Self-Directed IRA mistakes


Using a Self-Directed IRA comes with considerable freedom to select what you invest in, which is a huge benefit! Maybe you are interested in real-estate related assets, investing in private companies, or making loans with your Self-Directed IRA.

These options and many more are possible. This is why education is so important, which is something we care a lot about at IRA Innovations. We want to provide as much education as possible to our current and potential clients so you have the knowledge needed to be successful with your Self-Directed IRA.

Here are a few common mistakes sometimes made by Self-Directed IRA investors.

Working with disqualified persons

Transactions with disqualified people are considered prohibited by the IRS, and can have consequences. You, your spouse, lineal ascendants or descendants and their spouse are considered disqualified persons, meaning your IRA can’t interact with them directly. For more information about disqualified persons, read this post.

If you are interested in working with one of these people on an investment option, such as real estate, there are certain ways to structure these deals so that you can invest with these people.   

Making a prohibited transaction

The most common prohibited transactions are doing deals with disqualified persons.  Examples of prohibited transactions include you borrowing money from your Self-Directed IRA account; selling, exchanging, or leasing property between disqualified persons and your IRA; receiving compensation for managing property held by the IRA; working with disqualified persons; and a few others. 

Another example of a prohibited transaction includes buying certain investments that the IRS says cannot be held by IRAs, such as artwork; rugs; antiques; any metals except gold, silver, palladium, and platinum bullion; gems; stamps; coins except gold and silver coins minted by the US Treasury Department; and alcoholic beverages. 

Getting involved with any of these prohibited transactions is a mistake that can lead to account penalties. Read more about prohibited transactions from the IRS here on their website.

Making improper real estate transactions

Investing in real estate is one of the most popular investment choices made by our IRA Innovations clients. It’s an excellent option with so many choices; however, there are some things you need to be aware of.  The most important is that any property owned by your Self-Directed IRA cannot be used for your benefit or the benefit of disqualified persons. 

Other mistakes to avoid with real estate:

  • The disqualified persons mentioned above cannot perform work on the property — No hiring dad for the electrical or mom to plant the garden.
  • You cannot perform work on the property — Even if you do not plan to “pay” yourself for the work, doing work on the property yourself is considered a non-cash contribution to your IRA.
  • You can’t use the property at all, not even briefly — You are not allowed to live on the property, vacation on the property, or even spend the day at the property.
  • You are not allowed to use personal funds for expenses.  All money used on the property must come from your IRA.

Dealing with some investments

Whether it’s with your Self-Directed IRA investments or other types of investments, there may always be times when you wish you could go back and make different decisions for your account. However, if you make a mistake investing in an allowed investment (not disqualified), you can correct this mistake. 

In a self-directed transaction, you make all of the decisions regarding your investments, so again, the more you know about all the rules, regulations, and allowed/disallowed transactions, the better. For more detailed information, including additional details about disqualified persons, prohibited transactions, and more see IRS Publication 590-A.

We do want to mention that as a Self-Directed IRA custodian, we do not give out investment, tax, or legal advice. Learn more about alternative investment options.

Learn more about the basics of Self-Directed IRAs from IRA Innovations in Birmingham, AL. 

IRA Innovations provides self-directed retirement account administration and education in Birmingham, AL, Tuscaloosa, AL, and Nashville, TN. As the experts when it comes to “alternative” investments including private equities, they can provide the necessary tools and information to get started with a Self-Directed IRA.