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Self Directed IRAs and Real Estate Investments

A common assumption people make is that you can only invest in stocks or bonds in retirement accounts.  That is true for most retirement accounts, but there exist retirement options that allow significantly more exotic investments.  Today we’re going to explore these, otherwise known as a Self Directed IRA.


Let me start by saying this post will not be for everyone.  In fact in a way it’s not for me.  I prefer to invest in stocks and bonds over exotic options.  I can see myself using some of the below to invest in real estate in the future but for now my interest in Self Directed IRAs is purely curiosity.  As always, Full Time Finance is for entertainment purposes only.  Any actions are your’s and your’s alone.

Have You Heard of a Self Directed IRA?

So what is a Self Directed IRA and why haven’t you heard of this before?  Well you probably have but you don’t remember it.  Back during the 2012 presidential election there was a bunch of noise about Mitt Romney’s deca-million Self Directed IRA.  Many of the  reasons why his IRA account grew to 10s of million or dollars was because of his work in private equity.   However, some of the methods he used to grow his IRA to such enormous size can be applied by us mere normal human beings.

Investing an IRA Outside the Normal

A standard retirement account via a big brokerage, including your run of the mill IRA or Roth IRA, are limited to investing in stocks, bonds, mutual funds, or ETFs.  Some IRAs though allow investment in a broader array of options.  These require a special provider, so you won’t find this option through your local Fidelity or Schwab IRA.    They also typically cost more to setup.  But once setup they open up the opportunity to invest in things like precious metals, private companies, and real estate amongst other less mainstream options.

You mean you can purchase real estate as an investment in a IRA?  You bet.  In a Self Directed IRA you can buy as many properties as your IRA can afford.  Sounds great huh?  I recently read about a blogger that was ignoring his 401K because he didn’t want to do stock investing over the long run.    I forget the bloggers name but I did straight up ask had he considered planting the money in his 401k, then when he separates service (or if inservice moves are allowed earlier) he can move the money to a Self Directed IRA and buy what he chooses.  If you are not into stocks this is probably your retirement account investment for tax avoidance.

Separating IRA Funds from Your Other Assets

But….  The rules around a Self Directed IRAs are quite tricky.  You see the government wants your retirement account to stay separate from your general funds.  They don’t want you living off the money you’ve saved before retirement as some sort of tax shuffle.  As such Self Directed IRAs have rules to insure you and your family are not directly benefiting from the investments of the Roth IRA until the money from the account is dispersed.

Hard Assets and a Self Directed IRA

For the duh examples you can’t invest in say antiques, fine wine, or other collectibles and then keep them in your house.    You also can’t buy say a jewelry collection or something else you might be buying for your wife or kids.     In general if your investing in something tangible, say precious metals that is allowed, the best move is to have a 3rd party hold them at arms length to avoid this risk. You get the general jist but this ruling can be complicated.  I don’t like the precious metal asset class in general as I view it as having to many commonalities with speculation, but if you are so inclined this is an option.

Private Companies and Self Directed IRAs

You can also invest in a private company.    Again the rules are defined to keep you from benefiting directly from your IRA’s investments.  So your IRA can’t invest in a company you already hold, nor can you be employed there.      I’m not much interested in private equity investment due to the tendency to concentrate your money and the opaqueness of the investment.  As such I’ll leave it up to you the reader to investigate further if you would like to read more in this area.

Real Estate and Self Directed IRAs

Things get a little more interesting as we  venture into real estate.  You still have similar rules.  You can’t live, rent space, or vacation in a place your Self Directed IRA owns.  That would be benefiting.  You also can’t do work as a handyman maintaining anything your Self Directed IRA owns, that would be paying yourself to benefit.   You can’t even use your own money for maintenance.  All profits on real estate must flow back into the IRA.  Again that separating of you and the investment must occur for it to be legal. 

However, here is where it gets interesting. Don’t have enough in your account to buy real estate outright?  Your Roth can loan the money so long as the loan is a non recourse loan.   IE. if your purchased asset can’t support itself then only that asset can be forfeited, the lender can’t go after you or the IRA  (Finances real estate is subject to additional tax so consult a tax accountant).    This means you can use leverage in your Self Directed IRA.  In theory such leverage can result in an account with significantly higher dollar value then what you can otherwise contribute.  For example see Mitt Romney’s Deca-Million IRA.

Crowd Funding and Self Directed IRAs

You can also invest with others in say a crowd funding Real Estate Platform or other option.  This includes either the equity or debt versions of such investments.    In general I’d say real estate investing is the real value of a Self Directed IRA.  In the future I can see myself considering it for real estate crowd funding investing with a moderate pot of money.

Penalties for Mingling Assets

What happens if you violate any of the rules I outlined?  Violation of any of the above exceptions for self dealing could result in the entire IRA being deemed to have been distributed.  IE.  you may end up paying full taxes on the amount, plus if applicable based on age, the early withdrawal penalty.  Not a pleasant experience.  

Should You Invest in a Self Directed IRA?

So should you invest in a Self Directed IRA?  The answer is clearly it depends.  Quite frankly the rules are byzantine.  Like anything else with the IRS there is always some potential gray area.  The more complex the laws the more likely even if you do your diligence you might fall into that gray area.  With a  high penalty for a mistake and a very complex web of regulations, this definitely qualifies as an increased risk of being found in tax violation.  If I were to go with a Self Directed IRA I’d keep it to a very limited investment set and I’d consult with an appropriate tax expert on the account setup.

Probably Only Worth It If Used Significantly

Is all that extra risk and setup costs of a tax professional worth it?  It depends on the types of investments you want to make across your portfolio.  If you want to tilt heavily to real estate or private equity it’s probably at least worth a look.  If you are considering dropping a few dollars in real estate crowd funding it’s probably worth a pass.  Which really gets to the heart of why I’m just curious and not really acting right now.  

As stated previously after the next down turn I plan to invest in some real estate crowd funding platform.    But even so it may be quite a while before this investment amounts to anything significant.  As such for now a Self Directed IRA does not make sense for me any my family.  

Anyone have a Self Directed IRA?  If so how are you investing it?


  1. Scott @ Costa Rica FIRE
    Scott @ Costa Rica FIRE November 21, 2018

    We had a self-directed IRA with one of the large custodians out there and was very unhappy with their service, lead time and process. And their mistakes were annoying. After 2 years we went the solo 401k route so we can be further in the drivers seat, but since that is not an option for everyone, you can do the same with a self-directed IRA with checkbook control.

    We split our retirement investments about 50/50 between mutual funds and real estate, and currently own 3 properties and have issued a real estate loan in our solo 401k.

    • FullTimeFinance
      FullTimeFinance November 23, 2018

      Thanks for adding your personal perspective. Who were you using as a custodian?

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