The stock market has basically risen for the past decade. Are you concerned that a correction could negatively impact your retirement accounts?  One way to hedge the traditional investments in your portfolio (stocks, bonds, mutual funds, etc.) is by incorporating hard assets. Think real estate, gold, a privately held company, or undeveloped land. 

A self-directed IRA would provide an opportunity to incorporate these non-traditional investments into your retirement portfolio; before jumping in make sure you do your research. In addition to thoroughly understanding the investment you’re making within the account, you must also be aware of the rules and risks associated with it.

What’s the Difference?

The only difference between the self-directed IRA and the traditional IRA (or Roth) is the assets that you can hold in the account. Otherwise, it has the same eligibility requirement as the traditional IRA, as well as contribution limits, tax-deferred growth on savings, and the same withdrawal eligibility and minimum distribution requirement.

If you’re considering investing in a non-traditional asset and prefer to do so with existing retirement monies, you would need to transfer a portion (or all) of your traditional IRA assets to the self-directed IRA. Remember that each year you can only directly contribute a maximum of $6,000 (age 49 and under) or $7,000 (age 50 and over) to an IRA.  To make larger investments, you would have to fund the self-directed IRA from another IRA; or rollover funds from a non-active employer retirement account, such as a 401(k).

Consequences of Prohibited Transactions

Internal Revenue Code Section 4975 outlines prohibited transactions within a self-directed IRA and the penalties associated with violation of the Code. These rules apply to the IRA account owner, the account beneficiary(ies), and any disqualified persons (IRA owner’s family, including a spouse, lineal descendant (or his/her spouse) or ancestor). Prohibited transactions may include, but are not limited to:

  • Leveraging the account for a loan
  • Using property in the account for personal use (you and lineal family members)
  • Selling property to the IRA
  • Borrowing money from it
  • Living in a property held in the IRA
  • Repairing or enhancing the property within the IRA yourself

A 15% penalty tax could be charged to each individual involved in a prohibited transaction.  In addition, the asset would be removed from the IRA and a 10% penalty tax would be charged to the IRA owner for early withdrawal, if he/she is not yet age 59 1/2. If the transaction is reversible but isn’t reversed by the end of the following tax year, an additional 100% penalty tax would be imposed!

On top of this, if not corrected, the entire self-directed IRA would become null-and-void as of the first day of the year in which the prohibited transaction occurred, losing its tax-deferred status and treated as though the full account was distributed and subjected to income taxes. Ouch!

Additional Items to Note

Traditional investment account custodians don’t typically hold self-directed IRAs; thus, you would need to establish the account with a qualified custodian who does. Some banks and trust companies will custody these IRAs, and there are independent firms who specialize in them. Look for a custodian who has both experience and an excellent track record in this space.

When calculating the required minimum distribution (RMD) from your IRAs starting at age 72 (or age 70½ if grandfathered under the prior law), a formal valuation must be performed on the property within the self-directed IRA. You would also need to ensure you have sufficient cash in another IRA to fulfill the RMD or be willing to liquidate an asset in the self-directed IRA to meet the distribution requirement.

You will be responsible for making most of the decisions regarding the assets in your account, as well as implementing transactions and other work required for managing the property. You need to consider this investment as a job and dedicate the time necessary to administer the account successfully.

Assets that cannot be held in a self-directed IRA include collectibles, life insurance, antiques, and S-corporation stock.


Self-directed IRAs can be a good tool for diversifying your retirement portfolio. Before moving forward, make sure that you talk with a qualified advisor to help with your strategy for the account. You should also “check your gut” on whether the time required to manage the property effectively is something that you want to take on. 

Kathy Hower is a senior wealth advisor with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website or email Kathy

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