3 Pros (& 2 Cons) of Self-Directed IRA Investing

by | BiggerPockets.com

Looking back, I’ve spent a good part of my life searching for the greatest investment. I’ve tried many different types of investments over the years. Some weren’t right for me at the time, and some were.

Eventually, I found not only the type of investments I prefer, but also the way I prefer to invest. I also realized that I wanted to be the one in control of my own money.

So, what did this journey actually look like? Well, I’d say it’s similar to what many folks go through out there.

I remember my first corporate America type of job, where in a good year we had some profit sharing paid directly to our retirement accounts, but in a bad year, the company didn’t put any money away for me. I worked there for 13 years, and in that time, I only accumulated approximately one year’s total salary in my retirement account. Obviously, it wasn’t going to be an exciting proposition to continue on long-term with that firm.

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Mutual Funds

We literally only had three choices to invest in — one was an index fund, one was a bond fund, and I think the other was some type of international stock fund. I truly believe all three were pretty lousy since my coworkers and I seemed to try every combination of the three and none of us ever seemed to make any money.

When I finally quit that job, I started selling insurance, as well as working as a licensed real estate agent.


Since I was selling annuities as a retirement option for some of my clients, I tried rolling my retirement money out of the mutual funds and into an annuity. To be quite honest, these were extremely safe products. Although they didn’t really fit my needs at the time, they probably do have a place for some folks, depending on the scenario.

Related: The Self-Directed IRA: What You Should Know About This Wealth-Building Tool

The trouble with my annuity was that, although it was safe, there wasn’t much yield, and it took a long time to get my money out without penalty, especially since there were very strict rules on pulling money out or for rolling money into another qualified account. My next attempt at investing for retirement was to try using an experienced stockbroker, who was also a family member. How could I go wrong, right?



Now I had the inside track, a real stockbroker whom I felt I could trust. At first, my father and I made some money trading with the broker, and then we put up some more money in the stock of a local company that looked great on paper, but then suddenly their management team seemed to run off with all the money. Needless to say, we lost a lot of money.

It wasn’t until years later when I learned to trade options for myself that I realized exactly what happened. As the stock values were plummeting, my broker had never put a stop loss in place, which would have limited my losses.

Options Trading

By this time, I pretty much had it. I decided to start learning this stuff for myself.

I probably invested about $25k learning about puts and calls, putting insurance on my trades, incorporating stop losses, etc. It was like learning a foreign language at first with all the unique terminology. I also networked with others in the space and even had a mentor who I utilized to shadow his trades. The only challenge was that it took time and commitment to learn all of this, although the actual execution didn’t take long, but all the research and learning did. It was more an active investment than a passive one.

It was around this same time that I had started using my self-directed IRA retirement account.

Self-Directed IRAs

In the beginning, I was using other real estate investors’ IRAs to lend me more money for my real estate rehab deals. So, I had decided to move the remaining money I had from corporate America and my broker relative to a self-directed IRA. It was probably one of the best things I ever did.

I even converted my traditional IRA (where you pay tax on the crop) to a Roth IRA (where you pay tax on the seed), and I just paid the tax. Today, everything I have retirement-wise is all in a Roth IRA. Paying the tax wasn’t so bad because shortly after paying it, I bought a house for $40k and flipped it for $80k. For me, funding the Roth was well worth it.

So, here I am with my self-directed IRA, as I approach retirement, and although I have multiple IRA accounts that have owned real estate and traded options, today my favorite IRA investments are private money for short-term real estate rehab deals and performing notes and mortgages (the latter are serviced by a licensed third party). I also love that they provide a high yield and are passive.

What Are Some of the Pros of Having a Self-Directed IRA?

Pro #1: Tax-Free or Tax-Deferred

Although self-directed accounts are one or the other, tax-free or tax-deferred, both can be pretty good. A traditional type of IRA account is tax-deferred — which means you get an income tax break putting the money in, and it can grow tax-deferred, but when it’s withdrawn (which, by the way, has to start happening at age 70½), taxes are now due. Thus, you are paying tax on the crop.

With a Roth IRA account, your contributions are made with after-tax money, and now your account can grow tax-free. There are no taxes due upon withdrawal, and there’s no set age when you’re required to start taking withdrawals. Thus, you are paying tax on the seed.

Pro #2: Safe and Sheltered Vehicle

Self-directed IRAs are fairly safe vehicles in regard to things like creditors or judgments. Insurance contracts and IRA accounts are some of the safest buckets, where money can be set aside in a very protected environment and is usually immune to things like bankruptcy too, depending on your state. It’s also very difficult to sue an IRA account since technically it’s a trust account.

Pro #3: You Control the Investment

Some folks may look at this as a con since you have to be active, disciplined, and responsible for your own investments. But if you’re knowledgeable with what you’re investing in this can be an extremely profitable wealth building tool.

With Self-Directed IRAs, you are not limited to the traditional investments offered by your brokerage firm (i.e. traditional investments). You are also able to invest in many different alternative assets, such as real estate, gold and silver, mortgage notes, private placements, commodities, tax liens, hedge funds, oil, gas, mineral, lumber, etc. You have access to all investment opportunities, other than the few transactions which are prohibited by the IRS or U.S. Treasure Department.


What Are Some of the Cons?

Con #1: Fees and Paperwork

There can be some fees and paperwork to get used to, but there are no true performance fees, and if you’re an active investor, they can be somewhat nominal. Usually the fees are charged based on the number of investments or the total value of the account. It does pay you to check because depending on the type of asset in the account some companies are better than others. For example, when day trading options, one company’s fees I was using were modest and another company’s were a totally ridiculous cost per trade.

Con #2: Heavily Regulated and Complicated

Retirement accounts of any type are heavily regulated. There are many rules and much paperwork so it can seem overwhelming to some. Of course, you can’t do any self-dealing, where you as an individual would personally benefit, such as running a full-blown business from your IRA account. The last thing you want to do is have your account disqualified.

Related: How to Grow Your IRA From $5,500 to $204,345 With a Single Rental Property

Also, your liability varies by the type of investment or asset class. Keep in mind, you can also set up separate IRA accounts to limit any one account’s liability.

Many people don’t realize that they can have multiple IRA accounts with multiple companies.

Let’s Recap

Although self-directed IRA accounts work best for the folks who are actively using their accounts, they’re still only one of many options available to investors, and sometimes a person’s financial picture dictates the usefulness and practicality of using these types of accounts.

For me, I learned that I wanted to be the one watching over my own money, but I also wanted to invest passively, which is why I prefer to own private money loans and performing notes in my IRA.

Maybe you’re already using self-directed IRA strategies to build wealth inside of your account. Or maybe you’re looking to show others how to get higher yields in their self-directed IRA accounts by investing in things like real estate or note deals with you.

Either way, I believe it’s well worth the time it takes to learn about this unique, fairly unknown, wealth building tool that today only represents approximately 2% of the overall retirement accounts in the marketplace.

So, what are some of the pros and cons you’ve experienced when it comes to self-directed IRA accounts?

Let’s talk in the comments section below!

About Author

Dave Van Horn

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.


  1. David Krulac

    Hi Dave,

    Another con is that SDIRA are receiving more scrutiny from the IRS because of their rich pay day for the IRS when they blow up the SDIRA. Prohibited transactions are far reaching and the IRS only needs to show some “benefit” to the SDIRA holder and it doesn’t have to be monetary.

    Renting to a relative or even a business associate like a boss at market rent is still a prohibited transaction because of the good will “benefit” received.

    Managing your SDIRA rentals yourself is a prohibited transaction. If you are a licensed real estate agent or broker and receive a commission when buying or selling your SDIRA is a prohibited transaction. Maybe even using the same contractors on your SDIRA property and your other property could be considered getting a “benefit” from volume business?

    If eligible, a Solo 401K is a better option to a SDIRA.
    1. Its a Qualified Retirement Plan which has different rules than an IRS.
    2. A Prohibited transaction only disqualifies that transaction not the whole IRA.
    3. The contribution amounts are as high as $54,000 versus $6,500 for an IRA.
    4. Its easier to accumulate much more cash in the account than an IRA.
    5. As the Plan Administrator, you effectively control the checkbook without the stain of Checkbook SDIRAs, which is also under heightened IRS scrutiny.

    • Could you point me to where I could get more details on this?
      Managing your SDIRA rentals yourself is a prohibited transaction.

      My definition of “managing” is doing what a typical property manager would do. Find tenants and hire people to do any required work.

      If you know of any case law where an IRS has blown up an IRA?

      Appreciate the help!

        • Thanks Larry! Are you referring to the below when stating that managing my properties is a disqualified event? If so, my reading of this is that I am not able to lease the property to a disqualified person. I don’t see anything on this link that would indicate that I’m not able to lease this out to someone that isn’t disqualified.

          From the IRS link you supplied:
          Any of the following acts between the plan and a disqualified person:
          – Selling, exchanging, or leasing proper

          If I’m missing something please let me know! I’d like to figure out if I’m doing something wrong.

      • Dave Van Horn


        To my knowledge, managing your own Real Estate in your IRA could create issues.

        But I would suggest talking to an IRA Custodian or an Attorney who specializes in retirement accounts about this to get a clearer answer. And if you need any recommendations, feel free to private message me.


      • Curt Smith

        Not true, you can manage your rentals in the same way you select stocks to buy, You just can’t do any physical work. This is widely agreed that PM’ing is not an unpermitted transaction.

        But there are MANY practical problems with owning rentals in most SD-IRA custodians accounts, especially Equity Trust. We just left ET gladly after 4 yrs of running rentals in their account. I moved to a solo-401k as mentioned above, check book control… To much to type here re Equity Trust being a bad place to own rentals, ok for notes etc, but bad for rentals. A solo 401k with check book control is the ideal vehicle for owning rentals.

  2. Curt Smith

    Hi David, I completely agree re that a solo-401k with check book control is superior for all types of investing but especially if you hold rentals in your SD-IRA. Transfering assets from your SD-IRA to a solo-401k asap is a good idea.

    We are in the last steps of doing just this moving a bunch of rentals out of Equity Trust SD-IRA to our solo-401k. We used Advanta and used the “rent a plan” model where we set up our own LLC, EIN, Bank account. We did this for many reasons but not the least is the much lower unpermitted transaction impact should an audit happen. Then the getting away from Equity Trust was actually tied for #1 of reasons to move.

      • darin shoulders on


        I have all my retirement with EQ. I am amazed they lack automation. I also use their brokerage service for my equity investing which is very expensive and lack capabilities I had with my previous broker. For example, trailing stop creation when I buy a stock. I need a new SD-IRA. Any suggestion beyond what the ones mention already. Btw, I would like to buy notes within my SD-IRA.

  3. HI Curt,

    Can you tell us more about solo 401Ks? I have held self SD IRAs at Equity Trust for over 10 years. I am sick of their high fees and poor service. I have rentals as well as flips in my portfolio. I never self deal, but I do worry about an audit. Thanks

  4. Harry Metzinger

    Thanks for your insights Dave & David. I do not currently have a SD IRA or SD 401(k) but this is certainly food for thought.

    Many will point out that flipping houses is a business. If you can’t run a business out of your IRA account, how is flipping houses in an IRA allowable? Dave, is there any professional advice you received that you can share in this regard? Does limiting the number of flips/year in your SD IRA or balancing flips w/ other activities in your SD IRA like note investing allow one to flip houses and still adhere to IRS guidelines? Or no restrictions as far as you have been advised?

    Gary, I know a couple of experienced investors here in South Jersey who used to be w/ Equity Trust and then switched to CamaPlan. Both are very happy w/ CamaPlan as their IRA administrator.

    • Bryan Miller


      One way is to partner with a flipper. Use your funds to lend to a flipper and then rather than JV or take a profit split, it is better to set up a “participating note”, that will pay you a certain amount of interest, plus increases with the profit of the sale. By charging “interest” you remain as a “passive” investor, and avoid operating an active business with your retirement funds.

  5. margaret smith on

    Yes, as an account holder for two ROTH-SD IRA accounts, I certainly do recognize these issues. I do everything I can to stay within the IRS guidelines for self-dealing, and yet… many of the “rules” are vague and open to interpretation. All this means that I am not sleeping as well as I would like. It seems to have been the ($125 Mil?) Mitt Romney IRA that brought the vast increases in wealth using tax-free ROTHs that brought a whole new focus to the IRS auditors. The wave of the future seems fraught with danger for the investor….

    Education is key– and yet, it may not be enough. I will not be enjoying the “check book” or the “LLC” IRA, that is for sure- tempting, but one can clearly see the potential for conflict down the road!

    • Dave Van Horn

      Hi Quin,

      Well, what type of broker are you looking for? Are you buying your first house? a typical rental property? an REO property?, etc.

      My answer depends on what you’re trying to buy and how you’re trying to fund it. Also keep in mind brokers are very geographical so it also depends on where you plan to purchase as well.


  6. Katie Rogers

    “…my broker had never put a stop loss in place,…” I cannot recommend stop loss orders. Better to use trailing stop limit orders. The market makers, who make their money on the ask-bid spread, will gap the price down, usually right at market open and snatch up the bargain if you use a stop loss market order. A trailing limit stop order is much safer, protects the profits and limits the loss.

  7. Huiping Sheng

    Thanks for great sharing on this tough topic!

    I have rollover401k (pre-tax) and Ruth 401 (after-tax) from former job, could you please help me on few questions:

    1) Can I put those two together for rental property purchase or have to separate?

    2) If I pay tax and transfer the pre-tax to Ruth, and then I use Ruth 401 to purchase rental property, the return will free from tax forever or still need to pay tax one day?

    3) Someone told me I can use only the pre-tax 401 but not the Ruth401 for real-estate investment, does this right?

    4) If I transfer my 401k to a custodian and I dislike their work, can I transfer to another custodian after I purchased rental properties?

    5) My former job HSA may not enough for a big property but want to invest for RE. Can HSA funds be used for notes purchase? Or do you have some recommendation?

    Thanks Dave!

    • Dave Van Horn

      Hi Huiping,

      Glad you enjoyed the article!

      I should state that I’m not an accountant or a Self-directed IRA/401k Custodian but I think I can answer a lot of your questions. Along with my answers, I would also suggest talking to your Self Directed custodian(s) to get more information.

      1.) I believe you can combine those two accounts together, but you must take title to the property in proportion to the investment amount in each account. So for example, for a $100K property, where 60% of the capital came from the Rollover 401K to fund the deal, 60% of the property would have to be titled to that account. And if 40% of the capital came from the Roth 401k – 40% of the property would have to be titled to that account. The profits and expenses would also have to be proportioned accordingly to said accounts as well.

      2.) Well it depends what you do with the account in the future. There are certain business activities that could require you to pay UBIT (unearned business income tax).

      3.) No that’s not correct, to my knowledge. I would check with a Self-Directed Custodian to be sure.

      4.) Yes. To Curt’s point below, there’s definitely work involved – it can be very cumbersome.

      5.) HSA Funds can be used for note purchases. I do it myself with institutional notes. They can be used for similar investments as well such as tax liens or unsecured notes (i.e. LendingClub.com – depending on your state).

      I would make sure you’re talking specifically to a Self-Directed custodian for advice on these types of accounts.

      Best of luck.

      – Dave

  8. Curt Smith

    Re: xfering property between custodians: Yes you can xfer rentals (etc) between custodians. Its work. I’ve just did this xfering rentals held in ET xfered to my solo-401k, check book control. Have your real estate attorney prepare the new deed in the name of your solo 401k. Scan and email to your current custodian with a direction of singnature request AND an asset xfer form from your “to” org to the current custodian xfering this rental asset.

    Then when they sign the deed, give it to your attorney to file. Make sure the title insurance is bridged. You do not want to xfer via quit claim. Get a full warrantee deed signed, its no more effort or expense. You just have your closing attorney create the warrantee deeds.

  9. Peter Martucci

    Hi Dave,
    I have a couple of questions.
    First, we are getting ready to move south and sell our home in CT. If we were to get the estimated amount for our home based on Comps, we would be left with roughly 120-150K after we pay off “All” of our debt. I was going to utilize that money as a down payment for our final retirement home on a golf course in the south, but was thinking of another plan (provided my wife is up for it). This money will be tax free from Capital gains because we meet the requirement so can I take that money and set up a Roth IRA and then use that IRA to purchase rental properties? Thanks so much for your time!

  10. Bob Hatcher

    have just retired and have tried about every money losing investment strategy out there.
    About 15-18 years ago I read two book which completely changed my philosophy of investing and changed the results as well.
    I recommend you read and consider them because the philosophy is easy, doesn’t give you gas ,make your head hurt, and it works.
    First read The Little Book of Common Sense Investing by Bogle. He’s the guy who 65+ years ago started the Vanguard ETFs. If you still aren’t convinced, then read A Random Walk Down Wall Street by Mikhel (sp?).
    You’ll be glad you did this. I promise.

    • Kevin S.

      Hi Danica
      Your Roth IRA with Etrade is likely not self-directed. I took a look at etrade just now and confirmed.

      Thanks to everyone for sharing AND asking questions. I just learned a bunch of useful information from both sides of the question/answer.

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