Self-directed IRA

8 Replies

I have been trying to educate myself on the advantages of a Self-directed IRA vs Roth IRA.

My curiosity was peaked when I listened to a Podcast recently about a gentlemen that purchases "investment properties" with his Self-Directed IRAs.  In addition, he mentioned that he purchases "investment properties" for his children (who are minors) with the Self-directed IRAs. 

A Couple of more questions: 

  1. Can you use a Self-Directed IRA similar to a "Checking Account". Can I purchase property through it and make monthly payments through it allowing the "Cash Flow" to gain interest?
  2. Can I roll my current Roth into a Self-directed IRA?
  3. Typically, do investors form a LLC when using a Self-directed IRA when purchasing property?

Looking forward to responses from BP members. 


Beau Jensen

@Beau Jensen

Good questions.

Yes a Roth IRA can be transferred to a self-directed Roth IRA and then invested in an LLC-this is known as checkbook control IRA.

The regulations also allow for transfers from a traditional IRA to a self-directed IRA which can then also be invested in an LLC.

The LLC is then invested in real estate with all the gains flowing back to the LLC.

All gains will continue to grow tax-deferred until they are returned back to the IRA--generally at retirement-- and distributions are made directly from the IRA.

You can also convert traditional IRA money to Roth IRA funds and then invest the funds in a LLC which is then also invest in real estate.

The advantage of the Roth IRA over a traditional IRA is that the gains in the Roth IRA grow tax-free whereas the gains in the traditional IRA will be taxed once distributions commence. Also, Roth IRAs are noth subject to RMDs.

Another retirement vehicle you may not be aware of is the solo 401(k) which can also be self-directed in real estate. However, unlike an IRA, in order to open a solo 401(k) one must be self-employed with no full-time employees. The following covers the differences and similarities between a solo 401k and an IRA.

The Self-Directed IRA and Solo 401k Similarities

  • Both were created by congress for individuals to save for retirement;
  • Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
  • Both allow for Roth contributions;
  • Both are subject to prohibited transaction rules;
  • Both are subject to federal taxes at time of distribution;
  • Both allow for checkbook control for placing alternative investments;
  • Both may be invested in annuities;
  • Both are protected from creditors;
  • Both allow for nondeductible contributions; and
  • Both are prohibited from investing in assets listed under I.R.C. 408(m).

The Self-Directed IRA and Solo 401k Differences

  • In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
  • To open a self-directed IRA, self-employment income is not required;
  • In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company ( IRA LLC) must be utilized;
  • The solo 401k allows for checkbook control from the onset;
  • The solo 401k allows for personal loan known as a solo 401k loan;
  • It is prohibited to borrow from your IRA;
  • The Solo 401k may be invested in life insurance;
  • The self-directed IRA may not be invested in life insurance;
  • The solo 401k allow for high contribution amounts (for 2016; the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
  • The solo 401k business owner can serve as trustee of the solo 401k;
  • The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
  • When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
  • Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
  • When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
  • Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
  • Pre-tax IRA contributions on reported on line 32 of Form 1040;
  • Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
  • Roth solo 401k funds are subject to RMDs;
  • A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
  • Roth IRA funds are not subject to requirement minimum distributions (RMDs);
  • The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
  • The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
  • At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
  • At termination, the self-directed IRA is only required to file a form 1099-R.


Thanks for the reply and ALL the information.  

I am currently W2 employee, however could I create a "part-time" Self-Employment and use the Solo 401k?


@Beau Jensen

While you could "create" self-employment in order to qualify for a Solo 401(k), that usually does not work to your advantage.  In order for the Solo 401(k) to remain in effect, the self-employment must be ongoing.  The overhead of creating and maintaining a business - if the primary goal is just to qualify for the Solo 401(k) - often offsets the perceived benefits of the Solo 401(k).

A Checkbook IRA LLC is a great tool for taking existing retirement savings and diversifying into real estate.

The structure involves an IRA account that owns a LLC. You manage the IRA owned LLC and direct all investment activities. The IRA at the back end can be any flavor of IRA: traditional, Roth, SEP, etc.

If you have an existing traditional IRA and want to convert to Roth status, the amount of income converted will be taxable in the year of the conversion. Be sure to speak with your CPA about this strategy. It can be beneficial in many circumstances, but comes with a cost. Determining whether it is the correct move for you is a complicated analysis.

@Beau Jensen

If your self-employment activity is legitimate, you could setup a Solo 401k instead of having to go the IRA route. If self-employment is something you've been considering starting on a part-time basis, you may get the benefit of an additional income stream and the best retirement account out of the decision. Similar to what Brian was saying, though, I wouldn't jump through a lot of hoops just to be Solo 401k eligible if you don't plan to be self-employed on an ongoing basis.

Thanks for all the replies! A lot of great info! 



I'm trying to locate that podcast that Beau is referring to, where the gentleman uses his Self Directed IRA to purchase properties for him as well as his children... Can anyone help direct me to that podcast?

Thanks in advance!


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