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Self-Directed IRA Considerations and Regulations


Greetings fellow investors – I’ve been out of touch for a while as I’ve been struggling with two recent hand surgeries and not feeling very keyboard and mouse friendly. Doing much better now thanks to our Healthcare Workers, Surgeons and Physical Therapy heroes.

I hope all of you, your families and friends are healthy during the Covid-19 spike in cases.


When my husband and I decided to diversify our investment portfolio, we determined that Self-Directed IRA accounts would give us the access we needed to investment liquidity.

This is an opportunity that has worked well for us, but as always, it’s important to enlist the help of a financial advisor who can properly evaluate your holdings before making any decisions.


A Self-Directed individual retirement account is a type of Individual Retirement Account (IRA) that can hold a variety of alternative investments options not available through regular IRAs. Although the account is administered by a custodian or trustee, it's directly managed by you – the account holder.


The investment options of a self-directed IRA go beyond the typical array of stocks, bonds, and mutual funds. The following is just an example of the things you can invest in with a self-directed IRA:

  • Real estate

  • Precious metals

  • Private mortgages

  • Livestock

  • Tax lien certificates

  • Commodities, like oil or gas

  • Cryptocurrency

  • Foreign Currency


How a Self-Directed IRA works

Traditional IRA providers, like Fidelity or a Bank or Credit Union, do not offer a Self-Directed IRA. So, you’ll need to find a special trust company to act as your IRA Custodian.


You will need to perform due diligence when selecting a custodial company. There are quite a few to select from, so make sure to read all the fine print, and review all the custodial fees that may apply annually.


The contribution limits for a self-directed IRA or Self-Directed Roth are the same as other IRAs. As of 2020, and through 2021, the annual contribution limit is $6,000 for those under 50. If you’re age 50 or above, you can contribute up to $7,000. The contribution limit applies across all IRA accounts. So if you own another IRA account, any contributions to it will decrease how much you can contribute to your Self-Directed IRA that year.


Optional Self-Directed Solutions

Checkbook Controlled (LLC) (New option offered during the last 10 years)

A special purpose limited liability company (LLC) is established. As manager, you have the authority to make investment decisions on behalf of your IRA without the consent of a custodian. 

Custodian Controlled (More Traditional)

Offers more options than a financial institution Self-Directed IRA, but investments still require custodial consent. Best for investments that don’t involve a high frequency of transactions.

The Self-Directed IRA with Checkbook Control comes with many advantages for the independent IRA investor.

  1. You never have to seek the consent of a custodian to make IRA investments.

  2. You will no longer receive excessive custodian account fees

  3. No longer endure custodian delays on an investment opportunity

Lower Custodian Fees

A Self-Directed IRA LLC with “checkbook control” prevents you from paying excessive custodian fees based on account value and transaction fees. Instead, with a “checkbook control” Self-Directed IRA LLC, you will use an FDIC backed IRS passive custodian.

The custodian in the “checkbook control” Self-Directed IRA LLC structure is referred to as a “passive” custodian largely because the custodian has no requirement to approve any IRA related investment and simply serves the role of satisfying IRS regulations.

How to Establish a Self-Directed IRA with Checkbook Control

To establish the Self-Directed IRA LLC with Checkbook Control, the IRA establishes and owns a limited liability company (“LLC”). The IRA account owner (you) will manage the LLC. The passive custodian then transfers the IRA owner’s funds to the new IRA LLC bank account.


By having “checkbook control” over your IRA funds you will gain the following advantages:

  • You can still make traditional investments, such as stock, bonds and mutual fund investments as with a regular IRA. The income from these IRA investments will flow back into your IRA tax-free.

  • With a Self-Directed IRA and Checkbook Control, you, as manager of the IRA LLC, can move quickly on a great investment opportunity. You can act on an investment by simply writing a check or wiring funds from your Self-Directed IRA LLC bank account.

Self-Directed IRA Rule #1 – The Prohibited Transaction Rule

Prohibited Transactions are simply transactions that your Self-Directed IRA is not allowed to make. There are two parts to each of these transactions: the who and the what. The who is the investor and any linear relative like a child or parent. The what is giving or getting benefit to the account. Here’s two typical examples:

  • A family member may not make a donation, cash or work related, to your Self-Directed IRA, or personally benefit.

  • You can not take a salary for managing your Self-Directed IRA.


Self-Directed IRA Rule #2 – Contributions and RMDs

In a Self-Directed IRA, all contributions and Required Minimum Distributions must be made to the IRA itself, and not to the IRA’s checking account. Other than that, the rules for the Self-Directed IRA are similar to those of a standard IRA. With either type of IRA, the investor may start taking distributions at 59 ½, must start taking distributions at 70 ½, and can contribute up to $5,500 a year. (If the investor is 50 or older, then the contribution limit is $6,500.)

Self-Directed IRA Rule #3 – Taxes

A Self-Directed IRA is a tax deferred instrument, and thus no taxes are due until distributions are made. There are two exceptional cases, though, when taxes could become due in the present tax year. One is UBIT – Unrelated Business Income Tax – which is a tax that is applied if the IRA owns an active business. The second is UDFI – Unrelated Debt Financed Income – which is a tax levied on the portion of profits that can be attributed to leverage. (If leverage or borrowing has not occurred, then this doesn’t apply.) I will go more in depth on this subject in future blogs.

Self-Directed IRA Rule #4 – Reporting

There are three filings which may be required from your Self-Directed IRA:

  • Form 5948 – This reports the value of the IRA and any of the past year’s contributions. Download from the IRS.

  • Form 1099R – This reports any distributions from the IRA.

  • Form 990T – This is used for filing any potential UBIT or UDFI.

Self-Directed IRA Rule #5 – No Credit Cards

This is actually a Prohibited Transaction. Your Self-Directed IRA may not apply for a credit card, as the process entails giving a personal guarantee to the card. However, you may apply for a debit card.

Types of Alternative investments

Real estate

You can use your IRA investments to purchase real estate or undeveloped land. Any money you make from the investment, either from a sale or rental income, must be directed back into the IRA.


There are also other guidelines and prohibited transactions that you must avoid as to not violate IRS rules. For example, you and your family members are considered disqualified persons and can’t live on the property. So it would be inadvisable for you to purchase a rental property with the hopes of leasing a unit to your child or another family member.


If you want to make renovations or need to do maintenance to the property, you must use the IRA funds. For example, if you're adding a fence or fixing the plumbing, you can’t make these improvements yourself or you’ll end up a disqualified owner.


Private equity

The main caution to take here is not to invest in companies that you already have a stake in or are associated with. An example of an alternative investment could be a startup that you want to fund.


Precious metals

Acceptable metals include gold, silver, palladium, and platinum and they must adhere to standards regarding fineness and pureness.


Prohibited transactions

The IRS prohibits you from using the IRA funds for certain transactions regarding disqualified persons. These include:

  • Your spouse or family member

  • A beneficiary of the IRA

  • Fiduciaries, or someone related to the administration of your self-directed IRA

  • Company in which you own 50% stock


Prohibited assets

The following assets are prohibited:

  • Art

  • Antiques

  • Alcohol (no fine wine investments)

  • Gems

  • Coins (excluding US Treasury-minted gold and silver)

  • Life insurance

  • Rugs


Whether or not a self-directed IRA is right for you depends on your financial goals and appetite for risk. Remember that typically you can still invest in a traditional assets like stocks and bonds depending on your custodian.



Investing in alternative assets can be helpful for diversification. Alternative investments also have the potential for high returns. For instance, the start up that you fund might turn out to be a big success in the future. Volatile assets often experience huge spikes in growth, where as traditional assets, like a certificate of deposit (CD) earn money at a steadier rate.



On the other hand, you could lose a lot of money from your investments, too. The market is volatile for many alternative assets, and the rates of return are of course not guaranteed. This is especially true for digital assets, where the price swings can occur in a very short amount of time. It’s important to consider these fluctuations and how much risk you’re willing to take on if you’re saving for retirement.


If found in violation of the IRS code, you are likely to face large tax liabilities and penalties.


Self-directed IRAs also pose the risk of fraud. The U.S. Securities and Exchange Commission (SEC) warns investors of the risks associated with a self-directed IRA, including lack of transparency. It cautions against cryptocurrency and any initial coin offerings (ICOs) in particular, which might deceive investors by promising a high rate of return. While some cryptocurrency exchanges might be regulated by local governments, others may give the false impression that they adhere to SEC or CFTC (Commodity Futures Trading Commission) standards or are even endorsed by these government agencies. To avoid fraud, make sure you are trading on a reputable cryptocurrency exchange, and check the government website for any authorized official releases.


Reference information: Broad Financial experts and IRA Financial Group, LLC


This summary is for informational purposes and not intended to be a general solicitation or a sales advertisement of any kind.

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