Self-Directed Investing 101
The Self-Directed IRA industry is growing at a staggering pace and is expected to see over $2 trillion enter the market over the next few years. With over 45 million retirement account holders and less than 4% of those being held in nontraditional assets, the time to consider Self-Directed investing is now. The Investment Company Institute- the national association of U.S. investment companies, estimates that nearly $4.7 trillion in IRAs were held in the U.S. last year. Of this, an estimated $94 billion or a mere 2 percent are Self-Directed IRAs.
So, what is Self-Directed IRA Investing?
A Self-Directed IRA allows you to decide how to invest your retirement funds. Many people assume “Self-Directed” is a unique type of IRA. However, “Self-Directed” is not a type. Any IRA, whether it’s a Traditional, ROTH, SEP, or SIMPLE IRA can be self-directed.
Using your IRA to invest in non-traditional assets like real estate has been available to investors since 1974. You may be learning about this for the first time because large banks and brokerage firms don’t typically offer these investment options. You may ask – “Is this really legal?” The answer is yes. With the exception of life insurance contracts, collectibles, and stock in an S corporation, IRS rules allow all other investment types as long as they comply with the rules governing retirement plans.
Why Self-Direct?
Stock market volatility and the economy have many investors considering alternative assets for their retirement accounts. A Self-Directed IRA gives you control over your retirement funds by making tax-free investments in assets that you’re familiar with.
What Can I Invest in?
Below are some examples of investment opportunities available to you through your Self-Directed IRA:
| Types of Self-Directed IRA Investments Allowable by IRS: Revocable Living Trust2 | ||
|---|---|---|
| Residential real estate | Tax Lien Certificates | Precious Metals |
| Commercial real estate | Equipment leasing | Factoring |
| Undeveloped or raw land | Livestock | Accounts Receivable |
| Real estate notes | Foreign currency | Oil and Gas |
| Promissory notes | Stocks ,bonds, mutual funds | Structured Settlements |
| Limited partnerships | Private placements | |
| LLC and C-Corp | Structured Settlements | LLCs, LPs and C-Corporations |
What are the Rules?
Prohibited Transactions. IRS rules forbid certain types of transactions in IRA accounts. Some examples are listed below:
- Collecting management fees for your properties is also prohibited as it is a direct benefit for you, the account owner.
- Collecting commissions on properties purchased through your IRA.
- You may not buy, sell, or lease your real estate from disqualified persons.
- All profits generated from an IRA owned asset must be paid back into the IRA and all expenses incurred by the asset must be paid by the IRA (they may not be paid with personal funds and reimbursed by the IRA).
- Any debt used to acquire an asset in an IRA must be non-recourse. In other words, the IRA owner is prohibited from guaranteeing the note personally.
Disqualified Persons. IRS rules define certain individuals that are unable to participate in any transaction with your IRA:
- Yourself
- Your Spouse
- Your Children
- Your Children’s Spouses
- Your Parents
- Certain Business Partners
Additional Regulations. Here are a few examples of prohibited transactions using your IRA that you should become familiar with:
- The property must remain in the IRA until distributed or sold to a third party.
- Property owned within an IRA will not be able to take advantage of write-offs, such as depreciation or other expenses relating to the property.
- All rental profits must be returned to the IRA.
- When purchased, the property becomes an asset of the IRA.
- If you are an owner, you may not lease to a disqualified person, or in any way have a disqualified person occupy the property while it’s owned by your IRA.
- While an IRA owner cannot manage the property, they can hire a property manager or real estate broker to collect rent and maintain the property.
- Neither the IRA owner nor his/her family members (siblings excluded) may have access to or utilize the property while it’s in the IRA.
- Borrowing money from an IRA. IRA’s are prohibited from making loans to IRA owners as well as any other disqualified persons.
- IRA owners are prohibited from using their IRA as collateral for any loan, as the amount they pledge as security will be deemed a distribution by the IRS.
- Selling assets you already own to your IRA or to a disqualified person’s IRA.
- Purchasing a property for personal use, either by the IRA owner and/or a family member.
- Purchasing a property owned by a family member who is a disqualified person.
- Lending money to a disqualified person.
So should I open a Self-Directed IRA account?
Self-Directed investing isn’t for everyone. For some, the idea of having total control of their investments is a daunting one. We recommend reviewing your investment strategies with your tax advisor prior to investing. For more information about what a Self-Directed IRA can do for you call us toll-free at (888) 938-5872.
Helpful resources: Common follow-up reading includes Asset Protection Trust, Revocable vs Irrevocable Trust, and official IRS estate and gift tax guidance while sorting through timing, control, and long-term protection choices.
Where the next decision becomes clearer
Once What is Self-Directed IRA Investing? is on the table, the next questions usually center on risk, flexibility, and which planning step deserves attention first.
Points readers weigh before moving forward
- Timing matters because planning choices usually become narrower once a problem is already close.
- Control matters because the answer often depends on how much access or authority the owner wants to keep.
- Funding matters because a trust or entity has to be set up and maintained correctly to matter.
Practical reading path
To keep the next step practical rather than abstract, readers often move to Asset Protection Trust, Irrevocable Trust, and How It Works. When the question turns from reading to implementation, many readers move from these guides to a direct planning conversation.
