Self-Directed IRA's/Individual 401K's

When I first started focusing on the issues surrounding IRA's, especially the distribution rules, I discovered something that amazed me. SELF-DIRECTION!!! What is that you ask? Well, the term "self-directed" simply means that you, the investor, truly get to choose your IRA's (and now Solo 401(k) and Roth Solo 401(k)'s) investments. Real estate? Real estate notes? Ownership of a business? Yes, in a "real" self-directed IRA, this is all possible.

Most brokerage firms, banks and custodians that offer so-called "self-directed" IRA's actually limit their clients to the range of their investment offerings or publicly traded investments (mutual funds, stocks, REITs, etc.,). What most people don't understand is that the Internal Revenue Code doesn't define what you can invest in; it only defines what you CANNOT invest in.

Per the Internal Revenue Code, the following investments are not allowed for IRA's:

  1. Life insurance contracts (e.g., a life insurance policy on the life of the IRA owner);
  2. Collectibles (e.g., antique rugs, cars, stamps, furniture, etc.,);
  3. Capital stock in an "S" corporation.

Anything else is fair game. Now you are probably thinking, "if IRA's have been around since 1974 and if self-direction has always been possible, why haven't I heard of this before?" Well, welcome to the financial services industry!!! Unless a concept can be replicated thousands of times over and the administration (electronic processing) can be handled without too much trouble, training or inconvenience, large financial institutions don't want any part of it. Also, banks, insurance companies and most securities brokers make their money when you buy their investment products. So naturally they're not too interested to have you buy a parcel of land and hold it for five years, because then you won't be buying their investment products.

So don't be turned off when other "professionals" tell you that "you can't do that," or "it's illegal," or, "it's very complicated and fraught with IRS problems." In all fairness, some of these "professionals" have never discovered or been told that it is quite legal to buy real estate in an IRA. They don't know because the companies that employ them are not interested or informed themselves or they don't want to take the time to learn all the applicable rules.

Therefore, imagine the array of potential investments that fall well within the permissible boundaries. Raw land, rental properties, commercial properties, LLC's that invest in real estate, business interests, loans, etc. are all potential investments in your IRA and Solo 401(k). As you may have gleamed, I'm a firm believer in asset allocation and diversification. If you too believe that your portfolio could be enhanced and further diversified by adding non-traditional assets (in particular, assets or businesses that you have unique or specific knowledge about), we should talk.