7 Rules of Using a Self-Directed IRA – Episode 874

When I first heard about investing with a self-directed IRA, I had a lot of questions. The self-directed IRA is rarely talked about and has a lot of rules. This can be intimidating for new investors, but if you’re the kind of person who takes initiative and wants to be empowered in your wealth building, this investing vehicle is a powerful way to build wealth.

On this episode of Investing in Real Estate, we’re going to cover some of the main rules of using a self-directed account. Because a self-directed IRA is retirement account, the IRS has some strict rules you have to follow to maintain the tax-free status of the account. Press play to hear seven rules of using a self-directed IRA!

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1. You cannot purchase an investment from yourself or disqualified persons.
   Here’s a chart of who would be classified as a disqualified person. Don’t try to deal with disqualified persons or try to find loopholes to the rules. The IRS has very strict regulations, as well as severe penalties. It’s not worth it to try to break the rules. If you have a deal in mind and want to buy real estate from a disqualified person, just use a different financing method.
2. The self-directed IRA must hold the title on the property.
   This means you can’t have the property under your name, your LLC, your trust, or anything else. It must be owned by the IRA. There is a structure that exists as a self-directed IRA/LLC combo – but even in that scenario, the IRA must be on the title.
3. All expenses must be paid by the self-directed account.
   Need a repair on your property? Have a tax bill from the city? HOA fees? Every single expense related to the investment must be paid through the self-directed IRA, no matter how big or small. You’ll need to send your requests over to your custodian, and they can help process the transaction.
4. There can be no indirect benefits.
   What does this mean? All transactions should only benefit the self-directed IRA retirement account, not you. No using the property as a vacation home or storing things in the garage.
5. All money made from the investment should be placed into the IRA.
   Don’t think about investing with an IRA as a means to increase personal cash flow. All profit from the investment must be deposited directly into the IRA. If you’re looking for cash flow, this is not the strategy for you! An IRA investment is for retirement purposes.
6. You must invest in certain assets.
   Here’s another chart that shows what types of investments are allowed, and which are not. Real estate is on the table, but things like antiques and comic books are not. If you have questions about this, reach out to your custodian and they can give you a clear answer.
7. Early distributions are not allowed.
   The system is set up to discourage account holders from using their retirement funds before reaching the designated age of 59 1/2. In normal circumstances, if an investor withdraws funds from their account before this time, they will be subjected to penalties.

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