement to your personal name it is generally going to be a taxable distribution. I imagine what the WSJ is referring to is rather than taking it all out in one year and getting hit with the highest taxes, you may consider taking it out in smaller amounts over multiple years so that your income remains fairly low. That way the taxes paid are at lower rates. Another thing they may be referring to could be the 72T which is a strategy to help you avoid early distribution penalties if you are below retirement age. Definitely something to strategize with your CPA about before pulling the trigger.

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