Self-Directed IRA Starter Guide

A plain-language introduction to self-directed retirement accounts: what they are, how they are funded, what they can hold, and the rules that matter most before you invest.

Written for investors considering a first self-directed account, or moving an existing note, rental or private lending position inside one. Read it once end to end before you open anything, then keep it as a checklist to work from. 1. WHAT A SELF-DIRECTED IRA ACTUALLY IS A self-directed IRA is not a different kind of IRA. The tax treatment follows the same rules as any other traditional or Roth IRA; what changes is the custodian and the asset menu. The custodian holds the account and files the paperwork while you direct the investments. Where a brokerage account limits you to publicly traded securities, a self-directed custodian permits real property, mortgage notes, private lending positions and other alternative assets. 2. HOW THE MONEY GETS IN Transfer. A trustee-to-trustee transfer moves an existing IRA to your self-directed custodian with no tax and no penalty. This is the cleanest route for most investors. Rollover. Employer plan money from a 401(k), 403(b) or TSP moves into an IRA. A direct rollover avoids withholding; an indirect rollover carries a 60-day deadline. Contribution. Annual contributions, within the limits set for your age and the tax year, with income limits governing Roth contributions. 3. WHAT THE ACCOUNT CAN HOLD Real estate, mortgage notes and deeds of trust, private lending positions, LLC membership interests, limited partnerships, private placements and certain precious metals. A few things are off the table regardless of custodian: life insurance contracts, collectibles such as art, antiques, gems, stamps and most coins, and S corporation stock. 4. THE PEOPLE QUESTION (DISQUALIFIED PERSONS) You may not buy from, sell to or lend to a disqualified person, and the account may not provide you a personal benefit today. Disqualified persons include you, your spouse, your lineal ancestors and descendants and their spouses, certain fiduciaries, and any entity you control, generally at 50 percent or more. This is the rule that most often trips up first-time investors, and it reaches family members who would otherwise look like the obvious partner for a deal. 5. PROHIBITED TRANSACTIONS No personal use of an asset the account owns. No personal guarantee of a loan the account makes. No borrowing from the account. No payment of your own fees or expenses from it. No buying an asset you already hold personally, and no selling an account asset back to yourself. 6. LEVERAGE, UBIT AND THE CASH RESERVE Debt is the most common source of unwanted tax inside an IRA. When an account-owned property is financed, or a partnership interest involves leverage, a share of the income can be treated as unrelated business taxable income and taxed inside the account, reported on Form 990-T, with the tax paid from the account's own cash. A Roth account does not escape this. Practically, that means keeping cash in the account for expenses, custodian fees and any tax due, and asking your CPA to model the leverage before you close. 7. LENDING, OR BUYING A NOTE, INSIDE THE ACCOUNT A self-directed IRA can act as the lender or hold a note it purchases. Payments flow to the custodian and are credited to the account. Two disciplines matter: the note and its security instrument are titled in the name of the IRA or its custodian, never personally, and every borrower, property and payoff is underwritten the same way you would outside a retirement account. A note purchased from a disqualified person, or secured by property you personally use, does not belong in the account. 8. BEFORE YOU INVEST: A SHORT CHECKLIST Confirm the custodian accepts the asset before you sign anything. Have your CPA and attorney review the structure, the documents and the tax position. Title the asset in the account's name, with the custodian listed exactly as instructed. Keep the account's cash funded for taxes, custodian fees and property expenses. Document the valuation at purchase and keep a record of every transaction. Never take a personal benefit, a fee or a discount out of a deal the account owns. GOING DEEPER The recorded sessions in this library pick up where this guide leaves off: Self-Directed IRAs Explained covers the ground rules, Mastering Self-Directed IRAs covers real estate held inside an account, and Private Money Lending Using Your Self-Directed IRA covers lending criteria, collateral and working with borrowers. This guide is general education, not tax, legal or accounting advice. Structures differ by state, by custodian and by the facts of each deal, so confirm your own situation with your CPA and attorney before you move assets.