Real Estate Investing Basics

3 Pros (& 2 Cons) of Self-Directed IRA Investing

228 Articles Written

Looking back, I’ve spent a good part of my life searching for the greatest investment. I’ve tried many different types of investments over the years. Some weren’t right for me at the time, and some were.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Eventually, I found not only the type of investments I prefer, but also the way I prefer to invest. I also realized that I wanted to be the one in control of my own money.

So, what did this journey actually look like? Well, I’d say it’s similar to what many folks go through out there.

I remember my first corporate America type of job, where in a good year we had some profit sharing paid directly to our retirement accounts, but in a bad year, the company didn’t put any money away for me. I worked there for 13 years, and in that time, I only accumulated approximately one year’s total salary in my retirement account. Obviously, it wasn’t going to be an exciting proposition to continue on long-term with that firm.

Mutual Funds

We literally only had three choices to invest in — one was an index fund, one was a bond fund, and I think the other was some type of international stock fund. I truly believe all three were pretty lousy since my coworkers and I seemed to try every combination of the three and none of us ever seemed to make any money.

When I finally quit that job, I started selling insurance, as well as working as a licensed real estate agent.


Since I was selling annuities as a retirement option for some of my clients, I tried rolling my retirement money out of the mutual funds and into an annuity. To be quite honest, these were extremely safe products. Although they didn’t really fit my needs at the time, they probably do have a place for some folks, depending on the scenario.

Related: The Self-Directed IRA: What You Should Know About This Wealth-Building Tool

The trouble with my annuity was that, although it was safe, there wasn’t much yield, and it took a long time to get my money out without penalty, especially since there were very strict rules on pulling money out or for rolling money into another qualified account. My next attempt at investing for retirement was to try using an experienced stockbroker, who was also a family member. How could I go wrong, right?



Now I had the inside track, a real stockbroker whom I felt I could trust. At first, my father and I made some money trading with the broker, and then we put up some more money in the stock of a local company that looked great on paper, but then suddenly their management team seemed to run off with all the money. Needless to say, we lost a lot of money.

It wasn’t until years later when I learned to trade options for myself that I realized exactly what happened. As the stock values were plummeting, my broker had never put a stop loss in place, which would have limited my losses.

Options Trading

By this time, I pretty much had it. I decided to start learning this stuff for myself.

I probably invested about $25k learning about puts and calls, putting insurance on my trades, incorporating stop losses, etc. It was like learning a foreign language at first with all the unique terminology. I also networked with others in the space and even had a mentor who I utilized to shadow his trades. The only challenge was that it took time and commitment to learn all of this, although the actual execution didn’t take long, but all the research and learning did. It was more an active investment than a passive one.

It was around this same time that I had started using my self-directed IRA retirement account.

Self-Directed IRAs

In the beginning, I was using other real estate investors’ IRAs to lend me more money for my real estate rehab deals. So, I had decided to move the remaining money I had from corporate America and my broker relative to a self-directed IRA. It was probably one of the best things I ever did.

I even converted my traditional IRA (where you pay tax on the crop) to a Roth IRA (where you pay tax on the seed), and I just paid the tax. Today, everything I have retirement-wise is all in a Roth IRA. Paying the tax wasn’t so bad because shortly after paying it, I bought a house for $40k and flipped it for $80k. For me, funding the Roth was well worth it.

So, here I am with my self-directed IRA, as I approach retirement, and although I have multiple IRA accounts that have owned real estate and traded options, today my favorite IRA investments are private money for short-term real estate rehab deals and performing notes and mortgages (the latter are serviced by a licensed third party). I also love that they provide a high yield and are passive.

What Are Some of the Pros of Having a Self-Directed IRA?

Pro #1: Tax-Free or Tax-Deferred

Although self-directed accounts are one or the other, tax-free or tax-deferred, both can be pretty good. A traditional type of IRA account is tax-deferred — which means you get an income tax break putting the money in, and it can grow tax-deferred, but when it’s withdrawn (which, by the way, has to start happening at age 70½), taxes are now due. Thus, you are paying tax on the crop.

With a Roth IRA account, your contributions are made with after-tax money, and now your account can grow tax-free. There are no taxes due upon withdrawal, and there’s no set age when you’re required to start taking withdrawals. Thus, you are paying tax on the seed.

Pro #2: Safe and Sheltered Vehicle

Self-directed IRAs are fairly safe vehicles in regard to things like creditors or judgments. Insurance contracts and IRA accounts are some of the safest buckets, where money can be set aside in a very protected environment and is usually immune to things like bankruptcy too, depending on your state. It’s also very difficult to sue an IRA account since technically it’s a trust account.

Pro #3: You Control the Investment

Some folks may look at this as a con since you have to be active, disciplined, and responsible for your own investments. But if you’re knowledgeable with what you’re investing in this can be an extremely profitable wealth building tool.

With Self-Directed IRAs, you are not limited to the traditional investments offered by your brokerage firm (i.e. traditional investments). You are also able to invest in many different alternative assets, such as real estate, gold and silver, mortgage notes, private placements, commodities, tax liens, hedge funds, oil, gas, mineral, lumber, etc. You have access to all investment opportunities, other than the few transactions which are prohibited by the IRS or U.S. Treasure Department.


What Are Some of the Cons?

Con #1: Fees and Paperwork

There can be some fees and paperwork to get used to, but there are no true performance fees, and if you’re an active investor, they can be somewhat nominal. Usually the fees are charged based on the number of investments or the total value of the account. It does pay you to check because depending on the type of asset in the account some companies are better than others. For example, when day trading options, one company’s fees I was using were modest and another company’s were a totally ridiculous cost per trade.

Con #2: Heavily Regulated and Complicated

Retirement accounts of any type are heavily regulated. There are many rules and much paperwork so it can seem overwhelming to some. Of course, you can’t do any self-dealing, where you as an individual would personally benefit, such as running a full-blown business from your IRA account. The last thing you want to do is have your account disqualified.

Related: How to Grow Your IRA From $5,500 to $204,345 With a Single Rental Property

Also, your liability varies by the type of investment or asset class. Keep in mind, you can also set up separate IRA accounts to limit any one account’s liability.

Many people don’t realize that they can have multiple IRA accounts with multiple companies.

Let’s Recap

Although self-directed IRA accounts work best for the folks who are actively using their accounts, they’re still only one of many options available to investors, and sometimes a person’s financial picture dictates the usefulness and practicality of using these types of accounts.

For me, I learned that I wanted to be the one watching over my own money, but I also wanted to invest passively, which is why I prefer to own private money loans and performing notes in my IRA.

Maybe you’re already using self-directed IRA strategies to build wealth inside of your account. Or maybe you’re looking to show others how to get higher yields in their self-directed IRA accounts by investing in things like real estate or note deals with you.

Either way, I believe it’s well worth the time it takes to learn about this unique, fairly unknown, wealth building tool that today only represents approximately 2% of the overall retirement accounts in the marketplace.

So, what are some of the pros and cons you’ve experienced when it comes to self-directed IRA accounts?

Let’s talk in the comments section below!