Self-Directed Retirement Accounts and What You Can Accomplish

There are two jars. One labeled "Retirement" that is full of coins. The other jar is full of $100 bills stuffed inside.

I recently looked at my overall investment return on our IRA invested in the stock market. The average return has been 7%, which barely, if at all kept pace with inflation.

Something needed to change. Being a real estate junkie, investing in real estate is where my mind goes. However, this requires a self-directed retirement account. On to act two.

The Basics of Self-Directed Retirement Accounts

Self-directed retirement accounts, including Self-Directed Individual Retirement Accounts (SDIRAs) and Self-Directed Solo 401(k)s, allow individuals to have greater control over their investments. Unlike traditional retirement accounts that limit your investment choices to stocks, bonds, and mutual funds, self-directed accounts enable you to invest in a wide range of alternative assets, including real estate.

In our case, we opted for a Solo 401K, which does permit both myself and my husband to be in the plan while it is still considered a ‘Solo’ 401K. I am the plan administrator, which means I tell the company holding the retirement account (as trustee) where to invest.

Advantages of Investing in Real Estate through Self-Directed Retirement Accounts

Diversification: Real estate offers a diversification opportunity that can help mitigate risks in your retirement portfolio. It can provide a hedge against stock market volatility and inflation, which is often difficult to achieve with traditional assets.

Tax Advantages: Retirement accounts are by nature tax deferred. I have heard a host of arguments on both sides of the table as to the sense in having real estate in a tax benefited account. You should do your own research and apply it to your situation. In our case, we already had assets in retirement accounts, and if the return on investing it ourselves is better than the stock market, it makes sense.

Important Note: UBIT (Unrelated business income tax) does not apply to a Solo 401K. This is a tax that is triggered if loans are used to purchase real estate within an IRA. This is avoided with a Solo 401K, making it preferred if real estate investing with leverage is the plan.

Control: With a self-directed account, you have the power to make investment decisions. You can choose specific properties and property management companies, giving you greater control over your financial future. Or you want to invest in your friend’s business? You can do that!

Rules to Follow when Investing in Real Estate with a Self-Directed Retirement Account

While self-directed retirement accounts offer flexibility, they come with certain rules and guidelines that must be adhered to in order to maintain the tax advantages and avoid penalties. Here are the key rules to consider:

Prohibited Transactions: The IRS prohibits certain types of transactions within self-directed retirement accounts, such as buying a property you or your immediate family will personally use, investing in collectibles, or engaging in transactions with disqualified persons. These transactions can lead to penalties and the disqualification of the account.

Fair Market Value: All investments, including real estate, must be conducted at fair market value. Underpricing or overpricing real estate investments can result in adverse tax consequences.

Use a Custodian or Administrator: Self-directed retirement accounts require the use of a custodian or administrator. They are responsible for ensuring that the transactions and investments within the account are compliant with IRS regulations. Make sure to choose a reputable custodian with experience in handling real estate investments. We are using an LLC entity inside the Solo 401K, which allows us to write checks and direct the investments of the plan.

Avoid Self-Dealing: Do not engage in self-dealing with your retirement account. For instance, you cannot personally provide services to properties held within your account. This includes doing maintenance, repairs, or even serving as a property manager. Investing in syndications, private money lending, and similar hands-off types of investing can keep you in compliance while also keeping you profitable.

Diversification: Accurate record-keeping is essential. Maintain documentation of all transactions, income, and expenses related to your real estate investments to provide transparency and documentation for the IRS.


Investing in real estate within a self-directed retirement account can be a rewarding strategy that offers diversification not found in a brokerage house.


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