Why Self-Directed IRAs are worth knowing
Self-Directed IRA is a broad term used to describe retirement accounts that permit investments beyond the traditional brokerage menu. The law has allowed these investments since the mid-1970s, but many investors and advisors still aren’t aware of the full range of options. David’s message: you don’t need to exit qualified money to access real-world opportunities—you need the correct vehicle and compliance.
Key motivations for investors to use Self-Directed IRAs include:
- Diversification away from abstract securities into tangible assets.
- Greater investment flexibility—if the law doesn’t prohibit it, a Self-Directed IRA can generally buy it.
- Control and immediacy (especially with checkbook structures or Solo 401(k)s).
- Ability to invest in what you know—your local market, community lending, or niche industries.
Which account should I use? The core choices
David outlines four primary account types and when each is appropriate. Your choice depends on the source of funds, your intent (passive investment vs. active business), timing, and whether you are self-employed.
1. Basic Self-Directed IRA (custodial)
This is the simplest Self-Directed IRA. A custodian holds the account and executes investments when you submit paperwork. It’s ideal for single, non-time-sensitive passive investments—buying into a fund, a note, or a syndicated real estate project.
- Pros: Low cost to establish; custodian handles documentation; allows any investment the law permits (except prohibited items).
- Cons: Every transaction requires custodian involvement—slower execution and less immediacy.
2. Checkbook Self-Directed IRA (IRA LLC)
The Checkbook Self-Directed IRA uses an IRA-specific LLC between the custodian and the ultimate investment. The custodian owns the LLC membership interest for the benefit of the IRA; you are the manager. Funds are moved into the LLC’s bank account and you write checks or wire funds directly from that account.
- Pros: Immediate execution, active management permitted (not physical labor), ability to consolidate many investments under one custodian fee.
- Cons: Must respect prohibited transaction rules; annual custodian requirements vary; you must avoid doing the physical work yourself.
3. Solo 401(k)
If you are self-employed without full-time employees, the Solo 401(k) often outperforms an IRA LLC. It offers checkbook-style control, higher contribution limits, and the option to borrow up to 50% of the plan balance (to $50,000 max). It’s also often cheaper to maintain over the long run and more forgiving on transaction mistakes.
4. Rollover Business Startup (ROBS)
ROBS combines a 401(k) plan with a C corporation to allow qualified funds to buy a business that the plan then owns—permitting the entrepreneur to work for the business and be compensated. David emphasizes ROBS for business creation or acquisition where the owner wants to live and work in the business (unlike an IRA-owned asset where owner-occupancy or working would be prohibited).
- Pros: Can provide a job, housing and income without withdrawing retirement funds; time-tested for franchises and operating businesses.
- Cons: More complex to set up; requires corporate structure and plan administration; the client should provide a small personal capital contribution (David suggests at least ~5%).
What investments are allowed—and what is prohibited?
David repeats a useful rule of thumb: instead of memorizing what you can buy, memorize what you cannot. For IRAs, the common prohibitions are:
- Collectibles (rare exception for certain bullion held under IRA rules)
- Life insurance contracts
- Securities of S corporations (IRAs cannot hold S-corp stock)
For 401(k) plans, the only common prohibition is collectibles. In practice, that means most real assets—rental houses, apartments, raw land, notes, private loans, precious metals, and cryptocurrencies—are potentially purchasable inside the appropriate Self-Directed structure.
Major compliance issues: disqualified persons & prohibited transactions
Transactions are where mistakes happen—less so the choice of investment. The rules aim to prevent self-dealing and benefits to disqualified persons. Who is a disqualified person?
- You (the account owner), your lineal descendants and ascendants, their spouses
- Entities you control or that are owned by disqualified persons (majority ownership)
Common prohibited transactions include:
- Buying property from or selling to a disqualified person.
- Using IRA-owned property for personal use (you cannot live in or personally use property owned by your Self-Directed IRA until you take it as a distribution).
- Performing physical work on an IRA-owned property yourself—management tasks are permitted; physical labor is not.
- Guaranteeing a retirement account loan with personal recourse—loans for IRAs must be non-recourse.
- Transferring funds directly between your personal account and IRA LLC bank account without the custodian (contributions/distributions must flow through the custodian).
Consequences are severe: for IRAs, a prohibited transaction can cause the entire account to be treated as distributed as of the year of the offense (taxable event). For 401(k) plans, the penalty is more limited—typically money involved in the transaction—but still costly. This is why David stresses conservative behavior and planning ahead.
Leverage, loans, and taxes: practical points
Contrary to a common myth, you can use leverage inside a Self-Directed IRA—by using non-recourse financing. The loan must be non-recourse so that creditors can only claim the collateral in the event of default, not other IRA assets or you personally.
Unrelated Business Taxable Income (UBTI) or Unrelated Business Income Tax (UBIT) may apply when a tax-exempt account conducts business activity or holds leveraged property. For example, if an IRA uses non-recourse debt to acquire property, some portion of income attributable to that debt can trigger UBIT. UBIT is not a deal killer—it’s a tax factor to be included in the return calculation.
Required Minimum Distributions (RMDs) and in-kind distributions
RMDs can be managed creatively. If an IRA holds illiquid investments, you are not forced to sell assets at an inopportune time—an in-kind distribution is available. An in-kind distribution transfers ownership of an interest (e.g., a fractional membership interest or TIC interest) to satisfy the RMD. Valuation rules apply and can create planning opportunities (discounting minority interests, for example), but they must be documented and defended.
Choosing a custodian and fees
David emphasizes: don’t pick a trust company solely on price. Consider:
- How the custodian charges fees (per asset vs. based on valuation). In illiquid asset environments, valuation-based fees can lead to disputes.
- Custodian requirements for checkbook arrangements (some custodians won’t permit you to be the LLC manager; others require third-party reviews).
- Responsiveness and reputation—many transactions require custodian interaction (valuations, RMD calculations, transfers).
The checkbook IRA structure reduces custodian per-transaction friction: the custodian owns one membership interest in the LLC and charges for that single investment, while you manage multiple underlying investments inside the LLC bank account.
How long does setup take?
Timing varies by complexity:
- Basic Self-Directed IRA: often fast and inexpensive (you can do it yourself if comfortable).
- Checkbook Self-Directed IRA (IRA LLC): typically a few weeks to a month to coordinate fund transfers and establish the LLC and bank accounts.
- Solo 401(k): can often be done in a week if funds are ready.
- ROBS (Rollover Business Startup): a couple of weeks to establish the plan, C-corp, and transactions.
David’s practical tip: be prepared before you write offers. If you agree to a contract personally and later attempt to assign it to the IRA after the fact, you risk a prohibited transaction because the seller was taken off the market for your benefit.
Real examples that illustrate the choices
David shares several real-world stories that illuminate common strategies:
- A broker used a Self-Directed IRA to buy an unfinished spec home from a developer who had run out of capital. The IRA-funded investor finished the property and captured a tidy profit while saving the developer from a loss.
- A conservative investor began with a small note purchase through an IRA (e.g., a $35,000 loan on a distressed condo), then scaled up into higher-yield loans, including a wind-power loan that paid near 19%—all inside the IRA LLC.
- A retired couple wanted to buy and live in a mobile home/RV park and be paid to manage it. An IRA structure could not permit owner-occupancy or receiving compensation. The team pivoted to a ROBS arrangement: create a 401(k) plan, roll funds into the plan, the plan buys a C-corp, the C-corp buys the park, and the couple works for the business—solving the job, housing, and investment need without penalties.
How to get started: a simple checklist
- Decide your objective: passive investment, active management, buying/creating a business?
- Inventory current retirement accounts (IRAs, 401(k)s, Roths, inherited accounts).
- Contact a reputable Self-Directed IRA provider and tax advisor—ask how they charge and what checkbook requirements they impose.
- If doing an IRA LLC: choose an LLC name, register it, obtain an EIN, open the LLC bank account.
- Move the funds you intend to use (you don’t have to move everything).
- Negotiate and execute the investment in the IRA or the IRA LLC’s name and EIN.
- Document everything, keep transactions flowing through the custodian as required.
Final thoughts and next steps
Self-Directed IRAs, Checkbook IRAs, Solo 401(k)s, and ROBS are not exotic—these are legal, time-tested structures that extend qualified capital into the real world. They’re powerful, but they require planning, conservative behavior, and attention to prohibited transaction rules. David Moore’s consistent counsel is to think ahead, work with reputable custodians, and pick the vehicle that matches your intent.
“It’s your money—what do you want to do with it?” — David Moore, IRA Advantage
If you want advice regarding your options, David invites you to reach out to IRA Advantage. Whether you are a broker, investor, or entrepreneur, understanding these options gives you practical pathways to use qualified dollars for real, tangible investments—while keeping compliance front and center.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
