MJK: (208) 745-2865

KKOS Lawyers: (888) 801-0010

logo small

How to Self-Direct my IRA or 401k

a couple checking on a chart printed on a paper
You can actually invest in real estate, promissory notes, precious metals, cryptocurrency, small businesses, and concert tickets, or raw land. Your broker may tell you that you can’t do this and it’s prohibited. They’re blatantly wrong.

A true self-directed IRA (traditional or Roth), is a retirement account. Learning how to self-direct an IRA is crucial. YOU control and can be invested in a self-directed IRA more than what Wall Street offers. That’s right, you get to decide what you invest in. It’s NOT just stocks, bonds, mutual funds, annuities, or whatever your brokerage account is selling that month. 

Now your broker may tell you that you can’t do this and try to prohibit you from it. They’re wrong or simply lying. You can invest in things such as:

  • Rental property
  • Real estate development
  • Promissory notes
  • Precious metals
  • Cryptocurrency
  • Small businesses
  • Concert tickets
  • AND the list goes on and on

Why Doesn’t my Investment Advisor tell me this?

The usual reaction I hear from investors is, “Why haven’t I ever heard of these self-directed IRAs or self-directed 401(k)s before? Furthermore, why have I always been told that my retirement portfolio has to be in a bunch of mutual funds or stocks?”

The truth is your brokerage, ‘the typical Wall Street platform’, can’t allow you to self-direct. However, you can move your account to a custodian or trust company that follows YOUR direction to invest in what you know best!!

The answer is quite simple: The large financial institutions that control most of the U.S. retirement accounts don’t make enough money from the self-directed industry or strategy. They just point you in the direction of products that generate sales commissions and excessive fees.

What are the Restrictions on Investment Options?

Surprisingly, the list of what you can’t invest in is short . A retirement account simply restricts you from investing in the following:

  • Collectibles: such as art, stamps, coins, alcoholic beverages or antiques
  • Life insurance
  • S-corporation stock
  • Any investment that constitutes a prohibited transaction (dis­cussed below)
  • Any investment not allowed under federal law (e.g., a marijuana dispensary)

What this means is that you can have far more control than you ever imagined over your retirement accounts. You  have the potential to get a tax deduction in your business to fund your retirement accounts. You can also invest those retirement accounts in a more creative fashion to build your financial freedom. This is one of the key buckets you should try to build with the profits from your business. That way you are more diversified in your wealth-building process.

Interesting Examples

Everyday in our law firm we consult with clients around the country on how to set up their self-directed IRA and typically an LLC to go with it. The investor is then allowed to control an LLC owned by their self-directed IRA and start investing and doing business immediately. If you are looking for a qualified attorney to assist you in this process, please visit KKOS Lawyers.

Recently, I worked with a client buying and selling mobile homes in their Roth IRA. Their LLC (owned by their Roth) didn’t have a ton of money in it, but they started with just enough a few years ago to buy a couple of mobile homes. Now, three years later they have over 8 mobile homes, including several notes from selling mobile home interests, and over 200K equity in their Roth IRA. They started with less than 40k.

Personally, I have self-directed my own account (a health savings account) into a livestock operation in Eastern Idaho. Along with that a Roth into a crypto mining operation. I’ve also had a rental property in one of my self-directed accounts for almost 10 years! I want to make sure I TOO am doing the things I see my successful clients implement to build wealth.

Avoiding Prohibited Transactions

When self-directing your retirement account, you must be aware of the prohibited transaction rules. This is typically the topic your standard financial advisor will jump on and warn you about in order to scare you off from self-directing. Your advisor may also tell you to avoid self-directing because the IRS would audit you, you incur penalties or lose your retirement account altogether. Don’t listen to them!

Yes, there are rules to follow, but investors have been using the self-directing strategy for over 30 years and have made billions of dollars doing it.

The general rules regarding prohibited transactions are in Internal Revenue Code 4975 and the Employee Retirement Income Security Act (ERISA). These rules don’t restrict what your account can invest in but rather whom your IRA may transact with. In short, the prohibited transaction rules restrict your retirement account from engaging in a transaction with a disqualified person.

Who are Disqualified Persons?

Disqualified persons include the account owner, his or her spouse, children, parents, and certain business partners. For example, your retirement account could not buy a rental property that is owned by your father. The IRA must hold the property strictly for investment. The property may be leased to your cousin, friend, sister, or a random unrelated third party. It CANNOT be leased or used by you, the IRA owner, or the  previously mentioned  prohibited family members or business partners.

Only after the property has been distributed from the retirement account to the IRA owner may the owner or family members reside at or benefit from the property.

The rationale behind the prohibited transaction rules is that the federal government doesn’t want tax-advantaged accounts being controlled too closely by the owners themselves. They believe account holders could ‘game the system’ if left unchecked and design transactions to avoid or unfairly minimize tax by altering the true fair market value of the investment.

Of course, this short article can’t do the topic justice, and anyone self-directing an account I advise you to speak with a tax advisor or lawyer who truly understands the topic. This does not mean getting advice from your IRA custodian or 401(k) administrator.

If the IRS audits you or you make a mistake, you pay the penalties and taxes. There will be no custodian or administrator standing behind you. Their fine print always instructs the investor to get their own personal advisor. Someone who has a license and carries malpractice insurance to ensure the advice they give you is correct.

How to Learn More

The best source for comprehensive information on this topic is the book by my law partner, Mat Sorensen. It is titled “The Self-Directed IRA Handbook”, now in its 2nd Edition. You can also get helpful videos, articles, and open YOUR OWN self-directed account at www.directedira.com.

You can also check out our podcast at www.mainstreetbusinesspodcast.com for 50+ podcasts breaking down the topic of self-directing with humor and examples that bring the whole strategy alive. 

Bottom line, don’t let anyone tell you that you CAN’T invest your IRA in what you know best. Get the facts, start lowering the costs of management fees, and increasing the rate of return in your IRA account.

Interested in Learning More:

* To sign up for Mark’s weekly Free Newsletter and receive his Free E-Book “The Ultimate Tax Strategy Guide – 30 Steps to Saving the Most Money on Your Taxes” visit www.markjkohler.com.

Mark J. Kohler is a CPA, Attorney, co-host of the PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “The Business Owner’s Guide to Financial Freedom- What Wall Street Isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm KKOS Lawyers.


Mark Kohler

Mark Kohler

5 1 vote
Rate This
1 Comment
Oldest Most Voted
Inline Feedbacks
View all comments

What are the differences? Pros vs Cons?

Self-Directed IRA
Self-Directed IRA LLC
Self-Directed Brokerage Accounts

On Key

Related Posts

couple filling taxes

Should I file an Extension for my Personal Taxes?

Should you file an extension for your personal taxes? Contrary to popular opinion, it is not the end of the world if you don’t file your personal 1040 tax return by April 15th. In fact, there are several great reasons NOT to file on April 15th and file an Extension instead. This year “Tax Day”

person walking dogs

10 Ways to Write-Off Your Pet on Your Taxes

In this article, I will break down 10 ways to write-off your pet on your taxes. If you’re a pet owner, you know the joy and companionship a pet can bring to your life. But did you know that you may be able to write-off some of the expenses associated with owning a pet on