How does self direct IRA works?

6 Replies

Hi, I am new into this whole IRA thing and need some education on the concept of self directed Roth IRA and self directed tranditional IRA. Please correct me if I misunderstand any of these concept.

For self-directed Roth IRA, I believe can contribute $5,500 each year until my MAGI is greater than $117,000. The SD Roth IRA is after tax contribution. The SD Roth IRA can be used for tax lien and buying property and rent it. By age 59.5 and I decide to withdraw my investment from IRA, I get all those valid tax liens and real estate properties without being tax. Is that correct?

On the other hand, SD Traditional IRA has similar contribution and income restriction limit. By age 59.5 and I decide to withdraw my investment from IRA, I have to pay tax I own on all those properties, how does that work if my assets are in term of properties? How do they value the houses? Do I have to sell some houses on that profolio to pay off tax I own? Do I get to keep (any) properties when I withdraw from the IRA? Or do I have to sell all the properties in SD Traditional IRA to cash basis and pay the tax?

Thanks in advance.

Kin, your understanding is correct. Self-directed IRA is no different then conventional IRA in terms of taxation, contributions, distributions, etc. The only difference is that with using SD IRA you are not confined to the stock market and have virtually unlimited investment choices.

In regards to your other questions: if you decide to take a distribution from an IRA after 59.5 you would need to have enough liquid cash or you could take the entire (or portion) of the property as in-kind distribution. You will be taxed on the amount you are taking out so it is important to plan for that. To get the value of the property in a case of taxable event you would have to order an appraisal.

The good goal for you to consider is accumulating enough income producing assets (rentals, trust deeds, etc.) so that you can simply take income as distribution without touching the principal. With time and planning this is the best strategy in my opinion. 

@Kin Lay

1. Any eligible individual who has compensation may contribute to a Traditional IRA, however,

the deduction may be limited if  your income exceeds certain levels. (see: 

https://www.irs.gov/retirement-plans/ira-deduction-limits)

2. Limits on Roth IRA contributions based on modified AGI Your Roth IRA contribution might be limited based on your filing status and income.


3. The same combined contribution limit applies to all of your Roth and traditional IRAs.

@Dmitriy Fomichenko Do you know if self direct Roth IRA can check out loans from 401K? Let's say I acquired the property from the tax lien I purchased because the owner didn't pay my tax lien. My SD Roth IRA only has $5000 and not enough money to pay all the closing fee or rehab expense. Let's assume I need $30K to complete closing and rehab and my 401K has that amount. Can I check out a loan from 401K for my SD Roth IRA?

Kin, what you are proposing would not work and will be a prohibited transaction.

@Kin Lay

If you have a former employer 401k, you can transfer all or a portion of it to the Roth IRA and then those funds can be used for what you are proposing.

@Kin Lay Strategy that may be helpful is the "backdoor Roth." Using the backdoor Roth, you could get more tax-free growth and simplify taxes on distributions. You could also get more funds into the Roth account for needed liquidity. 

Backdoor Roth is a Roth conversion and called "backdoor" when it's used to circumvent the income limits on Roth contributions.

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