A self-directed IRA (traditional or Roth), is a retirement account YOU control. That’s right, you get to decide what you invest in…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 it’s prohibited. They’re blatantly wrong or simply lying. You can actually invest in real estate, promissory notes, precious metals, cryptocurrency, small businesses, and concert tickets, or raw land.

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

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 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 a very short list. A retirement account is simply restricted 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 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 and then 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 so that you are more diversified in your wealth-building process.

Interesting examples

Every day 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 IRA and start investing and ‘doing business’ immediately.

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 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.

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 you could get audited, have 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 found 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, but it cannot be leased or used by the IRA owner or the aforementioned 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 conducting transactions with parties who are close enough to the account owner that they could be designed to avoid or unfairly minimize tax by altering the true fair market value or price of the investment.

Of course, this short article can’t do the topic justice, and anyone self-directing an account is advised to speak with a tax advisor or lawyer who thoroughly understands the topic. This does not mean getting advice from your IRA custodian or 401(k) administrator. If you get audited or make a mistake, you pay the penalties and taxes, and no custodian or administrator will stand behind you. Their fine print always instructs the investor to get their own personal advisor — someone who is licensed and carries malpractice insurance to ensure the advice they give you is correct.

The best source of information on this topic is the book written by Mat Sorensen, “The Self-Directed IRA Handbook”, now in 2018 published in its 2nd Edition. Get helpful videos and articles at www.sdirahandbook.com.

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

* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.

Mark J. Kohler is a CPA, Attorney, co-host of the Radio Show “Refresh Your Wealth” and author of the new book “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” He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.